[Federal Register Volume 67, Number 243 (Wednesday, December 18, 2002)]
[Notices]
[Pages 77470-77473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31684]


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COMMODITY FUTURES TRADING COMMISSION


Review by the National Futures Association of Annual Financial 
Reports Required To Be Filed by Commodity Pool Operators

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and order.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'') 
is authorizing the National Futures Association (``NFA'') to conduct 
reviews of annual financial reports filed with the Commission by 
commodity pool operators (``CPOs''), as required by Commission Rules 
4.22(c) and 4.7(b)(3), and to grant and deny certain requests for 
extensions of time to file such reports. In addition, the Commission is 
authorizing NFA to maintain and to serve as the official custodian of 
Commission records required by Rules 4.22 and 4.7(b)(3).

EFFECTIVE DATE: December 18, 2002; with regard to all commodity pool 
annual financial reports for fiscal years ending on December 31, 2002, 
and thereafter.

FOR FURTHER INFORMATION CONTACT: Kevin P. Walek, Assistant Director, 
Eileen R. Chotiner, Futures Trading Specialist, Audit and Financial 
Review Section, or Michael A. Piracci, Attorney Advisor, Compliance and 
Registration Section, Division of Clearing and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

    The Commission previously has authorized NFA to conduct many 
functions that, until that time, were conducted by Commission staff. 
Such delegated functions include: the processing of applications for 
registration of intermediaries and floor traders under the Commodity 
Exchange Act (the ``Act''); \1\ the processing of notices of 
eligibility for certain exemptions from registration as a CPO and 
commodity trading advisor (``CTA''); \2\ and the review of Disclosure 
Documents required to be filed by CPOs and CTAs pursuant to Commission 
rules.\3\
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    \1\ 7 U.S.C. 1 et seq. (2000). See, e.g., 48 FR 35158 (Aug. 3, 
1983) (introducing brokers and associated persons thereof); 49 FR 
39593 (Oct. 9, 1984) (futures commission merchants, commodity pool 
operators, commodity trading advisors, and associated persons 
thereof); 51 FR 34490 (Sep. 29, 1986) (floor brokers); 58 FR 19657 
(Apr. 15, 1993) (floor traders).
    \2\ See 62 FR 52088 (Oct. 6, 1997) (the ``1997 Order'').
    \3\ Id.
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    The Commission has found that NFA exercises its authority in these 
areas with particular proficiency. Additionally, authorizing NFA to 
perform such functions has enabled Commission staff to devote resources 
to other aspects of the Commission's regulatory mission.
    The futures industry is continually expanding and transforming 
itself. As the industry changes and evolves, the Commission must also 
change and evolve, reassessing the manner in which it allocates its 
resources. Accordingly, by this order, the Commission is authorizing 
NFA to perform certain regulatory functions that may properly be 
performed by NFA instead of Commission staff. In particular, the 
Commission is authorizing NFA to review commodity pool annual financial 
reports for fiscal years ending on December 31, 2002, and thereafter, 
that CPOs are required to submit, pursuant to Commission Rules 4.22 and 
4.7(b)(3).\4\ In addition, the Commission is authorizing NFA, with 
regard to such reports, to receive, grant, and deny, requests submitted 
pursuant to Rule 4.22(f)(1) for extensions of time to distribute and 
file annual financial reports and to process notices of claims of 
extension of time filed pursuant to Rule 4.22(f)(2).
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    \4\ Commission rules referred to herein may be found at 17 CFR 
Ch. I (2002).

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[[Page 77471]]

II. Authority

    Section 4n(3)(A) of the Act provides, among other things, that each 
CPO shall ``file such reports in such form and manner as may be 
prescribed by the Commission.'' The Commission also notes that, in 
amending the Act through passage of the Commodity Futures Modernization 
Act of 2000 (the ``CFMA''),\5\ Congress intended, as evidenced in 
section 2 of the CFMA, to transform the role of the Commission from 
that of a frontline regulator to one of an oversight regulator of the 
futures industry. Moreover, section 125 of the CFMA required the 
Commission to conduct a study of the Act and the Commission's rules and 
orders governing the conduct of registrants under the Act, identifying, 
among other things, regulatory functions the Commission performs that 
can be delegated to NFA.\6\ Additionally, the Commission notes that 
NFA, as a registered futures association, is obligated to establish a 
program for the protection of customers and customer funds and to 
prevent fraudulent acts and practices.\7\
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    \5\ Pub. L. 106-554, 114 Stat. 2763 (codified as amended in 
scattered sections of 7 U.S.C.).
    \6\ A copy of the study may be viewed on the Commission's Web 
site at: www.cftc.gov/files/opa/opaintermediarystudy.pdf.
    \7\ See Commission Rule 170.5; See also section 17(b)(7) of the 
Act.
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III. Review of Annual Financial Reports

    Commission Rule 4.22(c) requires, among other things, that each CPO 
distribute an annual financial report to each participant in each pool 
that it operates and file two copies with the Commission. Rule 
4.12(b)(2)(iii) modifies the requirements as to the information to be 
contained in annual financial reports for certain commodity pools and 
the CPOs that operate such pools. CPOs that have claimed relief 
pursuant to Rule 4.12(b), with respect to qualifying pools, still must 
distribute and file annual financial reports for such pools pursuant to 
Commission Rule 4.22(c). Commission Rule 4.7(b)(3) exempts a CPO from 
the specific requirements of Rule 4.22(c) for certain commodity pools. 
Pursuant to Rule 4.7(b)(3)(i), however, a CPO still must distribute and 
file with the Commission an annual financial report for such pools. 
Commission staff currently review annual financial reports and issue 
letters to the CPO noting any issues concerning the CPO's compliance 
with relevant sections of the Act or Commission Rules, and work with 
the CPO to resolve such issues.
    NFA Compliance Rule 2-13 \8\ requires NFA members to file with NFA 
copies of any documents required to be filed with the Commission 
pursuant to part 4 of the Commission's rules. NFA staff reviews CPO 
annual financial reports during on-site audits as well as through a 
desk review program. Through working closely with NFA over the years, 
the Commission is confident in the expertise of NFA staff in reviewing 
these annual financial reports.
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    \8\ NFA Rules may be found on NFA's Web site at: 
www.nfa.futures.org.
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    Commission and NFA staffs have had extensive discussions concerning 
the specific elements of the Commission's review of CPO annual 
financial reports under the Act and regulations thereunder. Further, 
Commission and NFA staff have worked closely to ensure that NFA's 
procedures for review of CPO annual financial reports similarly conform 
to the Act and regulations thereunder. Further, NFA has represented it 
will take appropriate steps to address deficiencies found in such 
reports, that it will maintain records reflecting its review and 
corrective activities, and that the information contained in such 
reports and such records will be maintained by NFA in electronic format 
that shall be accessible to Commission staff by electronic means. Based 
on the foregoing, the Commission is satisfied that NFA has established 
that it is capable of and willing to receive and to appropriately 
review CPO annual financial reports.\9\ Accordingly, the Commission 
believes it would be appropriate for NFA to receive and to review CPO 
annual financial reports for compliance with the Act and applicable 
regulations thereunder.
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    \9\ See, e.g., Letter from Regina L. Thoele, Managing Director, 
Compliance, National Futures Association, to Jane Kang Thorpe, 
Director, Division of Clearing and Intermediary Oversight, Commodity 
Futures Trading Commission (Sep. 17, 2002); see also, Letter from 
Yvonne Downs, Senior Vice President, Compliance, National Futures 
Association, to Jane Kang Thorpe, Director, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission (Nov. 
4, 2002); and Letter from Jane Kang Thorpe, Director, Division of 
Clearing and Intermediary Oversight, Commodity Futures Trading 
Commission, to Yvonne Downs, Senior Vice President, Compliance, 
National Futures Association (Nov. 22, 2002).
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    In order to avoid disruption of outstanding reviews of annual 
financial reports, this authorization is effective only with regard to 
commodity pool annual financial reports for fiscal years ending on 
December 31, 2002, and thereafter. Stated another way, annual financial 
reports of commodity pools for fiscal years ending prior to December 
31, 2002, shall still be received and reviewed in the first instance by 
the Commission.

IV. Extensions of Time

    Commission Rule 4.22(f)(1) provides that if a CPO is unable to 
disburse the annual financial report for a pool within the time 
specified in Rule 4.22(c) it may apply for an ``extension of time to a 
specific date not more than 90 calendar days after the date as of which 
the Annual Report was to have been distributed.'' This application must 
be filed with the Commission prior to the date on which the annual 
financial report is due. The Commission must then notify the CPO, 
within ten calendar days after receipt of the application, whether the 
application has been granted, denied, or whether additional time is 
needed to analyze the application. As part of this order, the 
Commission is authorizing NFA to undertake this function. In a separate 
notice, published elsewhere today in the Federal Register, the 
Commission is amending its rules with regard to the submission of these 
applications for extensions of time so as to make clear that they need 
be filed only with NFA.
    In granting or denying applications made pursuant to Rule 
4.22(f)(1), Commission staff have issued, and made publicly available, 
letters that make clear the reasoning for granting or denying such 
requests. NFA, in determining whether to grant or deny requests made 
pursuant to Rule 4.22(f)(1), shall consult, and comply with, the 
guidance provided by the previous letters of Commission staff on this 
subject, as well as any future guidance, in whatever form, the 
Commission or Commission staff might provide. The Commission notes that 
in other contexts, such as determining whether to grant or deny an 
application for registration, NFA makes independent decisions based on 
general guidance provided by the Commission.\10\ The Commission fully 
expects that NFA will exercise the authority granted in this order with 
regard to requests for extensions of time in the same skillful manner 
as it has with regard to the registration of applicants.
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    \10\ See Appendix A to Part 3 of the Commission's rules.
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    Commission Rule 4.22(f)(2) provides for a self-executing extension 
of time of no more than 60 calendar days for distributing and filing an 
annual financial report of a commodity pool where the CPO is unable to 
prepare the annual financial report in the time required under the 
Commission's rules as a result of the pool's investments in

[[Page 77472]]

another collective instrument vehicle. To obtain the extension of time 
provided for in Rule 4.22(f)(2), the CPO must file a notice, in the 
form specified in the Rule, with the Commission and NFA. In the 
separate notice being published today, as discussed above, the 
Commission is amending Rule 4.22(f)(2) to provide that the notice need 
only be filed with NFA. As part of this order, the Commission is 
authorizing NFA to maintain and to serve as the official custodian of 
these notices.

V. Maintenance of and Access to CPO and CTA Filings

    As noted above, in a separate document, published elsewhere today 
in the Federal Register, the Commission is amending its rules with 
regard to the submission of annual financial reports, extensions of 
time for filing annual financial reports,\11\ and notices of 
eligibility for exemption from registration and certain part 4 
requirements required to be filed by CPOs and CTAs.\12\ Specifically, 
the Commission is amending the subject rules to make clear that CPOs 
and CTAs need only file the relevant documents with NFA and need not 
also file them with the Commission. As a result, NFA will act as 
official custodian of such records and will receive and maintain all 
records required to be filed by CPOs and CTAs with regard to the 
authorization made by the Commission in this and the 1997 Order.
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    \11\ With regard to annual financial reports and extensions of 
time for filing such reports, the rule amendments shall be made 
effective for such reports and extensions of time with regard to 
commodity pool annual financial reports for fiscal years ending on 
December 31, 2002, and thereafter.
    \12\ As noted above, in the 1997 Order the Commission authorized 
NFA to process notices of eligibility for certain exemptions.
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    As the Commission will no longer receive the subject filings, 
Commission staff has made NFA staff aware of the requirements that 
shall apply to NFA in maintaining these records. In particular, NFA 
will maintain these records in accordance with the Commission's Records 
Disposition Schedule. In addition, although Commission staff will no 
longer be reviewing the subject documents on a regular basis, the work 
of the Commission requires that Commission staff have ready electronic 
access to the information contained in the documents encompassed by 
this and the 1997 Order. NFA and Commission staffs have discussed the 
required availability and access by Commission staff to these records 
and the information contained therein. Effective March 10, 2003, 
Commission staff will have, at all times, immediate electronic access 
to a database containing all pertinent information contained in the 
subject filings, as well as the results of the NFA's review 
thereof.\13\ Moreover, NFA will, at the request of the Commission, 
Commission staff, or the Department of Justice,\14\ make available 
within 24 hours hard copies of any of the documents encompassed by this 
and the 1997 Order.
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    \13\ Due to routine maintenance of the system on which this 
information will reside, NFA has made the Commission aware that 
there may be times at which the system will not be accessible. NFA, 
however, has indicated that, whenever possible, all maintenance of 
the system will be conducted after business hours.
    \14\ See section 4n(3) of the Act.
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    The Commission has determined to authorize NFA to maintain and 
serve as official custodian of record for the filings, notice, reports, 
and claims required by Rules 4.7(b)(3), 4.22(c), 4.22(f)(1), and 
4.22(f)(2). This determination is based upon NFA's representations 
regarding procedures for maintaining and safeguarding all such records, 
in connection with NFA's assumption of the responsibilities for the 
activities referenced above. 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.

VI. Advisory 18-96

    CFTC 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.\15\ In order to obtain the relief provided for in the advisory, 
a CPO must file a claim for exemption with the Commission and NFA, as 
required in the advisory. In the 1997 Order, the Commission authorized 
NFA to process notices of claims filed by qualifying CPOs pursuant to 
CFTC Advisory 18-96. As discussed above, in a separate document 
published elsewhere today in the Federal Register, the Commission is, 
among other things, amending Commission rules with regard to notices of 
eligibility for exemption from registration and certain part 4 
requirements required to be filed by CPOs and CTAs to make clear that 
CPOs and CTAs need only file the relevant documents with NFA and need 
not also file them with the Commission. In order to conform the process 
for all claims for exemptions that the Commission has authorized NFA to 
process, the Commission is also ordering that as of January 1, 2003, 
all claims for exemption filed pursuant to CFTC Advisory 18-96 need 
only be filed with NFA and not also with the Commission.
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    \15\ CFTC Advisory No. 18-96, (1994-1996 Transfer Binder), Comm. 
Fut. L. Rep. (CCH) ] 26,659 (Apr. 11, 1996).
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VII. Conclusion and Order

    For the reasons discussed above, and pursuant to its authority 
under the Act, the Commission has determined to authorize NFA, with 
regard to commodity pool annual financial reports for fiscal years 
ending on December 31, 2002, and thereafter, to: (1) Receive and review 
annual financial reports required to be filed by CPOs pursuant to 
Commission Rules 4.7(b)(3) and 4.22(c), including annual financial 
reports required to be filed by CPOs that have claimed relief pursuant 
to Rule 4.12(b) with respect to qualifying pools, and to review such 
reports for compliance with the Act and the Commission Rules thereunder 
and to provide notice of deficiencies; (2) receive and grant or deny 
applications filed pursuant to Commission Rule 4.22(f)(1) for 
extensions of time to distribute annual financial reports; and (3) 
process notices of claims of extension of time to distribute and file 
annual financial reports filed pursuant to Commission Rule 4.22(f)(2). 
In addition, the Commission has determined to authorize NFA to maintain 
and to serve as the official custodian of such records. The Commission 
has also determined that, as of January 1, 2003, all claims for 
exemption filed pursuant to CFTC Advisory 18-96 need only be filed with 
NFA and need not also be filed with the Commission.
    These determinations are based upon: (1) The Congressional intent 
that the Commission be permitted to determine the best manner in which 
to oversee CPOs; (2) the Congressional intent that NFA, where 
appropriate, assume responsibility under the Act for regulatory 
functions the Commission has deemed unnecessary to retain; and (3) 
NFA's representation and

[[Page 77473]]

demonstration of its willingness and ability to administer the required 
regulatory functions in accordance with the standards established by 
the Act, the Commission's regulations and orders promulgated 
thereunder, any supplemental direction established by the Commission or 
Commission staff, and relevant case law, and to provide the Commission 
with whatever information, reports, summaries, or records the 
Commission may determine are necessary for effective oversight of NFA's 
administration of the functions delegated herein, or for the Commission 
to fulfill its role of regulatory oversight of the futures markets.
    This order does not authorize NFA to accept or act upon requests 
for exemption from the requirements of Rule 4.7(b)(3) or Rule 4.22(c), 
except applications for extensions of time filed pursuant to Commission 
Rule 4.22(f)(1), as discussed in this order. Moreover, NFA is not 
authorized to issue any interpretations, ``no-action'' positions, or 
exemptions with respect to the requirements of Rules 4.7(b)(3) and 
4.22(c).
    NFA is authorized to perform all functions specified in this order 
until 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 matter 
regarding the functions delegated to it by this order. Nothing in this 
order affects the applicability of any previous orders issued by the 
Commission.

    Issued in Washington, DC on December 11, 2002, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-31684 Filed 12-17-02; 8:45 am]
BILLING CODE 6351-01-P