[Federal Register Volume 62, Number 193 (Monday, October 6, 1997)]
[Notices]
[Pages 52088-52090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26389]


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COMMODITY FUTURES TRADING COMMISSION


Performance of Certain Functions by National Futures Association 
with Respect to Commodity Pool Operators and Commodity Trading Advisors

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and Order.

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SUMMARY:The Commodity Futures Trading Commission (Commission) is 
authorizing the National Futures Association (NFA) to conduct reviews 
of disclosure documents required to be filed with the Commission by 
commodity pool operators (CPOs) and commodity trading advisors (CTAs) 
pursuant to Rules 4.26(d) and 4.36(d), respectively. In addition, the 
Commission is authorizing NFA to process the following: (1) Notices of 
eligibility for exclusion for certain otherwise regulated persons from 
the definition of CPO, pursuant to Rule 4.5; (2) notices of claim for 
exemption from certain Part 4 requirements with respect to commodity 
pools (pools) and CTAs whose participants or clients are qualified 
eligible participants (QEPs) or qualified eligible clients (QECs), 
respectively, pursuant to Rule 4.7; (3) claims of exemption from 
certain Part 4 requirements for CPOs with respect to pools that 
principally trade securities, pursuant to Rule 4.12(b); (4) statements 
of exemption from registration as a CPO, pursuant to Rule 4.13; (5) 
notices of exemption from registration as a CTA for certain persons 
registered as an investment adviser, pursuant to Rule 4.14(a)(8); and 
(6) notices of claim for exemption from provisions of Part 4 for 
certain registered CPOs operating offshore pools, pursuant to Advisory 
18-96. Further, the Commission is authorizing NFA to maintain and serve 
as the official custodian of certain Commission records.

EFFECTIVE DATE: November 1, 1997.

FOR FURTHER INFORMATION CONTACT: Until the effective date of November 
1, 1997, comments regarding this Notice and Order may be directed to 
Paul H. Bjarnason, Jr., Deputy Director, or Kevin P. Walek, Senior 
Special Counsel, Division of Trading and Markets, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., 
Washington, DC 20581. Telephone: (202) 418-5430.

United States of America

Before the Commodity Futures Trading Commission Order Authorizing the 
Performance of Certain Functions With Respect to Commodity Pool 
Operators and Commodity Trading Advisors

I. Authority and Background

    Section 8a(10) of the Commodity Exchange Act \1\ (Act) provides 
that the Commission may authorize any person to perform any portion of 
the registration functions under the Act, notwithstanding any other 
provision of law, in accordance with rules adopted by such person and 
submitted to the Commission for approval or, if applicable, for review 
pursuant to Section 17(j) of the Act \2\ and subject to the provisions 
of the Act applicable to registrations granted by the Commission. 
Section 17(o)(1) of the Act \3\ provides that the Commission may 
require NFA to perform Commission registration functions in accordance 
with the Act and NFA rules. NFA has confirmed its willingness to 
perform certain functions now performed by the Commission and has 
provided the Commission with a detailed proposal setting forth 
standards and procedures to be followed and reports to be generated in 
administering the functions discussed below.\4\
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    \1\ 7 U.S.C. 12a(10)(1994).
    \2\ 7 U.S.C. 21(j)(1994).
    \3\ 7 U.S.C. 21(o)(1)(1994).
    \4\ Letter from Robert K. Wilmouth, President of NFA, to 
Brooksley Born, Chairperson of the Commission, dated June 20, 1997.
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    Upon consideration, the Commission has determined to authorize NFA, 
effective November 1, 1997, to perform the following functions: (1) to 
conduct reviews of disclosure documents required to be filed with the 
Commission by CPOs and CTAs pursuant to Rules 4.26(d) \5\ and 4.36(d), 
respectively; (2) to process \6\ notices of eligibility for exclusion 
for certain otherwise regulated persons from the definition of CPO, 
pursuant to Rule 4.5; (3) to process notices of claim for exemption 
from certain Part 4 requirements with respect to commodity pools and 
CTAs whose participants or clients are QEPs or QECs, respectively, 
pursuant to Rule 4.7; (4) to process claims of exemption from certain 
Part 4 requirements for CPOs with respect to pools that principally 
trade securities, pursuant to Rule 4.12(b); (5) to process statements 
of exemption from registration as a CPO, pursuant to Rule 4.13; (6) to 
process notices of exemption from registration as a CTA for certain 
persons registered as an investment adviser, pursuant to Rule 
4.14(a)(8); (7) to process notices of claim for exemption from 
provisions of Part 4 for certain registered CPOs operating offshore 
pools, pursuant to Advisory 18-96; \7\ and (8) to maintain and to serve 
as the official custodian of records for the filings, notices and 
claims required by the rules listed above. As discussed below, each of 
these functions involves disclosure requirements or exemptions from 
disclosure, reporting, recordkeeping and registration requirements for 
CPOs and CTAs.
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    \5\ Commission rules referred to herein can be found at 17 CFR 
Ch. I (1997).
    \6\ As used in this Notice and Order, the term ``process'' 
generally refers to the review of the filing, notice or claim for 
compliance with applicable requirements and, as appropriate, 
provision of notice of any deficiency in the filing, notice or 
claim.
    \7\ Advisory No. 18-96, (1994-1996 Transfer Binder) Comm. Fut. 
L. Rep. (CCH) para.26,659 (April 11, 1996).
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A. CPO and CTA Compliance with Rule 4.26(d) and 4.36(d)

    Rule 4.26(d)(1) requires that a CPO file a disclosure document \8\ 
with the Commission for each pool that it operates or intends to 
operate not less

[[Page 52089]]

than 21 calendar days prior to the date the CPO first intends to 
deliver the document to a prospective participant in the pool.\9\ 
Similarly, Rule 4.36(d)(1) requires that a CTA file a disclosure 
document \10\ with the Commission for each trading program that it 
offers or intends to offer not less than 21 calendar days prior to the 
date the CTA first intends to deliver the document to a prospective 
client in the trading program. Further, pursuant to Rules 4.26(d)(2) 
and 4.36(d)(2), CPOs and CTAs, respectively, must file with the 
Commission all subsequent amendments to their disclosure documents 
within 21 calendar days of the date upon which the CPO or CTA first 
knows or has reason to know of the defect requiring the amendment. In 
addition, CPOs and CTAs may not use their disclosure documents for more 
than nine months from the effective dates of such documents, in 
accordance with Rules 4.26(a)(2) and 4.36(b), respectively. The 
Commission's Division of Trading and Markets reviews disclosure 
documents filed by CPOs and CTAs, issues comment letters noting any 
compliance issues, and works with registrants to resolve these 
issues.\11\
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    \8\ Pursuant to Rule 4.21(a), a CPO may not solicit, accept or 
receive funds, securities or other property from a prospective 
participant in a pool that it operates or intends to operate unless, 
on or before the date it engages in that activity, the COP delivers 
or causes to be delivered to the prospective participant a 
Disclosure Document for the pool containing the information set 
forth in Rule 4.24.
    \9\ Rule 4.8 provides an exemption from the 21-day prefiling 
requirement of Rule 4.26(d)(1) to CPOs with respect to pools offered 
or sold solely to ``accredited investors'' in an offering exempt 
from registration under the Securities Act of 1933, as well as to 
CPOs of 4.12(b) pools in an exempt offering under the Securities Act 
of 1933.
    \10\ Pursuant to Rule 4.31(a), a CTA may not solicit or enter 
into an agreement with a prospective client to direct or to guide 
the client's commodity interest account or trading unless, at or 
before the time it engages in the solicitation or enters into the 
agreement (whichever is earlier), the CTA delivers or causes to be 
delivered to the prospective client a disclosure document for the 
trading program containing the information set forth in the Rule 
4.34.
    \11\ 45 FR 51600, 51603 (August 4, 1980); 46 FR 26004, 26010 
(May 8, 1981).
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    NFA Compliance Rule 2-13 requires that NFA members file with NFA a 
copy of any document required to be filed with the Commission pursuant 
to Part 4 of the regulations. NFA staff review CPO and CTA disclosure 
documents during the course of on-site audits as well as through a desk 
review program, as part of its audit priority system. In light of NFA's 
experience in receiving and reviewing disclosure documents of CPOs and 
CTAs, the Commission believes that it is appropriate for NFA to 
undertake the performance of this function. Accordingly, by this Order, 
NFA is authorized to review all disclosure documents filed by CTAs and 
all disclosure documents filed by CPOs for privately offered commodity 
pools \12\ and to provide notice of deficiencies. Such review of CTA 
and CPO disclosure documents will include those documents filed 
pursuant to the instant filing procedure set forth in Commission 
Advisory 95-44.\13\
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    \12\ Pursuant to Rule 4.24(d)(3)(i), privately offered commodity 
pools are those offered pursuant to section 4(2) of the Securities 
Act of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to 
Regulation D thereunder (17 CFR 230.501 et seq.).
    \13\ CFTC Interpretative Letter No. 95-44, [1994-1996 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 26,385 (April 20, 1995).
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B. Notices of Eligibility for Exclusion From the Definition of CPO

    Rule 4.5 provides an exclusion from the definition of commodity 
pool operator for certain persons who would otherwise be considered 
commodity pool operators. This exclusion is available for certain 
otherwise regulated persons, as set forth in Rule 4.5 (a)(1) through 
(a)(4) in connection with the operation of a qualified entity as 
described in Rule 4.5(b).\14\ Eligible persons claiming exclusion 
pursuant to Rule 4.5 must file with the Commission and NFA a notice of 
eligibility containing the information specified in Rule 4.5(c). By 
this Order, NFA is authorized to process notices of eligibility for 
exclusion from the definition of the term commodity pool operator 
pursuant to Rule 4.5.
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    \14\ Rule 4.5 also excludes certain trading vehicles from the 
commodity pool definition, and thus, their operators are not 
required to file any notice or make any specified representations to 
claim exclusion from the commodity pool operator definition.
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C. Claims for Exemption From Certain Part 4 Requirements With Respect 
to Commodity Pools and CTAs Whose Participants or Clients Are QEPs or 
QECs

    Rule 4.7 provides an exemption from certain Part 4 requirements 
with respect to the operators of commodity pools whose participants are 
limited to QEPs and with respect to commodity trading advisors whose 
clients are QECs, as those terms are defined by the Rule. Any 
registered commodity pool operator meeting the requirements of Rule 
4.7(a)(2) may claim relief from certain disclosure, reporting, and 
recordkeeping requirements by filing with the Commission and NFA a 
notice of claim for exemption pursuant to Rule 4.7(a)(3). Any 
registered commodity trading advisor meeting the requirements of Rule 
4.7(b)(2) may claim relief from disclosure and recordkeeping 
requirements with respect to the accounts or qualified eligible clients 
who have given due consent to their account being an exempt account 
under Rule 4.7 by filing with the Commission and NFA a notice of claim 
for exemption pursuant to paragraph 4.7(b)(3). By this Order, NFA is 
authorized to process notices of claim for exemption filed by 
qualifying CPOs and CTAs pursuant to Rule 4.7.

D. Exemption From Certain Part 4 Requirements for CPOs With Respect to 
Pools That Principally Trade Securities

    Rule 4.12(b) provides an exemption from certain disclosure and 
reporting requirements for registered CPOs of pools which principally 
trade securities and meet the criteria set forth in Rule 4.12(b)(1). 
Eligible CPOs must file a claim of exemption with the Commission and 
NFA pursuant to Rule 4.12(b)(3). By this Order, NFA is authorized to 
process claims for exemption filed by qualifying CPOs pursuant to Rule 
4.12(b).

E. Exemption From Registration as a CPO

    Rule 4.13 provides for an exemption from registration as a CPO for 
persons operating pools which meet the criteria set forth in either 
Rule 4.13(a)(1) or Rule 4.13(a)(2). Eligible persons must file with the 
Commission and NFA copies of the statement provided to pool 
participants setting forth the information specified in Rule 
4.13(b)(1). By this Order, NFA is authorized to process statements of 
exemption from CPO registration filed by qualifying persons pursuant to 
Rule 4.13.

F. Exemption From Registration as a CTA for Certain Persons Registered 
as Investment Advisers

    Rule 4.14(a)(8) provides exemption from registration as a CTA for 
registered investment advisers whose commodity advice is directed to 
Rule 4.5 entities and who meet the other criteria set forth in Rule 
4.14(a)(8) (i)-(ii). Persons claiming exemption from CTA registration 
pursuant to Rule 4.14(a)(8) must file with the Commission and NFA a 
notice of exemption in accordance with Rule 4.14(a)(8) (iii) and (v). 
By this Order, NFA is authorized to process notices of exemption from 
CTA registration filed by qualifying persons pursuant to Rule 
4.14(a)(8).

G. Claims for Exemption From Provisions of Part 4 for Certain 
Registered CPOs Operating Offshore Pools

    Commission Advisory 18-96 makes generally available to certain 
registered CPOs relief from disclosure, reporting and certain 
recordkeeping requirements in connection with the operation of offshore 
commodity pools. Registered CPOs who operate offshore commodity pools 
may claim such relief by filing a notice of a claim for exemption with 
the

[[Page 52090]]

Commission and NFA that sets forth the representations specified in the 
Advisory. By this Order, NFA is authorized to process notices of claims 
for exemption filed by qualifying CPOs pursuant to Advisory 18-96.

H. Recordkeeping Requirements

    By prior orders, the Commission has authorized NFA to maintain 
various other Commission registration records and has certified NFA as 
the official custodian of such records for this agency.\15\ The 
Commission has now determined, in accordance with its authority under 
Section 8a(10) of the Act, to authorize NFA to maintain and to serve as 
the official custodian of records for the filings, notices and claims 
required by Rules 4.26(d), 4.36(d), 4.5, 4.7, 4.12(b), 4.13 and 
4.14(a)(8) and Commission Advisory 18-96. This determination is based 
upon NFA's representations regarding the implementation of rules and 
procedures for maintaining and safeguarding all such records, in 
connection with NFA's assumption of responsibility for the above-
mentioned activities.
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    \15\ 49 FR 39593 (October 9, 1984); 50 FR 34885 (August 28, 
1985); 51 FR 25929 (July 17, 1986); 54 FR 19594 (May 8, 1989); 54 FR 
41133 (October 5, 1989); 58 FR 19657 (April 15, 1993).
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    In maintaining the Commission's records pursuant to this Order, NFA 
shall be subject to all other requirements and obligations imposed upon 
it by the Commission in existing or future orders or regulations. In 
this regard, NFA shall also implement such additional procedures (or 
modify existing procedures) as are acceptable to the Commission and as 
are necessary: to ensure the security and integrity of the records in 
NFA's custody; to facilitate prompt access to those records by the 
Commission and its staff, particularly as described in other Commission 
orders or rules; to facilitate disclosure of public or nonpublic 
information in those records when permitted by Commission orders or 
rules and to keep logs as required by the Commission concerning 
disclosure of nonpublic information; and otherwise to safeguard the 
confidentiality of the records.

II. Conclusion and Order

    The Commission has determined, in accordance with the provisions of 
Sections 8a(10) and 17(o)(1) of the Act and NFA's letter dated August 
27, 1997, to authorize NFA to perform the following functions:
    (1) To conduct reviews of disclosure documents required to be filed 
with the Commission by CPOs and CTAs pursuant to Rules 4.26(d) and 
4.36(d), respectively;
    (2) To process notices of eligibility for exclusion for certain 
otherwise regulated persons from the definition of CPO, pursuant to 
Rule 4.5;
    (3) to process notices of claim for exemption from certain Part 4 
requirements with respect to commodity pools and CTAs whose 
participants or clients are QEPs or QECs, respectively, pursuant to 
Rule 4.7;
    (4) To process claims of exemption from certain Part 4 requirements 
for CPOs with respect to pools that principally trade securities, 
pursuant to Rule 4.12(b);
    (5) To process statements of exemption from registration as a CPO, 
pursuant to Rule 4.13;
    (6) To process notices of exemption from registration as a CTA for 
certain persons registered as an investment adviser, pursuant to Rule 
4.14(a)(8);
    (7) To process notices of claim for exemption from provisions of 
Part 4 for certain registered CPOs operating offshore pools, pursuant 
to Advisory 18-96; and
    (8) To maintain and to serve as the official custodian of records 
for the filings, notices and claims required by the rules listed above.
    NFA shall perform these functions in accordance with the standards 
established by the Act and the regulations and orders promulgated 
thereunder, particularly Part 4 of the regulations and Commission 
orders issued thereunder, and shall provide the Commission with such 
summaries and periodic reports as the Commission may determine are 
necessary for effective oversight of this program.
    These determinations are based upon the Congressional intent 
expressed in Sections 8a(10) and 17(o) of the Act that the Commission 
have the authority to delegate to NFA any portion of the Commission's 
registration responsibilities under the Act for purposes of carrying 
out these responsibilities in the most efficient and cost-effective 
manner and upon NFA's representations concerning the standards and 
procedures to be followed and the reports to be generated in 
administering these functions.
    This Order does not, however, authorize NFA to render ``no-action'' 
positions, exemptions or interpretations with respect to applicable 
disclosure, reporting, recordkeeping and registration requirements.
    Nothing in this Order or in Sections 8a(10) or 17(o) of the Act 
shall affect the Commission's authority to review NFA's performance of 
the Commission functions listed in paragraphs 1-8 above.
    NFA is authorized to perform all functions specified herein until 
such time as the Commission orders otherwise. Nothing in this Order 
shall prevent the Commission from exercising the authority delegated 
herein. NFA may submit to the Commission for decision any specific 
matters that have been delegated to it, and Commission staff will be 
available to discuss with NFA staff issues relating to the 
implementation of this Order. Nothing in this Order affects the 
applicability of any previous orders issued by the Commission under 
Part 4.

    Issued in Washington, D.C., on September 30, 1997 by the 
Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 97-26389 Filed 10-3-97; 8:45 am]
BILLING CODE 6351-01-P