[Federal Register Volume 67, Number 219 (Wednesday, November 13, 2002)]
[Proposed Rules]
[Pages 68785-68790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28820]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4


Commodity Pool Operators and Commodity Trading Advisors; 
Exemption From Requirement To Register for CPOs of Certain Pools and 
CTAs Advising Such Pools

AGENCY: Commodity Futures Trading Commission.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
has received two specific proposals that would provide additional 
exemption from registration as a commodity pool operator (CPO). It also 
has received a proposal that would provide additional exemption from 
registration as a commodity trading advisor (CTA). The this Federal 
Register release the Commission is publishing and seeking comment on 
these proposals (Proposals) and is providing temporary CPO and CTA 
registration relief (No-Action Relief). To be eligible for the No-
Action Relief, a CPO or CTA must meet the criteria specified in the 
Supplementary Information section.

DATES: Comments must be received by January 13, 2002.

ADDRESSES: Comments on this advance notice of proposed rulemaking 
should be sent to Jean A. Webb, Secretary, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Comments may be sent by facsimile transmission to (202) 418-
5528, or by e-mail to [email protected]. Reference should be made to 
``Advance Notice of Proposed Rulemaking on CPO and CTA Registration 
Exemptions.''

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director, 
or Christopher W. Cummings, Special Counsel, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, 1155 21st 
Street, NW., Washington, DC 20581, telephone number: (202) 418-5450 or 
(202) 418-5445, respectively; facsimile number: (202) 418-5536, or 
(202) 418-5547, respectively; and electronic mail: [email protected] or 
[email protected], respectively.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 1a(5) of the Commodity Exchange Act (Act) defines the term 
``commodity pool operator'' to mean--

    [A]ny person engaged in a business that is of the nature of an 
investment trust, syndicate, or similar form of enterprise, and who, 
in connection therewith, 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 any commodity for future 
delivery on or subject to the rules of any contract market or 
derivatives transaction execution facility, * * * \1\

    \1\ 7 U.S.C. 1a(5) (2000). Section 1a(5) also provides the 
Commission with authority to exclude persons from the CPO 
definition.
    Commission Rule 4.10(d)(1) correspondingly defines the term 
``pool'' to mean ``any investment trust, syndicate or similar form 
of enterprise operated for the purpose of trading commodity 
interests.'' Commission rules cited to herein are found at 17 CFR 
Ch. I (2002).
    Both the Act and the Commission's rules issued thereunder can be 
accessed through the Commission's Web site: http://www.cftc.gov/cftc/cftclawreg.htm.

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[[Page 68786]]

Section 4m(1) of the Act \2\ provides in relevant part that it is 
unlawful for any CPO, ``unless registered under [the] Act, to make use 
of the mails or any means or instrumentality of interstate commerce'' 
in connection with its business as a CPO. Thus, except for several 
narrow exceptions described below, the operator of a collect investment 
vehicle that trades commodity interest contracts, whether for bona fide 
hedging purposes or otherwise, must be registered with the CFTC as a 
CPO.
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    \2\ 7 U.S.C. 6m(1) (2000).
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    The Commission has provided certain exceptions to the CPO 
registration requirement. In 1979, the Commission adopted Rule 4.13, 
which provides an exemption from CPO registration for the operators of 
essentially `` family, club or small pools,'' as those pools are 
defined in the rule.\3\ In addition, the Commission adopted in Rule 4.5 
an exclusion from the CPO definition for certain otherwise regulated 
``eligible persons'' with respect to their operation of ``certain 
qualifying entities,'' as those terms are defined in the rule, so long 
as they restrict the extent of their non-bona fide hedge activity in 
commodity interests as prescribed by the rule.\4\
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    \3\ See 44 FR 1918, 1919 (Jan. 8, 1979).
    \4\ See 50 FR 15868 (April 23, 1985). Rule 4.5 specifies 
operating criteria that must be complied with to claim the relief 
available under the rule. Commodity futures and option contracts may 
be used without limitation for ``bona fide hedging transactions and 
positions,'' as that term is defined in Rule 1.3(z)(1). Rule 4.5 
also permits up to 5 percent of the liquidation value of a 
qualifying entity's portfolio to be committed to establish positions 
that are non- bona fide hedging transactions and positions. On 
October 28, 2002 the Commission published for comment a proposed 
amendment to Rule 4.5 that would provide an alternative criterion 
for such transactions and positions--i.e., where the notional value 
of the transactions and positions does not exceed the liquidation 
value of the entity's portfolio. 67 FR 65743.
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    When the Commission adopted Rule 4.13, there were fewer than a 
dozen designated commodity interest contracts based on stock indices, 
interest rates or other financial instruments. Since 1979, however, the 
Commission has designated, and trading has commenced in, more than 180 
commodity interest contracts based on various financial instruments. 
These contracts frequently have attracted the interest of operators of 
collective investment vehicles, some of whom have registered with the 
Commission as CPOs so that they can use commodity interest contracts in 
their investment and risk management strategies. Others, however, have 
avoided participation in the commodity interest markets. While Rules 
4.5 and 4.13 do provide CPO registration relief, their criteria are too 
restrictive for many operators of collective investment vehicles to 
meet.
    Section 1a(6)(A) of the Act \5\ defines the term ``commodity 
trading advisor'' to mean any person who--
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    \5\ 7 U.S.C. 1a(6)(A)(2002).

    (i) For compensation or profit, engages in the business of 
advising others, either directly or through publications, writings 
or electronic media, as to the value or the advisability of trading 
in--
    (I) Any contract of sale of a commodity for future delivery made 
or to be made on or subject to the rules of a contract market or 
derivatives transaction execution facility;
    (II) Any commodity option authorized under section 4c; or
    (III) Any leverage transaction authorized under section 19; or
    (ii) For compensation or profit, and as part of a regular 
business, issues or promulgates analyses or reports concerning any 
of the activities referred to in clause (i).\6\
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    \6\ Section 1a(6) also excludes certain persons not at issue 
here from the CTA definition, and provides the Commission with 
authority to exclude other persons from that definition.

Section 4m(1) also requires CTAs to register as such with the 
Commission, and each of that section, Section 4m(3) and Rule 4.14 
provides exemption from CTA registration.
    Over time, persons who traditionally gave advice to collective 
investment vehicles solely on securities trading have become interested 
in providing trading advice to collective investment vehicles on 
commodity interest contracts based on various financial instruments as 
well. Absent the availability of an exemption, these persons have had 
to either register with the Commission as CTAs or refrain from 
providing any such commodity interest advice.
    In light of these market developments and changed circumstances, 
the Commission is seeking comment on the Proposals. By this Federal 
Register release, the Commission also is asking for input generally on 
the subject of which CPOs and CTAs the Commission additionally should 
exempt from registration and what criteria the Commission should use to 
determine eligibility for exemption.

II. The Proposals

A. The National Futures Association (NFA) Proposal \7\
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    \7\ NFA is a futures association registered as such with the 
Commission under section 17 of the Act.
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I. Introduction
    The NFA Proposal would add a CPO registration exemption as well as 
a corresponding CTA registration exemption to the exemptions currently 
set forth in Rules 4.13 and 4.14, respectively. The CPO exemption would 
be available to pool operators that commit a limited amount of pool 
assets (i.e., 5 percent of liquidation value) to establish commodity 
interest trading positions, and that restrict participation in the pool 
to ``accredited investors'' as defined in Rule 501(a) \8\ under the 
Securities Act of 1933 (Securities Act).\9\ The exemption would be set 
forth in a new paragraph (a)(3) of Rule 4.13, and would require a 
conforming amendment to paragraph (d) of the rule. The CTA exemption 
would apply to those persons that advise only pools operated by persons 
that are eligible for, and have claimed exemption under, the CPO 
provision described above. It would be set forth in a new paragraph 
(a)(10) of Rule 4.14.
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    \8\ 17 CFR 230.501(a) (2002).
    \9\ 15 U.S.C. 77a et seq (2000).
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    2. The text of the NFA Proposal.
    a. The NFA CPO Registration Exemption Proposal reads as follows:


Sec.  4.13  Exemption from registration as a commodity pool operator.

    (a) A person is not required to register under the Act as a 
commodity pool operator if:
    * * *
    (3)(i) It operates only commodity pools that use commodity 
futures or commodity options contracts solely for bona fide hedging 
purposes within the meaning and intent of Sec.  1.3(z)(1); Provided, 
however. That in addition, with respect to positions in commodity 
futures and commodity option contracts which do not come within the 
meaning and intent of 1.3(z)(1), the aggregate initial margin and 
premiums required to establish such positions for any pool does not 
exceed five percent of the liquidation value of that pool's 
portfolio, after taking into account unrealized profits and 
unrealized losses on any such contracts it has entered into and such 
trading is solely incidental to its other trading activity; And 
Provided further, That in the case of an option that is in-the-money 
at the time of purchase, the in-the-money amount as defined in Sec.  
190.01(x) may be excluded in computing such five percent;
    (ii) It has not and does not market participations to the public 
as or in a commodity pool or otherwise as or in a vehicle for 
trading in the commodity futures or commodity options markets;
    (iii) It limits the participants in its pools to accredited 
investors as defined in Securities Exchange Commission Rule 501;
    (iv) It discloses in writing to each prospective participant the 
purpose of and the limitations on the scope of the commodity futures 
and commodity options trading in which it will engage;
    (v) It submits to such special calls as the Commission may make 
to require it to demonstrate compliance with the provisions of this 
Sec.  4.13(a)(3) including but not limited to information on its 
pools' financial status and position holdings; and

[[Page 68787]]

    (vi) It maintains all books and records prepared in connection 
with its activities as a commodity pool operator for a period of 
five years from the date of preparation and keeps such books and 
records readily accessible during the first two years of the five 
year period. All such books and records shall be open to inspection 
by any representative of the Commission or the United States 
Department of Justice.
    (b)(1) No person who is exempt from registration as a commodity 
pool operator under paragraph (a)(1), (a)(2), or (a)(3) of this 
section and who is not registered as such pursuant to that exemption 
may, directly or indirectly, solicit, accept or receive funds, 
securities or other property from any prospective participant in a 
pool that it operates or that it intends to operate unless, on or 
before the date it engages in that activity, the person delivers or 
causes to be delivered to the prospective participant a written 
statement that must disclose this fact as follows: ``The commodity 
pool operator of this pool is not required to register, and has not 
registered, with the Commodity Futures Trading Commission. 
Therefore, unlike a registered commodity pool operator, this 
commodity pool operator is not required by the Commission to furnish 
a Disclosure Document, periodic Account Statements, and an Annual 
Report to participants in the pool.'' The person must:
    (i) Describe in the statement the exemption pursuant to which it 
is not registered as a commodity pool operator;
    (ii) Provide its name, main business address and main business 
telephone number on the statement;
    (iii) Manually sign the statement as follows: if such person is 
a corporation, by the chief executive officer, chief financial 
officer or counterpart thereto; if a partnership, by a general 
partner; and if a sole proprietorship, by the sole proprietor; and
    (iv) By the earlier of seven business days after the date the 
statement is first delivered to a prospective participant and the 
date upon which the pool commences trading in commodity interests:
    (A) File two copies of the statement with the Commission at the 
address specified in Sec.  4.2; and
    (B) File one copy of the statement with the National Futures 
Association at its headquarters office (Attn: Director of 
Compliance, Compliance Department).
* * * * *
    (d) If a person exempt from registration under the Act as a 
commodity pool operator under paragraph (a)(1), (a)(2), or (a)(3) of 
this section registers as a commodity pool operator, that person 
must comply with this Part 4 as if such person were not exempt from 
registration as a commodity pool operator.

    2. The NFA CTA Registration Exemption Proposal reads as follows:


Sec.  4.14  Exemption from registration as a commodity trading advisor.

    (a) A person is not required to register under the Act as a 
commodity trading advisor if:
* * * * *
    (10)(i) The person's commodity interest trading advice:
    (A) Is directed solely to and for the use of commodity pools that 
meet the requirements of and are operated by a person exempt from 
registration under Sec.  4.13(a)(3) or are operated by a person 
excluded from the definition of commodity pool operator under Sec.  
4.5;
    (B) Is solely incidental to its business of providing investment 
advice to such pools in instruments that are either exempt from 
regulation pursuant to the Commission's regulations or excluded from 
Commission regulation under the Act; and
    (C) Employs only such strategies as are consistent with eligibility 
status under Sec.  4.13(a)(3).
    (ii) The person is not otherwise holding itself out as a commodity 
trading advisor;
    (iii) The person submits to such special calls as the Commission 
may make to provide information on its position holdings; and
    (iv) Prior to the date upon which such person intends to engage in 
business as a commodity trading advisor, the person files a notice of 
exemption with the Commission.
    (A) The notice must provide the name, main business address and 
main business telephone number of the person filing the notice.
    (B) The notice must represent that the person qualifies for 
exemption under this Sec.  4.14(a)(10) and that it will comply with the 
criteria of this section.
    (C) The notice shall be effective upon filing, Provided, however, 
That an exemption claimed hereunder shall cease to be effective upon 
any change which would render the representations made pursuant to 
paragraph (a)(10)(iii)(B) of this section inaccurate or the 
continuation of such representations false or misleading.
    (v) In the event a person who has filed a notice of exemption under 
this Sec.  4.14(a)(10) subsequently becomes registered as a commodity 
trading advisor, the person must file a supplemental notice of that 
fact.
    (vi) Any notice required to be filed hereunder must be:
    (A) In writing;
    (B) Signed by a duly authorized representative; and
    (C) Filed, along with a copy, with the Commission at the address 
specified in Sec.  4.2.
    (D) A copy also must be filed with the National Futures Association 
at its headquarters office (ATTN: Director of Compliance, Compliance 
Department).

B. The Managed Funds Association (MFA) Proposal \10\
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    \10\ MFA is a non-profit membership organization for investment 
professionals in the hedge fund, futures and alternative investments 
industries.
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1. Introduction

    The MFA Proposal would provide an additional CPO registration 
exemption pursuant to a new Rule 4.9. The exemption would be 
available to pool operators that restrict participation in their 
pools to ``qualified eligible persons'' (QEPs) as defined in Rule 
4.7 and certain ``accredited investors'' as defined in Rule 501(a) 
under the Securities Act. As is set forth below, the MFA Proposal 
would distinguish between the qualifications that natural persons 
would be required to meet and the qualifications that non-natural 
persons would be required to meet.

2. The text of the MFA Proposal
    The MFA Proposal reads as follows:


Sec.  4.9.  Exemption From Commodity Pool Operator Registration For 
Certain Persons Operating Privately Offered Pools.

    (a) Subject to compliance with all of the provisions of this 
section, a person is exempt from registration as a commodity pool 
operator but remains otherwise subject to the jurisdiction of the 
Commission under the Act, provided that:
    (i) interests in all pools that it operates are exempt from 
registration under the Securities Act of 1933, and such interests 
are offered and sold without marketing to the public in the United 
States;
    (ii) it reasonably believes that at the time of investment (or, 
in the case of an existing pool, conversion to an eligible pool as 
defined herein), all individual investors (and any self-directed 
employee-benefit plans for such individuals) in all pools that it 
operates are qualified eligible persons as defined in Sec.  4.7;
    (iii) it reasonably believes that at the time of investment (or, 
in the case of an existing pool, conversion to an eligible pool as 
defined herein), all entity investors in all pools that it operates 
are (x) ``accredited investors'' as defined in 17 CFR 230.501(a)(1)-
(3), (7) and (8) or (y) qualified eligible persons as defined in 
Sec.  4.7; and
    (iv) neither the commodity pool operator nor any of its 
principals is subject to any statutory disqualifications set forth 
in section 8a(2) or 8a(3) of the Act unless such disqualification 
arises from a matter which was previously disclosed in connection 
with an application for registration if such registration was 
granted or was disclosed more than 30 days prior to the filing of 
this notice; provided, however, that the commodity pool operator may 
request that the Commission waive this provision, which waiver may 
be granted upon a showing of good cause.
    (b) Notwithstanding the exemption in (a) above:

[[Page 68788]]

    (i) the commodity pool operator shall remain subject to the 
anti-fraud and anti-manipulation provisions of the Act; and
    (ii) the commodity pool operator shall, within 180 days of the 
end of its fiscal year, deliver to the pool participants for each 
pool it operates under this exemption year-end financial statements 
certified by an independent public accountant and prepared in 
accordance with generally accepted accounting principles. In 
addition, the commodity pool operator shall file two (2) copies of 
the year-end financial statements with the Commission.
    (c) Any person who desires to claim the exemption provided by 
this section shall file with the Commission a notice of eligibility:
    (i) The notice of eligibility must contain the name, main 
business address and main telephone number of the person claiming 
the exemption and the name of the pool or pools for which exemption 
is claimed (an ``eligible pool'').
    (ii) The notice of eligibility must contain representations that 
the pool or pools, in order to be eligible pools, will be operated 
in accordance with the requirements set forth in (a) and (b) of the 
section.
    (iii) The notice of eligibility must contain a representation 
that the commodity pool operator will submit to such special calls 
as the Commission may make to require the commodity pool operator to 
demonstrate compliance with the provisions of Sec.  4.9(a)(i)-(iv) 
and (b)(ii) with respect to the eligible pool. Failure to comply 
with a special call as described in this paragraph will render the 
claimed exemption void.
    (iv) The notice of eligibility must be filed with the Commission 
prior to the date upon which the commodity pool operator intends to 
operate the eligible pool. In the case of a commodity pool operator 
operating one or more pools that would qualify as eligible pools but 
with respect to which no notice has been filed, a notice of 
eligibility may be filed with the Commission prior to the date upon 
which the commodity pool operator intends to commence operating the 
pool as an eligible pool, provided that the commodity pool operator 
has provided prior notice to pool participants that it intends to 
convert the pool to an eligible pool under this Sec.  4.9 by filing 
a notice of eligibility with respect to the pool and has given such 
participants the right to redeem from the pool prior to such filing.
    (v) The notice of eligibility shall be effective upon filing, 
provided that the filing is materially complete.
    (d)(i) A commodity pool operator who has claimed exemption 
hereunder must, in the event that any of the information contained 
or representations made in the notice of eligibility becomes 
inaccurate or incomplete, file a supplemental notice with the 
Commission to that effect which, if applicable, includes such 
amendments as may be necessary to render the notice of eligibility 
accurate and complete.
    (ii) The supplemental notice required by paragraph (d)(i) of 
this section shall be filed within fifteen business days after the 
commodity pool operator becomes aware of the occurrence of such 
event.
    (iii) An exemption claimed hereunder shall cease to be effective 
60 days after the commodity pool operator becomes aware of any 
change which would render inaccurate any of the representations 
required by subparagraph (c)(ii) or (iii) of this section. During 
such 60 day period, the commodity pool operator may cure the defects 
or prepare and file an application to register as a commodity pool 
operator with the Commission. The filing of an application by the 
commodity pool operator with the Commission will toll the running of 
the 60 day period.
    (e) A commodity pool operator that operates one or more pools 
that are not eligible pools under this Sec.  4.9 in addition to one 
or more pools that are eligible pools under Sec.  4.9 is, with 
respect to the eligible pools, exempt from all of the other 
requirements imposed on a commodity pool operator under the Act, 
provided that the commodity pool operator complies with this Sec.  
4.9.

III. The No-Action Relief

A. The Relief

    During the rulemaking process commenced by the publication of 
this advance notice of proposed rulemaking, the Commission has 
determined to provide relief through the issuance of No-Action 
Relief, set forth below. As with other registration relief available 
to CPOs and CTAs under CFTC rules, the No-Action Relief must be 
claimed through the filing of a notice with the NFA and the CFTC, 
and one-way disclosure of the claim must be made.\11\

    \11\ See, e.g., Rules 4.5 and 4.13.
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    1. CPO Registration No-Action Relief
    The Commission will not commence any enforcement action against a 
CPO based upon the failure of the CPO to register as such under Section 
4m(1) of the Act, where each pool for which the CPO claims relief under 
the No-Action Relief meets and remains in compliance with the following 
criteria:

    a. Participation in the pool is restricted to: ``accredited 
investors'' as defined in Rule 501(a) under the Securities Act; 
``knowledgeable employees'' as defined in Rule 3c-5 under the 
Investment Company Act of 1940,\12\ Non-United States persons as 
defined in CFTC Rule 4.7(a)(1)(iv); and the persons described in 
CFTC Rule 4.7(a)(2)(viii)(A); and
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    \12\ 17 CFR 270.3c-5 (2002).
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    b. The aggregate national value \13\ of each such pool's 
commodity interest positions, whether entered into for bona fide 
hedging purposes or otherwise,\14\ does not exceed fifty percent of 
the liquidation value of the pool's portfolio, after taking into 
account unrealized profits and unrealized losses on any such 
positions it has entered into.\15\

    \13\ For this purpose, a CPO should calculate ``notional value'' 
for each such futures position by multiplying the size of the 
futures contract, in contract units, by the current market price per 
unit, and for each such option position by multiplying the size of 
the option contract, in contact units, by the strike price. This 
criterion is patterned on the Commission's proposed alternative non-
hedge operating criterion for Rule 4.5, as discussed above.
    The following two examples show the effect of this notional 
value criterion using two different futures contracts. In each 
example, the CPO desires to establish the maximum number of 
contracts permissible under the No-Action Relief. In both examples 
it is assumed that one-half of the pool's liquidation value is $5 
million and that the settlement level of the contract is as of 
September 25, 2002.
    With respect to the S&P 500 Stock Price Index futures contract 
traded on the Chicago Mercantile Exchange, the settlement level was 
819.29 and the contract value was $204,822.50 (819.29 x $250). This 
means that the pool could establish 24 S&P 500 Stock Price Index 
futures contracts ($5,000,000 / 204,822.50 = 24.4).
    With respect to the 10-Year U.S. Treasury Note futures contract 
traded on the Chicago Board of Trade, the settlement level was 
114,160 points and the contract value was $114,160 (114,160 x 100%). 
This means that the pool could establish 43 10-Year Treasury Note 
futures contracts ($5,000,000 / $114,160 = 43.8).
    \14\ See Rule 1.3(z)(1).
    \15\ The operator of a ``fund of funds'' (an Investor Fund) that 
indirectly trade commodity interests through participation in one or 
more funds that directly trades commodity interests (each an 
Investee Fund) could claim exemption from registration under the No-
Action Relief where that Investor Fund trades commodity interests 
solely through participation in one or more Investee Funds, and the 
CPO of each such Investee Fund has itself claimed the No-Action 
Relief. The operator of an Investor Fund that additionally directly 
trades commodity interests could also claim the No-Action Relief, so 
long as the portion of the Investor Fund that directly trades 
commodity interests does not exceed the limit referred to above.
    For example, assume that the Investor Fund has a liquidation 
value of $1 million, four-fifths of which is invested in four 
Investee Funds whose operators have claimed the No-Action Relief. 
With the remaining one-fifth of liquidation value, or $200,000, the 
operator of the Investor Fund may have the Fund directly trade 
commodity interests, provided that the notional value of the Fund's 
commodity interest positions does not exceed fifty percent of the 
Fund's liquidation value, adjusted for unrealized profits and 
unrealized losses on positions directly entered into by the Fund.
    If, however, the notional value of those positions exceeded 
fifty percent of the liquidation value of $200,000, the operator 
would only be able to claim the No-Action Relief if the operator 
knew that the notional value of all of the Investor Fund's commodity 
interest positions (i.e., those held outright and those held through 
investment in the four Investee Funds) was fifty percent of the 
Investor Fund's liquidation value. To be in possession of such 
information, the operator would need to have direct knowledge of, 
and immediate access to, the notional value of the commodity 
interest positions of each Investee Fund. The operator of the 
Investor Fund could have this knowledge and access where, for 
example, it was the same person as, or an affiliate of, the CPOs of 
the Investee Funds.
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    2. CTA Registration No-Action Relief.
    The Commission will not commence enforcement action against a CTA 
based upon the failure of the CTA to register as such under Section 
4m(1) of the Act, where the CTA meets and remains in compliance with 
the following criteria:

    a. It claims relief from CPO registration under the No-Action 
Relief and its commodity interest trading advice is directed solely 
to, and for the sole use of, the pool or pools that it operates; 
\16\ or
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    \16\ This provision is patterned after Rule 4.14(a)(5).

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[[Page 68789]]

    b. It is registered as an investment adviser under the 
Investment Advisers Act of 1940 \17\ or with the applicable 
securities regulatory agency of any State, or it is exempt from such 
registration, or it is excluded from the definition of the term 
``investment adviser'' pursuant to section 202(a)(2) or 202(a)(11) 
of the Investment Advisers Act of 1940, provided that:
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    \17\ 15 U.S.C. 80b-1 et seq. (2000).
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    (i) The person's commodity interest trading advice:
    (A) Is directed solely to, and for the sole use of, pools 
operated by CPOs who claim relief from CPO registration under the 
No-Action Relief;
    (B) Is solely incidental to its business of providing securities 
advice to each such pool;
    (C) Employs only such strategies as are consistent with the 
``notional test'' under the No-Action Relief; and
    (ii) The person otherwise holding itself out as a CTA.

B. Claim of No-Action Relief

    As stated above, the No-Action Relief is not self-executing. 
Rather, a CPO or CTA eligible for the No-Action Relief must file a 
Claim to perfect the relief and msut make a one-way disclosure to its 
participants and clients, respectively, whether prospective or 
existing. A Claim of No-Action Relief will be effective upon filing, so 
long as the Claim is materially complete.
    Specifically, the Claim of No-Action Relief must:
    1. State the name, main business address, and main business 
telephone number of the CPO or CTA claiming the relief;
    2. State the capacity (i.e., CPO, CTA or both) and, where 
applicable, the name of the pool(s), for which the Claim is being 
filed;
    3. Represent that the CPO and CTA qualified for the No-Action 
Relief, that it will comply with the criteria of the No-Action Relief, 
and that it will provide the CFTC-specified disclosure, set forth 
below;
    4. Be signed by the CPO or CTA; and
    5. Be filed with the NFA at its headquarters office in Chicago, 
Illinois (ATTN: Director of Compliance), with a copy to the Commission 
at its headquarters office in Washington, D.C. (ATTN: Division of 
Clearing and Intermediary Oversight, Audit and Financial Review 
(Section), prior to the date upon which the CPO or CTA first engages in 
business that otherwise would require registration as such.

C. One-Way Disclosure

    1. For CPOs.
    To comply with the terms of a Claim of No-Action Relief that it has 
filed, a CPO must provide the following disclosure to prospective and 
existing participants in each pool it operates or intends to operate 
prior to engaging in activities that otherwise would require it to 
register as a CPO:

    ``Pursuant to No-Action Relief issued by the Commodity Future 
Trading Commission, [Name of CPO] is not required to register, and 
is not registered, with the Commission as a CPO. Among other things, 
the No-Action Relief requires this CPO to file a Claim of No-Action 
Relief with the National Futures Association and the Commission. It 
also requires that the aggregate notional value of this pool's 
commodity interest positions does not exceed fifty percent of the 
liquidation value of the Pool's Portfolio.
    You should also know that this registration No-Action Relief is 
temporary. In the event the Commission ultimately adopts a 
Registration exemption rule that differs from the No-Action Relief, 
[Name of CPO] must comply with that rule to be exempt from CPO 
registratin. If [Name of CPO] determines not to comply with that 
rule, it must either register with the Commission or cease having 
this Pool Trade Commodity Interests.''

    2. For CTAs
    To comply with the terms of a Claim of No-Action Relief that it has 
filed, a CTA must provide the following disclosure to each pool it 
advises or intends to advise prior to engaging in activities that 
otherwise would require it to register as a CTA:

    ``Pursuant to No-Action Relief issued by the Commodity Futures 
Trading Commission, [Name of CTA] is not required to register, and 
is not registered, with the Commission as a CTA. Among other things, 
the No-Action Relief requires this CTA to file a claim of No-Action 
Relief with the National Futures Association and the Commission. It 
also requires that this CTA provide advice solely to pools whose 
CPOs have filed a corresponding claim of No-Action Relief.
    You should also know that this registration No-Action Relief is 
temporary. In the event the Commission ultimately adopts a 
registration exemption rule that differs from the No-Action Relief, 
[Name of CTA] must comply with that rule to be exempt from CTA 
registration. If [Name of CTA] determines not to comply with that 
rule, it must either register with the Commission or cease providing 
commodity interest trading advice to this pool.''

D. Other Matters

1. Effect of Filing a Claim of No-Action Relief
    Persons that have filed a Claim of No-Action Relief will be exempt 
from Commission registration requirements under section 4m(1) of the 
Act. Such persons will remain subject, however, to prohibitions in the 
Act and the Commission's rules against fraud which apply to all CPOs 
and CTAs regardless of registration status. They also will remain 
subject to all other relevant provisions of the Act and the 
Commission's rules which apply to all commodity interest market 
participants, such as the prohibitions on manipulation and the trade 
reporting requirements.
2. Effect of Final Rulemaking on a Claim of No-Action Relief
    Any final action taken by the Commission as a result of this 
advance notice of proposed rulemaking will supersede the No-Action 
Relief. In the event the final action differs from the requirements of 
the No-Action Relief, the Commission will provide CPOs and CTAs with 
sufficient time within which to comply with such requirements, or, in 
the event a CPO or CTA is unable or unwilling to so comply, with 
sufficient time to register with the Commission or to withdraw a 
previously filed Claim of No-Action Relief and to cease engaging in 
business as a CPO or CTA.
3. Continued Availability of Registration No-Action Relief From 
Commission Staff
    The Commission is aware that there may be existing or subsequently 
organized CPOs and CTAs that do not meet the criteria of the No-Action 
Relief, but that nonetheless, under their particular facts or 
circumstances, merit relief from registration. The Commission also is 
aware that, in the past, its staff has provided CPO and CTA 
registration no-action relief on a case-by-case basis. Consistent with 
that practice, the Commission directs its staff to continue to issue 
such relief where appropriate facts or circumstances are present.

IV. Request for Comment

    The Commission requests public comment on the exemption criteria of 
the NFA Proposal, the MFA Proposal, the No-Action Relief, and the 
following issues:
    1. What are the appropriate investor qualifications for 
participation in collective investment vehicles operated or advised by 
persons eligible for any new CPO or CTA registration exemption? Should 
these qualifications vary with the extent of non-hedge commodity 
interest trading activity? Should these qualifications be the same as 
those employed in the federal securities laws and the rules of the 
Securities and Exchange Commission to define financially sophisticated 
or knowledgeable persons--e.g., ``accredited investors,'' ``qualified 
purchasers,'' and ``knowledgeable employees''? Are there any situations 
where either investor qualifications or the level or type of trading 
activity

[[Page 68790]]

should be the sole criterion for exemption?
    2. Should persons that qualify for any new CPO or CTA registration 
exemption be subject to a limit on non-hedge commodity interest trading 
activity that is higher or lower than the limit in the NFA Proposal? 
Should there be any limit at all on non-hedge activity by such persons?
    3. Should persons that quality for any new CPO or CTA registration 
exemption be subject to compliance with the special call, 
recordkeeping, and NFA notice requirements in the NFA Proposal and/or 
the special call, financial reporting, and CFTC notice and supplemental 
notice requirements of the MFA Proposal? Should these persons be 
subject to compliance with any other requirements and, if so, what 
should they be?
    4. Is there any other form of registration relief that the 
Commission should propose for CPOs or CTAs and, if so, what is it?
    5. How should the Commission's proposal address relief for the 
operator and/or the advisor of an Investor Fund \18\?
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    \18\ Staff has received numerous informal inquiries regarding 
the fund of funds issue. The Commission intends to address this 
issue in a separate context as it applies more broadly to the 
managed funds industry. However, it is important to recognize the 
implications for funds of funds in this release, as discussed above.

    Issued in Washington, DC on November 6th, 2002, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-28820 Filed 11-12-02; 8:45 am]
BILLING CODE 6351-01-M