[Federal Register Volume 71, Number 35 (Wednesday, February 22, 2006)]
[Rules and Regulations]
[Pages 8939-8943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1615]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AC25


Commodity Pool Operator Electronic Filing of Annual Reports

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending Commission rules to require that commodity pool 
annual financial reports submitted by commodity pool operators 
(``CPOs'') to the National Futures Association (``NFA'') be filed and 
affirmed electronically, in compliance with NFA's electronic filing 
procedures. NFA petitioned the Commission to adopt this amendment after 
its implementation of a pilot program for electronic filing of 
commodity pool annual reports in 2005.
    The amendment necessarily eliminates the requirement that the 
commodity pool annual report filed with NFA be manually signed, and 
replaces it with a requirement that CPOs maintain for five years in 
their own business records a manually signed oath or affirmation with 
respect to each annual report along with documentation supporting the 
compilation of certain key financial balances required to be submitted 
to NFA.
    In addition to mandating electronic filing, the Commission is also 
amending other provisions of its rules applicable to CPOs with respect 
to financial reporting to: (i) Explicitly state that commodity pool 
monthly and/or quarterly account statements distributed to participants 
must be prepared in accordance with generally accepted accounting 
principles; (ii) clarify that CPOs must file a notification of a change 
in a public accountant for a commodity pool with NFA; (iii) clarify 
that a reference to ``segregation'' with respect to a statement 
required to be made in an accountant's letter refers to the prohibition 
on commingling of funds of a commodity pool with the assets of any 
other person; and (iv) require that notifications concerning CPOs' 
election of fiscal years for commodity pools other than the calendar 
year or changes in fiscal year be filed solely with NFA and not the 
Commission.
    These amendments with respect to commodity pool financial reporting 
do not impact the distribution of annual reports to pool participants, 
which may continue to be provided through hard-copy distribution via 
postal mail or electronically if the pool participant consents thereto. 
Also, these amendments do not change the requirements or process for 
CPOs to request that the Commission provide confidential treatment to 
commodity pool annual reports submitted to NFA, in response to requests 
from the public made under the Freedom of Information Act.

DATES: Effective Date: March 24, 2006.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and 
Chief Accountant, at (202) 418-5430 or Jennifer C.P. Bauer, Special 
Counsel, at (202) 418-5472, Division of Clearing and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail: 
([email protected]) or ([email protected]).

SUPPLEMENTARY INFORMATION:

I. Background

    Rule 4.22(c) requires a CPO to file with NFA and to provide to each 
participant an annual financial report, certified by an independent 
public

[[Page 8940]]

accountant, for each commodity pool that it operates within 90 days of 
the end of the pool's fiscal year or the permanent cessation of 
trading.\1\ Also, Rule 4.7(b)(3) requires a CPO that has claimed an 
exemption from certain regulatory requirements pursuant to Rule 4.7 to 
file with NFA and to distribute to commodity pool participants an 
unaudited annual financial report in lieu of an audited annual 
financial report.\2\
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    \1\ The rules of the Commission cited in this release may be 
found at 17 CFR Ch. I (2005).
    \2\ CPOs operating pools offered solely to qualified eligible 
participants (``QEPs'') pursuant to Rule 4.7 may claim relief from 
the certification requirement of Rule 4.22(d) with respect to the 
exempt pools' financial statements. See Rule 4.7(b)(3).
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    Beginning with reports filed for the year ended December 31, 2004, 
the NFA implemented a pilot program permitting CPOs to voluntarily 
elect to file commodity pool annual reports through the use of an 
electronic filing system, the ``EasyFile'' system, accessed from the 
NFA's Web site.\3\ The NFA pilot program required that the complete 
annual report for commodity pools, including the public accountant's 
opinion contained in certified statements, be submitted to NFA in the 
Portable Document Format (``PDF'') file format. In addition to the 
electronic submission of the document in a PDF file format, 
participating CPOs were required to directly enter certain key 
financial statement balances or aggregated balances from the commodity 
pools' annual reports into the NFA's EasyFile system. The key financial 
statement balances filed electronically through the pilot program 
include all the data elements that NFA staff currently manually enter 
into the FACTS 2000 database from the information contained in hard 
copy annual reports, as well as several data elements that NFA staff 
added after consultation with members of the commodity pool industry, 
certified public accountants (``CPAs'') that serve the commodity pool 
industry, and Commission staff. NFA's FACTS 2000 database serves as the 
primary means by which NFA and Commission staff access commodity pool 
financial information.
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    \3\ NFA initially adopted the EasyFile electronic filing system 
for financial reporting by introducing brokers (``IBs'') in 2004. 
The Commission approved NFA's rules adopting EasyFile for IBs on 
June 28, 2004.
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    NFA requested that the Commission provide CPOs participating in the 
pilot program with relief from the requirement of Rule 4.22(h) that the 
annual report filed with NFA include a manually signed oath or 
affirmation, as NFA implemented an electronic version of the oath or 
affirmation applicable to both the document submitted in PDF file 
format and the key financial statement balances directly entered into 
the EasyFile system. The Commission's Division of Clearing and 
Intermediary Oversight issued exemptive relief in January 2005 to CPOs 
participating in the pilot program from the requirement that their 
pools' annual reports submitted to NFA be manually signed under Rule 
4.22(j).\4\ On August 26, 2005, the NFA petitioned the Commission to 
formally amend Rules 4.22 and 4.7 to eliminate the requirement that 
CPOs file manually signed pool annual reports with NFA, and to further 
require CPOs to file such annual reports with NFA electronically using 
the EasyFile system implemented in the pilot program.
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    \4\ CFTC Letter No. 05-01 may be accessed at http://www.cftc.gov/tm/letters/05letters/tm05-01.htm.
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    Mandatory electronic filing of commodity pool annual reports is 
anticipated to benefit both the Commission and NFA by increasing the 
quality of the financial data from commodity pool annual reports that 
will be collected in FACTS 2000 and be available to the Commission. 
Direct data entry by the CPO or its CPA, who are most familiar with the 
information being submitted, and system-enforced edit and validation 
checks,\5\ which are part of the electronic filing system, should 
enhance the integrity and quality of data collected. Also, NFA's 
guidance for the classification of the key data elements in the pilot 
program should increase the uniformity of data available in FACTS 2000, 
when utilized by all CPOs with respect to applicable commodity pool 
annual report filings.
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    \5\ For example, the system will prompt the user for a 
correction if the components listed as assets do not total to the 
amount entered for total assets, or if certain types of trading 
assets and liabilities are reported in the balance sheet but there 
are no gains or losses reported in the income statement with respect 
to such assets.
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    Pursuant to the effectiveness of these amendments, submission of 
annual reports in compliance with the NFA's electronic filing 
procedures, which require authentication through the use of user ids, 
passwords and specific permissions managed by designated Security 
Managers \6\ of CPOs, will replace the requirement that a manually 
signed oath or affirmation be submitted to NFA with a commodity pool's 
annual report. The user interface and system security for NFA's CPO 
electronic filing system are patterned after NFA's existing EasyFile 
system for IBs' unaudited financial reports. Similar to EasyFile for 
IBs, the CPO's Security Manager can establish users and assign them 
abilities to enter data and/or submit the report and data in the NFA 
electronic filing system.
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    \6\ The Security Manager procedure is part of NFA's existing 
electronic system for registration processing. The Commission 
adopted rule amendments in 2002 to enable NFA to utilize an online 
system for registration functions. See 67 FR 38,869 (June 6, 2002).
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    By these amendments CPOs will be required to maintain in their 
business records a manually signed oath or affirmation along with their 
commodity pool annual reports, and also sufficient documentation to 
support the compilation of the key balances from the annual report. 
Therefore, NFA may verify or corroborate the information submitted 
electronically if necessary.

II. Comments

    NFA was the only entity to file a comment letter on the proposed 
amendments. NFA supported the proposed amendments and stated that 
``mandatory participation [in electronic filing] should dramatically 
increase * * * efficiencies without imposing any undue hardships on our 
CPO Members.'' NFA also commented in support of the additional 
amendments proposed with respect to commodity pool financial reporting 
other than mandatory electronic filing, with one recommendation 
regarding the notification of changes in commodity pool certified 
public accountants. NFA commented that these required notifications to 
both the NFA and the Commission should only be submitted to NFA by 
CPOs, as they would be available to the Commission in the FACTS 2000 
database. The Commission agrees with this comment and has changed the 
amendment to reflect that for CPOs, such notification must be made 
solely to NFA. NFA will alert the Commission whenever a notification 
indicates a disagreement with CPAs or other non-routine circumstances.

III. Amendments

    Rule 4.22(c) requires that a registered CPO file with NFA an annual 
report for each pool that it operates within 90 days of the end of the 
pool's fiscal year or the permanent cessation of trading. The 
Commission is amending Rule 4.22(c) and Rule 4.7(b)(3) to specifically 
require that the commodity pool annual reports be submitted to NFA 
electronically through NFA's established electronic filing procedures. 
Further, the Commission is amending Rule 4.22(h), pursuant to which 
each such report, including those provided under Rule 4.7 and Rule 
4.12(b), must contain an oath or affirmation that, to the best of the 
knowledge and belief of the person making the oath or affirmation, the 
information contained in the document

[[Page 8941]]

is accurate and complete. The amendment shall require the oath or 
affirmation on annual reports filed with NFA to be made through the use 
of electronic filing procedures. The Commission is also deleting Rule 
4.22(j) and adding a provision to Rule 4.23(a) requiring CPOs to 
maintain in their books and records a manually signed oath or 
affirmation for all annual reports and account statements, and to 
maintain records of the key financial balances submitted to NFA that 
clearly demonstrate how such balances were derived.
    Rule 4.7(b)(2) requires that an account statement signed and 
affirmed by the CPO be prepared and distributed to pool participants no 
less frequently than quarterly within 30 calendar days after the end of 
the reporting period. The account statement must indicate: (1) The net 
asset value of the exempt pool as of the end of the reporting period; 
(2) the change in net asset value from the end of the previous 
reporting period; and (3) the net asset value per outstanding unit of 
participation in the exempt pool as of the end of the reporting period. 
The Commission is amending Rule 4.7(b)(2) to clarify that the account 
statement provided to participants must be presented and computed in 
accordance with generally accepted accounting principles as are other 
financial reports required in Part 4 of the Commission's Rules. By 
making this requirement explicit, the Commission is ensuring that 
established professional standards are the basis of such calculations.
    Rule 4.22(d) requires that the certification of commodity pool 
annual reports by independent accountants be made in accordance with 
the certification requirements of Rule 1.16 that are applicable to the 
financial statements of FCMs and IBs, with specific exceptions. Rule 
4.22(d) does not exempt CPOs from Rule 1.16(g), which requires written 
notification to be given to the NFA and to the Commission of changes in 
the entity's independent accountant. In order to make clear that this 
requirement applies to CPOs, the Commission is amending Rule 4.22(d) to 
specifically state that Rule 1.16(g) is also applicable to CPOs with 
respect to notifications of changes in the independent accountants 
engaged for the certification of commodity pool financial statements, 
except that such notification may be made solely to NFA. By clarifying 
this, the Commission will be assured that NFA receives proper notice of 
the circumstances of any changes of independent accountants, which NFA 
will report to the Commission if indicative of disagreements with 
auditors or similar circumstances of concern with respect to the 
commodity pool.
    Rule 4.22(f)(1) provides a mechanism for CPOs that cannot 
distribute annual reports for pools within the required timeframe 
without substantial undue hardship to file applications of extensions 
of time with NFA. In the context of requesting such an extension, the 
application to NFA must be accompanied by a letter from the pool's 
independent public accountant. One of the items that must be addressed 
in the letter is whether the independent accountant has any indication 
from the audit work in process to indicate that the CPO is not meeting 
``segregation'' requirements. In response to some perceived confusion 
by the use of the term ``segregation'', the Commission is amending Rule 
4.22(f)(1)(ii)(B) to clarify that this does not refer to the 
segregation requirements of Rule 1.20 applicable to FCMs, but instead 
refers to the prohibition on commingling of funds of a commodity pool 
with the assets of any other person contained in Rule 4.20(c).\7\
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    \7\ The language originally proposed was ``the segregation 
requirements of Sec.  4.20(c)'' showing the intent of the reference 
to reflect Rule 4.20 and not FCM segregation requirements contained 
in Commission Rule 1.20. 45 FR 51,600 at 51,610 (August 4, 1980).
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    Rules 4.22(g)(2) and (3) require notifications to be made to the 
Commission concerning CPOs' election of fiscal years for commodity 
pools other than the calendar year or subsequent changes in fiscal 
year-ends. The Commission is amending these Rules so that such 
notifications are solely required to be filed with NFA and not the 
Commission, consistent with other financial reporting filings that are 
now made to NFA directly as a result of functions the Commission has 
authorized NFA to perform.\8\ NFA is hereby authorized to maintain and 
serve as official custodian of these notifications as well as the 
notifications of changes in certified public accountant for commodity 
pools.
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    \8\ By order dated December 11, 2002, the Commission authorized 
NFA to: (1) Receive and review annual financial reports required to 
be filed by CPOs pursuant to 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 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 Rule 4.22(f)(2). In addition, the Commission 
authorized NFA to maintain and to serve as the official custodian of 
such records. 67 FR 77,470 (December 18, 2002).
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IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et. seq., 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission previously has 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on such entities in 
accordance with the RFA.\9\ The Commission has determined previously 
that registered CPOs are not small entities for the purpose of the 
RFA.\10\ The proposed amendments to Rule 4.7 and Rule 4.22 would apply 
only to registered CPOs. Therefore, the Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
action taken herein will not have a significant economic impact on a 
substantial number of small entities.
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    \9\ 47 FR 18618 (April 30, 1982).
    \10\ 47 FR at 18619.
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B. Paperwork Reduction Act

    This rulemaking alters the method of collection for a required 
collection of information under Part 4 of the Commissions Rules. As 
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 
the Commission submitted a copy of this section to the Office of 
Management and Budget (OMB) for its review. No comments were received 
in response to the Commission's invitation in the notice of proposed 
rulemaking to comment on any change in the potential paperwork burden 
associated with these rule amendments.

C. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by Section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new Rule under the Act. By its terms, Section 
15(a) as amended does not require the Commission to quantify the costs 
and benefits of a new Rule or to determine whether the benefits of the 
Rule outweigh its costs. Rather, Section 15(a) simply requires the 
Commission to ``consider the costs and benefits'' of its action.
    Section 15(a) of the Act further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest

[[Page 8942]]

considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The Commission's proposal contained an analysis of its 
consideration of these costs and benefits and solicited public comment 
thereon. 70 FR at 74244. No comments were received with respect to the 
analysis of the Commission's consideration. Therefore, pursuant to such 
consideration, the Commission has decided to adopt these amendments as 
discussed above.

List of Subjects in 17 CFR Part 4

    Advertising, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.


0
In consideration of the foregoing, 17 CFR Chapter I is amended as 
follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 
23.


0
2. Section 4.7 is amended by revising paragraphs (b)(2) and (b)(3) to 
read as follows:


Sec.  4.7  Exemption from certain Part 4 requirements for commodity 
pool operators with respect to offerings to qualified eligible persons 
and for commodity trading advisors with respect to advising qualified 
eligible persons.

* * * * *
    (b) * * *
    (2) Periodic reporting relief. Exemption from the specific 
requirements of Sec. Sec.  4.22(a) and (b); Provided, That a statement 
signed and affirmed in accordance with Sec.  4.22(h) is prepared and 
distributed to pool participants no less frequently than quarterly 
within 30 calendar days after the end of the reporting period. This 
statement must be presented and computed in accordance with generally 
accepted accounting principles and indicate:
    (i) The net asset value of the exempt pool as of the end of the 
reporting period;
    (ii) The change in net asset value from the end of the previous 
reporting period; and
    (iii) The net asset value per outstanding unit of participation in 
the exempt pool as of the end of the reporting period.
    (3) Annual report relief. (i) Exemption from the specific 
requirements of Sec. Sec.  4.22(c) and (d); Provided, That within 90 
calendar days after the end of the exempt pool's fiscal year, the 
commodity pool operator electronically files with the National Futures 
Association and distributes to each participant in lieu of the 
financial information and statements specified by those sections, an 
annual report for the exempt pool, affirmed in accordance with Sec.  
4.22(h) which contains, at a minimum:
* * * * *

0
3. Section 4.22 is amended by:
0
a. Revising paragraph (c) introductory text;
0
b. Revising paragraph (d) introductory text;
0
c. Revising paragraph (f)(1)(ii)(B);
0
d. Revising paragraphs (g)(2) and (3);
0
e. Revising paragraph (h); and
0
f. Removing paragraph (j), to read as follows:


Sec.  4.22  Reporting to pool participants.

* * * * *
    (c) Except as provided in paragraph (c)(6) of this section, each 
commodity pool operator registered or required to be registered under 
the Act must distribute an Annual Report to each participant in each 
pool that it operates, and must electronically submit a copy of the 
Report and key financial balances from the Report to the National 
Futures Association pursuant to the electronic filing procedures of the 
National Futures Association, within 90 calendar days after the end of 
the pool's fiscal year or the permanent cessation of trading, whichever 
is earlier, but in no event longer than 90 days after funds are 
returned to pool participants; Provided, however, That if during any 
calendar year the commodity pool operator did not operate a commodity 
pool, the pool operator must so notify the National Futures Association 
within 30 calendar days after the end of such calendar year. The Annual 
Report must be affirmed pursuant to paragraph (h) of this section and 
must contain the following:
* * * * *
    (d) The financial statements in the Annual Report must be presented 
and computed in accordance with generally accepted accounting 
principles consistently applied and must be certified by an independent 
public accountant. The requirements of Sec.  1.16(g) of this chapter 
shall apply with respect to the engagement of such independent public 
accountants, except that any related notifications to be made may be 
made solely to the National Futures Association, and the certification 
must be in accordance with Sec.  1.16 of this chapter, except that the 
following requirements of that section shall not apply:
* * * * *
    (f) * * *
    (1) * * *
    (ii) * * *
    (B) Do you have any indication from the part of your audit 
completed to date that would lead you to believe that the commodity 
pool operator was or is not meeting the recordkeeping requirements of 
this part 4 or was or is not complying with the Sec.  4.20(c) 
prohibition on commingling of property of any pool with the property of 
any other person?
* * * * *
    (g)(1) * * *
    (2) If a commodity pool operator elects a fiscal year other than 
the calendar year, it must give written notice of the election to all 
participants and must file the notice with the National Futures 
Association within 90 calendar days after the date of the pool's 
formation. If this notice is not given, the pool operator will be 
deemed to have elected the calendar year as the pool's fiscal year.
    (3) The commodity pool operator must continue to use the elected 
fiscal year for the pool unless it provides written notice of any 
proposed change to all participants and files such notice with the 
National Futures Association at least 90 days before the change and the 
National Futures Association does not disapprove the change within 30 
days after the filing of the notice.
    (h)(1) Each Account Statement and Annual Report, including an 
Account Statement or Annual Report provided pursuant to Sec.  4.7(b) or 
4.12(b), must contain an oath or affirmation that, to the best of the 
knowledge and belief of the individual making the oath or affirmation, 
the information contained in the document is accurate and complete; 
Provided, however, That it shall be unlawful for the individual to make 
such oath or affirmation if the individual knows or should know that 
any of the information in the document is not accurate and complete.
    (2) Each oath or affirmation must be made by a representative duly 
authorized to bind the pool operator, and
    (i) for the copy of a commodity pool's Annual Report submitted to 
the National Futures Association, such representative shall satisfy the 
required oath or affirmation through compliance

[[Page 8943]]

with the National Futures Association's electronic filing procedures, 
and
    (ii) for a commodity pool Account Statement or Annual Report 
distributed to participants, a facsimile of the manually signed oath or 
affirmation of such representative may be used so long as the manually 
signed original is retained in accordance with Sec.  4.23.
    (3) For each manually signed oath or affirmation, there must be 
typed beneath the signed oath or affirmation:
    (i) The name of the individual signing the document;
    (ii) The capacity in which he is signing;
    (iii) The name of the commodity pool operator for whom he is 
signing; and
    (iv) The name of the commodity pool for which the document is being 
distributed.
* * * * *

0
4. Section 4.23 is amended by adding a new paragraph (a)(12) to read as 
follows:


Sec.  4.23  Recordkeeping.

* * * * *
    (a) * * *
    (12) A manually signed copy of each Account Statement and Annual 
Report provided pursuant to Sec.  4.22, 4.7(b) or 4.12(b), and records 
of the key financial balances submitted to the National Futures 
Association for each commodity pool Annual Report, which records must 
clearly demonstrate how the key financial balances were compiled from 
the Annual Report.
* * * * *

    Issued in Washington, DC, on February 16, 2006 by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06-1615 Filed 2-21-06; 8:45 am]
BILLING CODE 6351-01-P