Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors: Prohibiting Exemptions on Behalf of Persons Subject to Certain Statutory Disqualifications

Citation85 FR 40877
Published date08 July 2020
Record Number2020-12607
SectionRules and Regulations
CourtCommodity Futures Trading Commission
Federal Register, Volume 85 Issue 131 (Wednesday, July 8, 2020)
[Federal Register Volume 85, Number 131 (Wednesday, July 8, 2020)]
                [Rules and Regulations]
                [Pages 40877-40892]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-12607]
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                COMMODITY FUTURES TRADING COMMISSION
                17 CFR Part 4
                RIN 3038-AE76
                Registration and Compliance Requirements for Commodity Pool
                Operators and Commodity Trading Advisors: Prohibiting Exemptions on
                Behalf of Persons Subject to Certain Statutory Disqualifications
                AGENCY: Commodity Futures Trading Commission.
                ACTION: Final rules.
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                SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
                is adopting as final (Final Rule) an amendment to Regulation 4.13,
                which contains the regulations applicable to commodity pool operators
                (CPOs) and commodity trading advisors. The Final Rule generally
                prohibits persons who have, or whose principals have, in their
                backgrounds any of the statutory disqualifications listed in section
                8a(2) of the Commodity Exchange Act (CEA or the Act) from claiming a
                CPO registration exemption under Regulation 4.13. Specifically, the
                Final Rule will require any person filing a notice claiming such
                exemption to represent that, subject to limited exceptions, neither the
                claimant nor any of its principals has in their backgrounds a CEA
                section 8a(2) disqualification that would require disclosure, if the
                claimant sought registration with the Commission.
                DATES:
                 Effective Date: The effective date for this Final Rule is September
                8, 2020.
                 Compliance Date: Compliance with the Final Rule will generally be
                required through the existing notice filing under Regulation
                4.13(b)(1), 17 CFR 4.13(b)(1). Therefore, persons who, as of the Final
                Rule's effective date, have filed that notice and are currently relying
                on an exemption from CPO registration under Regulation 4.13 will be
                required to comply with the Final Rule when those persons next file a
                notice of exemption for the 2021 filing cycle, i.e., on March 1, 2021.
                Persons claiming a Regulation 4.13 exemption for the first time on or
                after the Final Rule's effective date will be required to comply with
                the Final Rule when the person first files a notice of exemption.
                FOR FURTHER INFORMATION CONTACT: Joshua Sterling, Director, at 202-418-
                6056 or [email protected]; Amanda Lesher Olear, Deputy Director, at
                202-418-5283 or [email protected]; Elizabeth Groover, Special Counsel, at
                202-418-
                [[Page 40878]]
                5985 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:
                Table of Contents
                I. Background
                 a. Statutory and Regulatory Background
                 b. The Commission's October 2018 Proposal, Request for Public
                Comment, and Recent Final Rules
                II. Final Rules
                 a. Proposed Regulation 4.13(a)(6): A Proposal To Prohibit
                Statutory Disqualifications in CPOs Claiming Exemption Under
                Regulation 4.13
                 b. General Comments
                 c. The Final Rule: New Regulation 4.13(b)(1)(iii) and Responses
                To Specific Comments
                 i. Prohibition v. Disclosure: Clarifying the Consequences of New
                Regulation 4.13(b)(1)(iii)
                 ii. Scope of the Final Rule: Which statutory disqualifications
                will be grounds for prohibiting a claim to a CPO exemption?
                 iii. The Representation Requirement Under New Regulation
                4.13(b)(1)(iii) and Retaining One of the Proposed Exceptions
                 iv. Principal Classification and Treatment of RIAs
                 v. Persons with Covered Statutory Disqualifications May Seek
                Individual Exemptive Letter Relief or Apply for CPO Registration
                 vi. Timeframe for Exempt CPO Compliance With New Regulation
                4.13(b)(1)(iii)
                III. Related Matters
                 a. Regulatory Flexibility Act
                 b. Paperwork Reduction Act
                 c. Cost-Benefit Considerations
                 i. General Costs and Benefits
                 ii. Benefits and Costs of the Final Rule
                 iii. 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
                 Title VII of the Dodd-Frank Wall Street Reform and Consumer
                Protection Act (Dodd-Frank Act) \1\ established a statutory framework
                for the regulation of the swaps market to reduce risk, increase
                transparency, and promote market integrity within the financial system.
                As amended by the Dodd-Frank Act, section 1a(11) of the CEA 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 4m(1) generally requires each person who satisfies the CPO
                definition to register as such with the Commission.\4\ Additionally,
                CEA section 8a generally authorizes the Commission to register
                intermediaries and their associated persons, including CPOs, and also
                to refuse, condition, or revoke such registration.\5\
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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 Apr. 20, 2020).
                 \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 (2020).
                 \3\ 7 U.S.C. 1a(11). The CEA is found at 7 U.S.C. 1, et seq.
                (2018). Both the Act and the Commission's regulations are accessible
                through the Commission's website, https://www.cftc.gov.
                 \4\ 7 U.S.C. 6m(1).
                 \5\ 7 U.S.C. 12a.
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                 CEA section 8a(2) lists the offenses for which the Commission may
                upon notice, but without a hearing and pursuant to such rules,
                regulations or orders as the Commission may adopt, refuse to register,
                to register conditionally, or to suspend or place restrictions upon the
                registration of, any person, and for which the Commission may revoke
                the registration of any person with such a hearing as may be
                appropriate.\6\ Commission regulations require all persons applying for
                registration with the Commission to complete Form 7-R.\7\ Each natural
                person principal of an applicant is also required to complete Form 8-R,
                to submit fingerprints, and to undergo a criminal background check.\8\
                One of the purposes of Forms 7-R and 8-R, as well as the fingerprinting
                requirement, is to determine whether any applicant for registration or
                any of its principals has in its background one of the enumerated
                statutory disqualifications in the CEA.\9\ If a statutory
                disqualification enumerated in CEA section 8a(2) is disclosed or
                otherwise revealed through that process, such applicant is generally
                refused registration on that basis, and such statutorily disqualified
                principals will generally not be listed with the Commission. The
                Commission also has the authority under CEA section 8a(5) to make and
                promulgate such rules and regulations as, in the judgment of the
                Commission, are reasonably necessary to effectuate the provisions or to
                accomplish any of the purposes of the CEA.\10\ Finally, CEA section
                4(c) provides that the Commission, to promote responsible economic or
                financial innovation and fair competition, by rule, regulation, or
                order, after notice and opportunity for hearing, may exempt, among
                other things, any person or class of persons offering, entering into,
                rendering advice or rendering other services with respect to commodity
                interests, from any provision of the CEA.\11\ CEA section 4(c) provides
                a statutory basis for the Commission's promulgation of the various
                regulatory exemptions available to CPOs.
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                 \6\ 7 U.S.C. 12a(2). Such decisions to refuse, condition,
                revoke, or place restrictions on registration are subject to appeal
                by the affected person or registration in the manner provided in
                section 6(c) of the CEA. Id.
                 \7\ See 17 CFR 3.10(a)(1)(i).
                 \8\ 17 CFR 3.10(a)(2).
                 \9\ See Adoption of Revised Registration Form 8-R, 82 FR 19665,
                19665 (Apr. 28, 2017) (describing Form 8-R as designed to ``assess
                the applicant's fitness to engage in business as a derivatives
                professional''). See also Firm Application (Form 7-R), pp. 12-16
                (making various inquiries as to the criminal and disciplinary
                background of the firm and its principals), and p. 22 (requiring the
                applicant to certify that it would not be statutorily disqualified
                from registration under section 8a(2) or section 8a(3) of the Act),
                available at https://www.nfa.futures.org/registration-membership/templates-and-forms/Form7-R-entire.pdf (last retrieved June 1,
                2020).
                 \10\ 7 U.S.C. 12a(5).
                 \11\ 7 U.S.C. 4(c)(1).
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                 Part 4 of the Commission's regulations governs, among other things,
                the operations and activities of CPOs.\12\ Those regulations implement
                the statutory authority provided to the Commission by the CEA and
                establish multiple registration exemptions and definitional exclusions
                for CPOs, as discussed above.\13\ Part 4 also contains regulations that
                establish the ongoing compliance obligations applicable to CPOs,
                whether registered or exempt, as well as to those persons operating in
                the commodity interest markets pursuant to an exclusion from that
                definition. These requirements pertain to the commodity pools that CPOs
                operate and advise, and among other things, dictate matters of customer
                protection, disclosure, and reporting to a CPO's commodity pool
                participants.
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                 \12\ See 17 CFR pt. 4, generally.
                 \13\ See, e.g., 17 CFR 4.13 (providing multiple registration
                exemptions to qualifying persons meeting the CPO definition).
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                 The Commission has previously promulgated, pursuant to these
                statutory authorities, the various exemptions from registration as a
                CPO that are
                [[Page 40879]]
                enumerated in Regulation 4.13,\14\ and the Commission is today
                utilizing them to revise the basic eligibility criteria and amend the
                notice filing required to claim certain exemptions set forth in that
                regulation.\15\ As discussed above, persons seeking registration with
                the Commission, and their principals, are generally refused
                registration with the Commission on the basis that they have disclosed
                or are found to have in their backgrounds one of the statutory
                disqualifications enumerated in CEA section 8a(2). Conversely, prior to
                this Final Rule, persons claiming an exemption from CPO registration
                under Regulation 4.13 were not required to disclose any previous
                matters that might impact their eligibility or fitness for
                registration, or to otherwise meet any basic conduct standards beyond
                the substantive conditions of their claimed exemption. The Final Rule
                amendment seeks to close that regulatory gap by effectively prohibiting
                any person who has, or whose principals have, in their backgrounds a
                statutory disqualification listed in CEA section 8a(2) (Covered
                Statutory Disqualification, or CSD) from claiming a CPO exemption under
                Regulation 4.13. As a result of the Final Rule, persons who have a CSD
                in their background will generally be foreclosed from acting as a CPO,
                whether in a registered or exempt capacity, subject to limited
                exceptions discussed further below.
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                 \14\ See 17 CFR pt. 4 (citing as statutory authority, 7 U.S.C.
                1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 23).
                 \15\ The Commission notes that the title of the Final Rule,
                ``Amendments to Compliance Requirements for Commodity Pool Operators
                and Commodity Trading Advisors,'' is consistent with the related
                notice of proposed rulemaking published in 2018, notwithstanding
                that the amendment adopted by the Final Rule does not have any
                effect on commodity trading advisors.
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                b. The Commission's October 2018 Proposal, Request for Public Comment,
                and Recent Final Rules
                 In response to information received from members of the public, as
                well as CFTC staff's own internal review of its 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 to adopt several regulatory amendments applicable
                to CPOs and commodity trading advisors.\16\ Commission staff had
                previously become aware of a number of statutorily disqualified CPOs
                operating commodity pools pursuant to the registration exemption
                formerly available in Regulation 4.13(a)(4), which the Commission
                rescinded in 2012.\17\ Since the passage of the Dodd-Frank Act, the
                Commission has proposed and adopted amendments to Regulation 4.13,
                which have, in general, been designed to identify, accurately and in a
                timely manner, the exempt CPOs operating in its markets, to incorporate
                additional registration exemptions where appropriate, and to facilitate
                customer protection by requiring annual notice filings. The Commission
                is adopting this Final Rule because it believes that requiring persons
                to attest to both their and their principals' lack of Covered Statutory
                Disqualifications through an additional representation in the notice
                filing required by Regulation 4.13(b)(1) will further enhance the
                customer protection of exempt pool participants, and more generally,
                promote the public interest.
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                 \16\ Several of the proposed amendments were consistent with, or
                expansions of, relief that had been previously available through a
                staff advisory or through no-action and exemptive letters issued
                over the years by staff of the Commission's Division of Swap Dealer
                and Intermediary Oversight (DSIO) and its predecessors. See
                Registration and Compliance Requirements for Commodity Pool
                Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18,
                2018) (Proposal).
                 \17\ After the rescission, such CPOs would have been required to
                modify their operations to comply with a different exemption under
                Regulation 4.13, cease their operations, or receive relief from the
                Commission permitting them to register and continue operating.
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                 In the NPRM, the Commission included a proposed amendment to
                Regulation 4.13 that would have required any person claiming an
                exemption from CPO registration under Regulations 4.13(a)(1)-(a)(5) to
                represent that neither the person nor any of its principals is subject
                to any statutory disqualification under section 8a(2) or 8a(3) of the
                Act, unless such disqualification arises from a matter which was
                previously disclosed in connection with a previous application, if such
                registration was granted, or which was disclosed more than thirty days
                prior to the claim of this exemption (Proposed Regulation
                4.13(a)(6)).\18\ The Commission noted its belief then that ``it poses
                an undue risk from a customer protection standpoint for its regulations
                in their current form to permit statutorily disqualified persons or
                entities to legally operate exempt commodity pools, especially when
                those same persons would not be permitted to register with the
                Commission.'' \19\ Additionally, the Commission solicited comment on
                that particular proposed amendment, raising several specific questions
                for the public's consideration.\20\ In December 2019, the Commission
                published final amendments (2019 Final Rules) adopting several aspects
                of the Proposal with the general intent of simplifying the regulatory
                landscape for CPOs without reducing the customer protection and other
                benefits provided by those regulations.\21\ In describing the scope of
                the 2019 Final Rules, the Commission stated that certain aspects of the
                Proposal, including Proposed Regulation 4.13(a)(6), elicited a
                significant number of responsive and detailed public comments, and as a
                result, the Commission found that those proposed amendments required
                further consideration before they could be finalized.\22\
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                 \18\ Proposal, 83 FR at 52906-07; see also Proposal, 83 FR at
                52927 (proposing to adopt the prohibition at paragraph (a)(6) of
                Regulation 4.13).
                 \19\ Proposal, 83 FR at 52906.
                 \20\ Proposal, 83 FR at 52916 (raising questions regarding the
                scope of the proposed prohibition and its potential impact on
                currently exempt CPOs, among several other issues).
                 \21\ Registration and Compliance Requirements for Commodity Pool
                Operators and Commodity Trading Advisors: Registered Investment
                Companies, Business Development Companies, and Definition of
                Reporting Person, 84 FR 67343 (Dec. 10, 2019); and Registration and
                Compliance Requirements for Commodity Pool Operators (CPOs) and
                Commodity Trading Advisors: Family Offices and Exempt CPOs, 84 FR
                67355 (Dec. 10, 2019) (2019 Final Rules).
                 \22\ 2019 Final Rules, 84 FR at 67357.
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                 After additional consideration of Proposed Regulation 4.13(a)(6),
                as well as the ideas, questions, and suggestions received in public
                comments, the Commission has determined it appropriate to adopt, with
                specific modifications from the Proposal, the amendment, such that,
                subject to limited exceptions, persons subject to the Covered Statutory
                Disqualifications (i.e., those listed in CEA section 8a(2)) will
                generally no longer be able to claim CPO exemptions under Regulation
                4.13, absent a separate determination by the Commission (or its staff,
                pursuant to delegated authority) under CEA section 8a(2) or Regulation
                4.12(a), as more fully described below. The following sections describe
                the amendment as presented in the Proposal, respond to the substantive
                comments received, and finally, explain the amendment in its final form
                and how the Commission intends it to apply in the future.
                II. Final Rules
                a. Proposed Regulation 4.13(a)(6): A Proposal To Prohibit Statutory
                Disqualifications in CPOs Claiming Exemption Under Regulation 4.13
                 In the Proposal, the Commission, for the first time, proposed that
                CPOs exempt under Regulation 4.13, and principals of the foregoing, who
                have statutory disqualifications in their backgrounds be subject to
                conduct
                [[Page 40880]]
                standards similar to those of their registered counterparts. The
                Commission has now determined to exercise its statutory authority to
                amend the Commission's CPO exemption regime, such that both registered
                and exempt CPOs will be required to represent that they and their
                respective principals are not subject to the Covered Statutory
                Disqualifications listed in the CEA. The Commission continues to
                believe that ``preserving the prohibition on statutory
                disqualifications . . . and applying it to exemptions under Sec. 4.13
                would provide a substantial customer protection benefit by prohibiting
                statutorily disqualified persons from operating and soliciting
                participants for investment in exempt commodity pools.'' \23\
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                 \23\ Proposal, 83 FR at 52916.
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                 Proposed Regulation 4.13(a)(6) would have required any person who
                desires to claim an exemption under paragraphs (a)(1), (a)(2), (a)(3),
                (a)(4), or (a)(5) of the section to represent that neither the person
                nor any of its principals is subject to any statutory disqualification
                under section 8a(2) or 8a(3) of the Act, unless such disqualification
                arises from a matter which was previously disclosed in connection with
                a previous application, if such registration was granted, or which was
                disclosed more than thirty days prior to the claim of this
                exemption.\24\ The Commission did not propose to require that
                representation from CPOs of Family Offices, which it concurrently
                proposed to exempt from CPO registration, because ``such CPOs would be
                prohibited from soliciting non-family members/clients to participate in
                their pool(s), necessarily limiting their contact with prospective
                participants drawn from the general public, and as a result, reducing
                the Commission's customer protection concerns in that context.'' \25\
                The Commission stated its preliminary belief that this proposed
                approach ``addresses customer protection concerns regarding statutory
                disqualifications, while preserving flexibility in Commission
                regulations applicable to CPOs.'' \26\
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                 \24\ Proposal, 83 FR at 52927. This language is nearly identical
                to the representation required by paragraph C.4. of Staff Advisory
                18-96. See Offshore Commodity Pools Relief for Certain Registered
                CPOs From Rules 4.21, 4.22, and 4.23(a)(10) and (a)(11) and From the
                Location of Books and Records Requirement of Rule 4.23, available at
                https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last
                visited Apr. 22, 2020).
                 \25\ Proposal, 83 FR at 52906. The Commission formally adopted a
                CPO exemption for qualifying Family Offices in the 2019 Final Rules.
                See 2019 Final Rules, 84 FR at 67358, 67368.
                 \26\ Proposal, 83 FR at 52906.
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                 The Commission further explained that Proposed Regulation
                4.13(a)(6) would ``provide additional customer protection because
                statutorily disqualified, unregisterable persons would no longer be
                able to claim the CPO exemptions under Sec. [Sec. ] 4.13 (a)(1)
                through (a)(5).'' \27\ With respect to its future application, the
                Commission stated its intent that CPOs currently claiming an exemption
                under Regulation 4.13 would comply, ``as they renew their claims on an
                annual basis--i.e., existing claimants would be required to represent
                that neither they nor their principals are subject to statutory
                disqualifications under CEA sections 8a(2) or 8a(3), when they annually
                affirm their continued reliance on a Sec. 4.13 exemption next year.''
                \28\ In contrast, ``CPOs filing new claims of a Sec. 4.13 exemption,
                however, would be required to comply with this prohibition upon filing,
                if and when the amendments are adopted as proposed, and become
                effective.'' \29\
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                 \27\ Proposal, 83 FR at 52914.
                 \28\ Proposal, 83 FR at 52907.
                 \29\ Proposal, 83 FR at 52907.
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                 The Commission requested comment generally on all aspects of the
                Proposal, and also solicited comment through targeted questions about
                each of the proposed amendments, including Proposed Regulation
                4.13(a)(6).\30\ In particular, the Commission requested comment on
                ``the impact of adopting this provision on industry participants and
                currently exempt CPOs, and also, on what, if any, other statutory
                disqualifications should be permissible for exempt CPOs and their
                principals.'' \31\ The Commission also asked the following questions:
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                 \30\ Proposal, 83 FR at 52916.
                 \31\ Proposal, 83 FR at 52916.
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                 (1) What are the concerns and benefits associated with the
                expansion of the prohibition on statutory disqualifications to the CPO
                registration exemptions set forth in Sec. [Sec. ] 4.13(a)(1), (a)(2),
                (a)(3), and (a)(5), or proposed to be set forth in Sec. 4.13(a)(4)?
                 (2) Do the limited exceptions that would permit certain statutory
                disqualifications successfully address any unintended consequences of
                adding the prohibition to Sec. 4.13, while still providing a base
                level of customer protection by preventing statutorily disqualified
                individuals from legally operating exempt commodity pools?
                 (3) Generally, how should the Commission handle the implementation
                of the statutory disqualification prohibition?
                 (4) Specifically, how should the prohibition apply to current
                claimants under Sec. 4.13? How much time should the Commission allow
                for filing updated exemption claims subject to the prohibition?
                 (5) How much time should the Commission allow for an exempt CPO to
                replace statutorily disqualified principals, in order to maintain
                eligibility for a Sec. 4.13 exemption? \32\
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                 \32\ Proposal, 83 FR at 52916.
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                 The discussion below outlines the public comments received in
                response to the Proposal, focusing on the substantive comments received
                regarding Proposed Regulation 4.13(a)(6). The Commission will also
                explain how it has taken those comments into consideration, via
                specific adjustments to the Commission's approach in adopting the new
                statutory disqualification representation as a condition of receiving
                exemptive relief under Regulation 4.13.
                b. General Comments
                 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,\33\ who through delegation by the Commission,
                assists Commission staff in administering its CPO regulatory
                program.\34\ Additionally, Commission
                [[Page 40881]]
                staff participated in multiple ex parte meetings concerning the
                Proposal.\35\ Seven of the comment letters provided comment
                specifically on Proposed Regulation 4.13(a)(6).
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                 \33\ See 7 U.S.C. 21.
                 \34\ 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.
                 \35\ See ``Comments for Proposed Rule 83 FR 52902,'' available
                at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2925
                (last retrieved May 4, 2020).
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                 Commenters generally understood the customer protection goals of
                the Commission, and many supported the amendment; other commenters
                opposed it and raised several questions regarding its implementation.
                Dechert, for instance, opposed Proposed Regulation 4.13(a)(6), stating
                that the Commission should not extend to exempt CPOs a prohibition
                generally applicable only to registered CPOs.\36\ Dechert further
                commented that the proposed amendment would impose one of the most
                costly aspects of registration, that of principal classification and
                screening, on CPOs that are intended to be exempt from
                registration.\37\ SIFMA AMG additionally opposed Proposed Regulation
                4.13(a)(6) and expressed the need for the Commission's consumer
                protection goals to be balanced appropriately with compliance burdens
                and costs.\38\
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                 \36\ Dechert, at 7 (arguing that the Commission has generally
                determined it does not need to apply as close regulatory oversight
                to exempt CPOs as it does for registered CPOs, and that it is
                inconsistent with that conclusion for the Commission to apply this
                prohibition to exempt CPOs).
                 \37\ Dechert, at 7-8. Dechert emphasized the difficulty in
                determining who is and is not a principal of a CPO, pointing out
                that some types of principal do not involve a ``bright line test,''
                but rather a ``facts-and-circumstances analysis.'' Id.
                 \38\ SIFMA AMG, at 17. SIFMA AMG also requested that the
                Commission consider performing a study to determine if the
                prohibition against statutory disqualifications was actually needed
                in the population of exempt CPOs. Id.
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                 Commenters also compared the process surrounding Proposed
                Regulation 4.13(a)(6) to the Commission's registration processes
                currently outlined in part 3 of its regulations. Dechert and other
                commenters requested more detail on how the proposed amendment would
                operate and how exceptions would be considered or accepted.\39\
                Although the majority of comments indicated that their submitters
                understood the Commission's intention in proposing the prohibition on
                statutory disqualifications, Dechert expressed confusion as to whether
                Proposed Regulation 4.13(a)(6) was intended to require disclosure of
                such disqualifications, or whether it was actually designed to bar
                disqualified CPOs from relying on an exemption entirely.\40\
                ---------------------------------------------------------------------------
                 \39\ Dechert, at 11-12; see also IAA, at 11, and AIMA, at 9-10.
                 \40\ Dechert, at 9.
                ---------------------------------------------------------------------------
                 Some commenters cited a lack of clarity on process and other
                significant uncertainties associated with the proposed amendment, and a
                couple of commenters requested that the Commission reconsider and/or
                re-propose it.\41\ Alternatively, Dechert requested that the Commission
                develop processes regarding: (a) The identification and screening of
                principals; (b) disputing a determination by CFTC or NFA to bar a
                person from claiming exemption under Regulation 4.13; (c) the
                ``disclosure exception;'' and (d) the winding down of operations for
                affected CPOs in a manner that minimizes market disruption and any
                disadvantages to pool participants.\42\ MFA shared this concern,
                requesting clarity on the timing of disclosure for CPOs already exempt
                under a Regulation 4.13 exemption and pointing out the lack of
                procedure specified in the Proposal.\43\ MFA further suggested that the
                Commission consider adopting regulations that would establish a clear
                process for currently exempt CPOs to update their disclosures of
                statutory disqualifications to the Commission or NFA, including the
                disclosure of violations of requirements of other regulators.\44\
                ---------------------------------------------------------------------------
                 \41\ Dechert, at 12; SIFMA AMG, at 17.
                 \42\ Dechert, at 11. IAA also requested that the Commission
                develop a hearing process for denying persons the CPO exemptions,
                based on a statutory prohibition. IAA, at 11. See also AIMA, at 9.
                 \43\ MFA, at 4.
                 \44\ MFA, at 4.
                ---------------------------------------------------------------------------
                 Several commenters were concerned about the scope of Proposed
                Regulation 4.13(a)(6), including that offenses enumerated in CEA
                section 8a(3) would be considered statutory disqualifications.\45\
                AIMA, for instance, explained that the disqualifications listed under
                that statutory paragraph, in particular, provide the Commission grounds
                only for potentially disallowing registration, rather than an automatic
                bar to registration.\46\ Consequently, AIMA requested that any required
                representation include only offenses under CEA section 8a(2), or that
                the Commission exclude from consideration offenses listed in CEA
                section 8a(3)(B) and generally limit the incorporation of offenses in
                CEA section 8a(3) to those that are no more than ten years old.\47\ MFA
                similarly pointed out that even recordkeeping violations would need to
                be disclosed pursuant to CEA section 8a(3)(A); MFA also questioned the
                breadth and meaning of CEA section 8a(3)(M) disqualifications, known
                only in the statute as ``other good cause.'' \48\
                ---------------------------------------------------------------------------
                 \45\ See, e.g., Dechert, at 8 (stating that the statutory
                disqualifications impacting a person's eligibility for exemption are
                very broad).
                 \46\ AIMA, at 10.
                 \47\ AIMA, at 10.
                 \48\ MFA, at 4. See also SIFMA AMG, at 19 (arguing that offenses
                under CEA section 8a(3) are much less serious, more remote in time,
                or may be difficult to verify at the time a claim for exemption is
                filed); AIMA, at 10 (stating that including CEA section 8a(3) would
                be too broad, as it lists as disqualifying: Misdemeanor offenses
                regardless of age, regulatory offenses routinely cleared by NFA in
                administering the Commission's registration process for CPOs, and
                the ``amorphous `other good cause''').
                ---------------------------------------------------------------------------
                 Like AIMA, IAA and SIFMA AMG similarly requested that the
                representation cover only offenses listed under CEA section 8a(2).\49\
                SIFMA AMG additionally requested clarification from the Commission that
                a person would not be ``statutorily disqualified'' pursuant to a
                violation under CEA section 8a(3), unless and until the person receives
                a hearing and the Commission has made the filing with respect to the
                conduct at issue required by that statutory provision.\50\ Dechert
                requested that the Commission further limit the scope of Proposed
                Regulation 4.13(a)(6), such that the provision would only effectively
                prohibit statutory disqualifications involving instances of fraud and
                similar offenses involving commodities, securities, and other financial
                instruments, like CEA section 8a(2)(D).\51\ Additionally, Dechert
                requested that the Commission also consider: (a) Applying Proposed
                Regulation 4.13(a)(6) to only the person itself claiming the CPO
                exemption, rather than both the claimant and principals, and (b)
                grandfathering exempt CPOs currently in existence, in conjunction with
                the proposed amendment's adoption.\52\
                ---------------------------------------------------------------------------
                 \49\ IAA, at 11; SIFMA AMG, at 19.
                 \50\ SIFMA AMG, at 20.
                 \51\ Dechert, at 11 (stating that, as the prohibition was
                proposed, any violations of the CEA ``could require disclosure of a
                Statutory Disqualification'' and may prohibit a person from claiming
                a CPO exemption in Regulation 4.13).
                 \52\ Dechert, at 11.
                ---------------------------------------------------------------------------
                 IAA also requested that the Commission not require compliance with
                the proposed amendment from registered investment advisers (RIAs)
                because those entities are already subject to the statutory
                disqualification regime under the Investment Advisers Act of 1940 (IA
                Act), which, the IAA argued, Proposed Regulation 4.13(a)(6) would
                duplicate.\53\ SIFMA AMG also supported a carve-out for RIAs,
                explaining that RIAs are subject to a robust statutory disqualification
                regime under the IA Act, are required to disclose disciplinary events
                on their
                [[Page 40882]]
                Forms ADV, and are also subject to fiduciary duties to their
                clients.\54\
                ---------------------------------------------------------------------------
                 \53\ IAA, at 10.
                 \54\ SIFMA AMG, at 18. SIFMA AMG stated that accepting the SEC's
                statutory disqualification and disclosure regime for RIAs as
                substituted compliance for purposes of relying on the CPO exemptions
                under Regulation 4.13 would eliminate unnecessary costs without
                sacrificing the Commission's customer protection goals, and would
                also count as harmonization of SEC and CFTC regulations. Id.
                ---------------------------------------------------------------------------
                 NFA generally supported Proposed Regulation 4.13(a)(6) and agreed
                with the Commission's underlying rationale.\55\ NFA provided comments
                specifically regarding the two exceptions the Commission proposed: (a)
                If the statutory disqualification was previously disclosed in relation
                to a registration application, which was later granted, or (b) if the
                statutory disqualification was disclosed within the previous 30
                days.\56\ NFA stated that the exception for disqualifications disclosed
                within 30 days would not be practical, and was further inappropriate to
                apply to CPOs exempt from registration under Regulation 4.13, because
                such persons, in contrast to registered CPOs, generally have no ongoing
                obligation to update Commission registration forms if they should
                become inaccurate.\57\ Thus, NFA stated, there is no mechanism
                requiring this population of exempt CPOs to update the Commission or
                NFA as to new or recent statutory disqualifications to which they or
                their principals may be subject.\58\ As a result, NFA suggested that
                the Commission either abandon this exception entirely, or limit its
                application to persons that are already registered with the Commission
                and extend the amount of time.\59\ SIFMA AMG likewise raised questions
                about how currently exempt CPOs that are not registered with the
                Commission would update the Commission or NFA as to new statutory
                disqualifications, suggesting that the Commission accept updates by
                RIAs to their Forms ADV as substituted compliance for such
                disclosures.\60\
                ---------------------------------------------------------------------------
                 \55\ NFA, at 2.
                 \56\ NFA, at 2 (stating that the source of the second exception
                stems from the ongoing obligation of registered CPOs claiming Staff
                Advisory 18-96 and/or exemptive relief under Regulation 4.7 to
                update their registration forms whenever something occurs to make
                them inaccurate, like the recent commission of a statutory
                disqualification by the registrant or one of its principals).
                 \57\ NFA, at 2.
                 \58\ NFA, at 2.
                 \59\ NFA, at 3 (explaining that 30 days is simply not enough
                time to evaluate new statutory disqualifications and/or determine if
                a registration action or ineligibility determination for exemption
                is necessary as a result, but failing to specify an alternative
                amount of time that would be sufficient).
                 \60\ SIFMA AMG, at 19-20.
                ---------------------------------------------------------------------------
                 Still other commenters expressed concern over the timing of
                compliance with Proposed Regulation 4.13(a)(6). AIMA requested that the
                Commission allow at least 12 months for persons with such statutory
                disqualifications to come into compliance, so that the issue of whether
                those disqualifications should be a bar to claiming a CPO registration
                exemption could be determined.\61\ Similarly, Willkie requested that
                the Commission provide sufficient time for industry to absorb a
                significant rule change like this one, suggested that the effectiveness
                of the provision coincide with the annual update filings typically due
                in the first quarter of each year, and requested further that the
                Commission generally clarify the process around the proposed
                prohibition.\62\ IAA also requested that the Commission delay
                compliance with the proposed prohibition to allow CPOs to adjust their
                operations, in case of disqualified principals in their entities.\63\
                ---------------------------------------------------------------------------
                 \61\ AIMA, at 10.
                 \62\ Willkie, at 8.
                 \63\ IAA, at 12.
                ---------------------------------------------------------------------------
                c. The Final Rule: New Regulation 4.13(b)(1)(iii) and Responses to
                Specific Comments
                 After carefully considering Proposed Regulation 4.13(a)(6) as well
                as all of the public comments received, the Commission has determined
                it to be an appropriate exercise of its authorities under the CEA to
                finalize and adopt the proposed amendment with substantive adjustments
                responsive to those comments. The Commission will additionally provide
                guidance herein regarding the Final Rule's implementation. The
                Commission believes that, in conjunction with the substantive and
                procedural clarifications and the compliance schedule discussed below,
                the Final Rule will facilitate compliance by exempt CPOs with new
                Regulation 4.13(b)(1)(iii), while also minimizing costs associated with
                implementing the amendment.\64\
                ---------------------------------------------------------------------------
                 \64\ Further, the Commission has determined that moving forward
                with the Final Rule, rather than re-proposing this amendment as
                requested by a few commenters, is an appropriate and acceptable
                course of action, consistent with the Commission's regulatory
                policies and goals, particularly given the substantive adjustments
                made in direct response to public comments and the provision of
                additional compliance time and guidance.
                ---------------------------------------------------------------------------
                i. Prohibition v. Disclosure: Clarifying the Consequences of New
                Regulation 4.13(b)(1)(iii)
                 The Final Rule's amendment to Regulation 4.13 prohibits a person
                who has, or whose principals have, in their backgrounds a Covered
                Statutory Disqualification from claiming a CPO exemption thereunder, as
                opposed to requiring the disclosure of such disqualifications. As the
                Commission has previously stated, there is an undue risk posed to
                potential customers in the commodity interest markets, when a person
                can act as a CPO, including soliciting participants and accepting
                capital contributions in the name of its operated pool, without meeting
                the basic conduct standards set forth in the CEA. To address that risk,
                the Commission wishes to eliminate this inconsistent treatment between
                exempt and registered CPOs (and the principals thereof), in which
                certain persons may, by claiming an exemption from CPO registration,
                avoid the CEA's basic conduct requirements established for all persons
                registering as intermediaries with the Commission. The Commission
                understands that several commenters were generally opposed to
                prohibiting statutorily disqualified persons from claiming an exemption
                from CPO registration under Regulation 4.13.\65\ After further
                consideration of the Proposal, the comments, and regulatory policy
                goals, the Commission believes that, for the purpose of ensuring its
                customer protection goals are met, it is important that all persons
                falling within the CPO definition not be subject to the most serious
                statutory disqualifications, prior to operating or soliciting
                participants for participation in their pools. The Commission finds
                this regulatory outcome of the Final Rule appropriate because, as
                discussed further below, persons claiming an exemption under Regulation
                4.13 are exempt from the various regulatory obligations resulting from
                operating in a registered capacity.
                ---------------------------------------------------------------------------
                 \65\ See, e.g., Dechert, at 7; SIFMA AMG, at 17.
                ---------------------------------------------------------------------------
                 Dechert commented that with respect to exempt CPOs, ``the CFTC has
                generally determined it does not need to apply as close regulatory
                oversight . . . as it does for registered CPOs.'' \66\ The Commission
                does not consider the Final Rule to be inconsistent with that
                statement. The Commission notes that, notwithstanding the Final Rule's
                amendment to Regulation 4.13, exempt CPOs will continue to be exempt
                from registration, and as a result, from the compliance obligations
                applicable to CPOs registered or required to be registered, which are
                primarily set forth in part 4 of the Commission's regulations. Each
                determination to exempt certain persons from CPO registration is
                inextricably linked to the eligibility criteria of the regulatory
                exemption being claimed. The Commission has previously concluded
                [[Page 40883]]
                that such eligible persons generally implicate fewer of the
                Commission's regulatory and oversight interests, which supports the
                provision of a regulatory exemption from registration under those
                circumstances.\67\ The Commission therefore believes it appropriate to
                recognize the unique regulatory status of exempt CPOs, but also to
                ensure that the Final Rule's amendment applies as intended and in a
                logical fashion.
                ---------------------------------------------------------------------------
                 \66\ Dechert, at 7.
                 \67\ See, e.g., 17 CFR 4.13(a)(3)(ii) (requiring CPOs claiming
                this exemption to comply with one of two de minimis thresholds for
                commodity interest trading in their exempt pool(s)).
                ---------------------------------------------------------------------------
                 Dechert further noted that, as an alternative to Proposed
                Regulation 4.13(a)(6) and to CPO registration generally, the Commission
                has multiple authorities it might employ and rely upon with respect to
                CPOs exempt under Regulation 4.13, citing the anti-fraud authority in
                CEA section 4o, as well as the recordkeeping and special call
                authorities in Regulation 4.13(c)(1).\68\ Although the Commission
                agrees that exempt CPOs are subject to these authorities, which the
                Commission may employ on an as-needed basis, none of them is equivalent
                to or establishes a basic conduct standard applicable to CPOs exempt
                under Regulation 4.13. Moreover, each of the cited provisions is most
                useful to the Commission where a discrete issue has been identified
                that requires the Commission to act; in contrast, the Commission
                intends new Regulation 4.13(b)(1)(iii) to apply prophylactically,
                providing a foundational level of customer protection to exempt pool
                participants. Therefore, the Commission believes that this approach to
                remedying the fundamental customer protection risk discussed above is
                appropriate, notwithstanding the logistical and regulatory concerns
                asserted by commenters regarding the implementation of new Regulation
                4.13(b)(1)(iii).\69\
                ---------------------------------------------------------------------------
                 \68\ Dechert, at 7.
                 \69\ As discussed in further detail below, the Final Rule will
                address those concerns by removing the proposed reference to the
                disqualifications in CEA section 8a(3) in the required
                representation and also by providing a meaningful period of time for
                compliance by currently exempt CPOs.
                ---------------------------------------------------------------------------
                ii. Scope of the Final Rule: Which statutory disqualifications will be
                grounds for prohibiting a claim to a CPO exemption?
                 After consideration of the comments received regarding the
                statutory disqualifications that would be grounds for prohibiting a
                person from seeking to claim a CPO exemption, the Commission has
                determined not to include those violations enumerated in CEA section
                8a(3) in the Covered Statutory Disqualifications. The Commission finds
                persuasive commenters' arguments that the offenses listed in CEA
                section 8a(3), in the context of Regulation 4.13, warrant different
                treatment than those offenses listed in CEA section 8a(2).\70\ The
                Commission notes that due to their characteristics, CEA section 8a(3)
                offenses (unlike those enumerated in CEA section 8a(2)) serve as a bar
                to registration with the Commission, only after a hearing is conducted
                to formally find both that the disqualification has occurred, and that
                the disqualification should prevent a person from registering with the
                Commission.\71\ The Commission further believes that limiting the
                Covered Statutory Disqualifications that would result in a person being
                unable to rely upon Regulation 4.13 is consistent with the Commission's
                longstanding view that persons claiming an exemption from CPO
                registration generally implicate fewer of its regulatory concerns than
                those persons registered or required to be registered as CPOs.
                ---------------------------------------------------------------------------
                 \70\ See CEA section 8a(3), 7 U.S.C. 12a(3) (enumerating various
                disqualifications including: Any violations of CEA or Commission
                regulations; any violations of the Securities Act of 1933, the
                Securities Exchange Act of 1934, the IA Act, the Investment Company
                Act of 1940, among other federal statutes, as well as any similar
                state statutes and any related regulations; any failure to supervise
                that results in persons subject to such supervision violating the
                CEA or Commission regulations; willfully making materially false
                statements or omissions of fact in Commission reports, applications,
                disqualification proceedings, and other Commission proceedings;
                being subject to a denial, suspension, or expulsion order from a
                registered entity, registered futures association, or other self-
                regulatory organization; having a principal who has been or could be
                refused registration; and where there is other good cause).
                 \71\ This process should be contrasted with that of CEA section
                8a(2), the offenses of which may serve as the Commission's
                justification, upon notice, but without a hearing to refuse to
                register, to register conditionally, or to suspend or place
                restrictions upon the registration, of any person. 7 U.S.C. 12a(2).
                For persons already registered with the Commission, offenses under
                CEA section 8a(2) may also be cited by the Commission during such a
                hearing as may be appropriate to revoke the registration of any
                person. Id.
                ---------------------------------------------------------------------------
                 The Commission notes further that Regulation 4.13 was designed to
                provide registration relief to CPOs with relatively limited activities
                in the commodity interest markets. Specifically, exempt CPOs are
                subject to substantive limitations impacting their exempt pools'
                commodity interest footprint or trading strategy, the types of pool
                participants they may solicit for investment in those exempt pools, as
                well as the exempt pools' overall size and marketing activities. The
                terms of the regulatory exemptions consequently cause the operations
                and activities of these exempt CPOs to be more narrowly circumscribed
                than those of registered CPOs. The Commission believes, as a result,
                that new Regulation 4.13(b)(1)(iii) should be tailored to the most
                serious offenses, which can trigger a statutory disqualification
                without a prior hearing, i.e., those listed in CEA section 8a(2).
                 Commenters also expressed confusion regarding the procedural
                implications of including the statutory disqualifications in CEA
                section 8a(3), particularly the hearing requirement, and how they might
                be incorporated into a new prohibition process under Regulation 4.13.
                IAA specifically requested that the Commission adopt a ``reasonable
                person standard,'' with respect to a person's knowledge of statutory
                disqualifications, similar to Rule 506(d) of Regulation D, as adopted
                by the Securities and Exchange Commission (SEC).\72\ The Commission
                believes, however, that limiting the representation in new Regulation
                4.13(b)(1)(iii) to those offenses listed in CEA section 8a(2) will
                generally allow for effective implementation and will adequately
                address the Commission's customer protection concerns.
                ---------------------------------------------------------------------------
                 \72\ IAA, at 11 (requesting for disqualifications not to apply
                ``if the entity did not know, and, in the exercise of reasonable
                care, could not have known that a disqualification exists,'' and
                citing 17 CFR 230.506(d)(2)(ii)-(iv) as example).
                ---------------------------------------------------------------------------
                 By focusing only on the offenses listed in CEA section 8a(2), the
                Commission is removing from the representation's purview those
                disqualifications that do not necessarily serve as a general bar to
                registration because they require a formal procedural hearing before
                they can impact a person's registration status with the Commission. By
                narrowing the scope of Covered Statutory Disqualifications in this
                manner, the Commission is also recognizing its historical position that
                the commodity interest activities of exempt CPOs generally implicate
                fewer of the Commission's regulatory concerns. As a result, the
                Commission believes that new Regulation 4.13(b)(1)(iii) will
                appropriately bar persons subject to the CSDs from claiming exemption
                under Regulation 4.13, without the adoption of additional procedural
                requirements and without the adoption of a ``reasonable person''
                standard, which may be difficult to apply in this circumstance. As
                such, the Commission believes that the Final Rule will still ensure
                that persons with the most egregious and recent offenses are unable to
                solicit and accept funds for participations in commodity pools, even if
                they are
                [[Page 40884]]
                exempt, thereby strengthening overall confidence in pooled investment
                vehicles engaged in limited commodity interest trading.
                iii. The Representation Requirement Under New Regulation
                4.13(b)(1)(iii) and Retaining One of the Proposed Exceptions
                 The Final Rule will amend the notice requirement in Regulation 4.13
                to require a representation that neither the person nor any of its
                principals has in their backgrounds a Covered Statutory
                Disqualification, subject to one limited exception discussed below.\73\
                The Commission intends for this representation to be a threshold
                requirement for any persons claiming an exemption subject to the notice
                requirement in Regulation 4.13. If a person cannot truthfully make the
                required representation regarding the person and its principals, then
                that person will not qualify for an exemption from CPO registration. As
                discussed in detail above, the representation in its final form has
                been narrowed in scope to the CSDs, i.e., those offenses listed in CEA
                section 8a(2). Additionally, consistent with the Proposal, Family
                Offices relying on the new exemption in Regulation 4.13(a)(6), which
                are not subject to the notice filing requirement, will therefore also
                not be required to make the new representation. The Commission
                concludes that this is an appropriate regulatory outcome because Family
                Offices, by definition and by the substantive requirements of that
                exemption, only serve ``family clients,'' and thus, generally pose
                little customer protection risk to the investing public.
                ---------------------------------------------------------------------------
                 \73\ See infra new Regulation 4.13(b)(1)(iii).
                ---------------------------------------------------------------------------
                 Proposed Regulation 4.13(a)(6) contained two exceptions: Unless
                such disqualification arises from a matter which was previously
                disclosed in connection with a previous application, if such
                registration was granted, or which was disclosed more than thirty days
                prior to the claim of this exemption.\74\ As mentioned above, NFA
                commented that the second exception ``appears premised on the idea that
                the person claiming the exemption would be under an obligation, and
                have a method, to report an existing statutory disqualification to the
                Commission or NFA,'' and therefore, if the Commission or NFA did not
                act on it within thirty days, then the statutory disqualification would
                have no effect on the person.\75\ NFA further pointed out that ``unlike
                entities claiming relief under Advisory 18-96 and Regulation 4.7, which
                are registered and under an affirmative obligation to notify the
                Commission and NFA by updating their [registration forms] if they
                become subject to a statutory disqualification after they become
                registered, the vast majority of persons seeking an exemption under
                Regulation 4.13 are not [so] registered.'' \76\
                ---------------------------------------------------------------------------
                 \74\ Proposal, 83 FR at 52927. As discussed above, this language
                is derived from other relief containing similar prohibitions. See
                supra pt. II.A.
                 \75\ NFA, at 2.
                 \76\ NFA, at 2 (suggesting therefore that the Commission
                ``either eliminate this exception or limit it to persons that are
                currently registered'').
                ---------------------------------------------------------------------------
                 The Commission agrees with NFA's description of how the second
                proposed exception was intended to apply, and also with NFA's assertion
                that many persons claiming a Regulation 4.13 exemption are not
                registered with the Commission in another capacity, meaning they have
                neither filed, nor have they any ongoing obligation to update,
                registration forms with the Commission or NFA. After considering these
                comments, the Commission is therefore not adopting the second proposed
                exception. As a result, the remaining exception in new Regulation
                4.13(b)(1)(iii) adopted by this Final Rule will apply to the Covered
                Statutory Disqualifications that have been previously disclosed by the
                person or its principal in prior registration applications that were
                granted. The Commission believes that this result maintains the
                strength of the amendment, while permitting flexibility for
                circumstances where the Commission has affirmatively determined that a
                CSD in a person's background should not impede that person's ability to
                register.
                iv. Principal Classification and Treatment of RIAs
                 The Commission also received other substantive and procedural
                questions in response to Proposed Regulation 4.13(a)(6). Several
                commenters, for instance, claimed that it would be very burdensome for
                persons claiming exemption under Regulation 4.13 to identify, classify,
                and examine the principals within their business entities, and that
                requiring them to do so was effectively subjecting exempt CPOs to the
                most significant costs of intermediary registration with the
                Commission.\77\ Regulation 3.1(a) defines the term ``principal,'' by
                providing examples of who would be considered principals in a variety
                of legal entity structures, e.g., sole proprietorship, limited
                liability company, limited partnership, or corporation.\78\
                Consistently though, the ``principal'' definition is, generally
                speaking, limited to those individuals and entities within the CPO who
                have either management authority and responsibilities, or significant
                power derived from stock ownership or capital contributions. Principals
                usually include, therefore, managing members, company presidents,
                corporate executives, chief compliance officers, and any legal person
                who is a ten percent or more shareholder of the person.\79\ Dechert
                explained that ``certain aspects of the [Commission's principal]
                definition . . . do not create a bright-line test, but rather require a
                facts-and-circumstances analysis.'' \80\ Dechert further asserted that
                ``the principal classification and screening process creates the
                majority of the work necessary to register CPOs and CTAs, and is
                costly,'' requested that the Commission provide guidance ``as to how an
                exempt CPO could conduct such processes,'' and also asked that the
                Commission ``establish[ ] a process for disagreement by the CFTC or NFA
                with an exempt CPO's determination.'' \81\
                ---------------------------------------------------------------------------
                 \77\ See, e.g., Dechert, at 7-8.
                 \78\ 17 CFR 3.1(a). Additionally, Regulation 4.10(e)(1) also
                uses that ``principal'' definition for purposes of the Commission's
                part 4 regulations. 17 CFR 4.10(e)(1). NFA Registration Rule 101(t)
                is similar in design, and defines principal, in pertinent part, as
                ``a proprietor of a sole proprietorship; a general partner of a
                partnership; a director, president, chief executive officer, chief
                financial officer or a person in charge of a business unit, division
                or function subject to regulation by the Commission of a
                corporation, limited liability company, or limited liability
                partnership; a manager, managing member, or member vested with
                management authority for a limited liability company or limited
                liability partnership; or a chief compliance officer.'' NFA
                Registration Rule 101(t), available at https://www.nfa.futures.org/rulebook/rules.aspx?RuleID=RULE%20101&Section=8 (last retrieved Apr.
                7, 2020).
                 \79\ 17 CFR 3.1(a)(1)-(a)(3). Regulation 3.1(a)(4) additionally
                defines as a principal any person who employs a trust, proxy,
                contract, or other device to avoid becoming a ten percent or more
                shareholder for the purpose of evading being deemed a principal of
                the entity. 17 CFR 3.1(a)(4).
                 \80\ Dechert, at 8 (citing ``the head of business unit, division
                or function subject to CFTC regulation'' as an example). Regulation
                3.1(a)(1) includes in the ``principal'' definition, regardless of
                the entity's legal structure, any person in charge of a principal
                business unit, division or function subject to regulation by the
                Commission. 17 CFR 3.1(a)(1).
                 \81\ Dechert, at 8 and 11.
                ---------------------------------------------------------------------------
                 The Commission believes that preventing persons who have one or
                more statutorily disqualified principals from operating as exempt CPOs
                will generally increase the customer protection provided to
                participants in exempt pools, particularly because of the decision-
                making authority such principals may exercise regarding the operations
                of an exempt CPO and its exempt pool(s). The Commission also notes that
                several hundred CPOs currently maintain registration simultaneously
                with one or more CPO
                [[Page 40885]]
                exemptions, due to the nature of the various commodity pools they
                operate. The Commission believes that such exempt CPOs may be slightly
                advantaged because they will likely spend less time identifying and
                classifying principals than persons or entities who have no prior
                contact with commodity interest markets or the Commission, or who only
                operate pools pursuant to one or more exemptions from registration.
                Registered CPOs, who may be also claiming a CPO exemption, will have
                already gone through those processes for purposes of applying for
                registration with respect to their non-exempt commodity pools. Further,
                such CPOs would also be much less likely to have to remove and replace
                principals with Covered Statutory Disqualifications. In the event such
                an otherwise registered CPO or a principal thereof did have a CSD, it
                would likely fall under the exception discussed above for CSDs
                identified by the person and/or principal in a prior approved
                application for registration, in light of their existing status as a
                registrant and the obligation to disclose such offenses as they occur.
                 With respect to persons claiming a CPO exemption under Regulation
                4.13 for the first time, and persons who are exempt CPOs and not also
                registered with the Commission, the Commission understands that such
                persons will possibly be required to devote time and resources to
                determining who in their organization is a principal and whether any of
                them has a Covered Statutory Disqualification in their background. Some
                classes of principals under the Commission's regulations may involve a
                factual analysis to determine status. The Commission continues to
                believe, however, that most persons will be able to determine their
                principals relatively easily, due to the standard forms of business
                organization typically used by exempt CPOs and the detailed definitions
                provided by the Commission in its regulations.\82\ In particular,
                Regulation 3.1 details the roles, titles, ownership, and
                responsibilities that can give rise to a person being a ``principal''
                of a registrant, which the Commission believes reduces the challenges
                associated with identifying principals within an organization such as
                an exempt CPO. As discussed above, the Commission also believes that
                some persons claiming Regulation 4.13 exemptions may have already been
                required to identify their principals as part of their registration
                with the Commission as a CPO with respect to the operation of one or
                more other pools. The Commission believes that the substantive changes
                made in this Final Rule address the Commission's concerns about
                providing some customer protection to participants in pools operated by
                an exempt CPO, while permitting flexibility and facilitating compliance
                with Regulation 4.13 through additional compliance time. Therefore, the
                Commission is adopting new Regulation 4.13(b)(1)(iii), such that the
                required representation covers both persons claiming the exemption and
                their principal(s).
                ---------------------------------------------------------------------------
                 \82\ 17 CFR 3.1(a).
                ---------------------------------------------------------------------------
                 The Commission also received several requests for the Commission to
                exclude RIAs from the proposed amendment, on the basis that such RIAs
                are already subject to robust conduct requirements in the IA Act,
                which, commenters argue, the new representation would only serve to
                duplicate.\83\ Though the Commission agrees with commenters that RIAs
                are subject to conduct requirements under the IA Act, the Commission is
                declining to exclude RIAs from the scope of new Regulation
                4.13(b)(1)(iii). IA Act section 203(e) covers censures, denials, or
                suspensions of registration for investment advisers and provides the
                SEC the authority to censure, limit, suspend, or revoke the
                registration of any investment adviser, if, after notice and
                opportunity for a hearing, certain statutory disqualifications of the
                adviser or persons associated with it are proven and such adverse
                action is in the public interest.\84\ The Commission finds that the
                statutory disqualification regime of the IA Act differs materially from
                the corresponding provisions in the CEA. Of particular relevance to the
                Final Rule, the IA Act does not specify any statutory disqualifications
                that bar investment advisers from registration in a manner similar to
                the mechanism in CEA section 8a(2), i.e., without a procedural hearing
                or order.
                ---------------------------------------------------------------------------
                 \83\ See, e.g., IAA, at 10; SIFMA AMG, at 18.
                 \84\ IA Act section 203(e), 15 U.S.C. 80b-3(e).
                ---------------------------------------------------------------------------
                 The Commission notes that preserving its independent authority to
                determine which persons should be permitted to operate commodity pools
                in its markets subject to an exemption is consistent with the
                Commission's independent assessment of RIAs seeking registration with
                the Commission regarding their commodity interest activities. Under
                those circumstances, notwithstanding the RIA's registration with the
                SEC, the Commission assesses the registration application of the RIA
                under the terms of the CEA and the Commission's regulations promulgated
                thereunder, which reflect the unique regulatory concerns associated
                with intermediaries in the commodity interest markets. Although the
                Commission recognizes that most RIAs would not present any cause for
                reservation in permitting them to operate in the commodity interest
                markets, the Commission believes that retaining the ability to engage
                in an independent assessment regarding an RIA's fitness to act as an
                exempt CPO best serves its customer protection interests. Therefore,
                the Commission is not adopting the suggestion to exclude RIAs from the
                scope of new Regulation 4.13(b)(1)(iii).\85\
                ---------------------------------------------------------------------------
                 \85\ The Commission notes, however, that the majority of RIAs,
                based on their registration status with the SEC, should be able to
                easily comply with the representation regarding Covered Statutory
                Disqualifications required by amended Regulation 4.13.
                ---------------------------------------------------------------------------
                v. Persons With Covered Statutory Disqualifications May Seek Individual
                Exemptive Letter Relief or Apply for CPO Registration
                 As explained herein, the Commission believes that the adoption of
                this representation regarding the Covered Statutory Disqualifications
                for persons, and their principals, claiming exemption under Regulation
                4.13 is generally necessary to protect the participants in exempt
                commodity pools; however, the Commission recognizes that there may be
                facts and circumstances, pursuant to which permitting such disqualified
                CPOs and principals to operate exempt commodity pools may not be
                inconsistent with the Commission's customer protection concerns. The
                Commission notes its authority under Regulation 4.12(a) to ``exempt any
                person or any class or classes of persons from any provision of this
                part 4, if it finds that the exemption is not contrary to the public
                interest and the purposes of the provisions from which exemption is
                sought.'' \86\ The Commission has, by rule, delegated that authority to
                the Director of DSIO.\87\ Pursuant to that delegated authority and
                Regulation 140.99, those persons who have a Covered Statutory
                Disqualification, but nonetheless believe that it should not negatively
                affect their ability to claim a CPO exemption, may seek, on an
                individual or firm-by-firm basis, exemptive letter relief from the
                [[Page 40886]]
                representation adopted by this Final Rule by presenting the facts and
                legal rationale demonstrating that such exemptive letter relief would
                be consistent with the public interest and not contrary to the specific
                purposes of Regulation 4.13(b)(1), i.e., providing some customer
                protection to exempt pool participants.\88\ The Commission notes that
                it expects the granting of such requests to be infrequent and supported
                by a strong factual and legal basis, so as to avoid undermining the
                purposes of the Final Rule.
                ---------------------------------------------------------------------------
                 \86\ 17 CFR 4.12(a).
                 \87\ 17 CFR 140.93 (delegating the authority in Regulation
                4.12(a) to the DSIO Director, further facilitating the issuance of
                exemptive letter relief with respect to provisions in 17 CFR part
                4). As with all Commission delegations to staff generally: (1) The
                relevant Division Director (in this case, DSIO) may submit such a
                request regarding the delegated matter to the Commission for its
                consideration; and (2) the Commission may, at its election, exercise
                the delegated authority to consider such a request for relief. See
                17 CFR 140.93(b)-(c).
                 \88\ 17 CFR 140.99(a)(1) (defining an exemptive letter as ``a
                written grant of relief issued by the staff of a Division of the
                Commission from the applicability of a specific provision of the Act
                or of a rule, regulation or order issued thereunder by the
                Commission''). Such exemptive letters are typically issued subject
                to conditions determined by Commission staff to be necessary or
                appropriate, and further, these letters are subject to Commission
                review prior to issuance.
                ---------------------------------------------------------------------------
                 The Commission further advises that, at any time, even if a CPO is
                unsuccessful in its request for such exemptive letter relief, persons
                with CSDs may submit an application for CPO registration, in which any
                and all statutory disqualifications would be disclosed as required by
                Forms 7-R and 8-R, and reviewed through the existing registration
                process.\89\ Utilizing this existing process allows for the detailed
                analysis of each disqualification, and all of the facts related
                thereto, specifically with respect to the propriety of the Commission
                permitting such person to register as a CPO, and/or to list a principal
                with any such disqualifications in its background. This assessment
                further includes determining whether any conditions or restrictions
                might sufficiently mitigate the customer protection risks posed by the
                statutorily disqualified person or principals.\90\ Should the
                determination be made to permit the registration, such persons would be
                subject to the Commission's ongoing oversight regarding their commodity
                pool operations, and subject to all statutory and regulatory
                obligations applicable to registered CPOs and their principals. The
                Commission believes that these existing procedures for seeking
                individualized exemptive letter relief under part 4 of the Commission's
                regulations, as well as the registration process, present appropriate
                methods for considering alternative outcomes, where appropriate, from
                the prohibition of Covered Statutory Disqualifications in exempt CPOs
                adopted herein.
                ---------------------------------------------------------------------------
                 \89\ See, e.g., 17 CFR 3.10.
                 \90\ 7 U.S.C. 12a(2) (providing that the Commission has the
                authority to condition, restrict, or suspend the registration of any
                person under the Act). See also 17 CFR 3.60 (establishing the
                Commission's regulatory procedure to deny, condition, suspend,
                revoke, or place restrictions upon registration pursuant to sections
                8a(2), 8a(3), and 8a(4) of the Act). The Commission has delegated
                the implementation of its registration authority to NFA. Performance
                of Registration Functions by National Futures Association, 49 FR
                39593 (Oct. 9, 1984) (delegating by Commission Order the
                registration function to NFA with respect to futures commission
                merchants, CPOs, commodity trading advisors, and the associated
                persons thereof).
                ---------------------------------------------------------------------------
                vi. Timeframe for Exempt CPO Compliance With New Regulation
                4.13(b)(1)(iii)
                 The Commission also received and considered multiple comments
                regarding the exact timing of the effective and compliance dates
                regarding Proposed Regulation 4.13(a)(6). As stated above, the
                Commission anticipates that the changes in approach employed in this
                Final Rule should reduce the analysis required in order to comply.
                Nonetheless, the Commission believes it appropriate to facilitate
                persons claiming an exemption under Regulation 4.13 in transitioning
                and adjusting to the application of new Regulation 4.13(b)(1)(iii).
                Although the Final Rule will be effective within 60 days of
                publication, the Commission has determined not to mandate compliance
                with the additional representation required by new Regulation
                4.13(b)(1)(iii) for CPOs currently relying on an exemption in
                Regulation 4.13, as of that effective date. The Commission is
                establishing for these particular CPOs a compliance date of March 1,
                2021, which coincides with the deadline for persons filing annual
                reaffirmation notices under Regulation 4.13(b)(1) in the upcoming 2021
                filing cycle.
                 Although the Commission is declining to ``grandfather'' existing
                exempt CPOs with respect to the Final Rule, because it believes doing
                so may dilute any positive effect on customer protection the amendment
                would have, persons currently claiming an exemption from CPO
                registration may continue to do so, while identifying, classifying, and
                checking the backgrounds of the claiming person and its principals. The
                additional compliance period will allow currently exempt CPOs to
                continue operating their exempt pools, while they conduct the necessary
                inquiries regarding the claimant and principals (if they have not
                already been required to do so due to being otherwise registered).
                 On the other hand, persons claiming a Regulation 4.13 exemption for
                the first time on or after the Final Rule's effective date will not be
                provided additional compliance time. Publication of the Final Rule
                serves as notice to such persons that, to successfully claim an
                exemption from CPO registration, they will be thereafter required to
                identify their principals, conduct background checks, and represent
                that neither the person nor its principals are subject to the Covered
                Statutory Disqualifications, unless such offenses were disclosed in a
                registration application already approved by the Commission or NFA. The
                Commission believes this distinction between existing and new claimants
                under Regulation 4.13 is reasonable because persons establishing a new
                exempt CPO generally would have the opportunity to identify and check
                principals as part of the start-up process for the CPO and pool
                business, and prior to operating an exempt pool for the first time.
                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.\91\ 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. The regulatory amendments adopted herein affect only
                persons registered or required to be registered as CPOs and persons
                claiming exemptions from registration as such. 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).\92\ Such CPOs will generally continue to
                qualify for the exemption from registration, though the Commission
                believes that such exempt CPOs claiming Regulation 4.13(a)(2) may incur
                some costs as a result of the Final Rule. Like most other exempt CPOs,
                they will also be required to identify their principals and affirm that
                neither they nor the claiming entity
                [[Page 40887]]
                have in their backgrounds a Covered Statutory Disqualification. The
                Commission notes that this requirement will apply equally to all
                persons filing a notice of exemption under Regulation 4.13, after the
                effective date of the Final Rule, and that all CPOs currently claiming
                an exemption, including those that are small entities for RFA purposes,
                are subject to the guidance herein, requiring them to comply with new
                Regulation 4.13(b)(1)(iii) by March 1, 2021. The Commission did not
                receive any comments on its analysis of the application of the RFA to
                the Proposal or Proposed Regulation 4.13(a)(6).
                ---------------------------------------------------------------------------
                 \91\ 5 U.S.C. 601, et seq.
                 \92\ 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). As of April 20,
                2020, there are approximately 313 entities claiming this exemption.
                ---------------------------------------------------------------------------
                 The costs of new Regulation 4.13(b)(1)(iii), which are expected to
                vary depending on the size and complexity of the CPO in question, will
                generally be incurred once by exempt CPOs: Either at the compliance
                date required by the Final Rule, or at the formation of a new exempt
                CPO after the Final Rule is effective. The Commission believes further
                that, as small entities which are typically less complex
                organizationally, CPOs exempt under Regulation 4.13(a)(2) may
                potentially have an easier time identifying, classifying, and verifying
                the backgrounds of their principals. As such, the Commission believes
                that such small CPOs will incur, in general, lower costs, especially
                when compared to other types of exempt CPOs that are more likely to
                employ complex business structures or have more principals to identify
                and review.\93\ If an exempt CPO or its principal has a Covered
                Statutory Disqualification in its background, the Commission recognizes
                that such person could be significantly impacted, as the person would
                therefore likely be required to replace the disqualified principal to
                continue operating, or under some circumstances, may be required to
                even wind up and cease operating their pool(s) as an exempt CPO.
                ---------------------------------------------------------------------------
                 \93\ Persons claiming an exemption under Regulation 4.13(a)(3),
                for example, include persons operating complex pooled investment
                vehicle structures that typically have at least several principals
                operating the CPO and pools.
                ---------------------------------------------------------------------------
                 Throughout this Final Rule, the Commission has evaluated and taken
                into consideration the amendment's impact on small exempt CPOs. Though
                the Commission lacks sufficient data to predict exactly how many exempt
                CPOs may ultimately be required to cease pool operations by virtue of
                the Final Rule, the Commission expects very few CPOs exempt under
                Regulation 4.13(a)(2) will be required to cease operations as a result.
                The current number of exempt CPOs that are also small entities is
                relatively low (approximately 313), and the costs of new Regulation
                4.13(b)(1)(iii) are generally limited in occurrence, as discussed
                above. Finally, the Commission is also providing guidance in the Final
                Rule that provides additional time for certain affected persons to
                comply and incur costs resulting from this amendment, as an effort to
                mitigate disruption to these businesses. Therefore, the Commission
                concludes that the Final Rule does 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 regulation adopted by
                the Commission in the Final Rule 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.\94\ 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 Commission believes that as adopted, the Final Rule results in a
                collection of information within the meaning of the PRA, as discussed
                below. As such, the publication of a PRA notice soliciting comment
                regarding the Commission's estimated burden calculation for new
                Regulation 4.13(b)(1)(iii) will be required.
                ---------------------------------------------------------------------------
                 \94\ See 44 U.S.C. 3501, et seq.
                ---------------------------------------------------------------------------
                 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:
                Collections 3038-0005 and 3038-0023.\95\ In the 2019 Final Rules, the
                Commission adopted amendments to 17 CFR part 4, submitted those final
                amendments for OMB approval, and amended those information collections
                to reflect the regulatory changes adopted by that final rulemaking.\96\
                Significantly, because Proposed Regulation 4.13(a)(6) was initially
                proposed as a substantive requirement to be applicable to any person
                who desires to claim an exemption under paragraphs (a)(1), (a)(2),
                (a)(3), (a)(4), or (a)(5) in this section, the Commission never
                considered the proposed amendment in the context of the PRA or those
                collections of information. In the Proposal, the Commission invited the
                public and other Federal agencies to comment on any aspect of the
                information collection requirements discussed therein.\97\ The
                Commission did not receive any such comments.
                ---------------------------------------------------------------------------
                 \95\ Proposal, 83 FR at 52918.
                 \96\ See 2019 Final Rules, 84 FR at 67348; 84 FR at 67353.
                 \97\ Proposal, 83 FR at 52920.
                ---------------------------------------------------------------------------
                 As discussed above, the Final Rule adopts new Regulation
                4.13(b)(1)(iii), which requires a person filing a notice of exemption
                under Regulation 4.13(b)(1) to represent that neither the claimant nor
                any of its principals has in their backgrounds a Covered Statutory
                Disqualification that would require disclosure, if the claimant sought
                registration with the Commission. Because Proposed Regulation
                4.13(a)(6) did not require any additional information to be provided as
                part of the notice filed to claim an exemption under Regulation 4.13,
                the Commission did not account in the Proposal for any PRA burden
                associated with an additional representation in the notice filing
                required under Regulation 4.13(b)(1). Therefore, concurrent with the
                Final Rule, the Commission is updating the estimated burden associated
                with Regulation 4.13(b)(1), as amended by this Final Rule, and seeking
                public comment on those estimates in a PRA notice, separately published
                in this Federal Register.
                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.\98\ 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.
                ---------------------------------------------------------------------------
                 \98\ 7 U.S.C. 19(a).
                ---------------------------------------------------------------------------
                i. General Costs and Benefits
                 The baseline for the Commission's consideration of the costs and
                benefits of the Final Rule is the regulatory status quo, as determined
                by the CEA and the Commission's existing regulations. The Commission
                has endeavored to assess the costs and benefits of the Final Rule
                [[Page 40888]]
                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. Therefore, the below discussion of costs and benefits
                refers to the effects of the Final Rule on all activity covered by the
                amended regulations. Consequently, the Commission notes that some
                entities affected by the Final Rule are located outside of the United
                States.
                ii. Brief Overview of the Final Rule
                 The Final Rule adds new paragraph (b)(1)(iii) to the annual notice
                filing requirement in Regulation 4.13(b)(1), which will, once
                effective, require all persons filing a notice of exemption under
                Regulation 4.13 to represent that neither they nor their principals
                have in their backgrounds a Covered Statutory Disqualification, unless
                such disqualification arises from a matter which was disclosed in
                connection with a previous application for registration, if such
                registration was granted. The Commission intends for CPOs claiming a
                notice of exemption as of the Final Rule's effective date to first make
                this representation in the 2021 reaffirmation of the exemption, i.e.,
                March 1, 2021. The Commission believes that the adjustments to the
                Final Rule, discussed in detail above, as well as its guidance
                establishing an extended compliance period for currently exempt CPOs,
                address the majority of public comments received in response to
                Proposed Regulation 4.13(a)(6). The Commission concludes therefore that
                these efforts appropriately balance the Commission's regulatory
                interests with the costs of compliance to affected persons. New
                Regulation 4.13(b)(1)(iii) will effectively prohibit Covered Statutory
                Disqualifications, i.e., those listed in CEA section 8a(2), in persons
                filing a notice of exemption under Regulation 4.13, as well as in their
                principals, in a more tailored manner than the proposed amendment. As a
                result, the Commission believes the Final Rule addresses the
                Commission's customer protection concerns with respect to the exempt
                CPO population, while still reducing the regulatory burdens for exempt
                CPOs and their commodity pools.
                ii. Benefits and Costs of the Final Rule
                 The Commission believes that prohibiting persons who are
                statutorily disqualified under CEA section 8a(2), or who employ
                principals so disqualified, from claiming exemptions under Regulation
                4.13 will result in several benefits. As discussed in further detail
                above and in the Proposal, the Commission has concerns that ``pool
                participants may be exposed to risk posed by regulations permitting the
                operation of an offered [exempt] pool by a person who, generally, would
                not otherwise be permitted to register with the Commission.'' \99\ The
                Commission has noted that, ``even if the activities of a CPO do not
                rise to a level warranting Commission oversight through registration, a
                prospective participant should be able to be confident that a
                collective investment vehicle using commodity interests is not operated
                by a person,'' who, for example, has previously been the subject of an
                injunction relating to fraud or embezzlement.\100\
                ---------------------------------------------------------------------------
                 \99\ See Proposal, 83 FR at 52921.
                 \100\ Proposal, 83 FR at 52921-22 (citing 7 U.S.C. 12a(2)(C)(ii)
                as an example of a disqualification proposed to be prohibited by
                this amendment).
                ---------------------------------------------------------------------------
                 Prior to the Final Rule, persons claiming an exemption from CPO
                registration under Regulation 4.13 generally were not required to meet
                any basic conduct standards, in contrast to persons registered or
                required to register as CPOs with the Commission.\101\ The Final Rule
                remedies that regulatory gap by requiring that a person filing a notice
                of exemption from CPO registration under Regulation 4.13 meets
                substantively similar basic conduct standards as a person registered or
                required to be registered as a CPO. The Commission expects that
                correcting this regulatory inconsistency will increase overall investor
                confidence by setting a standard applicable to the vast majority of
                exempt CPOs operating pooled investment vehicles in the commodity
                interest markets. The result of the Final Rule will be that persons
                and/or principals who have a Covered Statutory Disqualification not
                previously disclosed in a prior approved application for registration
                will generally be prohibited from operating or soliciting the public
                for investment in exempt pools, or from serving as a principal of an
                exempt CPO.
                ---------------------------------------------------------------------------
                 \101\ See supra pt. II.c.i for additional historical and legal
                discussion.
                ---------------------------------------------------------------------------
                 Because the Final Rule will require such CPOs to assess themselves
                and their principals for any CEA section 8a(2) disqualifications, the
                Commission believes that once it is fully implemented, new Regulation
                4.13(b)(1)(iii) may provide reasonable assurance that persons subject
                to the Covered Statutory Disqualifications are not soliciting exempt
                pool participants and/or managing their capital via exempt pools.
                Moreover, the Commission expects that both prospective and actual
                participants in pools operated by exempt CPOs will experience enhanced
                customer protection by removing statutorily disqualified CPOs and/or
                principals thereof from the commodity interest markets. The Commission
                believes further that those participants will likely, as a result, also
                experience improved overall confidence in the exempt commodity pool
                space.
                 The Commission understands that the Final Rule could also result in
                potentially substantial costs to persons filing a notice of exemption
                under Regulation 4.13(b)(1). In the Proposal, the Commission further
                identified and described ``costs associated with either divesting from
                commodity interests held within a collective investment vehicle, or in
                completely winding up a commodity pool's operations,'' that could
                result from Proposed Regulation 4.13(a)(6).\102\ In addition to these
                ``wind-up'' costs, the Commission understands that principal
                identification and classification processes will likely result in costs
                to each affected exempt CPO, and that those costs will vary based on
                the overall structure of the CPO, the number of principals it employs,
                and other circumstances unique to its pool operations. Although these
                potential costs were a point of significant concern for several
                commenters, and the Commission specifically solicited comment in the
                Proposal on the ``impact of adopting [Proposed Regulation 4.13(a)(6)]
                on industry participants and currently exempt CPOs,'' commenters did
                not provide specific data or estimates quantifying the actual costs of
                compliance resulting from the proposed amendment.\103\
                ---------------------------------------------------------------------------
                 \102\ Proposal, 83 FR at 52923 (though the Commission noted that
                it ``lacks sufficient data to determine how many CPOs might be
                required to cease operating commodity pools pursuant to the
                exemptions . . . due to the presence of statutorily disqualified
                [persons or] principals'').
                 \103\ Proposal, 83 FR at 52916.
                ---------------------------------------------------------------------------
                 Despite the lack of information from commenters regarding potential
                or actual costs to affected persons, the Commission nonetheless
                considered those public comments, and strove to balance those costs
                with its regulatory and policy goals in a way that benefits market
                participants, customers, and the
                [[Page 40889]]
                general public interest. By narrowing the scope of the Covered
                Statutory Disqualifications in new Regulation 4.13(b)(1)(iii) to those
                listed in CEA section 8a(2), the Commission believes that the Final
                Rule strikes an appropriate regulatory balance between customer
                protection concerns and increased regulatory requirements. This
                adjustment means the required representation will target the most
                serious offenses warranting the statutory disqualifications listed in
                the CEA within the general population of exempt CPOs, including their
                principals. Moreover, the Final Rule further reduces procedural
                confusion by limiting the CSDs to those disqualifications that would
                serve as a bar to registration with the Commission, absent an
                additional hearing or proceeding. Finally, by providing guidance herein
                that extends the compliance period for persons currently relying upon a
                claim of exemption under Regulation 4.13(b)(1), the Commission wishes
                to facilitate compliance with the Final Rule. Specifically, the
                Commission intends this guidance to mitigate the risk of business
                interruption by providing affected persons with additional time to
                assess themselves and their principals, and to identify and address any
                CSDs that are found. The Commission is employing this tailored and
                gradual approach for the Final Rule and its implementation to, among
                other things, generally moderate costs to affected persons caused by
                new Regulation 4.13(b)(1)(iii).
                iii. Section 15(a) Considerations
                1. Protection of Market Participants and the Public
                 The Commission considered whether the Final Rule will have any
                detrimental effect on the customer protections of the Commission's
                regulatory regime and has concluded that the Final Rule will generally
                have a positive effect on the protection of market participants and the
                public. Through new Regulation 4.13(b)(1)(iii), the Commission is
                remedying an inconsistency, in which a person who may be prohibited by
                the CEA from conducting activities requiring registration could
                nonetheless engage in those activities by claiming a CPO registration
                exemption instead. The Final Rule will ensure that persons filing a
                notice of exemption under Regulation 4.13(b)(1), as amended, and
                persons registered or required to be registered as CPOs with the
                Commission will be treated similarly--in either instance, all such
                persons must be able to represent that they and their principals are,
                at a minimum, not disqualified under CEA section 8a(2), prior to
                soliciting the public for investment in, or otherwise operating a
                commodity pool. The Commission believes that basic conduct standards
                applicable to CPOs, regardless of registration status, will improve
                customer protection within the Commission's CPO regulatory program.
                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. The Commission
                believes that the Final Rule may positively impact the efficiency,
                competitiveness, and financial integrity of the commodity interest
                markets. The Final Rule will require all persons filing a notice under
                amended Regulation 4.13(b)(1) to represent that neither they nor their
                principals have in their backgrounds a Covered Statutory
                Disqualification. To the extent that disqualified persons are prevented
                from being an exempt CPO or from serving as a principal of an exempt
                CPO, as a result of new Regulation 4.13(b)(1)(iii), the Commission
                expects such disqualified persons (and principals) would either exit
                the commodity interest markets, or at least, discontinue operating in
                the exempt commodity pool space. Therefore, because it will ultimately
                cause the removal of entities, persons, and principals disqualified
                under CEA section 8a(2) from the exempt commodity pool space, the
                Commission believes that the Final Rule could have a positive impact on
                the efficiency, competitiveness, and financial integrity of the
                commodity interest markets overall.
                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 Rule generally results in limited, discrete 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 Rule will not have a significant
                impact on the practice of sound risk management because the manner in
                which various CPOs, pooled investment vehicles, and their respective
                principals organize, register, or claim an exemption from such
                registration has only a small influence on how such 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 Commission did not identify any additional
                public interest considerations not already discussed above.
                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.\104\ 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.
                ---------------------------------------------------------------------------
                 \104\ 7 U.S.C. 19(b).
                ---------------------------------------------------------------------------
                 The Commission has considered the Final Rule to determine whether
                it is anticompetitive and has identified no anticompetitive effects.
                Because the Commission has determined the Final Rule is not
                anticompetitive and has 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:
                [[Page 40890]]
                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. Amend Sec. 4.13 by:
                0
                a. Revising paragraph (b)(1)(ii); and
                0
                b. Redesignating paragraph (b)(1)(iii) as (b)(1)(iv), and adding new
                paragraph (b)(1)(iii).
                 The addition and revision read as follows:
                Sec. 4.13 Exemption from registration as a commodity pool operator.
                * * * * *
                 (b)(1) * * *
                 (ii) Specify the paragraph number pursuant to which the person is
                filing the notice (i.e., Sec. 4.13(a)(1), (2), (3), or (5)) and
                represent that the pool will be operated in accordance with the
                criteria of that paragraph;
                 (iii) Represent that neither the person nor any of its principals
                has in its background a statutory disqualification that would require
                disclosure under section 8a(2) of the Act if such person sought
                registration, unless such disqualification arises from a matter which
                was disclosed in connection with a previous application for
                registration, where such registration was granted; and
                * * * * *
                 Issued in Washington, DC, on June 5, 2020, 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: Prohibiting Exemptions
                Under Regulation 4.13 on Behalf of Persons Subject to Certain Statutory
                Disqualifications--Commission Voting Summary, Chairman's Statement, and
                Commissioners' Statements
                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--Supporting Statement of Chairman Heath P. Tarbert
                 As Robert Louis Stevenson aptly put it, ``Everybody, sooner or
                later, sits down to a banquet of consequences.'' \1\
                ---------------------------------------------------------------------------
                 \1\ While this is the popular rendering of Stevenson's quote, it
                appears to be apocryphal. Stevenson apparently used the phrase
                ``game of consequences.'' See Spurious Quotations, The Robert Louis
                Stevenson Archive, http://www.robert-louis-stevenson.org/richard-dury-archive/nonquotes.htm. Regardless whether Stevenson referred to
                a banquet or a game, his point was the same: Everyone must face the
                consequences of his or her actions. That is true for life generally,
                and for the derivatives markets specifically.
                ---------------------------------------------------------------------------
                 Today we are focused on the consequences of bad acts that result
                in ``statutory disqualification'' under the Commodity Exchange Act
                (``CEA''). These acts include the most serious types of financial
                crimes, such as embezzlement, theft, extortion, fraud,
                misappropriation, and bribery. Once an individual is statutorily
                disqualified, the CFTC may deny or revoke his or her registration.
                The same is true for corporate entities.
                 It stands to reason that someone who has been statutorily
                disqualified--and thus has no right to register with the CFTC--would
                be precluded from managing other people's money and positions in the
                derivatives markets the CFTC regulates. But currently, this is not
                exactly the case. As it turns out, a statutorily disqualified person
                who wishes to operate a fund that trades derivatives may simply
                claim one of the exemptions from registration as a commodity pool
                operator (``CPO'') under CFTC Rule 4.13. Although each of these
                exemptions has a number of conditions, the absence of statutory
                disqualification is not currently among them.
                 Today's final rule closes this loophole for bad actors. Under
                our rule as amended, a CPO claiming a registration exemption would
                be required to certify that neither the CPO nor any of its
                principals has in its background conduct that would result in
                automatic statutory disqualification under the CEA. I believe this
                rule will enhance customer protections and public confidence in the
                integrity of the derivatives markets by ensuring that bad actors
                cannot gain access to the funds of innocent, third-party investors
                simply by filing an exemption claim.\2\
                ---------------------------------------------------------------------------
                 \2\ The Commission has adopted a registration exemption for CPOs
                that meet the definition of ``family office'' under the Securities
                and Exchange Commission's regulations governing investment advisers.
                84 FR 67,368 (Dec. 10, 2019). Section 409 of the Dodd-Frank Act
                excluded family offices from the definition of ``investment
                adviser'' subject to the Investment Advisers Act. Given the clear
                legislative intent to remove family offices from regulation, it
                would be inappropriate for the CFTC to exert its own oversight over
                such offices. As Congress recognized in the Dodd-Frank Act,
                regulatory oversight over family offices would be a wasteful use of
                taxpayer funds, as such offices are owned and controlled by a single
                wealthy family. Given their affluence and familial ties, these
                investors generally neither desire nor need investor protections
                designed for the retail public at large. Consistent with this
                approach, today's prohibition on statutory disqualification does not
                apply to CPOs that are family offices. That said, we cannot allow
                bad actors to operate a family office in a way that adversely
                affects the market as a whole--for example, by engaging in
                manipulative or deceptive transactions through the family office. To
                that end, I have asked the Division of Swap Dealer and Intermediary
                Oversight to conduct a special call to determine how many family
                office managers would be prohibited from claiming the exemption if
                they were covered by this rule.
                ---------------------------------------------------------------------------
                 In so doing, we also strike a balance between bad acts that
                warrant automatic disqualification and other behavior that requires
                the opportunity for a hearing before the subject is disqualified.
                Because the CEA itself makes this kind of distinction in the context
                of registration, the Commission believes that lesser offenses \3\
                warrant different treatment than recent and more serious offenses in
                the context of registration exemptions. Thus, today's prohibition on
                statutory disqualification does not include offenses for which the
                CEA itself requires a hearing prior to disqualification.
                ---------------------------------------------------------------------------
                 \3\ This includes offenses that are less recent (e.g., felony
                convictions that are more than ten years old) or are less relevant
                to a person's fitness to handle customer funds (e.g., convictions
                for felonies that do not involve financial wrongdoing). See, e.g.,
                CEA Section 8a(3)(D).
                ---------------------------------------------------------------------------
                 I am comfortable with this exclusion, both because it is
                consistent with legislative intent and because CPOs relying on a
                Rule 4.13 registration exemption generally do not manage the money
                and derivatives positions of the retail public at large. Rather,
                these CPOs are limited by the terms of their exemption to small
                pools of select participants, pools limited to sophisticated
                investors, pools with de minimis derivatives positions, and the
                like.\4\
                ---------------------------------------------------------------------------
                 \4\ The rule also excludes statutory disqualifications that were
                previously disclosed to the Commission in a registration
                application, if the Commission chose to permit registration
                notwithstanding the disqualification. This exclusion is relevant
                because a CPO may be registered with the CFTC with respect to
                certain pools that it manages and claim a registration exemption
                with respect to other pools.
                ---------------------------------------------------------------------------
                 In addition to protecting customers from bad actors and
                enhancing the integrity of the derivatives profession, this rule
                also furthers the CFTC's strategic goal of ``being tough on those
                who break the rules.'' \5\ No longer will financial wrongdoers be
                able to use registration exemptions as a loophole to avoid the full
                consequences of their actions. For these reasons, I am pleased we
                are acting to finalize this rule.
                ---------------------------------------------------------------------------
                 \5\ See Draft CFTC 2020-2024 Strategic Plan, 85 FR 29,935 (May
                19, 2020), https://www.govinfo.gov/content/pkg/FR-2020-05-19/pdf/2020-10676.pdf.
                ---------------------------------------------------------------------------
                 Finally, it is worth remembering that sound regulation of the
                U.S. derivatives markets stems from a robust federal framework that
                the CFTC primarily administers, complemented and strengthened by an
                equally robust regime of self-regulation. A central pillar of that
                regime is the National Futures Association (``NFA''), the main self-
                regulatory organization for CPOs. NFA's strong support for this rule
                is just one of countless actions that demonstrate their steadfast
                commitment to the integrity of the derivatives community.\6\
                ---------------------------------------------------------------------------
                 \6\ See NFA Comment Letter on Registration and Compliance
                Requirements for Commodity Pool Operators and Commodity Trading
                Advisors (Dec. 17, 2018).
                ---------------------------------------------------------------------------
                [[Page 40891]]
                Appendix 3--Supporting Statement of Commissioner Brian Quintenz
                 I am pleased to support today's final rule amending the
                procedures for certain commodity pool operators (CPOs) to claim an
                exemption from registration.\1\ It is sound policy to prevent a firm
                from claiming a registration exemption if the entity or its
                principals are ``statutorily disqualified'' under section 8a(2) of
                the Commodity Exchange Act, when the same disqualification would
                prevent them from registering with the Commission. The
                disqualification applicable under today's amendment covers some of
                the most serious offenses under the Act, including fraud. While an
                exempt CPO is more limited in its activities than a registered CPO,
                for example, no pool has more than 15 participants \2\ or the CPO's
                commodity interest activity must remain below certain initial margin
                and notional amount thresholds,\3\ an exempt CPO still manages money
                for the public. I therefore agree with today's amendment that the
                firm should be held to one of the most fundamental customer
                protection standards under the Commodity Exchange Act.
                ---------------------------------------------------------------------------
                 \1\ Amended Commission regulation 4.13(b)(1)(iii) (17 CFR
                4.13(b)(1)(iii)).
                 \2\ Commission regulation 4.13(a)(2).
                 \3\ Commission regulation 4.13(a)(3).
                ---------------------------------------------------------------------------
                 I thank the Commission's staff for their work on this
                rulemaking, in particular for their thoughtful responses to issues
                that had been raised by commenters.
                Appendix 4--Concurring Statement of Commissioner Rostin Behnam
                 I support today's adoption of a final rule (the ``Final Rule'')
                requiring any person that files with the CFTC a notice claiming an
                exemption from registration as a commodity pool operator (``CPO'')
                under Regulation 4.13 of the Commodity Exchange Act (``CEA'' or the
                ``Act'') to affirmatively represent that neither the claimant nor
                any of the CPO's principals has in its background any statutory
                disqualifications listed in section 8a(2) of the CEA, which are
                required to be disclosed as a part of a CPO registration application
                with the Commission. Beyond closing a regulatory gap that allows
                certain persons that would generally fail to meet the CEA's basic
                conduct requirements to nevertheless claim an exemption from CPO
                registration, the Final Rule invigorates the Commission's stance as
                an active regulator with respect to the most diverse registration
                category within our jurisdiction. As I have said before, CPOs (and
                commodity trading advisors or ``CTAs'') are often identifiable by
                variable organizational structures, investment focus, participation,
                and solicitation, as well as complexity in how they are regulated
                within our authority.\1\ These factors demand that when we act, we
                do so with a laser focus on customer protections. I am pleased that
                this Final Rule aggressively advances customer protection in a
                tangible way.
                ---------------------------------------------------------------------------
                 \1\ Rostin Behnam, Statement of Concurrence by CFTC Commissioner
                Rostin Behnam: Amendments to Registration and Compliance
                Requirements for Commodity Pool Operators and Commodity Trading
                Advisors, Nov. 25, 2019, https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement112519.
                ---------------------------------------------------------------------------
                 I believe it is fully within our statutory duty to provide, at
                the very least, a foundational level of security on which customers,
                regardless of their experience and aptitude, can rely when parsing
                and considering what can seem like an endless amount of important
                information and fine print. Today's Final Rule provides that footing
                for exempt commodity pool participants by generally prohibiting
                persons who have, or whose principals have, in their backgrounds any
                of the statutory disqualifications listed in CEA section 8a(2)--
                which are generally egregious, recent in time, and based upon a
                previous finding or order by the Commission, a court, or another
                governmental body--from soliciting and accepting funds for
                participation in commodity pools, even if they are exempt.
                 I am pleased that the Final Rule and its preamble address the
                significant number of responsive public comments, especially those
                seeking clarity on process and procedure. Last fall, when the
                Commission finalized several amendments to Part 4 of the regulations
                addressing various registration and compliance requirements for CPOs
                and CTAs, I commended, among other things, its decision to not move
                forward at that time on the part of the proposal that led to today's
                Final Rule.\2\ That decision has led to a more thoughtful
                consideration of the comments received, the practicalities of the
                proposal, and the Commission's need to fulfill its regulatory goals
                while remaining true to the Act. To that end, I appreciate that the
                Final Rule preserves the Commission's direct and delegated
                authorities under CEA section 8a(2) and Regulation 4.12(a) to
                ultimately evaluate fitness for registration--or exemption, as the
                facts may dictate.
                ---------------------------------------------------------------------------
                 \2\ Id.
                ---------------------------------------------------------------------------
                Appendix 5--Statement of Commissioner Dan M. Berkovitz
                 I support today's final rule to prohibit commodity pool
                operators (``CPOs'') or their principals who are subject to
                statutory disqualification under Section 8a(2) from claiming an
                exemption from registration. This rule narrows a loophole in our CPO
                registration framework and strengthens the Commission's regulations
                to protect customers and market integrity.
                 Section 8a(2) of the Commodity Exchange Act (``CEA'') lists the
                offenses for which the Commission may refuse, suspend, or condition
                registration without a prior hearing. These offenses include major
                violations of a number of laws and regulations governing financial
                markets, including felony convictions for embezzlement, theft,
                extortion, and fraud.\1\ Today's rule will ensure that persons who
                are restricted under Section 8a(2) from operating in registered
                activities cannot escape such restrictions by engaging in activities
                that are exempt from registration.
                ---------------------------------------------------------------------------
                 \1\ CEA Section 8a(2)(D)(iii).
                ---------------------------------------------------------------------------
                 Although to a large degree this rule closes an existing loophole
                in our regulations, it perpetuates a glaring deficiency by failing
                to hold CPOs of family offices or their principals to the same
                standards of conduct as other exempt CPOs. The risks to market
                integrity presented by this omission are compounded by another
                recent rulemaking exempting CPOs of family offices from a
                requirement to notify the Commission if they claim an exemption from
                registration.\2\ Thus, under this set of new rules completed today,
                CPOs of family offices are exempt from registration, exempt from
                providing notice that they are using an exemption, and exempt from
                the statutory disqualifications that generally apply to all other
                CPOs. This triad of exemptions for CPOs of family offices leaves the
                Commission uniquely unaware of the activities and integrity of these
                entities.
                ---------------------------------------------------------------------------
                 \2\ Final Rule, Registration and Compliance Requirements for
                Commodity Pool Operators (CPOs) and Commodity Trading Advisors:
                Family Offices and Exempt CPOs, 84 FR 67355 (Dec. 10, 2019).
                ---------------------------------------------------------------------------
                 As I noted in my dissent on the final rule that exempted CPOs of
                family offices from notifying the Commission that they are claiming
                an exemption, family offices today are not ``mom and pop''
                operations that invest small sums in commodities, but rather large
                and sophisticated asset management enterprises established by and
                for mega-millionaires and billionaires.\3\ The Commission justified
                these exemptions on the grounds that related family members in these
                ``sophisticated'' entities do not need the customer protections that
                the CFTC otherwise applies to CPO activities. However, regardless of
                whether this assessment is accurate, customer protection is just one
                of several objectives of the Commission's CPO regulations. The
                regulation of CPOs facilitates the Commission's oversight of the
                derivative markets, management of systemic risks, and mandate to
                ensure safe trading practices.\4\ There is no basis to conclude that
                the activities of large family office CPOs pose less of a concern in
                these areas than the activities of other exempt or non-exempt CPOs.
                ---------------------------------------------------------------------------
                 \3\ Dissenting Statement of Commissioner Dan M. Berkovitz:
                Rulemaking to Provide Exemptive Relief for Family Office CPOs:
                Customer Protection Should be More Important than Relief for
                Billionaires, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement112519.
                 \4\ See, e.g., Commodity Pool Operators and Commodity Trading
                Advisors: Compliance Obligations, 77 FR 11252, 11253, 11275 (Feb.
                24, 2012); upheld in Investment Company Institute v. CFTC, 720 F.3d
                370 (D.C. Cir. 2013). In Section 4l of the CEA, Congress declared,
                ``the activities of commodity trading advisors and commodity pool
                operators are affected with a national interest in that, among other
                things . . . their operations are directed toward and cause the
                purchase and sale of commodities for future delivery . . . and the
                foregoing transactions occur in such volume as to affect
                substantially transactions in contract markets.'' 7 U.S.C. 6l.
                ---------------------------------------------------------------------------
                 The regulatory principle here is straightforward. We are not
                only responsible for monitoring market participants that pose risk
                to customers, but also those who pose risk to the integrity of our
                markets. Individuals who commit felonies or other serious violations
                affecting the integrity of financial markets should not be permitted
                to trade in CFTC markets, particularly without at least some
                supervision and oversight. If a
                [[Page 40892]]
                CPO of a family office or one of its principals has engaged in
                conduct serious enough to be subject to the disqualification
                provisions of Section 8a(2), such as fraud or misappropriation, then
                it should seek registration with the Commission and be subject to
                our oversight.
                 However, I am pleased that at my request, the CFTC staff will be
                making a special call to CPOs of family offices to determine how
                many, if any, are subject to statutory disqualification under
                Section 8a(2). The Commission currently has no information in this
                regard. I have consistently supported basing our regulatory
                decisions on the best available data. The data we will obtain from
                this special call will inform our judgment about whether further
                action is necessary to protect customers and the market.
                 I also am pleased that the Commission has declined to exclude
                registered investment advisers from the scope of this rule. The
                Securities and Exchange Commission has a different statutory
                disqualification regime. Registrants should abide by CFTC rules when
                they operate in our markets.
                 Going forward, the Commission should propose similar
                restrictions on the claiming of exemptions by statutorily
                disqualified commodity trading advisors. While this rule narrows one
                of the gaps in our Part 4 regulatory framework, this additional
                significant gap remains and should be closed.
                 I would like to thank the staff of the Division of Swap Dealer
                and Intermediary Oversight for working with my office to incorporate
                some of our comments and proposed revisions to this rule. As a
                matter of course, a collaborative rulemaking process that takes into
                account the input from all five Commissioners will produce better
                regulations.
                [FR Doc. 2020-12607 Filed 7-7-20; 8:45 am]
                BILLING CODE 6351-01-P
                

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