[Federal Register Volume 85, Number 114 (Friday, June 12, 2020)]
[Proposed Rules]
[Pages 35820-35835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12034]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AE46


Exemption From Registration for Certain Foreign Persons Acting as 
Commodity Pool Operators of Offshore Commodity Pools

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking; reopening of comment period.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
proposing to amend the conditions in Commission regulation 3.10(c) 
under which a person located outside of the United States engaged in 
the activity of a commodity pool operator (CPO; each person located 
outside of the United States a non-U.S. CPO) in connection with 
commodity interest transactions on behalf of persons located outside 
the United States (collectively, an offshore commodity pool or offshore 
pool) would qualify for an exemption from CPO registration and 
regulation with respect to that offshore pool. Specifically, through 
amendments to Commission regulation 3.10(c), the Commission is 
proposing that non-U.S. CPOs may claim an exemption from registration 
with respect to its qualifying offshore commodity pools, while 
maintaining another exemption from registration, relying on an 
exclusion, or registering as a CPO with respect to the operation of 
other commodity pools. The Commission is also proposing to add a safe 
harbor by which a non-U.S. CPO of an offshore commodity pool may rely 
upon the proposed exemption in Commission regulation 3.10(c) if they 
satisfy enumerated factors related to the operation of the offshore 
commodity pool. Additionally, the Commission is proposing to permit 
certain U.S. control affiliates of a non-U.S. CPO to contribute capital 
to such CPO's offshore pools as part of the initial capitalization 
without rendering the non-U.S. CPO ineligible for the exemption from 
registration under Commission regulation 3.10.

DATES: Comments must be received on or before August 11, 2020.

ADDRESSES: You may submit comments, identified by RIN 3038-AE46, by any 
of the following methods:
    CFTC Comments Portal: http://comments.cftc.gov. Select the ``Submit 
Comments'' link for this rulemaking and follow the instructions on the 
Public Comment Form.
    Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st 
Street NW, Washington, DC 20581.
    Hand Delivery/Courier: Same as Mail above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make publicly available. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act (FOIA), a petition for confidential treatment of the 
exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR Chapter I (2019).
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
FOIA.

FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, (202) 
418-6056, [email protected], Amanda Lesher Olear, Deputy Director, 
(202) 418-5283, [email protected], or regarding Section III of this 
Notice of Proposed Rulemaking, Frank Fisanich, Chief Counsel, (202) 
418-5949, [email protected], Division of Swap Dealer and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 1a(11) of the Commodity Exchange Act (CEA or Act) \2\ 
defines the term ``commodity pool operator'' as any

[[Page 35821]]

person \3\ engaged in a business that is of the nature of a commodity 
pool, investment trust, syndicate, or similar form of enterprise, and 
who, with respect to that commodity pool, solicits, accepts, or 
receives from others, funds, securities, or property, either directly 
or through capital contributions, the sale of stock or other forms of 
securities, or otherwise, for the purpose of trading in commodity 
interests.\4\ CEA section 1a(10) defines a ``commodity pool'' as any 
investment trust, syndicate, or similar form of enterprise operated for 
the purpose of trading in commodity interests.\5\ CEA section 4m(1) 
generally requires each person who satisfies the CPO definition to 
register as such with the Commission.\6\ With respect to CPOs, the CEA 
also authorizes the Commission, acting by rule or regulation, to 
include within or exclude from the term ``commodity pool operator'' any 
person engaged in the business of operating a commodity pool if the 
Commission determines that the rule or regulation will effectuate the 
purposes of the CEA.\7\
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    \2\ See 7 U.S.C. 1, et seq. (2019). The CEA and the Commission's 
regulations are accessible through the Commission's website, https://www.cftc.gov.
    \3\ See 17 CFR 1.3 (defining ``person'' to include individuals, 
associations, partnerships, corporations, and trusts).
    \4\ 7 U.S.C. 1a(11). See also 17 CFR 1.3 (defining ``commodity 
interest'' to include any contract for the purchase or sale of a 
commodity for future delivery, and any swap as defined in the CEA); 
Adaptation of Regulations to Incorporate Swaps, 77 FR 66288, 66295 
(Nov. 2, 2012) (discussing the modification of the term ``commodity 
interest'' to include swaps).
    \5\ 7 U.S.C. 1a(10).
    \6\ 7 U.S.C. 6m(1).
    \7\ 7 U.S.C. 1a(11)(B).
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    Additionally, CEA section 4(c), in relevant part with respect to 
this proposal, provides that the Commission, to promote responsible 
economic or financial innovation and fair competition, by rule, 
regulation, or order, after notice and opportunity for hearing, may 
exempt, among other things, any person or class of persons offering, 
entering into, rendering advice, or rendering other services with 
respect to commodity interests from any provision of the Act.\8\ 
Section 4(c) authorizes the Commission to grant exemptive relief if the 
Commission determines, inter alia, that the exemption would be 
consistent with the ``public interest.'' \9\
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    \8\ 7 U.S.C. 6(c)(1).
    \9\ See Conference Report, H.R. Report 102-978 at 8 (Oct. 2, 
1992) (``The goal of providing the Commission with broad exemptive 
powers . . . is to give the Commission a means of providing 
certainty and stability to existing and emerging markets so that 
financial innovation and market development can proceed in an 
effective and competitive manner.'').
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    To provide an exemption pursuant to section 4(c) of the Act with 
respect to registration as a CPO, the Commission must determine that 
the agreements, contracts, or transactions undertaken by the exempt CPO 
should not require registration and that the exemption from 
registration would be consistent with the public interest and the 
Act.\10\ The Commission must further determine that the agreement, 
contract, or transaction will be entered into solely between 
appropriate persons and that it will not have a material adverse effect 
on the ability of the Commission or any contract market to discharge 
its regulatory or self-regulatory duties under the Act.\11\ The term 
``appropriate person'' as used in section 4(c) includes a commodity 
pool formed or operated by a person subject to regulation under the 
Act.\12\ The Commission has previously interpreted the clause ``subject 
to regulation under the Act'' as including persons who are exempt from 
registration or excluded from the definition of a registration 
category.\13\
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    \10\ 7 U.S.C. 6(c)(2)(A).
    \11\ Id. at 6(c)(2)(B).
    \12\ Id. at 6(c)(3)(E).
    \13\ See Further Definition of ``Swap Dealer'', 77 FR 30596, 
30655 (May 23, 2012) (finding, in the context of the eligible 
contract participant definition, that ``construing the phrase 
`formed and operated by a person subject to regulation under the 
[CEA]' to refer to a person excluded from the CPO definition, 
registered as a CPO or properly exempt from CPO registration 
appropriately reflects Congressional intent'').
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    Part 3 of the Commission's regulations governs the registration of 
intermediaries engaged in, inter alia, the offering and selling of, and 
the provision of advice concerning, all commodity interest 
transactions. Commission regulation 3.10 establishes the procedure that 
intermediaries, including CPOs, must use to register with the 
Commission.\14\ Commission regulation 3.10 also establishes certain 
exemptions from registration.\15\ In particular, Commission regulation 
3.10(c)(3) (referred to herein as the 3.10 Exemption) provides that, 
inter alia, a person engaged in the activity of a CPO, in connection 
with any commodity interest transaction executed bilaterally or made on 
or subject to the rules of any designated contract market or swap 
execution facility, is not required to register as a CPO, provided 
that:
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    \14\ See, e.g., 17 CFR 3.10(a)(1)(i) (requiring the filing of a 
Form 7-R with the National Futures Association (NFA)).
    \15\ See 17 CFR 3.10(c) (exemption from registration for certain 
persons).
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    1. The person is located outside the United States, its 
territories, and possessions (the United States or U.S.) (a non-U.S. 
CPO);
    2. The person acts only on behalf of persons located outside the 
United States (an offshore commodity pool); and
    3. The commodity interest transaction is submitted for clearing 
through a registered futures commission merchant.\16\
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    \16\ 17 CFR 3.10(c)(3)(i). But see CFTC Staff Letters No. 16-08 
and 15-37. Pursuant to these letters, Commission staff in the 
Division of Swap Dealer and Intermediary Oversight (DSIO) recognized 
that not all swaps are required to be cleared, and thus provided 
relief from registration for certain intermediaries acting on behalf 
of persons located outside the United States or on behalf of certain 
International Financial Institutions in connection with swaps not 
subject to a Commission clearing requirement. In 2016, the 
Commission published a proposed rule that would codify the position 
articulated in these DSIO staff letters. See Exemption from 
Registration for Certain Foreign Persons, 81 FR 51824 (Aug. 5, 
2016). The Commission is reopening the comment period on such 
proposed rule pursuant to this Proposal. See Section III, infra.
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    A person acting in accordance with the 3.10 Exemption remains 
subject to the antifraud provisions of CEA section 4o,\17\ but is 
otherwise not required to comply with those provisions of the CEA or 
Commission regulations applicable to any person registered in such 
intermediary capacity or persons required to be so registered.\18\ The 
3.10 Exemption provides that it is available to non-U.S. CPOs whose 
activities, in connection with any commodity interest transaction 
executed bilaterally or made on or subject to the rules of any 
designated contract market or swap execution facility, are confined to 
acting on behalf of offshore commodity pools.\19\ This exemption was 
first adopted in 2007 and was based on a long-standing no-action 
position articulated by the Commission's Office of General Counsel in 
1976.\20\
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    \17\ 7 U.S.C. 6o.
    \18\ 17 CFR 3.10(c)(3)(ii). As market participants, however, 
such persons remain subject to all other applicable provisions of 
the CEA and the Commission's regulations promulgated thereunder.
    \19\ 17 CFR 3.10(c)(3)(i).
    \20\ Exemption from Registration for Certain Foreign Persons, 72 
FR 63976, 63977 (Nov. 14, 2007). See CFTC Staff Interpretative 
Letter 76-21.
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    In adopting the final rule amending Commission regulation 3.10, the 
Commission agreed with commenters who cited its longstanding policy of 
focusing ``customer protection activities upon domestic firms and upon 
firms soliciting or accepting orders from domestic users of the futures 
markets.'' \21\ The Commission further stated that the protection of 
non-U.S. customers of non-U.S. firms may be best deferred to foreign 
regulators.\22\ The

[[Page 35822]]

Commission noted its understanding that, pursuant to the terms of the 
3.10 Exemption, ``[a]ny person seeking to act in accordance with any of 
the foregoing exemptions from registration should note that the 
prohibition on contact with U.S. customers applies to solicitation as 
well as acceptance of orders.'' \23\ Moreover, the Commission stated 
that ``[if] a person located outside the U.S. were to solicit 
prospective customers located in the U.S. as well as outside of the 
U.S., these exemptions would not be available, even if the only 
customers resulting from the efforts were located outside the U.S.'' 
\24\
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    \21\ Exemption from Registration for Certain Foreign Persons, 72 
FR at 63977, quoting Introducing Brokers and Associated Persons of 
Introducing Brokers, Commodity Trading Advisors and Commodity Pool 
Operators; Registration and Other Regulatory Requirements, 48 FR 
35248, 35261 (Aug. 3, 1983).
    \22\ Id. The Commission also cited this policy position in the 
initial proposal for what ultimately became Commission regulation 
3.10(c)(3)(i). See Exemption from Registration for Certain Foreign 
Persons, 72 FR 15637, 15638 (Apr. 2, 2007).
    \23\ Exemption from Registration for Certain Foreign Persons, 72 
FR at 63977-78.
    \24\ Id. at 63978.
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    In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act) \25\ amended the definition of ``commodity pool 
operator'' and ``commodity pool'' to include those persons operating 
collective investment vehicles that engage in swaps,\26\ which resulted 
in an expansion of the universe of persons captured within the 
statutory definitions of both CPOs and commodity pools. When combined 
with the rescission of Commission regulation 4.13(a)(4) in 2012,\27\ an 
increasing number of non-U.S. CPOs were required to either register 
with the Commission or claim an available exemption or exclusion with 
respect to the operation of their commodity pools, both offshore pools 
and those offered to U.S. participants.
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    \25\ Public Law 111-203, H.R. 4173 (2010).
    \26\ See Section 721 of the Dodd-Frank Act.
    \27\ See Commodity Pool Operators and Commodity Trading 
Advisors; Compliance Obligations, 77 FR 11252, 11264 (Feb. 24, 
2012). Former Commission regulation 4.13(a)(4) provided an exemption 
from registration as a CPO for operators of commodity pools offered 
and sold to sophisticated participants. See 17 CFR 4.13(a)(4) 
(2010).
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    In 2018, the Commission proposed adding a new exemption in 
Commission regulation 4.13 to codify the relief provided in CFTC Staff 
Advisory 18-96 (Advisory 18-96).\28\ As part of that proposal, the 
Commission noted that the proposed exemption based on Advisory 18-96 
could be claimed on a pool-by-pool basis, and stated that ``[t]his 
characteristic would effectively differentiate the [proposed exemption] 
from the relief currently provided'' under the 3.10 Exemption.\29\ The 
Commission received several comments regarding that aspect of the 
proposal. One commenter noted that the 3.10 Exemption ``is widely 
relied on around the world by non-U.S. managers of offshore funds that 
are not offered to U.S. investors but that may trade in the U.S. 
commodity interest markets.'' \30\ This commenter further noted that 
``CPO registration for these offshore entities with global operations 
is not a viable option[,]'' due to the logistical and regulatory issues 
involved.\31\ Another commenter stated that, ``it is critical to bear 
in mind that the Commission . . . to our knowledge has never addressed, 
the separate and distinct question of whether an offshore CPO may rely 
on Rule 3.10(c)(3)(i) with respect to some of its offshore pools in 
combination with relying on other exemptions with respect to its other 
pools.'' \32\ Several other commenters expressed similar views and 
requested that the Commission affirm the ability to claim the 3.10 
Exemption on a pool-by-pool basis and to rely upon that exemption in 
addition to other exemptions, exclusions, or registration.\33\
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    \28\ Registration and Compliance Requirements for Commodity Pool 
Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18, 
2018); CFTC Staff Advisory 18-96 (Apr. 11, 1996).
    \29\ Registration and Compliance Requirements for Commodity Pool 
Operators and Commodity Trading Advisors, 83 FR at 52914.
    \30\ See Comment letter from the Asset Management Group of the 
Securities Industry and Financial Markets Association (SIFMA AMG) at 
9 (Dec. 17, 2018), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61922&SearchText=.
    \31\ Id. at 12.
    \32\ See Comment letter from Fried, Frank, Harris, Shriver, & 
Jacobson, LLP (Fried Frank) at 6 (Dec. 17, 2018), available at 
https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61920&SearchText=.
    \33\ See, e.g., Comment letter from Willkie, Farr, and 
Gallagher, LLP (Willkie) at 6 (Dec. 11, 2018), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61927&SearchText=; Comment letter from 
Alternative Investment Management Association (AIMA) at 6 (Dec. 17, 
2018), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61907&SearchText=.
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    In 2019, the Commission withdrew its proposal to codify the relief 
provided in Advisory 18-96, and, in light of the comments received in 
response to the discussion of the 3.10 Exemption, instead undertook an 
inquiry as to whether the 3.10 Exemption should be amended to respond 
to the current CPO space and the issues articulated by commenters.\34\ 
Based on the foregoing, and in light of the increasingly global nature 
of the commodity pool space, the Commission preliminarily believes that 
the statutory and regulatory developments since 2007 have resulted in a 
growing mismatch between the Commission's stated policy purposes 
underlying the 3.10 Exemption, which are to focus the Commission's 
resources on the protection of U.S. persons, and the 3.10 Exemption as 
adopted in 2007. Therefore, the Commission has preliminarily determined 
that it is appropriate to amend the 3.10 Exemption to better align the 
terms of the exemption with the Commission's continued policy goals. 
The result is this proposal.
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    \34\ Registration and Compliance Requirements for Commodity Pool 
Operators (CPOs) and Commodity Trading Advisors: Family Offices and 
Exempt CPOs, 84 FR 67355, 67357 (Dec. 10, 2019).
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II. The Proposal

    The Commission is proposing, pursuant to its authority under CEA 
section 4(c), several amendments to the current 3.10 Exemption (the 
Proposal). Specifically, the Commission is proposing amendments to the 
3.10 Exemption such that non-U.S. CPOs may rely on that exemption on a 
pool-by-pool basis to better reflect the current state of operations of 
CPOs. The Commission is also proposing a conditional safe harbor to 
enable non-U.S. CPOs who, by virtue of the structure of their offshore 
pool, cannot with certainty represent that there are no U.S. 
participants in their operated pool, to rely on the 3.10 Exemption. The 
Commission is further proposing that the revised 3.10 Exemption be 
available to be claimed along with other exemptions or exclusions 
available to CPOs generally and to provide an exception from the U.S. 
participant prohibition in the 3.10 Exemption for initial capital 
contributions received from a U.S. controlling affiliate of an offshore 
pool's non-U.S. CPO.

a. Pool-by-Pool Exemption

    The Commission understands that non-U.S. CPOs may operate both 
offshore commodity pools and commodity pools on behalf of persons 
located inside the United States (U.S. commodity pools or U.S. pools). 
As stated previously, however, the 3.10 Exemption prohibits persons 
from relying on that relief with respect to certain pools, but not 
others. Under a categorical prohibition on contact with U.S. persons by 
non-U.S. CPOs seeking to rely on the 3.10 Exemption, a non-U.S. CPO 
that operates both offshore pools and pools offered to U.S. persons 
would not be eligible for registration relief under Commission 
regulation 3.10(c). As a result, a non-U.S. CPO that operates a 
combination of offshore and onshore commodity pools would be required 
to either list its offshore pools with the Commission and comply with 
part 4 of the Commission's regulations with respect to the operation of 
those

[[Page 35823]]

pools as if those pools were no different from U.S. commodity pools, 
find another available exemption from registration, or claim a 
regulatory exclusion with respect to those offshore pools.
    The Commission continues to believe that it is advisable to focus 
its customer protection activities on U.S. persons and on the persons 
and firms that solicit derivatives transactions from those U.S. person 
customers.\35\ The Commission's regulatory regime was designed with a 
view to ensuring U.S. persons solicited for and participating in 
commodity pools receive the full benefit of the customer protections 
provided under the Act. The current terms of the 3.10 Exemption may 
result in the Commission overseeing the operation of commodity pools 
that are themselves not domestic either in terms of their location or 
participants. The Commission's mandate regarding protection of 
customers in the U.S. commodity interest markets with respect to the 
operation of commodity pools is primarily focused on protecting U.S. 
pool participants, not commodity pools located outside the United 
States that have only non-U.S. pool participants. Reducing regulation 
of commodity pools that are outside of the Commission's primary 
customer protection mandate also allows the Commission to more 
effectively apply its resources for this purpose. Therefore, the 
Commission is proposing to amend Commission regulation 3.10(c)(3) such 
that non-U.S. CPOs may avail themselves of the 3.10 Exemption on a 
pool-by-pool basis by specifying that the availability of the 3.10 
Exemption would be determined by whether all of the participants in a 
particular offshore pool are located outside the United States. The 
Commission preliminarily believes that amending the 3.10 Exemption such 
that non-U.S. CPOs may claim relief on a pool-by-pool basis 
appropriately focuses Commission oversight on those pools that solicit 
and/or accept U.S. persons as pool participants.
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    \35\ See Exemption from Registration for Certain Foreign 
Persons, 72 FR at 63977.
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    Moreover, since the adoption of the 3.10 Exemption in 2007, 
Congress expanded the Commission's jurisdiction to include, among other 
things, transactions in swaps \36\ and rolling spot retail foreign 
exchange transactions.\37\ When combined with amendments to, as well as 
the rescission of, various regulatory exemptions, this has necessarily 
resulted in an increase in the variety of persons captured within the 
definition of a CPO.\38\ Additionally, the Commission notes the 
increasing globalization of the commodity pool industry. For example, 
unlike when Commission regulation 3.10(c)(3)(i) was originally adopted, 
when measured by assets under management, today several of the largest 
CPOs are located outside the United States, and these larger CPOs 
typically operate many different commodity pools including some pools 
for U.S. investors and other pools for non-U.S. investors. Upon 
consideration of these developments, the Commission has preliminarily 
concluded that the 3.10 Exemption should be amended to reflect the 
Commission's regulatory interests in such an integrated international 
investment management environment. Therefore, the Commission 
preliminarily believes that the Proposal, if adopted, would provide 
much-needed regulatory flexibility for non-U.S. CPOs operating offshore 
commodity pools by taking into account the global nature of their 
operations without compromising the Commission's mission of protecting 
U.S. pool participants.
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    \36\ Wall Street Transparency and Accountability Act of 2010, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \37\ Food, Conservation, and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1651, 2189-2204 (2008).
    \38\ See, e.g., 17 CFR 4.13(a)(3) (swaps added to the enumerated 
commodity interests subject to the de minimis threshold following 
the Dodd-Frank Act, which effectively narrowed the availability of 
the exemption); Commodity Pool Operators and Commodity Trading 
Advisors: Amendments to Compliance Obligations, 76 FR 7976 (Feb. 11, 
2011) (rescinding Regulation 4.13(a)(4), which provided an exemption 
from registration for certain privately offered commodity pools).
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    For the reasons stated above, the Commission preliminarily believes 
that amending the 3.10 Exemption such that non-U.S. CPOs may claim the 
exemption from registration with respect to the operation of their 
offshore pools, while claiming an alternative exemption or exclusion, 
or registering regarding the operations of their commodity pools that 
are offered or sold to U.S. persons, is an appropriate exercise of its 
exemptive authority under section 4(c) of the Act. Additionally, the 
Commission preliminarily believes that clearly enabling non-U.S. CPOs 
to avoid the additional organizational complexity associated with 
separately organizing their offshore and domestic facing businesses in 
an effort to comply with the provisions of the 3.10 Exemption may 
result in more non-U.S. CPOs undertaking to design and offer commodity 
pools for persons in the United States. Moreover, the Commission 
preliminarily believes that this could result in greater diversity of 
pool participation opportunities for U.S. persons and that this 
increased competition amongst commodity pools and CPOs could foster 
additional innovation regarding commodity pool operations, which is 
already one of the more dynamic sectors of the Commission's 
responsibility. The Commission further preliminarily believes that this 
potential for increased competition and variation in commodity pools 
and CPOs would further promote the vibrancy of the U.S. commodity 
interest markets.
    The Commission has preliminarily determined that the proposed 
revisions to the 3.10 Exemption set forth herein will not have a 
material adverse effect on the ability of the Commission or any 
contract market to discharge their duties under the Act, because non-
U.S. CPOs that would be exempt under the terms of this Proposal would 
remain subject to the statutory and regulatory obligations imposed on 
all participants in the U.S. commodity interest markets.\39\ The 
Commission notes that this preliminary conclusion is consistent with 
section 4(d) of the Act, which provides that any exemption granted 
pursuant to section 4(c) will not affect the authority of the 
Commission to conduct investigations in order to determine compliance 
with the requirements or conditions of such exemption or to take 
enforcement action for any violation of any provision of the CEA or any 
rule, regulation or order thereunder caused by the failure to comply 
with or satisfy such conditions or requirements.\40\ Moreover, the 
Commission would retain the authority to take enforcement action 
against any non-U.S. CPO claiming the 3.10 Exemption based on their 
activities within the U.S. commodity interest markets consistent with 
its authority regarding market participants generally.
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    \39\ See, e.g., 7 U.S.C. 9 (prohibiting the use or employment of 
any manipulative or deceptive device in connection with any swap or 
contract of sale of any commodity in interstate commerce, or for 
future delivery on or subject to the rules of any registered 
entity).
    \40\ 7 U.S.C. 6(d).
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b. Proposed Safe Harbor With Respect to Inadvertent Participation of 
U.S. Participants in Offshore Pools

    As discussed above, one of the criteria for relief in current 
Commission regulation 3.10(c)(3)(i) is that, in connection with any 
commodity interest transaction executed bilaterally or made on or 
subject to the rules of any designated contract market or swap 
execution facility, the claiming non-U.S. CPO be acting only on behalf 
of persons located outside the United States, its

[[Page 35824]]

territories, or possessions.\41\ The Commission understands that non-
U.S. CPOs of offshore pools that are traded in offshore secondary 
markets may not have the ability to make such a representation with 
certainty as they cannot be assured that only persons located outside 
the U.S. would be accepted as participants because the participation 
units are not purchased directly from the offshore pool. Moreover, the 
Commission also understands that, given the common use of complex 
entity structures for tax purposes, a non-U.S. CPO may not have 
complete visibility into the ultimate beneficial owners of its offshore 
pool's participation units, even in the absence of secondary market 
trading.
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    \41\ 17 CFR 3.10(c)(3)(i).
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    Despite this fairly common lack of visibility into the ultimate 
ownership of some offshore pools, the Commission preliminarily believes 
that a non-U.S. CPO should be able to rely on the 3.10 Exemption 
provided that the non-U.S. CPO undertakes reasonable efforts to 
minimize the possibility of U.S. persons being solicited for or sold 
participation units in the offshore pool. The Commission preliminarily 
believes that non-U.S. CPOs should not be foreclosed from relying upon 
the relief available under the 3.10 Exemption solely due to the nature 
and structure of the operated offshore pool preventing them from 
representing with absolute certainty that no U.S. persons are 
participating in that pool, provided that such non-U.S. CPOs take 
reasonable actions available to them to ensure that only non-U.S. 
persons are solicited and admitted as pool participants.
    Therefore, the Commission is proposing to add a safe harbor as new 
Commission regulation 3.10(c)(3)(iv) for non-U.S. CPOs that have taken, 
what the Commission preliminarily believes are, reasonable steps 
designed to ensure that participation units in the operated offshore 
pool are not being offered or sold to persons located in the United 
States. Pursuant to that proposed safe harbor, a non-U.S. CPO would be 
permitted to engage in the U.S. commodity interest markets on behalf of 
offshore pools for which it cannot represent with absolute certainty 
that all of the pool participants are offshore, consistent with the 
requirements under the 3.10 Exemption, provided that such non-U.S. CPO 
meets the following conditions with respect to the operated offshore 
pool:
    1. The offshore pool's offering materials and any underwriting or 
distribution agreements include clear, written prohibitions on the 
offshore pool's offering to participants located in the United States 
and on U.S. ownership of the offshore pool's participation units; \42\
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    \42\ The Commission notes that, for purposes of the safe harbor, 
and consistent with the proposed exception for initial capital 
contributions from a U.S. controlling affiliate, proposed Commission 
regulation 3.10(c)(3)(iii) discussed infra, such U.S. controlling 
affiliate is not considered to be a ``participant.''
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    2. The offshore pool's constitutional documents and offering 
materials: (a) are reasonably designed to preclude persons located in 
the United States from participating therein, and (b) include 
mechanisms reasonably designed to enable the CPO to exclude any persons 
located in the United States who attempt to participate in the offshore 
pool notwithstanding those prohibitions;
    3. The non-U.S. CPO exclusively uses non-U.S. intermediaries for 
the distribution of participations in the offshore pool;
    4. The non-U.S. CPO uses reasonable investor due diligence methods 
at the time of sale to preclude persons located in the United States 
from participating in the offshore pool; and
    5. The offshore pool's participation units are directed and 
distributed to participants outside the United States, including by 
means of listing and trading such units on secondary markets organized 
and operated outside of the United States, and in which the non-U.S. 
CPO has reasonably determined participation by persons located in the 
United States is unlikely.
    For this purpose, the Commission has preliminarily determined that 
a non-U.S. intermediary would include a non-U.S. branch or office of a 
U.S. entity, or a non-U.S. affiliate of a U.S. entity, provided that 
the distribution takes place exclusively outside of the United States.
    By satisfying the factors of the safe harbor, for example, that the 
offshore pool's offering materials clearly prohibit ownership by 
participants that are U.S. persons,\43\ and by using offshore 
distribution channels and exchanges, the Commission preliminarily 
believes that the non-U.S. CPO is exercising sufficient diligence with 
respect to those circumstances within its control to demonstrate its 
intention to avoid engaging with U.S. persons concerning the offered 
offshore pool. Moreover, the Commission preliminarily believes that if 
a non-U.S. CPO meets the five factors in the safe harbor, the absence 
of U.S. participants is sufficiently ensured so as to allow reliance on 
the 3.10 Exemption. As with any of the Commission's other registration 
exemptions available to CPOs, whether domestic or offshore, the 
Commission would expect non-U.S. CPOs claiming the 3.10 Exemption to 
maintain adequate documentation to demonstrate compliance with the 
terms of the safe harbor.
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    \43\ See note 45, supra.
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    The Commission preliminarily believes that providing a safe harbor 
with appropriate conditions for non-U.S. CPOs of commodity pools, 
regarding the absence of U.S. participants in their offshore pools to 
avail themselves of the exemptive relief in the 3.10 Exemption, may 
result in more offshore pools choosing to engage in the commodity 
interest markets in the United States. Moreover, as noted above, 
pursuant to section 4(d) of the Act, the Commission expressly retains 
the statutory authority to conduct investigations in order to determine 
compliance with the requirements or conditions of such exemption or to 
take enforcement action for any violation of any provision of the CEA 
or any rule, regulation or order thereunder caused by the failure to 
comply with or satisfy such conditions or requirements.\44\ Moreover, 
again as noted above, the Commission would retain the authority to take 
enforcement action against any non-U.S. CPO claiming the 3.10 Exemption 
based on their activities within the U.S. commodity interest markets. 
Therefore, the Commission preliminarily believes that the safe harbor 
proposed herein is an appropriate exercise of its authority pursuant to 
section 4(c) of the Act.
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    \44\ 7 U.S.C. 6(d).
---------------------------------------------------------------------------

c. Utilizing the 3.10 Exemption Concurrent With Other Regulatory Relief 
Available to CPOs

    As discussed above, the Commission is proposing that the 3.10 
Exemption for non-U.S. CPOs be available on a pool-by-pool basis. 
Consistent with these proposed amendments, the Commission also 
preliminarily believes it is appropriate to propose amendments to 
explicitly provide that non-U.S. CPOs may claim the 3.10 Exemption 
while that CPO also claims other registration exemptions or regulatory 
exclusions with respect to other pools it operates, e.g., the de 
minimis exemption under Commission regulation 4.13(a)(3),\45\ or an 
exclusion from the definition of CPO under Commission regulation 
4.5,\46\ or to register with respect to such pools,\47\

[[Page 35825]]

in order to address the concerns articulated by commenters to the 2018 
Proposal.\48\ The Commission understands that this practice is known 
colloquially as the ability to ``stack'' exemptions.
---------------------------------------------------------------------------

    \45\ 17 CFR 4.13(a)(3).
    \46\ 17 CFR 4.5.
    \47\ The Commission notes that including registration among the 
provisions a non-U.S. CPO may ``stack'' with the 3.10 Exemption is 
not strictly necessary, as such status is implied given the 
amendments described earlier to allow the 3.10 Exemption to apply on 
a pool-by-pool basis. Nevertheless, the Commission is explicitly 
stating that such a status is possible to provide certainty to 
affected non-U.S. CPOs.
    \48\ See, e.g., AIMA, at 6; Willkie, at 6.
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    Currently, the 3.10 Exemption does not have a provision that 
contemplates its simultaneous use with other exemptions available under 
other Commission regulations. This stands in contrast with the language 
in Commission regulation 4.13(f), for example, which states that, the 
filing of a notice of exemption from registration under this section 
will not affect the ability of a person to qualify for exclusion from 
the definition of the term `commodity pool operator' under Sec.  4.5 in 
connection with its operation of another trading vehicle that is not 
covered under this Sec.  4.13.\49\
---------------------------------------------------------------------------

    \49\ 17 CFR 4.13(f).
---------------------------------------------------------------------------

    With respect to those non-U.S. CPOs that operate both U.S. pools 
and pools that meet the terms of the 3.10 Exemption, the Commission 
preliminarily believes that such non-U.S. CPOs should have the ability 
to rely on other regulatory exemptions or exclusions that they qualify 
for, just like any other CPO. The Commission preliminarily believes 
that the fact that the CPO of a U.S. commodity pool that otherwise 
meets the criteria for its operator to claim registration relief under 
Commission regulation 4.13(a)(3), for example, has also claimed the 
3.10 Exemption for one or more of its offshore pools does not raise 
heightened regulatory concerns regarding the operation of the U.S. 
pool. The Commission has independently developed the terms under which 
CPOs of U.S. commodity pools may claim registration relief, and the 
fact that a non-U.S. CPO operates both offshore and U.S. commodity 
pools does not undermine the rationale providing the foundation for the 
Commission's other regulatory exemptions available to CPOs generally.
    The Commission therefore preliminarily concludes that a non-U.S. 
CPO relying upon the 3.10 Exemption for one or more of its offshore 
pools should not be, by virtue of that reliance, foreclosed from 
utilizing other relief generally available to CPOs of U.S. pools. Thus, 
the Commission is also proposing to add Commission regulation 
3.10(c)(3)(iv) to establish that a non-U.S. CPO's reliance upon the 
3.10 Exemption for one or more pools will not affect that CPO's ability 
to claim other exclusions or exemptions, including those in Commission 
regulations 4.5 or 4.13, or to register with respect to the other pools 
that it operates.

d. Affiliate Investment Exception

    The Commission is also proposing to add Commission regulation 
3.10(c)(3)(iii), which provides that initial capital contributed by a 
non-U.S. CPO's U.S. controlling affiliate to that CPO's offshore 
commodity pool would not be considered in assessing whether that pool 
is an offshore pool for purposes of the 3.10 Exemption because the U.S. 
controlling affiliate would not be considered a ``participant'' for 
purposes of either proposed Commission regulation 3.10(c)(3)(ii) or 
3.10(c)(3)(iv). For the purpose of this proposed amendment, the term 
``control'' would be defined as the possession, direct or indirect, of 
the power to direct or cause the direction of the management and 
policies of a person, whether through the ownership of voting shares, 
by contract, or otherwise.\50\
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    \50\ The Commission currently uses this definition of 
``control'' in its part 49 regulations on swap data reporting. See 
17 CFR 49.2(a)(4). In January 2020, the Commission also proposed to 
implement this definition of ``control'' in the context of cross-
border regulation of swap dealers. See Cross-Border Application of 
the Registration Thresholds and Certain Requirements Applicable to 
Swap Dealers and Major Swap Participants, 85 FR 952, 1002 (Jan. 8, 
2020) (proposing to add the ``control'' definition at Sec.  
23.23(a)(1)).
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    Although the 3.10 Exemption is intended to focus the Commission's 
resources on protecting U.S. participants, the Commission preliminarily 
believes that the control typically exercised by a controlling 
affiliate over its non-U.S. CPO affiliate should provide a meaningful 
degree of protection and transparency with respect to the controlling 
affiliate's contribution of initial capital to the non-U.S. CPO's 
offshore commodity pool. Moreover, the majority of a CPO's compliance 
obligations generally focus on customer protection through a variety of 
disclosures regarding a person's participation in a pool, which is 
information the controlling affiliate would likely already be in a 
position to obtain independent of the Commission's regulations, thereby 
obviating the need for the Commission to mandate such disclosure and 
reporting.\51\
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    \51\ See 17 CFR 4.22(c)(8) (providing that a CPO need not 
distribute an annual report to pools operated by persons 
controlling, controlled by, or under common control with the CPO, 
provided that information regarding the underlying pool is contained 
in the investor pool's annual financial statement).
---------------------------------------------------------------------------

    A controlling person must, by definition, have the corporate or 
other legal authority to require the controlled CPO to provide more 
information than is required by the Commission, such as detailed 
information about the non-U.S. CPO's finances, management and 
operations, and, more relevant to the proposal herein, access to 
investment and performance information for the offshore pool. 
Accordingly, the Commission preliminarily believes that due to the 
fundamentally different features of the relationship between a 
controlling affiliate and a non-U.S. CPO as compared to an outside 
investor and a CPO, a U.S. controlling affiliate's participation, 
through an initial investment, in its affiliated non-U.S. CPO's 
offshore pool does not raise the same customer protection concerns as 
similar investments in the same pool by unaffiliated persons located in 
the United States.
    Commission staff in the Division of Swap Dealer and Intermediary 
Oversight (DSIO) previously granted staff no-action relief for a non-
U.S. CPO of offshore pools that received initial capital contributions 
from U.S. sources affiliated with the non-U.S. CPO for a limited period 
of time.\52\ Specifically, in CFTC Staff Letter 15-46, DSIO articulated 
a no-action position related to initial capital contributions provided 
to offshore pools operated by a non-U.S. CPO derived from the U.S. 
employees of the affiliated U.S. investment advisers to the offshore 
pools.\53\ In that instance, in part because the participants were 
natural person employees of the affiliated U.S. investment advisers, 
staff determined that it was appropriate to limit the time in which the 
U.S. derived capital could remain in the offshore pools without the 
non-U.S. CPO registering with the Commission.\54\
---------------------------------------------------------------------------

    \52\ See CFTC Staff Letter 15-46 (May 8, 2015).
    \53\ Id. at 2.
    \54\ Id.
---------------------------------------------------------------------------

    With respect to the exception proposed herein, the Commission 
preliminarily believes that imposing a time limit is not necessary 
where the initial investment capital is deriving not from natural 
person employees, but rather the corporate funds of a U.S. controlling 
affiliate. Unlike the facts presented in CFTC Staff Letter 15-46, the 
Commission preliminarily believes that the control that a U.S. 
controlling affiliate is able to exercise with respect to the 
operations of the non-U.S. CPO and its offshore pools provides adequate 
assurances that the U.S. controlling affiliate is able to obtain and 
act upon

[[Page 35826]]

the information relevant to its participation in the offshore pool.\55\
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    \55\ The Commission notes that certain control affiliates may be 
subject to the time limitations imposed on the contribution of 
initial capital to affiliated covered funds under the Volcker Rule 
due to their status as banking entities. See 17 CFR 75.12. The 
exemption proposed herein with respect to initial capital 
contributions does not affect or negate any other limitations 
imposed by other statutory or regulatory provisions applicable to 
the control affiliate.
---------------------------------------------------------------------------

    The Commission preliminarily intends to limit the exception for 
U.S. controlling affiliate capital contributions to those made at or 
near a pool's inception, which generally result from commercial 
decisions by the U.S. controlling affiliate, typically in conjunction 
with the non-U.S. CPO, to support the offshore pool until such time as 
it has an established performance history for solicitation purposes, 
although the contributed capital may remain in the offshore pool for 
the duration of its operations. The Commission preliminarily believes 
that this limitation is appropriate to ensure that the capital is being 
contributed in an effort to support the operations of the offshore pool 
at a time when its viability is being tested, rather than as a 
mechanism for the U.S. controlling affiliate to generate returns for 
its own investors.
    The Commission notes, however, that the proposed exclusion may not 
be used to evade the Commission's CPO compliance requirements with 
respect to offshore commodity pools. For example, a controlling 
affiliate located in the U.S. could invest in its affiliated non-U.S. 
CPO's offshore pool, and then solicit persons located in the U.S. for 
investment in that controlling affiliate, for the purpose of providing 
such investors indirect exposure to that offshore pool. Under these 
circumstances, the Commission preliminarily believes that such 
practices would generally constitute evasion of the Commission's 
regulation of CPOs and commodity pools soliciting and serving 
participants located in the U.S. and would render the non-U.S. CPO 
ineligible for the 3.10 Exemption. Additionally, the Commission 
preliminarily believes that U.S. controlling affiliates that are barred 
from participating in the U.S. commodity interest markets should not be 
permitted to gain indirect access to those markets through an 
affiliated non-U.S. CPO's offshore pool as this would undermine the 
purposes of such a ban. Therefore, the Commission is proposing to 
include provisions in the proposed exemption to prohibit such evasive 
conduct marked by either pooling of U.S. participant capital in the 
U.S. controlling affiliate or the contribution of initial capital to an 
offshore pool by a person subject to a statutory disqualification, 
ongoing registration suspension or bar, prohibition on acting as a 
principal, or trading ban with respect to participating in the U.S. 
commodity interest markets.
    Consistent with its authority under section 4(c) of the Act, the 
Commission preliminarily believes that providing an exception for 
initial capital contributions by U.S. controlling affiliates in 
offshore pools operated by affiliated non-U.S. CPOs could result in 
increased economic or financial innovation by non-U.S. CPOs and their 
offshore pools participating in the U.S. commodity interest markets. 
The Commission further preliminarily believes enabling U.S. controlling 
affiliates to provide initial capital to offshore pools operated by 
affiliated non-U.S. CPOs could provide such non-U.S. CPOs with the 
ability to test novel trading programs or otherwise engage in proof of 
concept testing with respect to innovations in the collective 
investment industry that might otherwise not be possible due to a lack 
of a performance history for the offered pool. For the reasons set 
forth above, the Commission has preliminarily concluded that it is 
appropriate to provide an exception for initial capital contributions 
by U.S. controlling affiliates in offshore pools operated by affiliated 
non-U.S. CPOs from the U.S. participant prohibition in the 3.10 
Exemption pursuant to section 4(c) of the Act.

e. General Request for Comment

    The Commission requests comment on all aspects of the Proposal. 
Specifically, given the concerns regarding potential evasion of CPO 
regulation using the controlling affiliate provision, the Commission 
seeks comment on several potential additional conditions on the 
exception that could be included in the final regulation.
    1. To establish that the funds of the controlling affiliate are 
being used for seeding purposes, should the exception state that the 
purpose of the investment by the controlling affiliate shall be for 
establishing the commodity pool and providing sufficient initial equity 
to permit the pool to attract unaffiliated non-U.S. investors? 
Similarly, should the exception be conditioned on the investment being 
limited in time to one, two, or three years after which time the 
investments of the controlling affiliate must be reduced to a de 
minimis amount of the pool's capital, such as 3 or 5 percent? What 
customer protection benefits would such limitations serve?
    2. Regarding the nature of controlling affiliates, to protect the 
U.S. persons invested therein, should the exception be limited to 
entities or persons that are otherwise financial institutions that are 
regulated in the United States to provide investor protections? For 
example, should the exception only be available to U.S. controlling 
affiliates regulated by the Securities and Exchange Commission, a 
federal banking regulator, or an insurance regulator?
    3. The Proposal notes that one of the reasons underlying the U.S. 
controlling affiliate exception is the affiliate's likely ability to 
demand that the non-U.S. CPO provide it with the information necessary 
to assess the operations and performance of the offshore pool. However, 
because these offshore pools are by definition non-U.S. entities and it 
is not possible to ascertain with certainty whether such information 
must be provided to a U.S. controlling affiliate under the laws 
applicable to the non-U.S. CPO and offshore pool, should the exception 
be conditioned on there being an obligation on the non-U.S. CPO that is 
legally binding in its home jurisdiction to provide the U.S. 
controlling affiliate with information regarding the operation of the 
offshore pool by the affiliated non-U.S. CPO?

III. Reopening of Comment Period Under 2016 Proposal

    On July 27, 2016, the Commission proposed to amend Commission 
regulation 3.10(c) to amend the conditions under which the exemption 
from registration would apply.\56\ Generally, the proposed amendment 
would permit a foreign broker or persons located outside the United 
States acting in the capacity of an introducing broker, commodity 
trading advisor, or commodity pool operator, each as defined in 
Commission regulation 1.3, to be eligible for an exemption from 
registration with the Commission if the foreign broker or person, in 
connection with a commodity interest transaction, only acts on behalf 
of (1) persons located outside the United States, or (2) International 
Financial Institutions (as defined in the proposed rule amendments), 
without regard to whether such persons or institutions clear such 
commodity interest transaction.
---------------------------------------------------------------------------

    \56\ Exemption from Registration for Certain Foreign Persons, 81 
FR 51824 (Aug. 5, 2016) (the ``2016 Proposal'').
---------------------------------------------------------------------------

    In response to the Proposal, the Commission received six 
comments,\57\ most of which were supportive of the proposal. Given the 
passage of time, however, the Commission now requests

[[Page 35827]]

comment on whether it would be appropriate to finalize the 2016 
Proposal along with the other amendments to Commission regulation 3.10 
proposed in this release. Thus, the Commission is reopening the comment 
period on all aspects of the 2016 Proposal for 60 days.
---------------------------------------------------------------------------

    \57\ These comment letters are on the Commission's website at: 
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1724.
---------------------------------------------------------------------------

    In addition, with respect to the 2016 Proposal, the Commission 
requests specific comment on whether Commission regulation 3.10 should 
require commodity interest transactions of persons located outside of 
the United States or of International Financial Institutions that are 
required or intended to be cleared on a registered derivatives clearing 
organization (DCO) to be submitted for clearing through a futures 
commission merchant registered in accordance with section 4d of the 
Act, unless such person or International Financial Institution is 
itself a clearing member of such registered DCO?

IV. Related Matters

a. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires Federal agencies, in 
promulgating regulations, to consider whether the rules they propose 
will have a significant economic impact on a substantial number of 
small entities and, if so, to provide a regulatory flexibility analysis 
regarding the economic impact on those entities. Each Federal agency is 
required to conduct an initial and final regulatory flexibility 
analysis for each rule of general applicability for which the agency 
issues a general notice of proposed rulemaking.\58\
---------------------------------------------------------------------------

    \58\ 5 U.S.C. 601, et seq.
---------------------------------------------------------------------------

    The Proposal by the Commission today would affect only CPOs. The 
Commission has previously 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 requirements of the 
RFA.\59\ With respect to CPOs, the Commission previously has determined 
that a CPO is a small entity for purposes of the RFA, if it meets the 
criteria for an exemption from registration under Commission regulation 
4.13(a)(2).\60\ With respect to small CPOs operating pursuant to 
Commission regulation 4.13(a)(2), the Commission preliminarily believes 
that, should the amendments to the 3.10 Exemption be adopted as final, 
certain of those small CPOs may choose to operate additional pools 
outside the United States, which could provide additional opportunities 
to develop their operations not currently available to them. The 
Commission notes, however, that such small CPOs would remain subject to 
the total limitations on aggregate gross capital contributions and pool 
participants set forth in Commission regulation 4.13(a)(2) because that 
exemption is based on the entirety of the CPO's pool operations. 
Because investment vehicles operated under the 3.10 Exemption remain 
commodity pools under the CEA, the Commission preliminarily does not 
believe that the amendments proposed herein would result in a 
significant economic impact on a substantial number of small CPOs. 
Further, the Commission notes that the Proposal would impose no new 
obligation, significant or otherwise. Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that the Proposal, if adopted, will not have a significant economic 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \59\ See, e.g., Policy Statement and Establishment of 
Definitions of ``Small Entities'' for Purposes of the Regulatory 
Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982).
    \60\ Id. at 18619-20. Commission regulation 4.13(a)(2) exempts a 
person from registration as a CPO when: (1) None of the pools 
operated by that person has more than 15 participants at any time, 
and (2) when excluding certain sources of funding, the total gross 
capital contributions the person receives for units of participation 
in all of the pools it operates or intends to operate do not, in the 
aggregate, exceed $400,000. See 17 CFR 4.13(a)(2).
---------------------------------------------------------------------------

b. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA.\61\ An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number. The 
Commission has preliminarily determined that the proposed amendments, 
if adopted, will not impose any new recordkeeping or information 
collection requirements, or other collections of information that 
require approval of the Office of Management and Budget (OMB) under the 
PRA.
---------------------------------------------------------------------------

    \61\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

    The Commission invites the public and other interested parties to 
comment on this PRA determination. Pursuant to 44 U.S.C. 3506(c)(2)(B), 
the Commission generally solicits comments in order to: (1) Evaluate 
whether a proposed collection of information is necessary for the 
proper performance of the functions of the Commission, including 
whether the information will have practical utility; (2) evaluate the 
accuracy of the Commission's estimate of the burden of a proposed 
collection of information; (3) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (4) mitigate the burden of a collection of information 
on those who are to respond, including through the use of automated 
collection techniques or other forms of information technology. The 
Commission specifically invites public comment on the accuracy of its 
estimate that no additional information collection requirements or 
changes to existing collection requirements would result from the 
regulatory amendments proposed herein.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs (OIRA), by fax at (202) 395-6566 or by email at 
[email protected]. Please provide the Commission with a copy 
of submitted comments, so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the ADDRESSES section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission. OMB is required to make a decision concerning a 
collection of information between 30 and 60 days after publication of 
this document in the Federal Register. Therefore, a comment is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

c. Cost-Benefit Considerations

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before issuing new regulations under 
the CEA.\62\ Section 15(a) of the Act further specifies that the costs 
and benefits of the proposed rules shall be evaluated in light of five 
broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness and 
financial integrity of the futures markets; (3) price discovery; (4) 
sound risk management practices; and (5) other public interest 
considerations. The Commission may, in its discretion, give greater 
weight to any of the five enumerated areas of concern and may, in its 
discretion, determine that, notwithstanding its costs, a particular 
rule is necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or to accomplish any of the purposes 
of the CEA. The Commission invites public comment on its cost-benefit 
considerations.
---------------------------------------------------------------------------

    \62\ 7 U.S.C. 19(a).

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[[Page 35828]]

    As explained above, the current 3.10 Exemption provides relief from 
registration to non-U.S. CPOs operating offshore pools with foreign 
participants.\63\ The 3.10 Exemption provides that it is only available 
to non-U.S. CPOs acting on behalf of offshore commodity pools. In a 
prior proposal that discussed the 3.10 Exemption, the Commission stated 
that the current registration exemption is not available on a pool-by-
pool basis, meaning that a non-U.S. CPO would be unable to claim the 
exemption with respect to its offshore pools meeting the specified 
criteria for the 3.10 Exemption while maintaining CPO registration with 
respect to other pools--e.g., pools, regardless of domicile, with U.S. 
participants. Therefore, non-U.S. CPOs that operate a mix of some 
offshore pools that are not available to U.S. participants and other 
pools that are offered and sold to U.S. participants would have to 
either register and list all of their operated pools or claim an 
alternative exemption or exclusion. One such available source of 
exemptive relief is Staff Advisory 18-96 (Advisory 18-96), which, 
although still requiring registration of the CPO, does provide relief 
from the majority of the compliance obligations set forth in part 4 of 
the Commission's regulations.\64\
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    \63\ See Section I, supra.
    \64\ CFTC Staff Advisory 18-96 (Apr. 11, 1996).
---------------------------------------------------------------------------

    The Commission is proposing several amendments to the current 3.10 
Exemption. Specifically, the Commission is proposing to amend the 3.10 
Exemption such that non-U.S. CPOs may rely on that exemption on a pool-
by-pool basis through proposed Commission regulation 3.10(c)(3)(ii). 
Next, proposed Commission regulation 3.10(c)(3)(iii) would make it 
clear that a non-U.S. CPO's eligibility to rely upon the 3.10 Exemption 
is unaffected by any contributions the non-U.S. CPO's offshore pools 
might receive from the non-U.S. CPO's U.S. controlling affiliate. The 
Commission is also proposing Commission regulation 3.10(c)(3)(iv), 
which would establish a regulatory safe harbor for those non-U.S. CPOs 
that cannot represent with absolute certainty that there are no U.S. 
participants in the operated offshore pool. Finally, the Commission is 
proposing Commission regulation 3.10(c)(3)(v), which would permit non-
U.S. CPOs to claim an available exemption from registration, claim an 
exclusion, or register with respect to the other pools they operate. 
The proposed amendments would grant non-U.S. CPOs relief that will 
likely generate costs and benefits. The baseline against which these 
costs and benefits are compared is the regulatory status quo set forth 
in current Commission regulation 3.10(c)(3).
    The consideration of costs and benefits below is based on the 
understanding that the markets function internationally, with many 
transactions involving U.S. firms taking place across international 
boundaries; with some Commission registrants being organized outside of 
the United States; with some leading industry members typically 
conducting operations both within and outside the United States; and 
with industry members commonly following substantially similar business 
practices wherever located. Where the Commission does not specifically 
refer to matters of location, the discussion of costs and benefits 
below refers to the effects of this proposal on all activity subject to 
the proposed amended regulations, whether by virtue of the activity's 
physical location in the United States or by virtue of the activity's 
connection with activities in or effect on U.S. commerce under CEA 
section 2(i).\65\
---------------------------------------------------------------------------

    \65\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

i. Proposed Commission Regulation 3.10(c)(3)(ii): Providing That the 
3.10 Exemption May Be Claimed on a Pool-by-Pool Basis
    Specifically, pursuant to the Proposal, a non-U.S. CPO would be 
able to claim the 3.10 Exemption from registration with respect to its 
eligible offshore pools, while either registering as a CPO or claiming 
another available exemption or exclusion for its other pools that are 
either located in the U.S., or that solicit and/or accept as 
participants persons located within the U.S. Absent the proposed 
amendment, such CPOs would face some costs and compliance burdens 
associated with the operation of their offshore pools,\66\ despite the 
Commission's historical focus on prioritizing customer protection with 
respect to persons located in the United States. For example, certain 
registered U.S. and non-U.S. CPOs file self-executing notices pursuant 
to Advisory 18-96 with respect to their offshore pools. The Advisory 
provides compliance relief with respect to all of the pool-based 
disclosures required under the Commission's regulations, as well as 
many of the reporting and recordkeeping obligations that otherwise 
would apply to registered CPOs, with the exception of the requirement 
to file Form CPO-PQR under Commission regulation 4.27. The relief 
pursuant to Advisory 18-96 also allows qualifying, registered U.S. CPOs 
to maintain their offshore pool's original books and records at the 
pool's offshore location, rather than at the CPO's main business office 
in the United States.\67\
---------------------------------------------------------------------------

    \66\ As discussed, infra, certain CPOs may be eligible for 
significant compliance relief pursuant to Advisory 18-96.
    \67\ See note 28, supra.
---------------------------------------------------------------------------

    Currently, based on the notices filed pursuant to Advisory 18-96, 
the Commission is aware of 23 non-U.S. CPOs that operate 84 offshore 
pools and 20 U.S. CPOs that operate 88 offshore pools. In total, 43 
CPOs file 18-96 notices. However, the Commission preliminarily believes 
that there are likely a number of registered non-U.S. CPOs that do not 
list their offshore pools with the Commission, and, therefore, do not 
claim relief under Advisory 18-96. Although these exemption notices 
must be filed by hardcopy, the Commission believes the administrative 
costs are low.\68\ CPOs must employ at least one staff-person to manage 
and file the one-time notice under Advisory 18-96. For a notice under 
Advisory 18-96 to be effective, the CPO must provide, among other 
things, business-identifying and contact information; representations 
that its principals are not statutorily disqualified; enumerated rules 
from which the CPO seeks relief; and contact information for person(s) 
who will maintain offshore books and records.\69\ Under the Proposal, 
the current 23 registered non-U.S. CPOs would be able to delist their 
offshore pools and no longer file 18-96 notices acknowledging that they 
operate one of the 84 offshore pools. Upon delisting of such pools, 
those registered non-U.S. CPOs would no longer have to include their 
offshore pools in their Form CPO-PQR filings, which will result in cost 
savings for those CPOs. The 20 U.S. CPOs, however, would continue to 
claim relief under Advisory 18-96, because they remain ineligible for 
the 3.10 Exemption due to their location in the United States.
---------------------------------------------------------------------------

    \68\ See https://www.nfa.futures.org/members/cpo/cpo-exemptions.html.
    \69\ See note 28, supra.
---------------------------------------------------------------------------

    Currently, one way that a registered CPO can avoid the requirement 
to list its offshore pools with the Commission is to establish a 
separate, foreign-domiciled CPO for all of the pools that are eligible 
for the 3.10 Exemption. The Commission preliminarily believes that the 
Proposal would eliminate the incentive to establish a separately 
organized CPO solely to operate the pools that would qualify for the 
3.10 Exemption. The Commission preliminarily believes, however, that 
the

[[Page 35829]]

financial expenses associated with establishing a foreign CPO varies 
depending on the operating size and structure of the registered CPO. 
The Commission further notes that incentives to establish additional 
CPOs may also be affected by the amount of the financial outlay to 
establish foreign-domiciled CPOs given that set-up costs--such as, 
costs to pay staff and experts; expenses for business licenses and 
registrations; costs to draft operational and disclosure documents; 
fees to establish technological services--would be expected to vary by 
jurisdiction. Therefore, although the Commission believes that there 
are costs associated with establishing a separate, foreign-domiciled 
CPO, the Commission preliminarily believes that such costs may be 
marginal and would be dependent on the organization and domicile of the 
registered CPO.
    The Commission expects that amending the 3.10 Exemption such that 
non-U.S. CPOs may claim the exemption on a pool-by-pool basis would 
result in such CPOs saving the costs associated with forming and 
maintaining a new CPO to operate the other pools in its overall 
structure, and would thereby remove unnecessary complexity in pool 
operations. Therefore, by amending the 3.10 Exemption such that non-
U.S. CPOs may claim the exemption on a pool-by-pool basis, the 
Commission preliminarily believes that it would eliminate a large 
portion of CFTC-registered, non-U.S. CPOs' compliance costs associated 
with the operation of their offshore pools, which by their very 
characteristics implicate fewer of the Commission's regulatory 
interests. This is only for U.S. compliance costs, as non-U.S. CPOs 
would still have compliance costs with non-US regulatory regimes. 
Moreover, the Commission preliminarily believes that this targeting of 
its CPO oversight appropriately recognizes the global nature of the 
asset management industry.
    The Commission also does not expect that non-U.S. CPOs would 
experience any increased costs associated with the amendments such that 
the 3.10 Exemption may be claimed on a pool-by-pool basis. As noted 
above, the Commission is proposing to permit the exemption to be 
claimed without any filing by the non-U.S. CPO. This is no different 
from how the current exemption is implemented. The current terms of the 
3.10 Exemption would require a CPO to monitor the operations of its 
offshore pools to ensure that the pools are not offered in the United 
States and that they do not have any participants located in the United 
States. Under the terms of the Proposal, such CPOs would continue to be 
required to engage in such monitoring.
    The Commission preliminarily believes that there may be some loss 
of information available to the public regarding the existence of the 
offshore pools operated by registered non-U.S. CPOs because such 
offshore pools would no longer be listed with the Commission, and 
consequently, the pools' existence and identifying information would 
not be publicly disclosed on NFA's BASIC database. The Commission has 
preliminarily concluded that this loss of information would have a 
minimal impact on the general public because persons located within the 
United States would typically not be permitted by the non-U.S. CPO to 
participate in such pools.
ii. Proposed Commission Regulation 3.10(c)(3)(iv): Regulatory Safe 
Harbor for Non-U.S. CPOs With Possible Inadvertent U.S. Participants in 
Offshore Pools
    As explained previously, the Commission is proposing Commission 
regulation 3.10(c)(3)(iv) to provide a regulatory safe harbor for those 
non-U.S. CPOs who, due to the structure of their offshore pools, cannot 
represent with absolute certainty that there are no U.S. participants 
in their offshore pools, provided that such non-U.S. CPOs take certain 
enumerated actions to ensure that no U.S. persons are participating in 
the offshore pool. The Commission preliminarily believes that proposed 
Commission regulation 3.10(c)(3)(iv) benefits non-U.S. CPOs by making 
the registration relief provided under the 3.10 Exemption more widely 
available by recognizing the informational limitations inherent in 
certain pool structures. Therefore, the Commission preliminarily 
believes that this proposed safe harbor could result in more non-U.S. 
CPOs relying upon the 3.10 Exemption with respect to more pools. At 
this time, the Commission lacks sufficient information to quantify the 
number of additional non-U.S. CPOs and offshore pools that may claim 
relief under proposed Commission regulation 3.10(c)(3)(iv) because the 
Commission does not currently receive information of the nature 
necessary to determine which offshore pools currently listed with the 
Commission are offered and sold solely to offshore participants and 
what subset of those pools may have participation units traded in the 
secondary market. Given, however, that exchange traded commodity pools 
currently comprise less than 1% of the total number of pools listed 
with the Commission, the Commission preliminarily believes that it is 
reasonable to estimate the number of offshore pools operated in a 
similar manner to be equally small.
    The Commission preliminarily believes that non-U.S. CPOs that would 
be eligible for registration relief under proposed Commission 
regulation 3.10(c)(3)(iv) would avail themselves of that relief. This 
could result in the Commission receiving less information regarding the 
operation of such offshore pools operated pursuant to the proposed 
regulatory safe harbor. As noted above, the Commission preliminarily 
believes that the amount of information lost as a result of the 
deregistration of such non-U.S. CPOs and associated delisting of their 
eligible offshore pools would be minimal due to the expected small 
number of CPOs and pools relative to the total population of registered 
CPOs and listed pools.
    The Commission also preliminarily expects that there may be some 
inadvertent U.S. participants in offshore pools who would lose the 
customer protection afforded by part 4 of the Commission's regulations 
should a non-U.S. CPO decide to delist its offshore pools and claim 
relief under the 3.10 Exemption, given the clarity and certainty 
provided by the regulatory safe harbor. The Commission preliminarily 
believes that the enumerated actions comprising the regulatory safe 
harbor provide assurance that the number of U.S. persons so impacted 
would be small. Moreover, the Commission preliminarily believes that 
such U.S. persons, to the extent that they are aware that they are 
participating in what is known to be an offshore pool through the 
purchase of participation units sold in an offshore secondary market, 
may not expect to benefit from the customer protection provisions in 
part 4 of the Commission's regulations, but would instead expect to 
rely upon the regulatory protections of the offshore pool's home 
jurisdiction.
iii. Proposed Commission Regulation 3.10(c)(3)(v): Utilizing the 3.10 
Exemption Concurrent With Other Available Exclusions and Exemptions
    As explained above, the Commission is also proposing to add 
Commission regulation 3.10(c)(3)(v) such that non-U.S. CPOs may rely 
upon the 3.10 Exemption concurrent with other exemptions and 
exclusions, or, alternatively, registration under the Commission's 
regulations. The Commission preliminarily believes that proposed 
Commission regulation 3.10(c)(3)(v) therefore benefits non-U.S. CPOs 
through consistent treatment of

[[Page 35830]]

CPOs of pools that are operated in a substantively identical manner 
with respect to their use of derivatives or their size, regardless of 
where the CPO is based. The Commission has also preliminarily 
determined that these proposed amendments will benefit the non-U.S. CPO 
industry generally by providing certainty regarding the ability to 
simultaneously rely upon the 3.10 Exemption and other exclusions and 
exemptions available under the Commission's regulations. The Commission 
also notes that this proposed amendment is consistent with other 
instances in its CPO regulatory program, where the Commission already 
permits CPOs to claim more than one type of exemption or exclusion or 
to register with respect to the variety of commodity pools operated by 
them.\70\
---------------------------------------------------------------------------

    \70\ See, e.g., 17 CFR 4.13(e)(2) and 4.13(f).
---------------------------------------------------------------------------

    The Commission further preliminarily believes that by clarifying 
the permissibility of using Commission regulation 4.13 exemptions, for 
example, in conjunction with the 3.10 Exemption, non-U.S. CPOs may be 
more likely to claim the relief under Commission regulation 4.13 for 
their eligible pools, rather than registering and listing those pools. 
The Commission preliminarily concludes that clearly establishing the 
availability of other exemptions and exclusions or, alternatively, 
registration with respect to the operation of certain pools offered or 
sold to persons within the United States will further enable the 
Commission to more efficiently deploy its resources in the oversight of 
CPOs and commodity pools that it has previously determined more fully 
implicate its regulatory concerns and interests under the CEA.
    If more non-U.S. CPOs claim exemptions under Commission regulation 
4.13(a)(3), for example, for some of their U.S. facing pools as a 
result of the Proposal, this could result in pools that were previously 
listed and associated with a CPO registration being delisted. Under 
these circumstances, the Commission would, as a result, no longer 
receive financial reporting with respect to those pools, including on 
Form CPO-PQR. Because these commodity pools would in fact already be 
operated consistent with an existing exemption or exclusion, and 
because the Commission has previously determined that pools operated in 
such a manner generally do not require a registered CPO, the Commission 
has preliminarily determined that any resulting loss of insight into 
such pools and their CPOs would also be consistent with the 
Commission's overall regulatory policy concerning CPOs and commodity 
pools.\71\
---------------------------------------------------------------------------

    \71\ The Commission notes that it retains special call authority 
with respect to those CPOs claiming an exemption from registration 
pursuant to Commission regulation 4.13, which enables the Commission 
to obtain additional information regarding the operation of 
commodity pools by such exempt CPOs. See 17 CFR 4.13(c)(iii).
---------------------------------------------------------------------------

iv. Proposed Sec.  3.10(c)(3)(iii): Exclusion of Controlling Affiliate 
Investments in Offshore Pools From the 3.10 Exemption Eligibility 
Determination
    The Commission is also proposing to permit non-U.S. CPOs to rely 
upon the 3.10 Exemption for the operation of an offshore pool, even if 
a controlling affiliate within the United States provides initial 
capital for the offshore pool. Absent the relief provided by proposed 
Commission regulation 3.10(c)(3)(iii), a non-U.S. CPO of an offshore 
pool receiving initial capital from a controlling affiliate within the 
U.S. would generally be required to register as a CPO and list that 
pool with the Commission, unless another exemption or exclusion was 
available. As a registered CPO with respect to that offshore pool, the 
non-U.S. CPO would then be required to comply with the compliance 
obligations set forth in part 4 of the Commission's regulations.
    As discussed previously, the Commission has preliminarily concluded 
that participation in an offshore pool by a U.S. controlling affiliate 
does not raise the same regulatory concerns as would an investment in 
the same pool by an unaffiliated participant located within the United 
States. In addition to the reasons outline above, the Commission 
preliminarily believes that this proposed relief or condition to the 
proposed 3.10 Exemption would provide regulatory relief for a small 
number of currently-registered CPOs. Based on the number of claims 
filed under Advisory 18-96, there are 23 non-U.S. CPOs that operate 84 
offshore commodity pools. The Commission is unaware, however, of 
whether any of the offshore pools operated by those non-U.S. CPOs 
actually received initial capital contributions from a U.S. controlling 
affiliate, in part, because the Commission does not collect such 
information. Nevertheless, because of the small number of claims by 
non-U.S. CPOs under Advisory 18-96, the Commission preliminarily 
believes that the number of these CPOs that would be subject to 
proposed Commission regulation 3.10(c)(3)(iii) would be less than the 
23. The Commission preliminarily believes that there may be an unknown 
number of registered non-U.S. CPOs that have never listed their 
offshore pools with the Commission, and hence did not seek relief under 
the Advisory. Therefore, the total number of non-U.S. CPOs utilizing 
this exemption could also be higher. In addition, as a result of the 
Commission being unware of the current number of offshore pools 
operated by a non-U.S. CPO receiving seed capital from a U.S. 
controlling affiliate, it is unable to predict how many pools will 
utilize this proposed exclusion in the future, if this Proposal is 
finalized.
    The Commission also preliminarily believes that this proposed 
amendment would result in reduced costs for non-U.S. CPOs with initial 
capital contributions from U.S. controlling affiliates by removing such 
investments from consideration for 3.10 Exemption eligibility, thereby 
eliminating any registration and compliance costs for such pools. The 
proposed amendment would, however, result in U.S. controlling 
affiliates not being able to rely upon the protections provided by CPO 
registration and by part 4 of the Commission's regulations, with 
respect to their investments in an offshore pool operated by their 
affiliated non-U.S. CPO.\72\ The Commission preliminarily believes that 
this loss would be mitigated by such a U.S. controlling affiliate's 
ability to exercise control over the operations of the affiliated non-
U.S. CPO, and thereby obtain whatever information regarding the 
offshore pool a U.S. controlling affiliate may deem material to its 
investment. Moreover, the Commission preliminarily believes this 
approach is consistent with the Commission's focus on protecting U.S. 
investors participating in commodity pools and recognizes that U.S. 
controlling affiliates may also be regulated by other federal and state 
authorities.
---------------------------------------------------------------------------

    \72\ For example, a U.S. controlling affiliate would not be able 
to rely upon the Commission's part 4 regulations to require its 
affiliated non-U.S. CPO to provide the controlling affiliate with 
disclosures and reporting generally mandated by those rules.
---------------------------------------------------------------------------

    In the event, should this proposal be finalized, that a non-U.S. 
CPO has listed one or more offshore pools with the Commission due to 
the fact that the offshore pool received initial capital contributions 
from a U.S. controlling affiliate, and such non-U.S. CPO determines to 
delist the offshore pool in question and instead rely upon the revised 
3.10 Exemption, the Commission would as a result no longer receive 
financial reporting with respect to such pool, including on Form CPO-
PQR. Because, however, the Commission has preliminarily determined that 
initial capital

[[Page 35831]]

contributions by a U.S. controlling affiliate do not raise the same 
customer protection concerns as capital received from other U.S. 
participants, the Commission has preliminarily determined that any 
resulting loss of insight into such pools and their CPOs would also be 
consistent with the Commission's overall regulatory policy concerning 
CPOs and commodity pools.
v. Section 15(a) Factors
1. Protection of Market Participants and the Public
    The Commission preliminarily believes that the Proposal would not 
have a material negative effect on the protection of market 
participants and the public. The proposed amendments enhance the 
Commission ability to focus its efforts on protecting U.S. investors. 
The Commission will continue to receive identifying information from 
U.S. CPOs operating offshore pools and pools offered to U.S. investors. 
Regarding a non-U.S. CPO whose offshore pools receive initial capital 
contributions from a controlling affiliate in the United States, the 
Commission preliminarily believes that although those offshore pools 
may no longer be subject to part 4 of the Commission's regulations, 
controlling affiliates, by virtue of their control over the non-U.S. 
CPO, need not be as reliant upon the customer protection provided by 
compliance with the Commission's regulations. The Commission also 
preliminarily expects that some U.S. participants in offshore pools 
operated pursuant to the regulatory safe harbor may also lose the 
customer protections afforded by part 4 of the Commission's 
regulations; however, the Commission preliminarily expects the number 
of such U.S persons to be small due to the criteria required for 
reliance upon the safe harbor.
2. Efficiency, Competitiveness and Financial Integrity of the Futures 
Markets
    The Commission has not identified any impact that the Proposal 
would have on the efficiency, competitiveness and financial integrity 
of the futures markets.
3. Price Discovery
    The Commission has not identified any particular impact that the 
Proposal would have on price discovery.
4. Sound Risk Management Practices
    The Commission has not identified any impact that the Proposal 
would have on sound risk management practices.
5. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations impacted by the Proposal beyond those preliminarily 
identified as part of its analysis supporting the Commission's exercise 
of its authority under section 4(c) of the Act.

d. Anti-Trust Considerations

    Section 15(b) of the Act requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under CEA section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of the Act.\73\ The Commission believes that the 
public interest to be protected by the antitrust laws is generally to 
protect competition.
---------------------------------------------------------------------------

    \73\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission has considered the Proposal to determine whether it 
is anticompetitive and has preliminarily identified no anticompetitive 
effects. The Commission requests comment on whether the Proposal is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
Proposal is not anticompetitive and has no anticompetitive effects, the 
Commission has not identified any less anticompetitive means of 
achieving the purposes of the Act. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the Act that would otherwise be served by adopting the 
Proposal.
vi. Request for Comment
    The Commission is seeking comment on all aspects of the costs and 
benefits associated with this Proposal. The Commission specifically 
seeks comment regarding the treatment of U.S. CPOs operating both U.S. 
and offshore pools by foreign regulatory bodies.

List of Subjects in 17 CFR Part 3

    Consumer protection, Definitions, Foreign futures, Foreign options, 
Registration requirements.
    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 3 as follows:

PART 3--REGISTRATION

0
1. The authority citation for part 3 is revised to read as follows:

    Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 
12a, 13b, 13c, 16a, 18, 19, 21, and 23.

0
2. Amend Sec.  3.10 by:
0
a. Revising paragraph (c)(3)(i);
0
b. Redesignating paragraph (c)(3)(ii) as paragraph (c)(3)(v);
0
c. Adding new paragraphs (c)(3)(ii) through (iv);
0
d. Revising newly redesignated paragraph (c)(3)(v), and
0
e. Adding paragraph (c)(3)(vi).
    The revisions and additions read as follows:


Sec.  3.10  Registration of futures commission merchants, retail 
foreign exchange dealers, introducing brokers, commodity trading 
advisors, commodity pool operators, swap dealers, major swap 
participants, and leverage transaction merchants.

* * * * *
    (c) * * *
    (3)(i) A person located outside the United States, its territories 
or possessions engaged in the activity of: An introducing broker, as 
defined in Sec.  1.3 of this chapter; or a commodity trading advisor, 
as defined in Sec.  1.3 of this chapter, in connection with any 
commodity interest transaction executed bilaterally or made on or 
subject to the rules of any designated contract market or swap 
execution facility only on behalf of persons located outside the United 
States, its territories or possessions, is not required to register in 
such capacity provided that any such commodity interest transaction is 
submitted for clearing through a futures commission merchant registered 
in accordance with section 4d of the Act.
    (ii) A person located outside the United States, its territories or 
possessions engaged in the activity of a commodity pool operator, as 
defined in Sec.  1.3 of this chapter, in connection with any commodity 
interest transactions that are executed bilaterally or made on or 
subject to the rules of any designated contract market or swap 
execution facility, is not required to register in such capacity when 
such transactions are executed on behalf of a commodity pool the 
participants of which are all located outside the United States, its 
territories or possessions, and provided that, any such commodity 
interest transaction is submitted for clearing through a futures 
commission merchant registered in accordance with section 4d of the 
Act.
    (iii) With respect to paragraphs (c)(3)(ii) and (iv) of this 
section, initial

[[Page 35832]]

capital contributed to a commodity pool by an affiliate, as defined by 
Sec.  4.7(a)(1)(i) of this chapter, that controls, as defined by Sec.  
49.2(a)(4) of this chapter, the pool's commodity pool operator shall 
not be a ``participant'' for purposes of determining whether such 
commodity pool operator is executing commodity interest transactions on 
behalf of a commodity pool, the participants of which are all located 
outside of the United States, its territories or possessions, provided 
that:
    (A) The control affiliate and its principals are not subject to a 
statutory disqualification, ongoing registration suspension or bar, 
prohibition on acting as a principal, or trading ban with respect to 
participating in commodity interest markets in the United States, its 
territories or possessions; and
    (B) Interests in the control affiliate are not marketed as 
providing access to trading in commodity interest markets in the United 
States, its territories or possessions.
    (iv) With respect to paragraph (c)(3)(ii) of this section, a 
commodity pool operated by a person located outside the United States, 
its territories or possessions shall be considered to be satisfying the 
terms of paragraph (c)(3)(ii) of this section if:
    (A) The commodity pool is organized and operated outside of the 
United States, its territories or possessions;
    (B) The commodity pool's offering materials and any underwriting or 
distribution agreements include clear, written prohibitions on the 
commodity pool's offering to participants located in the United States 
and on U.S. ownership of the commodity pool's participation units;
    (C) The commodity pool's constitutional documents and offering 
materials are reasonably designed to preclude persons located in the 
United States from participating therein and include mechanisms 
reasonably designed to enable its operator to exclude any persons 
located in the United States who attempt to participate in the offshore 
pool notwithstanding those prohibitions;
    (D) The commodity pool operator exclusively uses non-U.S. 
intermediaries for the distribution of participations in the commodity 
pool;
    (E) The commodity pool operator uses reasonable investor due 
diligence methods at the time of sale to preclude persons located in 
the United States from participating in the commodity pool; and
    (F) The commodity pool's participation units are directed and 
distributed to participants outside the United States, including by 
means of listing and trading such units on secondary markets organized 
and operated outside of the United States, and in which the commodity 
pool operator has reasonably determined participation by persons 
located in the United States is unlikely.
    (v) Claiming an exemption under paragraph (c)(3)(ii) of this 
section will not affect the ability of a person to register with the 
Commission or qualify for and/or claim an exclusion or exemption 
otherwise available under Sec.  4.5 or 4.13 of this chapter, with 
respect to the operation of a qualifying commodity pool or trading 
vehicle not covered by the relief in this section.
    (vi) A person acting in accordance with paragraph (c)(3)(i) or (ii) 
of this section remains subject to section 4o of the Act, but otherwise 
is not required to comply with those provisions of the Act and of the 
rules, regulations and orders thereunder applicable solely to any 
person registered in such capacity, or any person required to be so 
registered.
* * * * *

    Issued in Washington, DC, on June 1, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Exemption From Registration for Certain Foreign Persons 
Acting as Commodity Pool Operators of Offshore Commodity Pools--
Commission Voting Summary, Chairman's Statement, and Commissioners' 
Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Supporting Statement of Chairman Heath P. Tarbert

    In his second inaugural address in 1893, President Grover 
Cleveland remarked that ``[u]nder our scheme of government the waste 
of public money is a crime against the citizen.'' \1\ The CFTC is a 
taxpayer-funded agency, and Congress expects us to deploy our 
resources to serve the needs of American taxpayers. That is why as 
Chairman and Chief Executive, I have sought to revisit our agency's 
regulations where there does not appear to be a clear connection to 
furthering the interests of the United States or our citizens.
---------------------------------------------------------------------------

    \1\ Second Inaugural Address of Grover Cleveland (Mar. 4, 1893), 
reprinted in American History Through Its Greatest Speeches: A 
Documentary History of the United States 278 (Courtney Smith, et 
al., eds. 2016).
---------------------------------------------------------------------------

    The CFTC's framework for regulating foreign commodity pool 
operators (``CPOs'') protects U.S. investors who put their money in 
commodity investment funds run from outside the United States. But, 
in some instances, the only benefit of CFTC regulation of offshore 
CPOs is to foreign investors. There is no statutory mandate for the 
CFTC to regulate funds never offered or sold to U.S. investors. To 
do so absent a compelling reason would be--in President Cleveland's 
words--a waste of public money.
    Consequently, I am pleased to support today's proposal to amend 
the exemption for CPOs in regulation 3.10(c) (``3.10 Exemption''). 
If adopted, the proposal would eliminate the potential need for the 
CFTC to require the registration and oversight of non-U.S. CPOs 
whose pools have no U.S. investors. The proposal would additionally 
exempt U.S.-based affiliates of fund sponsors who put seed money 
into offshore funds that have only foreign investors. In so doing, 
the proposal would provide much-needed regulatory flexibility for 
non-U.S. CPOs operating offshore commodity pools, without 
compromising the CFTC's mission to protect U.S. investors.

Exemption for Foreign CPOs Sponsoring Funds Without U.S. Investors

    The proposal would amend the conditions under which a foreign 
CPO, in connection with commodity interest transactions on behalf of 
persons located outside the United States, would qualify for an 
exemption from CPO registration and regulation with respect to that 
offshore pool. Specifically, through amendments to our regulation 
3.10(c), a non-U.S. CPO would be able to claim an exemption from 
registration for its qualifying offshore commodity pools, without 
being required to register as a CPO with respect to the operation of 
other commodity pools.\2\
---------------------------------------------------------------------------

    \2\ The proposal also would add a safe harbor as new regulation 
3.10(c)(3)(iv) for non-U.S. CPOs that have taken what the Commission 
preliminarily believes are reasonable steps designed to ensure that 
participation units in the operated offshore pool are not being 
offered or sold to persons located in the United States.
---------------------------------------------------------------------------

    Absent a compelling reason, the CFTC should be focused on U.S. 
markets and U.S. investors, and refrain from extending our reach 
outside the United States.\3\ The protection of non-U.S. customers 
of non-U.S. firms is best left to foreign regulators with the

[[Page 35833]]

relevant jurisdiction and mandate.\4\ Therefore, I believe it is 
appropriate for the proposed rule to allow foreign CPOs to rely on 
the 3.10 Exemption for their foreign commodity pools when they have 
no U.S. investors. Where a foreign CPO does have U.S. investors, 
other exemptions or exclusions from registration might be available.
---------------------------------------------------------------------------

    \3\ For example, section 2(i) of the Commodity Exchange Act 
provides that the swap provisions of Title VII of the Dodd-Frank Act 
shall not apply to activities outside the United States unless those 
activities (1) have a direct and significant connection with 
activities in, or effect on, commerce of the United States; or (2) 
contravene such rules or regulations as the Commission may prescribe 
or promulgate as are necessary or appropriate to prevent the evasion 
of Title VII. In interpreting this provision, the Commission has 
taken the position that ``[r]ather than exercising its authority 
with respect to swap activities outside the United States, the 
Commission will be guided by international comity principles and 
will focus its authority on potential significant risks to the U.S. 
financial system.'' Cross-Border Application of the Registration 
Thresholds and Certain Requirements Applicable to Swap Dealers and 
Major Swap Participants, 85 FR 952, 955 (Jan. 8, 2020).
    \4\ The Commission also cited this policy position in the 
initial proposal for what ultimately became Commission regulation 
3.10(c)(3)(i). See 72 FR 15637, 15638 (Apr. 2, 2007).
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    Unfortunately, under a strict construction of the current rule, 
if a foreign CPO has one fund with U.S. investors, then the foreign 
CPO must register all its funds or rely on some other exemption 
besides the 3.10 Exemption. This ``all or nothing'' reading of the 
rule has produced two competing consequences--neither of which makes 
for good regulatory policy. First, if the CPO chooses to register 
all its funds, the CFTC ends up regulating some foreign-based funds 
without any U.S. investors. Second, if the CPO refuses to register 
any of its funds, then U.S. investors are effectively denied the 
liquidity and investment opportunities offered by foreign commodity 
pools.
    In the last decade, statutory and regulatory developments have 
produced a growing mismatch between the Commission's stated policy 
purposes underlying the 3.10 Exemption (that focus the CFTC's 
resources on the protection of U.S. persons) and the strict 
construction of the 3.10 Exemption (that leads to its ``all or 
nothing'' application). To address this mismatch, today's proposal 
would amend the 3.10 Exemption to align the plain text of the 
exemption with our longstanding policy goal of regulating only 
foreign CPOs that offer their funds to U.S. investors. In effect, 
the Commission's walk would finally conform to our talk.\5\
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    \5\ Apart from policy incoherence inside the CFTC, the mismatch 
has also caused confusion among CPOs and their investors. A number 
of foreign CPOs have not adopted the strict ``all or nothing'' 
reading of the 3.10 Exemption, but have instead quite sensibly 
latched on to the Commission's stated policy behind the rule to 
conclude that a foreign CPO may rely on the current 3.10 Exemption 
for non-U.S. pools with only non-U.S. investors even if the foreign 
CPO operates other non-U.S. pools with U.S. investors. Given that 
the confusion largely stems from the Commission's own doing, I would 
not support any enforcement action against foreign CPOs whose 
interpretation followed the spirit, if not the letter, of the 3.10 
Exemption. Furthermore, today's proposal, if adopted, would 
vindicate their reading.
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Affiliate Investment Exemption

    In addition to ensuring the CFTC's resources are focused on 
commodity pools with U.S. investors, we must also strive to protect 
those who are truly arms-length, third-party investors. To that end, 
the proposal would permit certain U.S. control affiliates of a non-
U.S. CPO to contribute capital to that CPO's offshore pools as part 
of the initial capitalization without rendering the non-U.S. CPO 
ineligible for the 3.10 Exemption. In other words, the proposal 
would simply allow a U.S. parent company of a foreign CPO to invest 
in what is effectively its own offshore fund, without triggering 
registration requirements.
    It is hard to imagine how an entity that ultimately controls a 
given foreign CPO could lack a sufficient degree of transparency 
with respect to its own contribution of initial capital to an 
offshore commodity pool run by that same foreign CPO. In short, a 
U.S. controlling affiliate's initial investment in its affiliated 
non-U.S. CPO's offshore pool does not raise the same investor 
protection concerns as similar investments in the same pool by 
unaffiliated persons located in the United States. In many cases, 
moreover, the parent company is itself regulated by other U.S. 
regulators--for instance, state insurance departments in the case of 
insurance companies that wish to deploy their own general account 
assets as they best see fit, in keeping with their separate 
regulatory regimes. Accordingly, I see no reason to deploy the 
limited, taxpayer-funded resources of the CFTC to protect U.S. 
parents of foreign CPOs who are far better positioned than our 
federal agency to safeguard their own interests.

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I am pleased to support today's proposal to amend the 
Commission's regulation providing an exemption from registration for 
a foreign commodity pool operator trading on U.S. markets on behalf 
of foreign investors.\1\ Building on previously granted staff no-
action relief, the proposal would create new possibilities for fund 
managers and provide for simplified compliance. At the same time, 
the proposal ensures that the Commodity Exchange Act continues to 
protect U.S. market participants. Like the Commission's proposal 
from January addressing its jurisdiction over foreign swap dealing 
activities,\2\ this rulemaking sensibly marks the boundaries of the 
Commission's reach into foreign derivatives trading activities in 
light of market realities. And like the proposal from earlier this 
year amending the Commission's regulations governing commodity 
broker bankruptcies,\3\ in this rulemaking the Commission staff 
applies their experience to make the Commission's regulations more 
efficient.
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    \1\ CFTC regulation 3.10(c)(3) (17 CFR 3.10(c)(3)).
    \2\ Cross-Border Application of the Registration Thresholds and 
Certain Requirements Applicable to Swap Dealers and Major Swap 
Participants (Notice of Proposed Rulemaking), 85 FR 952 (Jan. 8, 
2020).
    \3\ Bankruptcy Regulations (Notice of Proposed Rulemaking) 
issued by the Commission on Apr. 14, 2020, publication in the 
Federal Register pending.
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    I would like to highlight certain aspects of the proposal. It 
would permit a foreign fund manager to satisfy the exemption's 
requirement that its pool does not contain funds of U.S. investors 
by complying with certain safe harbors, such as fund documentation 
disclosures.\4\ The proposal recognizes that the manner in which 
fund interests are sold in the real world often makes it impossible 
for a fund manager to make a blanket attestation that there is no 
U.S. investment in a given commodity pool. I am also particularly 
pleased to see that U.S. affiliates of foreign pools would have the 
ability to contribute initial capital to those pools.\5\
---------------------------------------------------------------------------

    \4\ Proposed regulation 3.10(c)(3)(iv).
    \5\ Proposed regulation 3.10(c)(3)(iii).
---------------------------------------------------------------------------

    I applaud the staff of the Commission for continuing their work 
despite the COVID-19 pandemic and I look forward to reviewing the 
industry's comments.

Appendix 4--Statement of Commissioner Rostin Behnam

    I will support today's notice of proposed rulemaking and 
reopening of a comment period primarily aimed at amending the 
conditions of the current exemption under Commission regulation 
3.10(c)(3) (referred to as the ``3.10 Exemption'') available to 
certain non-U.S. commodity pool operators (CPOs) to further reflect 
the increasingly global nature of the CPO space and clarify the 
Commission's approach with respect to its oversight of foreign 
intermediaries that are not engaged in commodity interest activities 
on behalf of U.S. customers. I greatly appreciate the time and 
consideration that the staff of the Division of Swap Dealer and 
Intermediary Oversight (DSIO) gave to my comments and concerns. I 
also wish to thank the Office of General Counsel (OGC) staff for 
ensuring that we consistently adhere to the letter and spirit of the 
Commodity Exchange Act (CEA or the ``Act'') and regulations. I am 
pleased that the ongoing dialog that has become a hallmark of many 
working relationships within the Commission is enduring better than 
ever through the pandemic, and that we can advance important policy 
and regulatory initiatives without sacrificing constructive debate 
and deliberation.
    Today's proposal both expands the availability of the 3.10 
Exemption to non-U.S. CPOs who operate both qualifying offshore 
commodity pools and other commodity pools that may or may not meet 
an alternative regulatory registration exemption or exclusion and 
eases certain identifiable and unduly restrictive impediments to 
relying on the 3.10 Exemption. Like several recent rulemakings 
undertaken with respect to Part 4 of the Commission Regulations, 
today's proposal is a continuation of the Commission's ongoing 
efforts in honing its regulatory footprint with respect to this 
dynamic segment of the derivatives market by refining our approach 
through calibrating decades of policy and rulemakings to the needs 
of the market participants, consumers, and the national public 
interest we are charged with protecting.
    Though today's proposal is brief in its delivery, it reflects 
many years of staff experience and familiarity with the Commission's 
historical positions and reasoning in addressing material policy 
issues raised by appropriately balancing the financial interests of 
foreign intermediaries and their customers with our commitment to 
the financial integrity of U.S. markets and U.S. customer 
protection. I believe today's proposal equally reflects the 
Commission's commitment to making targeted changes in step with 
improvements in surveillance and monitoring capabilities as well 
with our

[[Page 35834]]

relationships with both the National Futures Association (NFA) and 
foreign regulators.
    Last fall, when the Commission finalized several amendments to 
part 4 of the regulations addressing various registration and 
compliance requirements for CPOs and commodity trading advisors, I 
commended its decision to not move forward at that time on proposals 
to exempt from registration qualifying CPOs operating commodity 
pools outside of the U.S. consistent with Commission Staff Advisory 
18-96 \1\ and adding a prohibition against statutory 
disqualifications for certain exempt CPOs.\2\ The decision not to 
act reflected a thoughtful consideration of the comments received 
and the practicalities of both proposals as they related to ongoing 
concerns about cross-border issues and the Commission's regulatory 
goals.
---------------------------------------------------------------------------

    \1\ Advisory No. 18-96, Offshore Commodity Pools Relief for 
Certain Registered CPOs from rules 4.21, 4.22 and 4.23(a)(10) and 
(a)(11) and From the Location of Books and Records Requirement of 
Rule 4.23 (Apr. 11, 1996), https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm.
    \2\ Rostin Behnam, Statement of Concurrence by CFTC Commissioner 
Rostin Behnam: Amendments to Registration and Compliance 
Requirements for Commodity Pool Operators and Commodity Trading 
Advisors, Nov. 25, 2019, https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement112519.
---------------------------------------------------------------------------

    Today's proposal results from ongoing review and discussions 
with market participants and the NFA to determine how best to 
provide relief that better aligns the Commission's customer 
protection concerns with the Commission's regulatory provisions in 
an increasingly international asset management space.\3\ Other 
aspects of today's proposal include the addition of a safe harbor 
for person's engaged in CPO activities with respect to offshore 
commodity pools that take certain enumerated actions aimed at 
preventing U.S. persons from participating in such pools, and a 
provision permitting certain U.S. control affiliates of a non-U.S. 
CPO to contribute capital to such CPO's offshore pools as seed money 
without impacting the non-U.S. CPO's eligibility for the 3.10(c) 
Exemption. Taking a pause as opposed to rushing forward has afforded 
Commission staff additional time to tailor regulatory language so as 
to avoid confusion and inadvertent loss of longstanding Commission 
policy aimed at protecting U.S. customers.
---------------------------------------------------------------------------

    \3\ Of note, today's proposal does not retract Staff-Advisory 
18-96, remains available to U.S. CPOs and others who would not be in 
the position to rely on the revised 3.10(c) Exemption as proposed 
today.
---------------------------------------------------------------------------

    While I have some questions and will be interested in hearing 
from commenters on the specific issues raised with regard to seed 
money and certain other aspects of the proposal that seem to 
permeate multiple policy-driven discussions of late, I believe 
today's proposal is reasonable, will reduce regulatory burdens 
without sacrificing key regulatory protections, and is drafted in 
observance of the high standards for exercising exemptive authority 
under section 4(c) of the Act. To that end, I am reassured that the 
exercise of such authority unequivocally preserves the Commission's 
authority outlined in section 4(d) of the Act to investigate a CPO's 
compliance with the requirements and conditions of the 3.10(c) 
Exemption, as proposed, and to bring an enforcement action for any 
violation of any provision of the CEA or Commission regulations 
caused by the failure to comply with or satisfy any of the 
Exemption's conditions or requirements.\4\ This is in addition to 
the Commission's retained authority to take enforcement action 
against any non-U.S. CPO claiming the 3.10 Exemption based on their 
activities within the U.S. derivatives markets consistent with our 
authority regarding market participants generally.
---------------------------------------------------------------------------

    \4\ 7 U.S.C. 6(d).
---------------------------------------------------------------------------

    Again, I would like to thank the staffs of DSIO, OGC and the 
rest of the Commissioners who worked to put forth this proposal.

Appendix 5--Statement of Commissioner Dan M. Berkovitz

    I support the proposal to amend regulation 3.10(c)(3) addressing 
the exemption from registration for foreign persons who operate 
commodity pools for customers located outside of the United States 
(``Proposal''). The Commission should focus its limited resources on 
commodity pools in which U.S. persons participate, rather than 
commodity pools located outside the U.S. in which only non-U.S. 
persons participate. The Proposal addresses several specific 
scenarios in which the registration exemption would apply, and which 
previously created potential uncertainty for market participants.
    I am concerned, however, that the provision in the Proposal that 
would enable controlling affiliates--U.S. entities with U.S. 
investors that provide capital to non-U.S. pools--to rely on the 
exemption could be used by CPOs who take funds directly from U.S. 
persons to evade the CPO registration and regulatory requirements. I 
look forward to reviewing comments on whether that provision is 
appropriate and whether additional conditions or limitations should 
apply to prevent such abuse.

Non-U.S. Pools With no U.S. Customers

    It is longstanding CFTC policy that an entity that meets the CPO 
definition and trades commodity interests in our markets is not 
required to register as a CPO if the entity is located offshore and 
only operates pools for persons located outside of the United 
States.\1\ In 2007, the Commission expressly codified the exemption 
in regulation 3.10(c)(3). Customer protection is a primary goal of 
the Commission's registration and regulatory requirements for 
CPOs.\2\ The rationale for the exemption for foreign pools has been 
that the CFTC's customer protection regulations generally should 
focus on regulating activities that have an impact on U.S. customers 
and commerce.\3\ To the extent the commodity pools that would be 
exempt from registration under the Proposal trade derivatives on 
U.S. exchanges, those activities are subject to oversight by the 
exchanges and through the Commission's exchange regulations.
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    \1\ See CFTC Staff Interpretative Letter 76-21 (Aug. 15, 1976).
    \2\ The regulation of CPOs also facilitates the Commission's 
oversight of the derivative markets, management of systemic risks, 
and mandate to ensure safe trading practices. See, e.g., Commodity 
Pool Operators and Commodity Trading Advisors: Compliance 
Obligations, 77 FR 11252, 11253, 11275 (Feb. 24, 2012); upheld in 
Investment Company Institute v. CFTC, 720 F.3d 370 (D.C. Cir. 2013).
    \3\ See e.g., Commodity Exchange Act (``CEA'') section 2(i). In 
contrast to this focus on customers, a primary policy goal of swap 
dealer regulation is preventing systemic risk. This goal 
necessitates oversight of swap trading activity outside of the 
United States that can have a significant impact on U.S. commerce if 
risks from that activity come back into the U.S. financial system 
through regulated swap dealers. See generally Interpretive Guidance 
and Policy Statement Regarding Compliance with Certain Swap 
Regulations, 78 FR 45292 (July 26, 2013).
---------------------------------------------------------------------------

    Since the adoption of the regulation 3.10(c)(3) registration 
exemption, two developments have increased the need for greater 
clarity in the rule. First, changes to CFTC regulations since the 
2008 financial crisis, particularly adding swap regulation and 
placing needed limits on other CPO registration exemptions, have led 
to a significant increase in the number of pool operators that are 
technically subject to registration. Second, the business of 
commodity investment management has become more global in nature, 
increasing the complexity of cross border activities by the firms 
that operate commodity pools.
    The Proposal would exempt non-U.S. CPOs from registration and 
regulation with respect to individual commodity pools that do not 
solicit from U.S. persons or have U.S. investors.\4\ The Proposal 
also provides that this exemption for some pools may be used with 
other exemptions or exclusions permitted under our regulations. 
These changes largely reflect the pre-existing policy that non-U.S. 
CPOs need not register their offshore pools.
---------------------------------------------------------------------------

    \4\ The CPO would need to register and comply with CFTC 
regulations with regard to any other commodity pools it operates 
that do solicit funds from U.S. persons.
---------------------------------------------------------------------------

    The Proposal would provide a safe harbor to the non-U.S. CPOs in 
the event that U.S. persons become inadvertently invested in the 
offshore pools. The Proposal appears to provide adequate conditions 
on the safe harbor to prevent abuse thereof. I look forward to 
comments on whether the proposed conditions should be expanded, 
reduced, or otherwise modified.
    Finally, the Proposal would permit a non-U.S. CPO to rely on the 
exemption even if a U.S. entity that controls the non-U.S. CPO 
contributes capital in the initial funding of the exempt offshore 
pools. This provision could be beneficial for U.S. fund managers 
seeking to compete in foreign markets and may be acceptable with 
appropriate limits.
    I am concerned, however, that the controlling affiliate 
provision would enable persons in the U.S. to indirectly invest--
either knowingly or unknowingly--in unregulated foreign commodity 
pools. Under this provision, partnerships and corporations could 
take in investment funds from U.S. persons and invest those funds in 
commodity pools operated by non-U.S. pool operators that they 
``control.'' Neither the controlling

[[Page 35835]]

affiliates nor the pool operators would be regulated by the CFTC. 
The U.S. investors in the U.S. control affiliate would receive none 
of the CPO disclosures or other protections afforded by our laws and 
regulations. In fact, they may never know that the entity they are 
investing in is placing their funds in offshore commodity pools. 
There is no requirement to disclose this information to U.S. persons 
investing in the controlling affiliate.
    Furthermore, the Proposal permits an unregistered non-U.S. CPO 
to accept ``initial capital contributions'' from a control affiliate 
that is a U.S. person, but does not provide any limitations on the 
duration or extent of such contributions. Arguably, under the 
proposed provision, the controlling affiliate could fund the entire 
pool investment with funds from U.S. persons and leave that amount 
in the pool with no time limitation, thus allowing a complete end-
run around our CPO regulations.
    The Proposal expressly acknowledges that evasion of our CPO 
rules is possible and says that such evasion would be unlawful. I 
want to thank the CFTC staff who drafted the Proposal for working 
with my office to add some conditions to the provision. However, I 
am still concerned there may be insufficient safeguards to prevent 
abuse. For these reasons, I requested that several questions be 
added to the Proposal to address which additional conditions could 
appropriately be added to achieve the purpose of the provision and 
still provide sufficient protections to the U.S. investors in the 
controlling affiliate. I look forward to the comments on this issue.

Exercising Commodity Exchange Act Section 4(c) Authority

    Finally, the Proposal relies on authority provided to the 
Commission in CEA section 4(c) to adopt exemptions from regulatory 
requirements if certain public policy goals are better served and if 
certain conditions are satisfied. Generally, I am not in favor of 
using this authority unless no other direct legal authority exists 
and doing so clearly falls within the intent of Congress in giving 
the Commission that power. During the development of the draft 
Proposal, I raised a number of concerns regarding the use of section 
4(c) and I want to commend the CFTC staff for their efforts to 
address my concerns by more fully explaining in the Proposal why the 
use of section 4(c) authority is appropriate in this instance.

[FR Doc. 2020-12034 Filed 6-11-20; 8:45 am]
 BILLING CODE 6351-01-P