[Federal Register Volume 85, Number 235 (Monday, December 7, 2020)]
[Rules and Regulations]
[Pages 78718-78742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23810]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AE46


Exemption From Registration for Certain Foreign Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission) 
is adopting amendments (Final Rule) revising the conditions set forth 
in the Commission regulation under which a person located outside of 
the United States (each, a foreign located person) engaged in the 
activity of a commodity pool operator (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. The Final Rule provides 
that the exemption under the applicable Commission regulation for 
foreign located persons acting as a CPO (a non-U.S. CPO) on behalf of 
offshore commodity pools may be claimed by such non-U.S. CPOs on a 
pool-by-pool basis. The Commission is also adopting a provision 
clarifying that a non-U.S. CPO may claim an exemption from registration 
under the applicable Commission regulation with respect to a qualifying 
offshore commodity pool, while maintaining another exemption from CPO 
registration, relying on a CPO exclusion, or even registering as a CPO, 
with respect to its operation of other commodity pools. Additionally, 
the Commission is adopting a safe harbor by which a non-U.S. CPO of an 
offshore pool may rely upon that exemption, if it satisfies several 
enumerated factors related to its operation of the offshore commodity 
pool. The Commission is also adopting an amendment permitting U.S. 
affiliates of a non-U.S. CPO to contribute initial capital to such non-
U.S. CPO's offshore pools, without affecting the eligibility of the 
non-U.S. CPO for an exemption from registration under the applicable 
Commission regulation. The Commission is also adopting amendments to 
the applicable Commission regulation originally proposed in 2016 that 
clarify whether clearing of commodity interest transactions through a 
registered futures commission merchant (FCM) is required as a condition 
of the registration exemptions for foreign intermediaries, and whether 
such exemption is available for foreign intermediaries acting on behalf 
of international financial institutions.

DATES: The effective date for this Final Rule is February 5, 2021.

FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, at 202-
418-6056, [email protected]; with respect to the finalization of the 
2016 Proposal: Frank N. Fisanich, Chief Counsel, at 202-418-5949 or 
[email protected]; with respect to all other aspects of this release: 
Amanda Lesher Olear, Deputy Director, at 202-418-5283 or 
[email protected]; Pamela Geraghty, Associate Director, at 202-418-5634 
or [email protected]; Elizabeth Groover, Special Counsel, at 202-418-
5985 or [email protected], Division of Swap Dealer and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1151 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Statutory and Regulatory Background
    B. Recent Regulatory Proposals Related to Commission Regulation 
3.10(c)
    C. The 2020 Proposal
II. Final Rule
    A. General Comments in Response to the 2016 and 2020 Proposals
    B. Reconsidering the 2016 Proposal and Comments Received
    1. The 2016 Proposal's Amendments to Commission Regulation 
3.10(c)
    2. Responsive Comments Received Regarding the 2016 Proposal
    3. Finalizing the 2016 Proposal
    C. Pool-by-Pool Exemption
    D. Utilizing the 3.10 Exemption Concurrent With Other Regulatory 
Relief Available to CPOs
    E. The Safe Harbor for Non-U.S. CPOs With Respect to Inadvertent 
U.S. Participants in Their Offshore Pools
    F. Exception for Initial Capital Contributions by U.S. 
Affiliates of a Non-U.S. CPO to Its Offshore Pools
    1. U.S. ``Controlling'' Affiliates
    2. The Timing of a U.S. Affiliate's Capital Contributions to an 
Offshore Pool
    3. Additional Anti-Evasion Conditions: The Marketing Prohibition 
and Prohibiting ``Bad Actor'' U.S. Affiliates
    4. Analysis Under Section 4(c) of the Act
    G. Additional Relief for Commodity Trading Advisors
    H. Reorganization of Commission Regulation 3.10(c)
III. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    1. Costs and Benefits Related to Finalizing the 2016 Proposal
    2. Commission Regulation 3.10 (c)(5)(i): Claiming the 3.10 
Exemption on a Pool-by-Pool Basis
    3. Commission Regulation 3.10(c)(5)(iii): Providing A Safe 
Harbor for Non-U.S. CPOs Whose Offshore Pools May Have Inadvertent 
U.S. Participants
    4. Commission Regulation 3.10(c)(5)(iv): Utilizing the 3.10 
Exemption Concurrent with Other Available Exclusions and Exemptions
    5. Commission Regulation 3.10(c)(5)(ii): The Affiliate 
Contribution Exception
    6. Section 15(a) Factors
    D. Anti-Trust Considerations

I. Background

A. Statutory and Regulatory Background

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

[[Page 78719]]

person \2\ 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. 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.\3\ CEA section 4m(1) 
generally requires each person who satisfies the CPO definition to 
register as such with the Commission.\4\ 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.\5\
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    \1\ 7 U.S.C. 1a(11). See also 17 CFR 1.3 (defining ``commodity 
interest'' to include, inter alia, 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). The Act is found at 7 
U.S.C. 1, et seq. (2018), and the Commission's regulations are found 
at 17 CFR Ch. I (2020). Both are accessible through the Commission's 
website, https://www.cftc.gov.
    \2\ 7 U.S.C. 1a(38); 17 CFR 1.3 (defining ``person'' to include 
individuals, associations, partnerships, corporations, and trusts).
    \3\ 7 U.S.C. 1a(10).
    \4\ 7 U.S.C. 6m(1).
    \5\ 7 U.S.C. 1a(11)(B).
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    Additionally, CEA section 4(c), in relevant part with respect to 
the Final Rule, 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.\6\ CEA 
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.'' \7\
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    \6\ 7 U.S.C. 6(c)(1).
    \7\ 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.\8\ 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.\9\ 
The term ``appropriate person'' as used in CEA section 4(c) includes 
``a commodity pool formed or operated by a person subject to regulation 
under the Act.'' \10\ 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.\11\
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    \8\ 7 U.S.C. 6(c)(2)(A).
    \9\ 7 U.S.C. 6(c)(2)(B).
    \10\ 7 U.S.C. 6(c)(3)(E).
    \11\ 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 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,\12\ and also sets forth certain exemptions from 
registration.\13\ In particular, Commission regulation 3.10(c)(3)(i), 
discussed in further detail below, provides, inter alia, that a person 
engaged in the activity of a CPO, commodity trading advisor (CTA), or 
introducing broker (IB), in connection with any commodity interest 
transaction executed bilaterally or made on or subject to the rules of 
any designated contract market (DCM) or swap execution facility (SEF), 
is not required to register as a CPO, CTA, or IB (relief referred to 
herein as the 3.10 Exemption), provided that:
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    \12\ See, e.g., 17 CFR 3.10(a)(1)(i) (requiring the filing of a 
Form 7-R with the National Futures Association (NFA)).
    \13\ 17 CFR 3.10(c) (providing exemptions 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.);
    2. The person acts only on behalf of persons located outside the 
United States; and
    3. The commodity interest transaction is submitted for clearing 
through a registered FCM.\14\
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    \14\ 17 CFR 3.10(c)(3)(i).
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    Commission regulation 3.10(c)(2)(i) provides a similar exemption 
from registration for a person located outside the United States acting 
as an FCM.\15\
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    \15\ 17 CFR 3.10(c)(2)(i).
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    A person acting in accordance with the 3.10 Exemption remains 
subject to the antifraud provisions of, inter alia, CEA section 4o,\16\ 
but is otherwise not required to comply with those provisions of the 
CEA or Commission regulations applicable to any person registered in 
the relevant intermediary capacity,\17\ or persons required to be so 
registered.\18\ Of particular relevance to the amendments adopted 
herein regarding non-U.S. CPOs, 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 DCM or SEF, are confined to acting on 
behalf of offshore commodity pools.\19\ This exemption was first 
adopted in 2007 (2007 Final Rule) 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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    \16\ 7 U.S.C. 6o.
    \17\ For purposes of this adopting release, the term 
``intermediary'' includes persons acting in the capacity of an FCM, 
IB, CPO, or CTA. For more information, see ``Intermediaries,'' CFTC, 
available at https://www.cftc.gov/IndustryOversight/Intermediaries/index.htm.
    \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. 
See, e.g., 7 U.S.C. 9 (prohibiting manipulation by any person with 
respect to a swap or futures transaction).
    \19\ 17 CFR 3.10(c)(3)(i).
    \20\ Exemption from Registration for Certain Foreign Persons, 72 
FR 63976, 63977 (Nov. 14, 2007) (2007 Final Rule). See also CFTC 
Staff Interpretative Letter 76-21.
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    In adopting the 2007 Final Rule, 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 
Commission noted its understanding that, pursuant to the terms of the 
3.10

[[Page 78720]]

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\ 2007 Final Rule, 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 discussing what ultimately would be adopted as 
Commission regulation 3.10(c)(3)(i). Exemption from Registration for 
Certain Foreign Persons, 72 FR 15637, 15638 (Apr. 2, 2007).
    \23\ 2007 Final Rule, 72 FR at 63977-63978.
    \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 definitions of ``commodity pool 
operator'' and ``commodity pool'' in the CEA 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 both statutory definitions.\27\ When combined with the 
rescission of Commission regulation 4.13(a)(4) in 2012,\28\ 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, regardless of 
whether such pools were offshore or offered to U.S. participants.
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    \25\ Public Law 111-203, H.R. 4173 (2010) (Dodd-Frank Act).
    \26\ Section 721 of the Dodd-Frank Act.
    \27\ See also Adaptation of Regulation to Incorporate Swaps, 77 
FR 66288 (Nov. 2, 2012) (incorporating this expanded jurisdiction 
over swaps into existing Commission regulations).
    \28\ 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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B. Recent Regulatory Proposals Related to Commission Regulation 3.10(c)

    As discussed further below, on July 27, 2016, the Commission 
proposed to amend Commission regulation 3.10(c) (2016 Proposal) 
revising the conditions under which the exemption from intermediary 
registration would apply.\29\ Generally, the 2016 Proposal would permit 
a foreign located person acting in the capacity of an FCM, IB, CTA, or 
CPO, to utilize an exemption from registration as such, provided that 
the foreign located person, in connection with any commodity interest 
transaction, acts solely on behalf of (1) other foreign located 
persons, or (2) international financial institutions (IFIs, which were 
further defined in the 2016 Proposal's proposed Commission regulation 
(c)(6)). The proposed amendments provided an exemption from 
registration without regard to whether such foreign located person 
cleared the commodity interest transaction.\30\ In response to the 2016 
Proposal, the Commission received six comments, most of which were 
supportive of those proposed amendments.\31\ The Commission, however, 
did not finalize the 2016 Proposal at that time.
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    \29\ Exemption from Registration for Certain Foreign Persons, 81 
FR 51824 (Aug. 5, 2016) (2016 Proposal).
    \30\ 2016 Proposal, 81 FR at 51827.
    \31\ The public comment file for the 2016 Proposal is available 
on the Commission's website. Comments for Proposed Rule 81 FR 51824, 
available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1724. See infra pt. II.B. for additional 
discussion of the 2016 Proposal and Commission responses to those 
public comments.
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    In 2018, the Commission proposed, among other changes to its part 4 
regulations, adding a new exemption from CPO registration to Commission 
regulation 4.13 (2018 Proposal) that would formally incorporate the 
relief provided by CFTC Staff Advisory 18-96 (Advisory 18-96) in the 
Commission's CPO regulatory provisions.\32\ In the 2018 Proposal, the 
Commission noted that the proposed exemption based on Advisory 18-96 
was intended to 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.\33\ The Commission received several comments regarding the 
2018 Proposal's discussion of the differences between the proposed 
amendment to Commission regulation 4.13 and the existing 3.10 
Exemption.\34\
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    \32\ Registration and Compliance Requirements for Commodity Pool 
Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18, 
2018) (2018 Proposal); CFTC Staff Advisory 18-96 (Apr. 11, 1996).
    \33\ 2018 Proposal, 83 FR at 52914.
    \34\ The comment file for the 2018 Proposal is also available on 
the Commission's website. Comments for Proposed Rule 83 FR 52902, 
available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2925.
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    For instance, 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.'' \35\ 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.\36\ 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.'' \37\ Several other commenters expressed 
similar views and requested that the Commission affirm CPOs' 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.\38\
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    \35\ 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=.
    \36\ Id. at 12.
    \37\ 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=.
    \38\ See, e.g., Comment Letter from Willkie, Farr, and 
Gallagher, LLP (Willkie), at 6 (Dec. 17, 2018), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61927&SearchText=; and 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 the portion of the 2018 Proposal 
related to adopting the relief provided in Advisory 18-96 as a CPO 
registration exemption, and, in light of the comments received in 
response to its discussion of the 3.10 Exemption, 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.\39\ Based 
on the foregoing experience and history, and in consideration of the 
increasingly global nature of the commodity pool space, the Commission 
proposed certain amendments to the 3.10 Exemption on May 28, 2020, 
which were subsequently published in the Federal Register on June 12, 
2020 (2020 Proposal).\40\
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    \39\ 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).
    \40\ Exemption from Registration for Certain Foreign Persons 
Acting as Commodity Pool Operators of Offshore Commodity Pools, 85 
FR 35820 (Jun. 12, 2020) (2020 Proposal).
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C. The 2020 Proposal

    The 2020 Proposal consisted of several proposed amendments to the 
3.10 Exemption. Specifically, the Commission proposed amendments to the 
3.10 Exemption such that non-U.S.

[[Page 78721]]

CPOs may rely on that relief on a pool-by-pool basis.\41\ The 
Commission also proposed an amendment confirming that the 3.10 
Exemption, as revised, may be utilized along with other exemptions or 
exclusions available to CPOs generally, or CPO registration.\42\ The 
Commission further proposed a conditional safe harbor for non-U.S. CPOs 
who, by virtue of a pool's structure, cannot represent with absolute 
certainty that there are no U.S. participants in their operated 
offshore pool.\43\ Finally, the Commission also proposed to provide an 
exception from the 3.10 Exemption's prohibition on U.S. participants, 
such that a U.S. controlling affiliate could provide initial capital to 
an offshore pool operated by its affiliated non-U.S. CPO without being 
considered a U.S. participant in that offshore pool.\44\ In addition to 
the substantive amendments to the 3.10 Exemption proposed for the first 
time as part of the 2020 Proposal, the Commission also reopened the 
comment period associated with the 2016 Proposal for a period of 60 
days.\45\
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    \41\ 2020 Proposal, 85 FR at 35822.
    \42\ 2020 Proposal, 85 FR at 35824.
    \43\ 2020 Proposal, 85 FR at 35823.
    \44\ 2020 Proposal, 85 FR at 35825.
    \45\ 2020 Proposal, 85 FR at 35826-35827.
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II. Final Rule

    After considering all of the comments received, and for the reasons 
stated by the Commission herein, the Commission is amending Commission 
regulation 3.10(c), in a manner generally consistent with the 2016 and 
2020 Proposals, with certain adjustments resulting from commenters' 
suggestions and after additional consideration of the proposed 
regulatory text. The Commission will first generally summarize the 
public comments received addressing both the 2016 and 2020 Proposals. 
Then, in addition to the rulemaking history of Commission regulation 
3.10(c) set forth above, the Commission will briefly explain the 2016 
Proposal, respond to all of the relevant public comments received, and 
detail the amendments derived from the 2016 Proposal adopted in the 
Final Rule.\46\ The Commission will then discuss the remaining 2020 
Proposal amendments with respect to non-U.S. CPOs operating offshore 
pools pursuant to the 3.10 Exemption, summarize the 3.10 Exemption 
amendments being adopted, respond to the relevant public comments 
received, and explain the substance and rationale of any adjustments in 
approach from the 2020 Proposal to what the Commission is adopting in 
the Final Rule today.\47\ Finally, the Commission will explain its 
efforts to reconcile proposed amendments from both the 2016 and 2020 
Proposals, which includes a non-substantive reorganization of 
Commission regulation 3.10(c).\48\
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    \46\ See infra pt. II.B.
    \47\ See infra pts. II.C-G.
    \48\ See infra pt. II.H.
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A. General Comments in Response to the 2016 and 2020 Proposals

    The Commission requested comment generally on all aspects of the 
2020 Proposal, and specifically asked questions about potential 
additional conditions or limitations to the proposed relief that might 
be incorporated during finalization.\49\ The comment period for the 
2020 Proposal, along with the reopened comment period for the 2016 
Proposal, expired on August 11, 2020, and the Commission received four 
relevant comment letters: One from an individual, one from a foreign 
intergovernmental organization, one submitted jointly by five industry 
professional and trade associations (collectively, the Industry 
Groups), and one submitted by an asset manager that operates 
globally.\50\ Two of those comment letters also provided new or 
additional comments with respect to the 2016 Proposal.\51\ Finally, 
Commission staff also hosted one ex parte meeting to discuss aspects of 
the 2020 Proposal with an Industry Group.\52\
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    \49\ 2020 Proposal, 85 FR at 35826 (asking three questions 
regarding the conditions of the proposed exception from the 3.10 
Exemption for initial capital investments in a non-U.S. CPO's 
offshore pool by a U.S. controlling affiliate). See also id. at 
35827 (asking, with respect to the 2016 Proposal, an additional 
question about the clearing of transactions otherwise covered by the 
3.10 Exemption).
    \50\ The Commission received a total of five comment letters, 
one of which was either spam or otherwise not substantively relevant 
to the 2020 Proposal in any respect. For relevant comments on the 
2020 Proposal, see Comment Letter from Mr. Chris Barnard (Aug. 11, 
2020) (Barnard); Comment Letter from the European Stability 
Mechanism (Aug. 6, 2020) (ESM); Joint Comment Letter from AIMA, 
SIFMA AMG, the Investment Advisers Association (IAA), Investment 
Company Institute Global (ICI Global), and the Managed Funds 
Association (MFA) (Aug. 11, 2020) (Industry Group Letter), and 
Comment Letter from the Vanguard Group (Aug. 11, 2020) (Vanguard).
    \51\ Industry Group Letter, at 12-13, and ESM, at 1-3.
    \52\ The complete comment file for the 2020 Proposal can be 
found on the Commission's website. Comments for Proposed Rule 85 FR 
35820, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3122.
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    The comments received by the Commission were, in general, strongly 
supportive of the 2020 Proposal.\53\ Commenters largely agreed with the 
proposed amendments, positing that, if adopted, the 2020 Proposal 
``would simplify compliance by eliminating the potential need for the 
CFTC to require registration and oversight of non-U.S. CPOs whose pools 
have no U.S. investors.'' \54\ The Industry Groups also ``applaud[ed] 
the Commission's actions in turning its attention to the increasingly 
global nature of the asset management space and proposing rule changes 
that will better align the express terms of its regulations with both 
the Commission's policy goals and current global practices.'' \55\ 
Although offering support for the 2020 Proposal overall, commenters 
also suggested additional regulatory edits with respect to several 
specific issues raised by that release, and provided responses to the 
questions posed by the Commission.\56\
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    \53\ Industry Group Letter, at 2; Vanguard, at 2; Barnard, at 2; 
ESM, at 1.
    \54\ Barnard, at 2.
    \55\ Industry Group Letter, at 1.
    \56\ See, e.g., Vanguard, at 2-3; Industry Group Letter, at 2-
15, app. A.
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    As noted above, the Commission requested comment generally on the 
2020 Proposal, but also posed several targeted questions about 
potential additional conditions for the proposed exception regarding 
the initial capital contributions of U.S. controlling affiliates in a 
non-U.S. CPO's offshore pool (Affiliate Contribution Exception).\57\ In 
addition to commenting generally on the 2020 Proposal, the Industry 
Groups submitted the sole comment letter specifically responding to 
those questions. The Industry Groups stated that they do not support 
additional conditions on the Affiliate Contribution Exception, and that 
they believe such limitations ``would not provide any additional 
protection to U.S. investors, customers, or the U.S. commodity interest 
markets.'' \58\ For instance, the Commission queried whether the 
Affiliate Contribution Exception should more explicitly be intended for 
``seeding purposes,'' including whether it should ``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?'' 
\59\ Alternatively, the Industry Groups suggested a defined ``purpose'' 
for affiliate contributions, ``for the purpose of establishing, or 
providing ongoing support to, the pool.'' \60\
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    \57\ 2020 Proposal, 85 FR at 35826. See infra pt. II.F for a 
more detailed discussion on the Affiliate Contribution Exception 
adopted in the Final Rule.
    \58\ Industry Group Letter, at 17.
    \59\ 2020 Proposal, 85 FR at 35826.
    \60\ Industry Group Letter, at 17.
---------------------------------------------------------------------------

    Regarding the nature of controlling affiliates, the Commission also 
queried

[[Page 78722]]

whether the Affiliate Contribution Exception should ``be limited to 
entities or persons that are otherwise financial institutions that are 
regulated in the United States to provide investor protections?'' \61\ 
The Commission additionally inquired whether the Affiliate Contribution 
Exception should ``only be available to U.S. controlling affiliates 
regulated by the Securities and Exchange Commission, a federal banking 
regulator, or an insurance regulator?'' \62\ The Industry Groups stated 
that they do not believe any benefit would result from ``limiting the 
affiliates that contribute capital to regulated entities'' because it 
would further introduce the Commission ``into the decision-making 
process for commercial decisions and resource allocation of global 
organizations,'' and ``also prevent the use of common practices for 
this type of funding, including holding companies and trust 
companies.'' \63\ One commenter also stated that a U.S. affiliate 
should not be required to ``be regulated in the United States in order 
to qualify'' for the Affiliate Contribution Exception.\64\
---------------------------------------------------------------------------

    \61\ 2020 Proposal, 85 FR at 35826.
    \62\ Id.
    \63\ Industry Group Letter, at 18.
    \64\ Vanguard, at 2.
---------------------------------------------------------------------------

    The Commission also noted in the 2020 Proposal that one of the 
rationales behind the Affiliate Contribution Exception is the 
affiliate's likely ability to demand that the non-U.S. CPO provide it 
with information necessary to assess the offshore pool's operations and 
performance.\65\ Because it may not be possible to ascertain with 
certainty whether such information must be provided to a U.S. 
controlling affiliate under laws applicable to the non-U.S. CPO, the 
Commission queried in the 2020 Proposal whether the Affiliate 
Contribution Exception should 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?'' \66\ The Industry Groups noted that ``an organization's decision 
to contribute capital to support the operations of an offshore CPO is a 
commercial business decision, not an investment decision of the type 
that Part 4 information addresses.'' \67\ Therefore, the Industry 
Groups stated, there is ``no need for the Commission to determine what 
type of information global business organizations will need to exercise 
their business judgment in this regard or for the Commission otherwise 
to intervene in the organization's decision-making process.'' \68\ The 
Commission did not receive any comments supporting the additional 
limitations for which the Commission specifically solicited public 
feedback in the 2020 Proposal.
---------------------------------------------------------------------------

    \65\ 2020 Proposal, 85 FR at 35826.
    \66\ Id.
    \67\ Industry Group Letter, at 18.
    \68\ Id. (noting that ``requiring this exception to be 
conditioned on there being a legally binding obligation in the non-
U.S. CPO's home jurisdiction would create unnecessary non-U.S. legal 
analysis on the part of the affiliate'').
---------------------------------------------------------------------------

B. Reconsidering the 2016 Proposal and Comments Received

    In addition to reopening the comment period with respect to the 
2016 Proposal, the Commission queried specifically whether Commission 
regulation 3.10 should require commodity interest transactions of 
foreign located persons or IFIs that are required or intended to be 
cleared on a registered derivatives clearing organization (DCO) to be 
submitted for clearing through an FCM registered in accordance with 
section 4d of the Act, unless such foreign located person or IFI is 
itself a clearing member of such registered DCO.\69\ As mentioned 
above, the Commission received two additional comments relevant to the 
2016 Proposal as a result of the reopening of the 2016 Proposal's 
comment period. After a brief explanation of the 2016 Proposal, the 
Commission will discuss and address these additional comments, along 
with the public comments originally received in 2016, and outline the 
Final Rule amendments resulting from the 2016 Proposal below.
---------------------------------------------------------------------------

    \69\ 2020 Proposal, 85 FR at 35827.
---------------------------------------------------------------------------

1. The 2016 Proposal's Amendments to Commission Regulation 3.10(c)
    At the time the 2016 Proposal was published, and until the Final 
Rule's amendments become effective, Commission regulation 3.10(c)(2)-
(c)(3) generally provides an exemption from registration, subject to 
specific conditions, for certain foreign located persons acting as 
intermediaries (collectively, Foreign Intermediaries) with respect to 
persons also located outside the U.S., even though such transactions 
may be executed bilaterally, or on or subject to the rules of a DCM or 
SEF.\70\ With respect to activities involving commodity interest 
transactions executed bilaterally, or made on or subject to the rules 
of any DCM or SEF, Commission regulation 3.10(c)(3)(i) provides an 
exemption from registration as a CPO, CTA, or IB, where the person is a 
foreign located person, acting only on behalf of other foreign located 
persons, and the commodity interest transaction is submitted for 
clearing through a registered FCM.\71\ Commission regulation 
3.10(c)(2)(i) currently provides a similar exemption from registration 
for any Foreign Intermediary acting as an FCM.\72\
---------------------------------------------------------------------------

    \70\ 17 CFR 3.10(c)(2)-(c)(3). See supra pt. I.A.
    \71\ 17 CFR 3.10(c)(3)(i).
    \72\ 17 CFR 3.10(c)(2)(i).
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    Pursuant to the 2016 Proposal, the Commission proposed to amend 
Commission regulations 3.10(c)(2) and (c)(3) to revise the conditions 
under which those exemptions from registration would apply.\73\ 
Specifically, the 2016 Proposal's amendments would permit a Foreign 
Intermediary to be eligible for an exemption from registration, if the 
Foreign Intermediary, in connection with a commodity interest 
transaction, only acts on behalf of (1) foreign located persons, or (2) 
IFIs,\74\ without regard to whether such persons or institutions clear 
such commodity interest transaction.\75\ It was the Commission's 
intention in 2016--and remains so now--to promulgate regulations 
consistent with its longstanding policy of focusing its customer 
protection activities upon domestic firms, and upon firms soliciting or 
accepting orders from domestic participants.\76\
---------------------------------------------------------------------------

    \73\ 2016 Proposal.
    \74\ For purposes of the 2016 Proposal, the Commission defined 
IFIs as those multinational institutions defined in the Commission's 
previous rulemakings and staff no-action letters, i.e., 
International Monetary Fund, International Bank for Reconstruction 
and Development, European Bank for Reconstruction and Development, 
International Development Association, International Finance 
Corporation, Multilateral Investment Guarantee Agency, African 
Development Bank, African Development Fund, Asian Development Bank, 
Inter-American Development Bank, Bank for Economic Cooperation and 
Development in the Middle East and North Africa, Inter-American 
Investment Corporation, Council of Europe Development Bank, Nordic 
Investment Bank, Caribbean Development Bank, European Investment 
Bank and European Investment Fund (the International Bank for 
Reconstruction and Development, International Finance Corporation, 
and Multilateral Investment Guarantee Agency are parts of the World 
Bank Group). 2016 Proposal, 81 FR at 51825, citing Further 
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' 
``Major Swap Participant,'' ``Major Security-Based Swap 
Participant,'' and ``Eligible Contract Participant,'' 77 FR 30596, 
30692, n.1180 (May 23, 2012) (Entities Final Rule).
    \75\ 2016 Proposal, 81 FR at 51826.
    \76\ Id.
---------------------------------------------------------------------------

2. Responsive Comments Received Regarding the 2016 Proposal
    In response to the 2016 Proposal, the Commission originally 
received six comments \77\ and subsequently received

[[Page 78723]]

two additional comments,\78\ as a result of reopening the comment 
period pursuant to the 2020 Proposal. AIMA, CME, MFA, and the Industry 
Groups commented that the 2016 Proposal would improve market efficiency 
and increase liquidity in U.S. markets by eliminating the regulatory 
burden associated with Commission registration imposed on Foreign 
Intermediaries acting solely on behalf of other foreign located 
persons.\79\ In particular, MFA also commented that foreign located 
persons would generally not have any expectation that a Foreign 
Intermediary would be subject to Commission oversight.\80\ The CME also 
noted that the proposed amendments would positively impact the 
likelihood of productive cooperation concerning the regulation of 
derivatives across all jurisdictions going forward.\81\ One individual 
commented that Foreign Intermediaries should be required to register 
with the Commission no matter the circumstance.\82\ The other 
individual did not address the 2016 Proposal in any manner. Regarding 
the two additional comment letters received after the 2020 Proposal, 
the Industry Groups and ESM were both strongly supportive of the 
Commission finalizing amendments from the 2016 Proposal; additionally, 
ESM requested that it be explicitly included in the definition of 
``international financial institution.'' \83\
---------------------------------------------------------------------------

    \77\ The original six comments were submitted by: AIMA; the CME 
Group, Inc. (CME); IAA; MFA; and two individuals unaffiliated with 
any registrant or derivatives industry organization. Comments for 
Proposed Rule 81 FR 51824, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1724. See specifically, Comment 
Letter from AIMA (Sept. 6, 2016) (AIMA), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61002&SearchText=; Comment Letter from CME (Aug. 
23, 2016) (CME), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60997&SearchText=; Comment Letter 
from IAA (Sept. 6, 2016) (IAA), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61003&SearchText=; Comment Letter from MFA 
(Sept. 2, 2016) (MFA), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61000&SearchText=.
    \78\ The two additional 2020 comment letters addressing the 2016 
Proposal are the jointly submitted Industry Group Letter and the 
comment letter from ESM, described above as a foreign 
intergovernmental organization. Comments for Proposed Rule 85 FR 
35820, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3122. See supra pt. II.A.
    \79\ AIMA, at 1; CME, at 1-2; MFA, at 1; Industry Group Letter, 
at 12-13.
    \80\ MFA, at 1.
    \81\ CME, at 2.
    \82\ Comment Letter from ``Jean Publieee'' (Aug. 8, 2016), 
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60987&SearchText=.
    \83\ Industry Group Letter, at 13; ESM, at 2.
---------------------------------------------------------------------------

3. Finalizing the 2016 Proposal
    After considering all of the comments, the Commission is finalizing 
its amendments to Commission regulation 3.10(c) from the 2016 Proposal, 
with two modifications. First, the Commission originally proposed to 
amend the language of the exemptions to remove the requirement that any 
commodity interest transaction shall be submitted for clearing through 
a registered FCM.\84\ In doing so, the Commission recognized that not 
all commodity interest transactions are subject to a clearing 
requirement under the CEA or Commission regulations, or even available 
for clearing by any DCO.\85\ However, by removing the clearing 
condition, the Commission inadvertently failed to reiterate that those 
transactions that are required to be cleared must be cleared by a 
clearing member of the relevant DCO. The proposed removal of such 
language may have had the unintended consequence of leading some market 
participants to misconstrue the Commission's purpose as an intention to 
permit unregistered foreign located persons to become clearing members 
on a DCO to clear commodity interest transactions on behalf of 
customers that were also foreign located persons. Thus, the Final Rule 
provides that the exemptions from registration in Commission regulation 
3.10(c) are conditioned on (1) clearing on a DCO any commodity interest 
transaction that is required or intended to be cleared on a registered 
DCO; and (2) an additional requirement that such transactions must be 
cleared through a registered FCM, unless the Foreign Intermediary's 
customer is a clearing member of the relevant DCO.
---------------------------------------------------------------------------

    \84\ 2016 Proposal, 81 FR at 51826.
    \85\ Id.
---------------------------------------------------------------------------

    Second, the Commission is modifying the definition of 
``international financial institution'' proposed in 2016 to be 
consistent with the definition of U.S. person recently adopted by the 
Commission in its final cross-border rules for swap dealers (SDs) and 
major swap participants (MSPs) (Cross-Border Final Rule), which 
generally excludes IFIs from the definition of U.S. person.\86\ 
Consistent with the Cross-Border Final Rule, the Commission is defining 
the term ``international financial institutions'' in Commission 
regulation 3.10(c) to include the International Monetary Fund, the 
International Bank for Reconstruction and Development, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the United Nations, the IFIs that are defined in 22 
U.S.C. 262r(c)(2), those institutions that are defined as 
``multilateral development banks'' in the European Union's regulation 
on ``OTC derivatives, central counterparties and trade repositories,'' 
\87\ their agencies and pension plans, and any other similar 
international organizations, and their agencies and pension plans.\88\
---------------------------------------------------------------------------

    \86\ Cross-Border Application of the Registration Thresholds and 
Certain Requirements Applicable to Swap Dealers and Major Swap 
Participants, 85 FR 56924, 56937-38 (Cross-Border Final Rule).
    \87\ Cross-Border Final Rule, 85 FR at 56937-56938; Regulation 
(EU) No 648/2012 of the European Parliament and of the Council on 
OTC Derivative Transactions, Central Counterparties and Trade 
Repositories, Article 1(5(a)) (July 4, 2012), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648. 
Article 1(5(a)) references Section 4.2 of Part 1 of Annex VI to 
Directive 2006/48/EC, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0048. The definitions overlap, but 
together they include the following: The International Monetary 
Fund, International Bank for Reconstruction and Development, 
European Bank for Reconstruction and Development, International 
Development Association, International Finance Corporation, 
Multilateral Investment Guarantee Agency, African Development Bank, 
African Development Fund, Asian Development Bank, Inter-American 
Development Bank, Bank for Economic Cooperation and Development in 
the Middle East and North Africa, Inter-American Investment 
Corporation, Council of Europe Development Bank, Nordic Investment 
Bank, Caribbean Development Bank, European Investment Bank and 
European Investment Fund. As noted above, the International Bank for 
Reconstruction and Development, the International Development 
Association, the International Finance Corporation, and the 
Multilateral Investment Guarantee Agency are parts of the World Bank 
Group.
    \88\ See infra new Commission regulation 3.10(c)(1)(iii) 
(adopting a formal IFI definition for purposes of applying the 
exemptions otherwise established by that provision).
---------------------------------------------------------------------------

    The IFI definition adopted by the Final Rule also includes two 
additional institutions identified in CFTC Staff Letters 17-34 \89\ and 
18-13.\90\ In CFTC Staff Letter 17-34, Commission staff provided relief 
from CFTC margin requirements to swaps between SDs and ESM,\91\ and in 
CFTC Staff Letter 18-13, Commission staff identified the North American 
Development Bank as an additional entity that should be

[[Page 78724]]

considered an IFI for purposes of applying the SD and MSP 
definitions.\92\ The Commission concludes that it is appropriate to 
include these two entities in the IFI definition adopted by the Final 
Rule because the status of both entities as multinational organizations 
formed for public purposes is the same as that of the other already 
identified IFIs. Therefore, new Commission regulation 3.10(c)(1)(iii) 
lists specific IFIs, with these two additions. The IFI definition also 
includes a catch-all for ``any other similar international 
organizations, and their agencies and pension plans,'' which the 
Commission intends to extend the definition to any of the entities 
discussed above that are not explicitly listed in the definition.
---------------------------------------------------------------------------

    \89\ CFTC Staff Letter No. 17-34 (Jul, 24, 2017), available at 
https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf. See also CFTC Staff 
Letter No. 19-22 (Oct. 16, 2019), available at https://www.cftc.gov/csl/19-22/download.
    \90\ CFTC Staff Letter No. 18-13 (May 16, 2018), available at 
https://www.cftc.gov/csl/18-13/download.
    \91\ CFTC Staff Letter No. 17-34. In addition, in May 2020, the 
Commission adopted an amendment to Commission regulation 23.151 to 
exclude ESM from the definition of ``financial end user,'' which 
will have the effect of excluding swaps between certain SDs and ESM 
from the Commission's uncleared swap margin requirements. Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 85 FR 27674 (May 11, 2020).
    \92\ CFTC Staff Letter 18-13. See also CFTC Staff Letter 17-59 
(Nov. 17, 2017) (providing no-action relief from the swap clearing 
requirement of section 2(h)(1) of the CEA), available at https://www.cftc.gov/csl/17-59/download.
---------------------------------------------------------------------------

    As the Commission recognized in the 2016 Proposal, IFIs are 
operated to satisfy public purposes and have as their members sovereign 
nations from around the world. Although such institutions may have 
headquarters or another significant presence in the United States, the 
Commission recognizes that the unique attributes and multinational 
status of these institutions do not warrant treating them as domestic 
persons for purposes of the intermediary registration exemptions in 
Commission regulation 3.10(c). The status of IFIs as multinational 
member agencies leads the Commission to recognize a need to mitigate 
restraints on the ability of IFIs to enter into transactions in all 
member countries in conjunction with promoting global economic 
development and fulfilling other public purposes. The Commission has 
determined that this purpose is better served by defining 
``international financial institution'' to be consistent with the 
Cross-Border Final Rule because the list of IFIs as proposed in the 
2016 Proposal was limited to a specified list and may have required 
amendment from time to time.

C. Pool-by-Pool Exemption

    The 2020 Proposal would amend the 3.10 Exemption such that non-U.S. 
CPOs could avail themselves of the relief thereunder 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 commodity pool are located outside the United States.\93\ The 
Commission stated its preliminary belief that this amendment would 
appropriately focus Commission oversight on those pools that solicit 
and/or accept persons located in the United States as pool 
participants.\94\ The Commission further noted several developments in 
the pooled investment space since the original adoption of the 3.10 
Exemption that, in the Commission's preliminary opinion, also supported 
the amendments in the 2020 Proposal.\95\ Specifically, the Commission 
observed that Congress in 2010, through the Dodd-Frank Act, expanded 
the Commission's jurisdiction to include swaps and rolling spot retail 
foreign exchange transactions, and that, when combined with the 
rescission or revision of certain CPO exemptions and exclusions, this 
expanded authority resulted in a significant increase in the number of 
entities captured within the definition of CPO.\96\
---------------------------------------------------------------------------

    \93\ 2020 Proposal, 85 FR at 35822-35823.
    \94\ 2020 Proposal, 85 FR at 35823.
    \95\ Id.
    \96\ Id.
---------------------------------------------------------------------------

    In considering the propriety of the pool-by-pool exemption set 
forth in the 2020 Proposal, the Commission also noted the increasing 
globalization of the commodity pool industry, observing that, in 
contrast with the pool industry at the time of the original adoption of 
Commission regulation 3.10(c)(3)(i), several of today's largest CPOs, 
when measured by assets under management, are located outside the 
United States.\97\ The Commission noted further that these larger CPOs 
typically operate many different commodity pools simultaneously, 
including some pools for U.S. investors and other pools for investors 
outside of the United States.\98\ Therefore, the Commission 
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, which the Commission 
preliminarily believed would be accomplished through the 2020 
Proposal.\99\
---------------------------------------------------------------------------

    \97\ Id.
    \98\ Id.
    \99\ Id.
---------------------------------------------------------------------------

    The Commission received one comment explicitly addressing the 
proposed pool-by-pool availability of the 3.10 Exemption in the 2020 
Proposal.\100\ The Industry Groups stated their strong support for 
``the revised structure of the 3.10 Exemption that the Commission has 
proposed, which clearly and expressly provides for reliance on the 
exemption on a pool-by-pool basis.'' \101\ The Industry Groups further 
stated their agreement with the Commission's preliminary belief that 
the proposed amendments `` `better reflect the current state of 
operations of CPOs' and more clearly align the text of the rule with 
the Commission's policy goals.'' \102\ They also noted their belief 
that ``[t]he intention to permit an exempt or registered non-U.S. 
offshore CPO to rely on the 3.10 Exemption on a pool-by-pool basis is 
crystal clear, both in the language of the proposed amendment and the 
Release.'' \103\
---------------------------------------------------------------------------

    \100\ Industry Group Letter, at 10. See also Vanguard, at 2 
(expressing support for the 2020 Proposal in general and the 
substantive comments from the Industry Groups); Barnard, at 2 
(expressing support for the 2020 Proposal generally).
    \101\ Industry Group Letter, at 10.
    \102\ Id., quoting 2020 Proposal, 85 FR at 35822.
    \103\ Id. at 11.
---------------------------------------------------------------------------

    After considering the comments received, the Commission has 
determined to finalize the 2020 Proposal so that non-U.S. CPOs may 
utilize the 3.10 Exemption for their offshore commodity pools on a 
pool-by-pool basis. As such, the Commission is amending the 3.10 
Exemption for non-U.S. CPOs, as proposed, to specify that its 
availability would be determined, in part, by whether all of the 
participants in a particular offshore pool are foreign located 
persons.\104\ Permitting non-U.S. CPOs to rely upon the relief provided 
by the 3.10 Exemption on a pool-by-pool basis will further allow the 
Commission to focus its resources on the oversight of CPOs operating 
pools offered and sold to participants located in the U.S., i.e., the 
Commission's primary customary protection mandate. Therefore, the 
Commission concludes that the Final Rule properly tailors the 3.10 
Exemption to address the increasingly global nature of the investment 
management space since 2007, without compromising the Commission's 
mission of protecting U.S. pool participants and effectively regulating 
CPOs managing U.S. assets.
---------------------------------------------------------------------------

    \104\ 2020 Proposal, 85 FR at 35831 (proposing Commission 
regulation 3.10(c)(3)(ii) to provide this relief on a pool-by-pool 
basis to qualifying non-U.S. CPOs for their offshore pools). See 
infra new Commission regulation 3.10(c)(5)(i) (retaining that 
proposed language and updating solely to reflect the adoption of 
defined terms from the 2016 Proposal, including ``foreign located 
person'').
---------------------------------------------------------------------------

    For the reasons stated above, the Commission determines that 
amending the 3.10 Exemption to provide relief from registration to non-
U.S. CPOs for their offshore pools on a pool-by-pool basis is an 
appropriate exercise of its exemptive authority under CEA section 4(c). 
The persons involved in the transactions subject to the exemptive 
relief provided herein are ``appropriate persons,'' as discussed in the 
2020 Proposal, because the term ``appropriate person'' as used in CEA 
section 4(c)

[[Page 78725]]

includes ``a commodity pool formed or operated by a person subject to 
regulation under the Act.'' \105\ 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.\106\ Consistent with its 
preliminary belief in the 2020 Proposal, the Commission believes that 
clearly enabling non-U.S. CPOs to avoid the additional organizational 
complexity associated with separately organizing their offshore and 
domestic facing commodity pool businesses may result in more non-U.S. 
CPOs undertaking to design and offer pools for persons in the United 
States. Moreover, this could, in turn, result in a greater diversity of 
commodity pools offered and/or sold to persons in the United States, 
and this increased competition amongst commodity pools and their CPOs 
could broadly foster additional innovation in the commodity pool space, 
already one of the more dynamic sectors regulated by the Commission. 
Further, this potential for increased competition and variation in 
commodity pools and CPOs resulting from the Final Rule will further 
promote the vibrancy of the U.S. commodity interest markets.
---------------------------------------------------------------------------

    \105\ 7 U.S.C. 6(c)(3)(E).
    \106\ 77 FR at 30655 (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).
---------------------------------------------------------------------------

    The Commission concludes that the amendments adopted herein will 
not have a material adverse effect on the ability of the Commission or 
any DCM to discharge their duties under the Act, because non-U.S. CPOs 
relying on the 3.10 Exemption, as amended by the Final Rule, with 
respect to their offshore commodity pools will remain subject to the 
statutory and regulatory obligations imposed on all participants in the 
U.S. commodity interest markets.\107\ This conclusion is consistent 
with section 4(d) of the Act, which provides that any exemption granted 
pursuant to CEA 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 Act or any 
rule, regulation or order thereunder caused by the failure to comply 
with or satisfy such conditions or requirements.\108\ Further, to the 
extent a non-U.S. CPO operates both offshore and domestic commodity 
pools, these amendments to the 3.10 Exemption do not restrict or 
negatively affect the Commission's statutory and regulatory authority 
applicable to the commodity pool and intermediary activities of the 
non-U.S. CPO involving persons located in the United States. Rather, 
this aspect of the Final Rule simply reflects the Commission focusing 
its regulatory resources on U.S. pool participants and the firms 
soliciting them for trading commodity interests, which are squarely 
within its customer protection mandate.\109\ Finally, under the Final 
Rule, the Commission retains the authority to take enforcement action 
against any non-U.S. CPO claiming the 3.10 Exemption based on its 
activities within the U.S. commodity interest markets, consistent with 
the Commission's authority regarding market participants generally.
---------------------------------------------------------------------------

    \107\ 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).
    \108\ 7 U.S.C. 6(d).
    \109\ 2020 Proposal, 85 FR at 35823.
---------------------------------------------------------------------------

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

    As discussed above, the Commission proposed that the 3.10 Exemption 
for non-U.S. CPOs be available on a pool-by-pool basis. Consistent with 
those proposed amendments, and to address the concerns articulated by 
commenters to the 2018 Proposal,\110\ the Commission also proposed to 
explicitly provide that a non-U.S. CPO may claim the 3.10 Exemption for 
its offshore pool(s), while such non-U.S. CPO also claims another 
registration exemption or regulatory exclusion with respect to other 
pools it operates, e.g., the de minimis exemption under Commission 
regulation 4.13(a)(3),\111\ an exclusion from the CPO definition under 
Commission regulation 4.5,\112\ or registers with respect to such 
pools.\113\ As noted in the 2020 Proposal and confirmed by the 
responsive comments received, the Commission understands that this 
practice is known colloquially as the ability to ``stack'' exemptions.
---------------------------------------------------------------------------

    \110\ See, e.g., AIMA, at 6; Willkie, at 6.
    \111\ 17 CFR 4.13(a)(3).
    \112\ 17 CFR 4.5.
    \113\ 2020 Proposal, 85 FR at 35824-25. See infra new Commission 
regulation 3.10(c)(5)(iv).
---------------------------------------------------------------------------

    Absent the finalization of this amendment, the 3.10 Exemption would 
not have a provision that expressly contemplates its simultaneous use 
with other exemptions or exclusions available under other Commission 
regulations. This contrasts with the language in Commission regulation 
4.13(f), for example, which states that the filing of a notice of 
exemption from registration under that 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 Sec.  
4.13.\114\ In the 2020 Proposal, the Commission stated its preliminary 
belief that non-U.S. CPOs relying on the 3.10 Exemption should have the 
ability to rely on other regulatory exemptions or exclusions that they 
qualify for, just like any other CPO.\115\ The Commission noted that it 
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 other regulatory relief 
available to CPOs generally.\116\ The Commission therefore 
preliminarily concluded that a non-U.S. CPO relying upon the 3.10 
Exemption for one or more of its offshore pools should not, by virtue 
of that reliance, be foreclosed from utilizing other relief generally 
available to CPOs of U.S. pools.\117\
---------------------------------------------------------------------------

    \114\ 17 CFR 4.13(f).
    \115\ 2020 Proposal, 85 FR at 35825.
    \116\ Id.
    \117\ Id.
---------------------------------------------------------------------------

    The Commission received one comment regarding the ability to 
combine the 3.10 Exemption with either registration or other available 
CPO exemptions or exclusions. The Industry Groups strongly supported 
this aspect of the 2020 Proposal because it ``clearly and expressly 
provides for reliance on the [3.10 E]xemption on a pool-by-pool basis 
and also, in a separate provision, expressly acknowledges the ability 
to combine or `stack' exemptions.'' \118\ They did, however, suggest 
removing from the proposed amendment the specific references to 
Commission regulations 4.13 and 4.5, so as to better align the 
provision with the Commission's stated intentions in the 2020 Proposal, 
i.e., to permit the 3.10 Exemption to be broadly combinable with other 
available exemptions or exclusions, or registration.\119\
---------------------------------------------------------------------------

    \118\ Industry Group Letter, at 10.
    \119\ Id. at 12 (citing the 2020 Proposal, 85 FR at 25824-25, 
and stating that the Commission repeatedly describes the provision 
``as permitting simultaneous reliance on different exemptions or 
registration, giving examples of such exemptions, but without 
limiting the exemptions in question'').
---------------------------------------------------------------------------

    After considering the comments received, and for the reasons stated 
in

[[Page 78726]]

the 2020 Proposal, the Commission is adopting the proposed amendment 
permitting the 3.10 Exemption to be maintained concurrently with CPO 
registration and/or other exemptions or exclusions otherwise available 
to the claiming non-U.S. CPO. The Commission agrees that it is not 
necessary for the exclusions and exemptions available under Commission 
regulations 4.5 and 4.13 to be explicitly enumerated therein. Although 
the relief provided by Commission regulations 4.5 and 4.13 is the 
predominant means by which commodity pools are operated without the 
registration of a CPO, those provisions are not the sole source of such 
relief available to CPOs for their pools. Therefore, the Final Rule 
adopts the provision permitting the ``stacking'' of the 3.10 Exemption 
with either registration or other available relief from CPO regulation 
by the Commission, without the specific references to Commission 
regulations 4.5 and 4.13.\120\
---------------------------------------------------------------------------

    \120\ See infra new Commission regulation 3.10(c)(5)(iv).
---------------------------------------------------------------------------

E. The Safe Harbor for Non-U.S. CPOs With Respect to Inadvertent U.S. 
Participants in Their Offshore Pools

    The 2020 Proposal also proposed a safe harbor for non-U.S. CPOs 
that have taken reasonable actions designed to minimize the possibility 
that participation units in the operated offshore pool are being 
offered or sold to persons located in the United States. The Commission 
understands that some non-U.S. CPOs may not be able to represent with 
absolute certainty that they are acting only on behalf of foreign 
located persons invested in their offshore pools, as such non-U.S. CPOs 
may not have complete visibility into the ultimate beneficial ownership 
of their offshore pool participation units. Pursuant to the proposed 
safe harbor, a non-U.S. CPO would be permitted to engage in the U.S. 
commodity interest markets on behalf of an offshore pool for which it 
cannot represent with absolute certainty that all of the pool 
participants are offshore, as required by the 3.10 Exemption, provided 
that such non-U.S. CPO meets the following conditions:
    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;
    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 non-U.S. 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.
    With respect to this proposed safe harbor, the Commission stated 
its preliminary expectation 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.\121\
---------------------------------------------------------------------------

    \121\ 2020 Proposal, 85 FR at 35824.
---------------------------------------------------------------------------

    The Commission also stated its preliminary belief that satisfying 
the criteria of the proposed safe harbor would serve as an indication 
that a non-U.S. CPO is exercising sufficient diligence with respect to 
those circumstances within its control to minimize the possibility of 
engaging with persons located in the United States concerning the 
offered offshore pool.\122\ Moreover, the Commission stated its 
preliminary belief that, if a non-U.S. CPO meets the five factors in 
the proposed safe harbor, the likely absence of U.S. participants is 
sufficiently ensured so as to allow reliance on the 3.10 
Exemption.\123\ As with any of the Commission's other registration 
exemptions available to CPOs generally, the Commission expressed in the 
2020 Proposal its expectation that non-U.S. CPOs claiming the 3.10 
Exemption would maintain adequate documentation to demonstrate 
compliance with the terms of the safe harbor.\124\
---------------------------------------------------------------------------

    \122\ Id.
    \123\ Id.
    \124\ Id.
---------------------------------------------------------------------------

    The Commission received only one comment regarding the proposed 
safe harbor. The commenter supported it, saying that ``[t]he proposed 
safe harbor provides adequate provisions that will simplify compliance 
with no loss of regulatory amenity.'' \125\
---------------------------------------------------------------------------

    \125\ Barnard, at 2.
---------------------------------------------------------------------------

    Accordingly, upon consideration of the comments, and consistent 
with the rationale expressed in the 2020 Proposal, the Commission is 
adopting the safe harbor as proposed. The Commission believes, as it 
did in the 2020 Proposal, that this amendment is an appropriate 
exercise of the Commission's exemptive authority under CEA section 
4(c). The persons involved in the transactions subject to the exemptive 
relief provided herein are ``appropriate persons,'' as discussed in the 
2020 Proposal, because the term ``appropriate person'' as used in CEA 
section 4(c) includes ``a commodity pool formed or operated by a person 
subject to regulation under the Act.'' \126\ 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.\127\ This safe harbor 
may promote responsible economic or financial innovation and fair 
competition in the U.S. commodity interest markets generally, thereby 
increasing their vibrancy and liquidity.\128\ The safe harbor adopted 
herein permits a non-U.S. CPO of an offshore pool, by taking defined 
steps designed to mitigate the risk of U.S. participation in the 
offshore pool, to continue to qualify for the 3.10 Exemption, and thus, 
avoid being regulated both by its regulatory authority in its home 
jurisdiction and by the Commission. This effectively places the non-
U.S. CPO on an equal footing with those domestic CPOs solely regulated 
by the Commission because each is generally subject to a single, 
appropriate regulatory regime with respect to the operation of its 
commodity pools. Additionally, the presence and activity of additional 
offshore pools with trading strategies developed outside the United 
States creates a diversity of viewpoint in the U.S. commodity interest 
markets, which could encourage innovation and competition by domestic 
CPOs as well.
---------------------------------------------------------------------------

    \126\ 7 U.S.C. 6(c)(3)(E).
    \127\ 77 FR at 30655 (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).
    \128\ 7 U.S.C. 6(c).

---------------------------------------------------------------------------

[[Page 78727]]

    Moreover, providing a safe harbor enabling non-U.S. CPOs to utilize 
the 3.10 Exemption, subject to appropriate conditions minimizing 
possible U.S. participants in the covered offshore pools, may result in 
more non-U.S. CPOs and their offshore pools choosing to trade in the 
U.S. commodity interest markets, which adds liquidity to those markets 
and thereby promotes more efficient price discovery therein. 
Importantly, the adoption of the safe harbor will not have a material 
adverse effect on the ability of the Commission to discharge its 
regulatory duties under the Act. Pursuant to CEA section 4(d), 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, notwithstanding this amendment.\129\ 
Finally, as noted above, the Commission retains 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. 
Nothing in the Final Rule, including the adoption of this safe harbor, 
negatively affects or restricts the Commission's statutory and 
regulatory authority applicable to the commodity pool and intermediary 
activities of a non-U.S. CPO involving persons located in the United 
States. Therefore, the Commission concludes that the safe harbor, as 
adopted herein, is an appropriate exercise of its authority pursuant to 
section 4(c) of the Act.\130\
---------------------------------------------------------------------------

    \129\ 7 U.S.C. 6(d).
    \130\ See infra new Commission regulation 3.10(c)(5)(iii).
---------------------------------------------------------------------------

F. Exception for Initial Capital Contributions by U.S. Affiliates of a 
Non-U.S. CPO to Its Offshore Pools

    The 2020 Proposal also proposed an Affiliate Contribution 
Exception, providing that initial capital contributed by a non-U.S. 
CPO's U.S. controlling affiliate to the non-U.S. CPO's offshore 
commodity pool would not affect the eligibility of the non-U.S. CPO for 
the 3.10 Exemption with respect to that offshore pool.\131\ To that 
end, despite its initial capital contribution(s), the U.S. controlling 
affiliate would not be considered a ``participant'' for purposes of 
determining whether all of the offshore pool's participants are located 
outside of the United States, as required by the 3.10 Exemption.\132\ 
The Commission noted that the term ``control'' in this proposed 
provision: (1) Was intended to 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; and (2) would be defined, consistent with part 49 of 
its regulations, 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.\133\ As discussed in more detail below, the Commission 
proposed multiple conditions and limitations to the Affiliate 
Contribution Exception: (1) The U.S. affiliate must ``control,'' as 
defined in Commission regulation 49.2(a)(4), the non-U.S. CPO of the 
offshore pool; (2) only contributions considered to be ``initial 
capital contributions,'' i.e., those made at or near the inception of 
an offshore commodity pool, are covered by the exception; (3) interests 
in the U.S. affiliate are not being marketed as an investment or asset 
that provides exposure to the U.S. commodity interest markets; and (4) 
the U.S. affiliate must not be subject to a statutory disqualification, 
ongoing registration suspension or bar, prohibition on acting as a 
principal, or trading ban with respect to the U.S. commodity interest 
markets.\134\
---------------------------------------------------------------------------

    \131\ 2020 Proposal, 85 FR at 35825-35826.
    \132\ Id. at 35825.
    \133\ Id. (explaining that this definition of ``control'' stems 
from Commission regulation 49.2(a)(4) and was recently incorporated 
into the Commission's approach in the cross-border regulation of 
SDs); Id. at 35832 (proposing Commission regulation 
3.10(c)(3)(iii)).
    \134\ 2020 Proposal, 85 FR at 35825, 35831-35832.
---------------------------------------------------------------------------

    The Commission received two comment letters addressing and 
discussing the Affiliate Contribution Exception in the 2020 Proposal. 
Both commenters generally supported the Commission's proposed Affiliate 
Contribution Exception. Vanguard strongly supported this aspect of the 
2020 Proposal, but stated its belief that ``two changes would enhance 
the Proposal, consistent with the Commission's mandate to protect U.S. 
commodity pool participants.'' \135\ The Industry Groups also strongly 
supported the proposed Affiliate Contribution Exception. This approach, 
the Industry Groups explained, as reflected in the Commission's own 
staff relief letters and certain regulatory provisions, ``recognizes 
that these [affiliate] capital contributions are not `investments' made 
for the purpose of seeking returns from a pooled vehicle,'' and that 
prior Commission staff letters have previously recognized that capital 
contributions to a pool by the CPO's U.S. affiliate or the CPO's U.S. 
principals do not constitute ``participation'' in the pool that would 
otherwise require the protections of the Commission's CPO regulatory 
program in 17 CFR part 4.\136\
---------------------------------------------------------------------------

    \135\ Vanguard, at 2. The two changes urged by Vanguard are 
discussed in more detail below.
    \136\ Industry Group Letter, at 5.
---------------------------------------------------------------------------

    Specifically, the Industry Groups noted that the proposed approach 
recognizes that affiliate contributions ``reflect `commercial' business 
decisions'' to further the CPO's business goals and support the CPO's 
innovation and investment opportunities.\137\ Both comment letters also 
recommended that, in finalizing the 2020 Proposal, the Commission adopt 
certain modifications that would generally expand the proposed 
availability of the Affiliate Contribution Exception.\138\ The 
Commission will now explain the proposed conditions, responsive 
comments, and finally, the approach it is taking in the Final Rule, 
including the Commission's analysis pursuant to CEA section 4(c).
---------------------------------------------------------------------------

    \137\ Industry Group Letter, at 5.
    \138\ Industry Group Letter, at 2-3; Vanguard, at 2.
---------------------------------------------------------------------------

1. U.S. ``Controlling'' Affiliates
    In the 2020 Proposal, the Commission proposed to permit U.S. 
controlling affiliates to contribute initial capital to offshore pools 
operated by their affiliated non-U.S. CPOs, because it preliminarily 
believed that the control typically exercised by a U.S. controlling 
affiliate over its non-U.S. CPO affiliate should provide a meaningful 
degree of protection and transparency with respect to the U.S. 
controlling affiliate's contribution of initial capital to a non-U.S. 
CPO's offshore commodity pool.\139\ For purposes of determining what 
constitutes a ``controlling affiliate,'' as that term was used in the 
2020 Proposal,\140\ the Commission used the definition of ``affiliate'' 
set forth in Commission regulation 4.7(a)(1)(i), which defines an 
``affiliate'' as a person that directly or indirectly through one or 
more persons, controls, is controlled by, or is under common control 
with the specified person,\141\ and the definition of ``control'' as 
set forth in Commission regulation 49.2(a)(4), which defines 
``control'' as the possession, direct or indirect, of the power to 
direct or cause the direction of the management and

[[Page 78728]]

policies of a person, whether through the ownership of voting 
securities, by contract, or otherwise.\142\
---------------------------------------------------------------------------

    \139\ 2020 Proposal, 85 FR at 35825.
    \140\ The proposed Affiliate Contribution Exception referred to 
the qualifying contributing affiliate as ``the control affiliate.'' 
See, e.g., 2020 Proposal, 85 FR at 35832.
    \141\ 17 CFR 4.7(a)(1)(i).
    \142\ 17 CFR 49.2(a)(4).
---------------------------------------------------------------------------

    The Commission further noted that the majority of a registered 
CPO's compliance obligations focus on customer protection through a 
variety of disclosures regarding a person's participation in a pool, 
which information a controlling affiliate would likely already be in a 
position to obtain, independent of the Commission's regulations.\143\ 
The Commission preliminarily believed that a controlling person would 
have the corporate or other legal authority to require the controlled 
non-U.S. CPO to provide information equivalent to that required by the 
Commission, such as detailed information about the non-U.S. CPO's 
finances, management, and operations, and more relevant to the proposed 
amendment, access to investment and performance information for the 
offshore pool.\144\ Based on that understanding, the Commission 
preliminarily concluded that, due to the fundamentally different 
features of the relationship between a controlling affiliate and a non-
U.S. CPO, as compared with that between an outside investor and that 
CPO, initial capital contributions by a U.S. controlling affiliate to 
an offshore pool operated by an affiliated non-U.S. CPO do not raise 
the same customer protection concerns as investments in those pools by 
unaffiliated persons located in the United States.\145\
---------------------------------------------------------------------------

    \143\ 2020 Proposal, 85 FR at 35825, citing 17 CFR 4.22(c)(8) 
(providing that a registered 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).
    \144\ 2020 Proposal, 85 FR at 35825.
    \145\ Id.
---------------------------------------------------------------------------

    As noted above, both responsive comments supported the general 
concept of the proposed Affiliate Contribution Exception. Although the 
commenters agreed that employing the definition of ``affiliate'' from 
Commission regulation 4.7(a)(1)(i) for this purpose is appropriate, 
they both opposed the additional proposed condition of ``control,'' as 
defined in Commission regulation 49.2(a)(4).\146\ Vanguard recommended 
that the Commission not require that the U.S. affiliate contributing 
capital to an offshore pool managed by a non-U.S. CPO ``be a 
controlling affiliate of the non-U.S. CPO or be regulated in the United 
States in order to qualify for'' the Affiliate Contribution 
Exception.\147\ Likewise, the Industry Groups specifically recommended 
that the Affiliate Contribution Exception be applicable to offshore 
pool contributions by all affiliates, as defined in Commission 
regulation 4.7(a)(1)(i), rather than just controlling affiliates, and 
further stated their belief that limiting the exception to 
contributions from controlling affiliates serves no regulatory need for 
the Commission.\148\
---------------------------------------------------------------------------

    \146\ Vanguard, at 2; Industry Group Letter, at 5.
    \147\ Vanguard, at 2 (citing other 17 CFR part 4 regulations as 
provisions that ``acknowledge that a CPO's affiliate that 
contributes capital to offshore pools does not need to receive the 
information that is otherwise provided by a CPO to other investors 
for their protection'').
    \148\ Industry Group Letter, at 5-6 (stating that, ``[a]s 
proposed, the [Affiliate Contribution Exception] would be available 
only to contributions by those entities in an organizational 
structure that are upstream of the CPO, and would exclude 
contributions from all other affiliates'').
---------------------------------------------------------------------------

    Additionally, the Industry Groups stated that the Commission's 
motivation in requiring such control, that the U.S. controlling 
affiliate would therefore have access to any and all information on the 
non-U.S. CPO and the offshore pool otherwise required for participants 
by virtue of 17 CFR part 4, was misplaced because, they argued, capital 
contributions to a pool by affiliates of its CPO ``reflect commercial 
business decisions intended for the purpose of supporting the 
organization's business operations.'' \149\ The Industry Groups 
emphasized, moreover, that limiting the Affiliate Contribution 
Exception to controlling affiliates is ``neither necessary nor 
appropriate to ensure that global organizations can obtain the 
information they need for commercial decision-making.'' \150\ They 
stated that requiring control in the Affiliate Contribution Exception 
``would in no way further the protection of U.S. investors,'' because 
affiliate contributions to an offshore pool are ``not properly viewed 
as participant investments requiring Part 4 protection[s].'' \151\ The 
Industry Groups also argued that the proposed condition would ``prevent 
many global organizations from being able to rely on the exemption in 
circumstances that do not present any of the concerns'' raised in the 
2020 Proposal.\152\ Finally, the Industry Groups stated that ``there is 
no basis for requiring the entity directly contributing capital to 
control the [non-U.S.] CPO,'' as long as all of the entities involved 
remain, ``under [the] common control of an entity responsible for the 
success of the enterprise.'' \153\
---------------------------------------------------------------------------

    \149\ Id. at 6.
    \150\ Id. (noting further that this proposed condition does not 
``accurately reflect the realities of enterprise decision-making and 
information flow'').
    \151\ Industry Group Letter, at 8.
    \152\ Id. at 7-8.
    \153\ Id. at 6.
---------------------------------------------------------------------------

    After further consideration of the proposed Affiliate Contribution 
Exception and the comments received, the Commission does not believe 
that requiring the U.S. affiliate to ``control'' the non-U.S. CPO is 
necessary to address the Commission's stated policy concerns. The 
definition of ``affiliate'' in Commission regulation 4.7(a)(1)(i) 
already incorporates the idea of ``control,'' \154\ which is 
substantively identical to that in Commission regulation 
49.2(a)(4).\155\ Therefore, as noted by commenters, control is already 
required between or among related entities for those entities to be 
considered ``affiliates'' under Commission regulation 4.7(a)(1)(i), as 
``control'' is inherent to that ``affiliate'' definition.
---------------------------------------------------------------------------

    \154\ 17 CFR 4.7(a)(1)(i).
    \155\ When the Commission proposed the definition of 
``affiliate'' in Commission regulation 4.7, which it later adopted 
without modification, it stated that the definition was identical to 
that in the Securities and Exchange Commission's (SEC's) Regulation 
D. Exemption for Commodity Pool Operators With Respect to Offerings 
to Qualified Eligible Participants; Exemption for Commodity Trading 
Advisors With Respect to Advising Qualified Eligible Clients, 65 FR 
11253, 11256 (Mar. 2, 2000) (stating that the proposed definition is 
based upon the ``affiliate'' definition in Rule 501 of Regulation D 
under the Securities Act of 1933.); 17 CFR 230.501(b). The 
definition of ``affiliate'' in Regulation D is identical to that in 
SEC Rule 405 of Regulation C. Revision of Certain Exemptions From 
Registration for Transactions Involving Limited Offers or Sales, 47 
FR 11251, 11255 (Mar. 16, 1982); 17 CFR 230.405. Rule 405 of 
Regulation C, in turn, defines ``control'' as used in the definition 
of ``affiliate'' in both Regulation D and--pertinent to this Final 
Rule--Commission regulation 4.7(a)(1)(i), 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 securities, by contract, or otherwise. 17 CFR 203.405, 
control.
---------------------------------------------------------------------------

    Because control is a fundamental element of the relationship 
between a U.S. affiliate and non-U.S. CPO, and therefore is 
incorporated into the proposed Affiliate Contribution Exception due to 
its reference to Commission regulation 4.7(a)(1)(i), the Commission 
believes that including an additional reference to ``control'' from 
Commission regulation 49.2(a)(4) is redundant and unnecessary to ensure 
there is ``a meaningful degree of protection and transparency,'' or 
adequate information and disclosure flowing between those entities. 
Upon consideration of the comments and the Commission's concerns 
delineated in the 2020 Proposal about sufficient information regarding 
an offshore pool investment being available to a contributing U.S. 
affiliate, the

[[Page 78729]]

Commission believes that such U.S. affiliate does not have to control 
the non-U.S. CPO, as contemplated by the 2020 Proposal, for the 
Commission to be reasonably confident that the U.S. affiliate has a 
meaningful degree of visibility into the operations of the non-U.S. CPO 
and the offshore pool, absent the protections provided by part 4 of the 
Commission's regulations. Therefore, the Commission concludes in the 
Final Rule that it is not necessary for the U.S. affiliate to be a 
controlling affiliate, provided that ``control,'' as articulated by the 
affiliate definition in Commission regulation 4.7(a)(1)(i), is 
present.\156\
---------------------------------------------------------------------------

    \156\ 2020 Proposal, 85 FR at 35825. The Commission notes that, 
in the 2020 Proposal, this discussion focused on the relationship 
between a ``U.S. controlling affiliate'' and the non-U.S. CPO 
because the Commission believed that, for purposes of the proposed 
Affiliate Contribution Exception, 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 the information relevant to its participation in 
the non-U.S. CPO's offshore pool. Id. at 35825-35826.
---------------------------------------------------------------------------

    In arriving at this conclusion, the Commission reflected upon the 
nature and characteristics of the types of relationships generally 
included within the definition of ``affiliate'' under Commission 
regulation 4.7(a)(1)(i), as incorporated in both the 2020 Proposal and 
the Final Rule. As explained above, entities meet the definition of 
``affiliate'' in Commission regulation 4.7(a)(1)(i) primarily by virtue 
of the control in their relationships to one another; this obviates the 
need for the Commission, through its regulations or otherwise, to 
mandate the provision of information to the contributing affiliate.
    For instance, if the U.S. affiliate controls the non-U.S. CPO, as 
discussed in the 2020 Proposal, the U.S. affiliate would have the 
direct authority to obtain any information it needs related to its 
capital contribution to the offshore pool operated by its controlled 
non-U.S. CPO. Alternatively, if a U.S. affiliate is controlled by the 
non-U.S. CPO of an offshore pool, as a corporate subsidiary, in the 
Commission's experience, the U.S. affiliate typically has increased 
access to information about the operations of its parent, as compared 
to a third-party participant, because the controlled U.S. affiliate may 
obtain such information as needed, and otherwise has the ability to 
access internal information regarding its parent's operations, 
including information regarding an offshore pool. Moreover, where the 
U.S. affiliate and the non-U.S. CPO are under common control of a third 
entity, that third-party controlling affiliate, due to its interest in 
the continued viability of the U.S. affiliate, the non-U.S. CPO, and 
the enterprise as a whole, would, in the Commission's experience, 
ensure that its controlled U.S. affiliate was in possession of any and 
all relevant information regarding the offshore pool necessary to 
assess the propriety of the U.S. affiliate contributing initial capital 
to that vehicle. In each instance, the U.S. affiliate, regardless of 
whether it is controlling, controlled by, or under common control with 
a non-U.S. CPO of an offshore pool, would have a mechanism to obtain 
information regarding the operations of that offshore pool, independent 
of the Commission's regulatory requirements under 17 CFR part 4. This 
conclusion is also consistent with the Commission's determination to 
exempt certain affiliated pool participants from the disclosure and 
reporting requirements in part 4 of its regulations, based on similar 
analyses of the nature of those contributions and of the relationships 
between such affiliated participants and the CPO.\157\
---------------------------------------------------------------------------

    \157\ See, e.g., 17 CFR 4.21(a)(2) (stating that, for purposes 
of distributing disclosure documents to prospective participants, a 
CPO is not required to distribute to a commodity pool operated by a 
pool operator that is the same as, or that controls, is controlled 
by, or is under common control with, the pool operator of the 
offered pool); 17 CFR 4.22(c)(8) (providing that, for purposes of 
the Annual Report distribution requirement, the term ``participant'' 
does not include a commodity pool operated by a pool operator that 
is the same as, or that controls, is controlled by, or is under 
common control with the pool operator of a pool in which the 
commodity pool is invested).
---------------------------------------------------------------------------

    Based on the foregoing, the Commission concludes that the general 
nature of such affiliate relationships assuages its stated concerns in 
the 2020 Proposal in the context of the Affiliate Contribution 
Exception. The Commission believes that where the U.S. affiliate 
contributing initial capital to the offshore pool controls, is 
controlled by, or is under common control with, the offshore pool's 
non-U.S. CPO, consistent with the ``affiliate'' definition in 
Commission regulation 4.7(a)(1)(i), this provides such U.S. affiliate 
with sufficient access to the information it needs about the non-U.S. 
CPO or the offshore pool to make properly informed decisions regarding 
any initial capital contributions to that offshore pool. Thus, the 
Commission concludes that such U.S. affiliate of a non-U.S. CPO 
contributing to its offshore pool should be eligible for the Affiliate 
Contribution Exception, provided the other conditions are met. The 
Final Rule therefore adopts the Affiliate Contribution Exception, 
without additionally requiring that the U.S. affiliate control the 
affiliated non-U.S. CPO, and without reference to Commission regulation 
49.2(a)(4).\158\
---------------------------------------------------------------------------

    \158\ See infra new Commission regulation 3.10(c)(5)(ii).
---------------------------------------------------------------------------

2. The Timing of a U.S. Affiliate's Capital Contributions to an 
Offshore Pool
    In the 2020 Proposal, the Commission also stated its preliminary 
intent to limit the Affiliate Contribution Exception to capital 
contributed by a U.S. controlling affiliate at or near the inception of 
a non-U.S. CPO's offshore pool.\159\ The Commission explained that such 
initial capital contributions generally result from commercial 
decisions by the U.S. controlling affiliate, typically in conjunction 
and coordination with the non-U.S. CPO, to support the offshore pool 
until such time as it has an established performance history for 
solicitation purposes, notwithstanding that the affiliate's capital may 
remain invested for the life of the offshore pool.\160\ Limiting the 
Affiliate Contribution Exception to initial capital contributions, the 
Commission preliminarily believed, 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.\161\
---------------------------------------------------------------------------

    \159\ 2020 Proposal, 85 FR at 35826.
    \160\ Id.
    \161\ Id.
---------------------------------------------------------------------------

    The Commission also discussed in the 2020 Proposal whether such 
contributions should be time-limited in any regard. The Commission 
acknowledged a staff letter issued by the Division of Swap Dealer and 
Intermediary Oversight (DSIO), wherein DSIO staff determined that a 
limitation on how long U.S. contributions could remain invested in an 
offshore pool without the non-U.S. CPO registering as such was 
appropriate, because some of the U.S. derived capital came from U.S. 
natural persons employed by the non-U.S. CPO's affiliated U.S. 
investment advisers.\162\ In the 2020 Proposal, the Commission 
preliminarily concluded that imposing a similar time limit on the 
proposed Affiliate Contribution Exception was not necessary, where the 
initial capital contributions are derived not from natural person 
employees, but rather from the corporate funds of the contributing 
affiliate.\163\
---------------------------------------------------------------------------

    \162\ Id. at 35825, citing CFTC Staff Letter 15-46 (May 8, 
2015), available at https://www.cftc.gov/csl/15-46/download.
    \163\ 2020 Proposal, 85 FR at 35825.

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[[Page 78730]]

    In response, the Industry Groups commented that the Commission's 
rationale supporting the Affiliate Contribution Exception ``applies 
equally to affiliate support provided at other points in a pool's life 
cycle, and that limiting the [exception] to `initial' contributions 
would thus reduce the effectiveness of the exemption without serving 
any U.S. investor protection purpose.'' \164\ Vanguard supported the 
Commission's belief that any contribution of capital by a U.S. 
affiliate should be done to support the operations of an offshore pool 
at a time when its viability is being tested.\165\ However, Vanguard 
noted that limiting contributions to ``at or near a pool's inception'' 
would have the unintended consequence of ``limiting [an] affiliate's 
ability to support its non-U.S. CPO,'' and accordingly, recommended 
that the Commission not limit the Affiliate Contribution Exception to 
initial capital contributions.\166\
---------------------------------------------------------------------------

    \164\ Industry Group Letter, at 8.
    \165\ Vanguard, at 3.
    \166\ Id.
---------------------------------------------------------------------------

    Additionally, the Industry Groups stated that there are ``many 
situations in the life of an offshore pool, after the initial startup 
period, where it is beneficial, and may be essential, to the pool's 
viability and to its participants for the CPO or its affiliates to 
provide additional support for the pool.'' \167\ The Industry Groups 
noted that there are matters beyond a CPO's control ``such as 
shareholder redemption activity and market disruptions'' that make it 
important for the offshore pool to have continued access to affiliate 
capital support.\168\ Alternatively, the Industry Groups stated that 
they would not be opposed to the Commission including in the Affiliate 
Contribution Exception a specific ``purpose'' provision, to ensure it 
is used ``properly'' or in good faith; their suggested language would 
require that, `` `contributions of the affiliate will be for the 
purpose of establishing, or providing ongoing support to, the 
[offshore] pool to attract or retain non-U.S. investors and will not be 
used as a mechanism for the U.S. affiliate to generate returns for its 
own investors.' '' \169\
---------------------------------------------------------------------------

    \167\ Industry Group Letter, at 8-9 (describing regulatory and 
business reasons, such as limits on owner concentration, investment 
diversification, internal guidelines, ensuring qualified purchaser 
status, or seeding a new share class for an existing offshore pool).
    \168\ Industry Group Letter, at 9.
    \169\ Id.
---------------------------------------------------------------------------

    After considering the comments received, the Commission is limiting 
the Affiliate Contribution Exception to initial capital contributions 
to an offshore pool by U.S. affiliates of the pool's non-U.S. CPO, as 
proposed. Specifically, commenters confirmed the Commission's 
preliminary belief that affiliates commonly support offshore pools by 
making capital contributions at or near the pool's inception to 
facilitate the establishment of performance history for solicitation 
purposes, although the affiliate's capital may remain invested as long 
as the offshore pool operates. The Commission was clear in the 2020 
Proposal that it was comfortable excepting from regulation, via the 
proposed Affiliate Contribution Exception, those capital contributions 
from a non-U.S. CPO's U.S. affiliate to an offshore pool that are 
contributed ``at or near a pool's inception'' for the specific purposes 
of generating performance history resulting from innovative or new 
trading programs.\170\ The Commission stated that, consistent with its 
authority under CEA section 4(c), the Commission intended the proposed 
Affiliate Contribution Exception to allow such non-U.S. CPOs to test 
novel trading programs or otherwise engage in proof of concept testing 
in the collective investment industry that might otherwise not be 
possible due to a lack of a performance history for the offshore 
pool.\171\
---------------------------------------------------------------------------

    \170\ 2020 Proposal, 85 FR at 35826.
    \171\ Id.
---------------------------------------------------------------------------

    Conversely, commenters have recommended expanding the time frame 
for affiliate capital contributions to permit them at any point during 
an offshore pool's existence, such that affiliate contributions may be 
made for a variety of reasons, other than testing a novel trading 
strategy or establishing a performance history for solicitation 
purposes.\172\ Such circumstances would permit a U.S. affiliate to 
provide ongoing support to an offshore pool, either to facilitate the 
offshore pool's ongoing operations in times of distress, or to attract 
and retain participants later in the offshore pool's lifecycle, well 
beyond its inception. The Commission has concerns that expanding the 
time frame for the Affiliate Contribution Exception in this manner 
could result in a U.S. affiliate being used by its affiliated non-U.S. 
CPO to financially support an otherwise poorly performing or even 
failing offshore pool, which could, in turn, adversely affect the 
financial condition of (and potentially result in the failure of) the 
U.S. affiliate, and ultimately, cause harm to the U.S. financial system 
and investors.
---------------------------------------------------------------------------

    \172\ See, e.g., Industry Group Letter, at 8-9.
---------------------------------------------------------------------------

    Moreover, the Commission believes that it would be difficult to 
craft a regulatory provision that appropriately expands the time frame 
and/or circumstances under which U.S. affiliates would be permitted to 
make capital contributions to an offshore pool, without rendering the 
Affiliate Contribution Exception overbroad or impermissibly vague. As 
noted above, commenters suggested rule text requiring that, `` 
`contributions of the affiliate will be for the purpose of 
establishing, or providing ongoing support to, the [offshore] pool to 
attract or retain non-U.S. investors and will not be used as a 
mechanism for the U.S. affiliate to generate returns for its own 
investors.' '' \173\ This suggested language, in the Commission's 
opinion, provides such minimal limitations on the circumstances under 
which a U.S. affiliate could contribute capital to an offshore pool 
(with the only prohibition being the outright evasive generation of 
profits for investors in the U.S. affiliate), as to render the 
limitation meaningless in practice. As noted above, the Commission 
intended the proposed Affiliate Contribution Exception to be available 
for specific purposes related to the start-up or inception of an 
offshore pool, and to generating performance history for its new 
trading program or strategy. The Commission finds that broadening the 
exception's purpose as suggested by commenters could result in undue 
risk from offshore pools flowing back onto U.S. shores, and thus, to 
U.S. investors. Therefore, the Commission declines to broaden the time 
frame, and is adopting the Affiliate Contribution Exception as 
proposed, with the limitation to initial capital contributions by U.S. 
affiliates.\174\
---------------------------------------------------------------------------

    \173\ Id.
    \174\ Any non-U.S. CPO contemplating accepting additional 
capital contributions for an offshore pool from one or more of its 
U.S. affiliates outside the period of initial capitalization would 
have to separately qualify for, rely upon, or claim other relief 
from registration as a CPO with the Commission. Any such investment 
would not be eligible for this Affiliate Contribution Exception.
---------------------------------------------------------------------------

    The Industry Groups also suggested that the Commission consider 
clarifying that, for purposes of the 3.10 Exemption, including the 
Affiliate Contribution Exception, when the Commission or one of its 
regulations refers to a ``pool,'' it should generally be construed as 
also referring to series, sub-funds, and/or segregated portfolios of 
business organizations that provide statutory ring-fencing of assets 
and liabilities for each series, sub-fund, or segregated 
portfolio.\175\ The Commission notes that the 2020 Proposal did not

[[Page 78731]]

address the treatment of series, sub-funds, and/or segregated 
portfolios of structures that provide limited liability amongst such 
subdivisions. Furthermore, the Commission notes that, to date, it has 
not revised the definition of the term ``pool'' in Commission 
regulation 4.10(d) to recognize such subdivisions as individual pools, 
nor did the Commission propose such amendment in the 2020 
Proposal.\176\ Finally, given that the term ``pool'' is used throughout 
the Commission's regulations, the Commission believes that it would be 
more appropriate to address the issue of how a pool may be organized 
more globally within its regulations, which it is unable to accomplish 
through this Final Rule.\177\ Therefore, the Commission is not adopting 
a definition of ``pool'' for purposes of the 3.10 Exemption.
---------------------------------------------------------------------------

    \175\ Industry Group Letter, at 11, n. 25 (noting that, despite 
the different terminology between domestic series trusts and 
``segregated portfolios,'' the latter is an analogous corporate 
structure frequently used in jurisdictions outside of the United 
States).
    \176\ 17 CFR 4.10(d)(1) (defining ``pool'' as any investment 
trust, syndicate or similar form of enterprise operated for the 
purpose of trading commodity interests).
    \177\ See Administrative Procedure Act, Public Law 404, 60 Stat. 
237, ch. 324, sections 1-12 (1946) (APA); codified by Public Law 89-
554 (1966) at 5 U.S.C. 551-559, 701-706, 1305, 3105, 3344, 5372, 
7521 (2011). Specifically, see APA, 5 U.S.C. 553(b).
---------------------------------------------------------------------------

3. Additional Anti-Evasion Conditions: The Marketing Prohibition and 
Prohibiting ``Bad Actor'' U.S. Affiliates
    The Commission acknowledged in the 2020 Proposal that the proposed 
Affiliate Contribution Exception could result in evasion of the 
Commission's regulations generally with respect to offshore pools.\178\ 
As an example, the Commission described a situation where a U.S. 
controlling affiliate could invest in its affiliated non-U.S. CPO's 
offshore commodity pool, and then solicit persons located in the United 
States for investment in the U.S. controlling affiliate, in an effort 
to provide such U.S. investors with indirect exposure to the offshore 
pool.\179\ The Commission then stated its preliminary belief that, 
under those circumstances, the Commission would consider such practices 
as constituting evasion of the Commission's CPO regulations, and would 
thus render the non-U.S. CPO ineligible for the 3.10 Exemption.\180\ 
The Commission therefore proposed an ``anti-evasion'' requirement in 
the Affiliate Contribution Exception that, interests in the U.S. 
controlling affiliate are not marketed as providing access to trading 
in commodity interest markets in the United States, its territories or 
possessions.\181\
---------------------------------------------------------------------------

    \178\ 2020 Proposal, 85 FR at 35826.
    \179\ Id.
    \180\ Id.
    \181\ Id. at 35832 (proposing Commission regulation 
3.10(c)(3)(iii)(B)). If interests in a U.S. entity including an 
affiliate of a CPO are marketed to U.S. persons as providing access 
to trading in commodity interest markets outside the United States, 
its territories or possessions, then that entity may be required to 
register with the Commission pursuant to Commission regulation 
30.4(c). 17 CFR 30.4(c).
---------------------------------------------------------------------------

    In the 2020 Proposal, the Commission further stated its preliminary 
belief that U.S. controlling affiliates who are barred from 
participating in the U.S. commodity interest markets should not be 
permitted to utilize the Affiliate Contribution Exception as a method 
to gain indirect access to those markets via an affiliated non-U.S. 
CPO's offshore pool, which would undermine the efficacy of such a 
bar.\182\ Therefore, the Commission also proposed to limit the 
Affiliate Control Exception to U.S. controlling affiliates, which 
themselves and their 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.\183\
---------------------------------------------------------------------------

    \182\ 2020 Proposal, 85 FR at 35826.
    \183\ Id. at 35832 (proposing Commission regulation 
3.10(c)(3)(iii)(A)).
---------------------------------------------------------------------------

    Regarding the Commission's concerns about the Affiliate 
Contribution Exception being used to evade other of the Commission's 
part 4 regulatory protections, the Industry Groups concluded that the 
``anti-evasion condition of the [2020] Proposal,'' prohibiting the 
marketing of interests in the U.S. affiliate as providing access to 
trading in U.S. commodity interest markets, addresses this concern and 
``is well-tailored to achieve its purpose.'' \184\ The Industry Groups 
did suggest, however, that the Commission could also ``specify in the 
rule text, or in the final adopting release, that only affiliated 
entities, and not natural person affiliates, are contemplated by the 
[Affiliate Contribution Exception].'' \185\ The Commission agrees that 
it would further its intention of limiting the Affiliate Contribution 
Exception to juridical persons, rather than natural persons, as stated 
in the 2020 Proposal, to specifically limit the availability of that 
provision to entities, and not natural persons, in the regulatory text. 
As discussed in the 2020 Proposal, the Commission declined to propose a 
limit on the time in which capital contributions from U.S. affiliates 
can remain in the offshore pool because it was envisioning such 
contributions deriving from entity affiliates rather than natural 
persons.\186\ For the reasons stated in the 2020 Proposal, the 
Commission is therefore adopting, as proposed, but with the additional 
limitation suggested by commenters, the ``anti-evasion'' requirement 
designed to prohibit evasive conduct, in which U.S. participant capital 
could be solicited for investment in the U.S. affiliate, providing 
indirect exposure to the offshore pool.\187\
---------------------------------------------------------------------------

    \184\ Industry Group Letter, at 7.
    \185\ Id.
    \186\ 2020 Proposal, 85 FR at 35825.
    \187\ See infra new Commission regulation 3.10(c)(5)(ii)(C).
---------------------------------------------------------------------------

    With respect to the proposed condition prohibiting those U.S. 
controlling affiliates that are 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 from relying on the 
Affiliate Contribution Exception, the Industry Groups stated that the 
proposed condition goes far beyond its purpose as stated by the 
Commission.\188\ The Industry Groups explained that the ``regulatory 
purpose is to keep out affiliates that are barred from participating in 
the U.S. commodity interest markets,'' but the proposed condition 
``applies to the vague and far broader universe of persons that are 
`subject to a statutory disqualification.' '' \189\ Consequently, the 
Industry Groups recommended that the Commission remove any reference to 
statutory disqualification in this provision, for the purpose of 
eliminating confusion, and that the Commission focus this condition on 
prohibiting ``entities that are in fact barred from participating in 
the U.S. commodity interest markets,'' from utilizing the Affiliate 
Contribution Exception.\190\
---------------------------------------------------------------------------

    \188\ Industry Group Letter, at 10.
    \189\ Id.
    \190\ Id.
---------------------------------------------------------------------------

    The Commission agrees that including statutory disqualifications in 
this provision does not further its goal of mitigating the risk that 
persons no longer permitted to participate in the U.S. commodity 
interest markets directly use the Affiliate Contribution Exception to 
access such markets through indirect means. The Commission notes that 
the issue of statutory disqualifications is related to registration 
with the Commission and generally concerns judgments regarding fitness 
to intermediate transactions on behalf of third parties.\191\ Those 
concerns are not present in the context

[[Page 78732]]

of the Affiliate Contribution Exception, where the Commission is more 
focused on foreclosing a potential loophole that could permit persons 
that are barred or prohibited from trading in the U.S. commodity 
interest markets to do so indirectly via offshore pool investments. 
Therefore, in response to commenters and to more clearly tailor this 
provision to the rationale the Commission articulated in the 2020 
Proposal, the Commission is adopting the Affiliate Contribution 
Exception with the condition that the affiliate and its principals are 
not barred or suspended from participating in commodity interest 
markets in the United States, its territories or possessions.\192\
---------------------------------------------------------------------------

    \191\ See 7 U.S.C. 12a(2) and 12a(3).
    \192\ See infra new Commission regulation 3.10(c)(5)(ii)(B).
---------------------------------------------------------------------------

4. Analysis Under Section 4(c) of the Act
    Consistent with its authority under section 4(c) of the Act, the 
Commission concludes that providing the Affiliate Contribution 
Exception, subject to the conditions included in the Final Rule as 
detailed above, 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 persons involved in the 
transactions subject to the exemptive relief provided herein are 
``appropriate persons,'' as discussed in the 2020 Proposal, because the 
term ``appropriate person'' as used in CEA section 4(c) includes a 
commodity pool formed or operated by a person subject to regulation 
under the Act.\193\ 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.\194\ The Commission continues to believe that 
enabling U.S. 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.
---------------------------------------------------------------------------

    \193\ 7 U.S.C. 6(c)(3)(E).
    \194\ 77 FR at 30655 (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).
---------------------------------------------------------------------------

    Additionally, the adoption of the Affiliate Contribution Exception 
will not have a material adverse effect on the ability of the 
Commission to discharge its regulatory duties under the CEA. The U.S. 
affiliates contributing initial capital to offshore pools operated by 
their affiliated non-U.S. CPO will typically have access to the 
information and disclosures necessary for such U.S. affiliate to 
independently evaluate the propriety of its contribution to a specific 
offshore pool, absent the protections typically provided by part 4 of 
the Commission's regulations. Based on its analysis above, the 
Commission concludes that the contributions subject to the Affiliate 
Contribution Exception are distinguishable from offshore pool 
contributions sourced from the general public in the United States that 
otherwise make such offshore pool ineligible for the 3.10 Exemption. 
Also, pursuant to CEA section 4(d), 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, notwithstanding 
this amendment.\195\ Further, the Commission retains the authority to 
take enforcement action against any non-U.S. CPO claiming the 3.10 
Exemption based on its activities within the U.S. commodity interest 
markets, and nothing in the Final Rule, including the adoption of the 
Affiliate Contribution Exception, negatively affects or restricts the 
Commission's statutory and regulatory authority applicable to the 
commodity pool and intermediary activities of a non-U.S. CPO involving 
persons located in the United States. For the reasons stated in the 
2020 Proposal and the analysis provided in this Final Rule, the 
Commission concludes that it is appropriate to provide the Affiliate 
Contribution Exception from the U.S. participant prohibition in the 
3.10 Exemption, pursuant to section 4(c) of the Act.
---------------------------------------------------------------------------

    \195\ 7 U.S.C. 6(d).
---------------------------------------------------------------------------

G. Additional Relief for Commodity Trading Advisors

    The Industry Groups recommended that the Commission adopt relief 
for non-U.S. CTAs, substantially similar to that proposed for non-U.S. 
CPOs in the 2020 Proposal, because, they argued, ``[t]he regulatory 
goals in the 2020 Release apply equally to CTAs.'' \196\ Specifically, 
the Industry Groups requested that the Commission amend Commission 
regulation 3.10(c) to ``permit non-U.S. CTAs to claim the relief under 
Commission regulation 3.10(c) on an account-by-account basis . . . and 
[to] simultaneously rely on registration or other exemptions or 
exclusions for CTA activities on behalf of U.S. investors, in the same 
manner as the proposed amendments provide for CPOs.'' \197\ They argued 
that this amendment would also make it clear that a non-U.S. CTA 
providing advice to an offshore pool operated pursuant to the 3.10 
Exemption would be eligible for relief from registration with the 
Commission.\198\ In support of their arguments, the Industry Groups 
cited multiple instances of the Commission and its staff historically 
permitting the ``stacking'' of statutory and regulatory exemptions with 
registration for CTAs, and stated that ``the Commission's focus on 
[commodity trading] advice to U.S. investors [is] well established in 
the Commission's regulatory framework.'' \199\
---------------------------------------------------------------------------

    \196\ Industry Group Letter, at 13.
    \197\ Id.
    \198\ Id.
    \199\ Id. at 13-14.
---------------------------------------------------------------------------

    Despite these comments, the Commission is not adopting the 
suggested amendments to Commission regulation 3.10(c) regarding the 
activities of non-U.S. CTAs. The 2020 Proposal, which dealt primarily 
with amendments impacting the operations of CPOs, did not contemplate 
or discuss any such comparable modifications to Commission regulation 
3.10(c) with respect to the activities of non-U.S. CTAs on behalf of 
foreign located persons.\200\ The 2020 Proposal also did not query 
whether the amendments impacting non-U.S. CPOs and their offshore pools 
should likewise be extended to include any of the activities of non-
U.S. CTAs; nor did it address or consider the regulatory impact, 
positive or negative, such policy choices could have on the 
Commission's regulatory program for CTAs. Under these circumstances, 
the Commission does not believe that the public would have had 
sufficient notice regarding the issue of adopting parallel provisions 
for non-U.S. CTAs, such that the public could provide meaningful 
comment as required by the Administrative Procedure Act.\201\ 
Therefore, the

[[Page 78733]]

Commission declines to amend revised Commission regulation 3.10(c)(4) 
in a manner that would substantively alter or change the relief 
currently provided by that regulation to qualifying non-U.S. CTAs.
---------------------------------------------------------------------------

    \200\ The Commission is adopting as final herein other 
amendments to Commission regulation 3.10(c) applicable to non-U.S. 
CTAs consistent with the 2016 Proposal. The Commission notes that 
those amendments broadly applied to non-U.S. IBs, non-U.S. CPOs, and 
non-U.S. CTAs, and did not impact or alter the specific conditions 
of eligibility for non-U.S. CTAs relying on the exemptive relief in 
that regulation.
    \201\ APA, 5 U.S.C. 553(b)-(c). The Commission notes that it 
does not disagree with the Industry Groups' characterization of the 
Commission's or its staff's past positions with respect to the 
``stacking'' of statutory and/or regulatory exemptions from CTA 
registration, or their combination with registration as such, being 
permissible. The Commission is, however, declining to adopt in 
revised Commission regulation 3.10(c)(4) relief for non-U.S. CTAs, 
comparable to that adopted herein for non-U.S. CPOs, without a prior 
published rulemaking proposal raising, addressing, and soliciting 
public comment on that specific policy question.
---------------------------------------------------------------------------

H. Reorganization of Commission Regulation 3.10(c)

    As recognized by certain commenters, and as mentioned above, 
adopting the Final Rule as proposed in both the 2020 Proposal and the 
2016 Proposal requires modification of the rule text as presented in 
each proposal. Thus, the Final Rule reorganizes that provision to 
accommodate the adopted changes and to increase the regulation's 
overall readability and clarity. Other than the changes specifically 
explained in this adopting release, this reorganization is not intended 
to make substantive changes to the regulatory obligations of any 
affected market participant.
    Commission regulation 3.10(c), as adopted in the Final Rule, is 
reorganized. New paragraph 3.10(c)(1) now provides certain definitions 
of terms that are used throughout the remainder of paragraph (c), 
including: ``covered transaction,'' defined to mean a commodity 
interest \202\ transaction executed bilaterally or made on or subject 
to the rules of any DCM or registered SEF; ``foreign located person,'' 
defined to mean a person located outside the United States, its 
territories, or possessions; and ``international financial 
institution,'' the definition of which is discussed above in section 
II.B.3. The remainder of paragraph (c) is organized so that its 
enumerated sub-paragraphs refer to registration exemptions available to 
each type of intermediary. Thus, new paragraph 3.10(c)(2) sets forth 
exemptions applicable to market participants engaged in the activities 
of an FCM; new paragraph 3.10(c)(3) sets forth exemptions applicable to 
those persons engaged in the activities of an IB; new paragraph 
3.10(c)(4) refers to an exemption for CTAs; and new paragraph 
3.10(c)(5) provides an exemption for CPOs, and contains the conditions 
thereto and related provisions discussed above. Finally, new paragraph 
3.10(c)(6) contains the rule text previously presented in Commission 
regulation 3.10(c)(5).
---------------------------------------------------------------------------

    \202\ ``Commodity interest'' is defined in Commission regulation 
1.3. 17 CFR 1.3, commodity interest.
---------------------------------------------------------------------------

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires Federal agencies, 
when promulgating regulations, to consider whether the rules they 
propose will have a significant economic impact on a substantial number 
of small entities. If the rules are determined to have a significant 
economic impact, such agencies must provide a regulatory flexibility 
analysis regarding such economic impact. 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.\203\
---------------------------------------------------------------------------

    \203\ 5 U.S.C. 601, et seq.
---------------------------------------------------------------------------

    The Final Rule adopted by the Commission today would affect FCMs, 
IBs, CTAs, and CPOs. The Commission has established certain definitions 
of ``small entities'' to be used by the Commission in evaluating the 
impact of its rules on such entities in accordance with the 
requirements of the RFA.\204\ The Commission has previously determined 
that FCMs are not small entities for purposes of the RFA. Therefore, 
the RFA does not apply to FCMs.\205\
---------------------------------------------------------------------------

    \204\ 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).
    \205\ Id.
---------------------------------------------------------------------------

    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).\206\ With respect to small CPOs operating pursuant to 
Commission regulation 4.13(a)(2), the Commission has concluded 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.\207\ 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 does not believe that the 
Final Rule will result in a significant economic impact on a 
substantial number of small CPOs. Further, the Commission notes that 
the Final Rule would impose no new obligation, significant or 
otherwise, on any affected small CPO. Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that the Final Rule will not have a significant impact on a substantial 
number of small entities with respect to CPOs.
---------------------------------------------------------------------------

    \206\ 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. 17 CFR 4.13(a)(2).
    \207\ 2020 Proposal, 85 FR at 35827.
---------------------------------------------------------------------------

    With respect to CTAs and IBs, the Commission has found it 
appropriate to consider whether such registrants should be deemed small 
entities for purposes of the RFA on a case-by-case basis, in the 
context of the particular Commission regulation at issue.\208\ As 
certain of these registrants may be small entities for purposes of the 
RFA, the Commission considered whether these amendments would have a 
significant economic impact on such registrants.\209\ By combining 
amendments from the 2016 and 2020 Proposals, the Final Rule will 
clarify in what circumstances certain foreign located persons acting in 
the capacity of an IB or CTA are exempt from registration under 
Commission regulation 3.10(c), in connection with commodity interest 
transactions solely on behalf of other foreign located persons. The 
Final Rule thus would not impose any new burdens on these market 
participants. Rather, to the extent that the Final Rule provides an 
exemption from generally required intermediary registration, the 
Commission believes it is reasonable to infer that operating pursuant 
to the exemption, as amended by the Final Rule, will be less burdensome 
to such participants. The Commission does not, therefore, expect IBs or 
CTAs that are small entities to incur any additional costs as a result 
of the Final Rule amendments. Accordingly, the Chairman, on behalf of 
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
Final Rule will not have

[[Page 78734]]

a significant impact on a substantial number of small entities with 
respect to IBs and CTAs.
---------------------------------------------------------------------------

    \208\ See 47 FR at 18620 (CTAs); and Introducing Brokers and 
Associated Persons of Introducing Brokers, Commodity Trading 
Advisors and Commodity Pool Operators; Registration and Other 
Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983) (IBs).
    \209\ 2016 Proposal, 81 FR at 51826.
---------------------------------------------------------------------------

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.\210\ 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. In the 
2020 Proposal, the Commission preliminarily determined that the 
proposed amendments, if adopted, would 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.\211\
---------------------------------------------------------------------------

    \210\ 44 U.S.C. 3501, et seq.
    \211\ 2020 Proposal, 85 FR at 35827.
---------------------------------------------------------------------------

    The Commission invited the public and other interested parties to 
comment on any aspect of the information collection requirements 
discussed in the 2020 Proposal.\212\ The Commission did not receive any 
such comments. The Commission similarly invited the public and other 
interested parties to comment on any aspect of the reporting burdens 
under the 2016 Proposal,\213\ but also did not receive any such 
comments. Therefore, the Commission concludes that the Final Rule, by 
adopting amendments to Commission regulation 3.10(c) derived from both 
the 2016 Proposal and the 2020 Proposal, does not impose any new 
recordkeeping or information collection requirements, or other 
collections of information that require OMB approval under the PRA.
---------------------------------------------------------------------------

    \212\ Id.
    \213\ 2016 Proposal, 81 FR at 51827.
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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.\214\ Section 15(a) of the Act further specifies that the costs 
and benefits 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 invited public comment on the cost-benefit considerations in 
both the 2016 and 2020 Proposals, but received no comments on those 
analyses.\215\
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    \214\ 7 U.S.C. 19(a).
    \215\ 2016 Proposal, 81 FR at 51827; 2020 Proposal, 85 FR at 
35827.
---------------------------------------------------------------------------

    As discussed above, pursuant to the 2016 Proposal, the Commission 
proposed to amend Commission regulations 3.10(c)(2) and (c)(3) to 
revise the conditions under which those exemptions from registration 
would apply. Specifically, the 2016 Proposal would permit a Foreign 
Intermediary to be eligible for an exemption from registration, if the 
Foreign Intermediary, in connection with a commodity interest 
transaction, only acts on behalf of (1) foreign located persons, or (2) 
IFIs, without regard to whether such persons or institutions clear such 
commodity interest transaction.\216\ The Final Rule adopts the 
exemptions as proposed in the 2016 Proposal, but clarifies that 
commodity interest transactions effected by Foreign Intermediaries on 
behalf of foreign located persons that are required or intended to be 
cleared on a registered DCO, must be cleared through a registered FCM, 
unless the foreign located person is a clearing member of the DCO (and 
thus may clear for itself).\217\
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    \216\ 2016 Proposal, 81 FR at 51826.
    \217\ See supra pt. II.B.3.
---------------------------------------------------------------------------

    As described above, the Commission is adopting several amendments 
to Commission regulation 3.10(c). Specifically, the Commission is 
amending the 3.10 Exemption such that non-U.S. CPOs may rely on that 
relief on a pool-by-pool basis through new Commission regulation 
3.10(c)(5)(i). Next, new Commission regulation 3.10(c)(5)(ii) contains 
the finalized Affiliate Contribution Exception, which makes it clear 
that a non-U.S. CPO's eligibility for the 3.10 Exemption is unaffected 
by initial capital contributions from a U.S. affiliate of the non-U.S. 
CPO to the non-U.S. CPO's offshore pools, provided certain conditions 
are met. The Commission is also adding new Commission regulation 
3.10(c)(5)(iii), which establishes a conditional safe harbor permitting 
non-U.S. CPOs, who cannot represent with absolute certainty that there 
are no U.S. participants in their offshore pools, to nonetheless 
utilize the 3.10 Exemption for those offshore pools. Finally, the 
Commission is adopting Commission regulation 3.10(c)(5)(iv), which 
explicitly permits a non-U.S. CPO utilizing the 3.10 Exemption for one 
or more offshore pools to register as a CPO, claim an available 
exemption from CPO registration, claim an exclusion from the CPO 
definition, or claim other available relief from CPO regulation, with 
respect to other pools it operates. These regulatory amendments adopted 
by the Final Rule 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).\218\
---------------------------------------------------------------------------

    \218\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

1. Costs and Benefits Related to Finalizing the 2016 Proposal
    Pursuant to the Final Rule, the Commission has recognized that not 
all commodity interest transactions are required to be cleared.\219\ 
This aspect of the Final Rule should provide the benefit of reducing 
inefficiencies in the commodity interest activities of foreign located 
persons by eliminating confusion over whether the relevant exemption 
from registration is dependent on clearing commodity interest 
transactions through a registered FCM. With respect to commodity 
interest transactions that are required or intended to be cleared by a 
registered DCO, the Final Rule should provide the benefit of increased 
market efficiency by clearly delineating that such transactions must be 
cleared

[[Page 78735]]

through a registered FCM, unless the Foreign Intermediary's customer is 
a member of the DCO (and thus, may clear for itself). The Commission 
further believes that the legal certainty provided by this aspect of 
the Final Rule may increase participation in the U.S. commodity 
interest markets by foreign located persons, and thus, ensure greater 
depth in such markets accessed by U.S. persons. The Commission has not 
identified any additional costs attributable to this aspect of the 
Final Rule.
---------------------------------------------------------------------------

    \219\ See supra pt. II.B.3.
---------------------------------------------------------------------------

2. Commission Regulation 3.10(c)(5)(i): Claiming the 3.10 Exemption on 
a Pool-by-Pool Basis
    Pursuant to the Final Rule, a non-U.S. CPO will be able to claim 
the 3.10 Exemption with respect to its qualifying offshore pools, while 
registering as a CPO or claiming another CPO exemption or exclusion for 
its other pools that do not qualify for the 3.10 Exemption because they 
are either domiciled in the U.S., or they solicit and/or accept as 
participants persons located within the United States. Absent this 
amendment, such non-U.S. CPOs face some costs and compliance burdens 
associated with the operation of their offshore pools,\220\ 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.\221\ 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 its 
offshore location, rather than at the CPO's main business office in the 
United States.\222\
---------------------------------------------------------------------------

    \220\ Such costs vary widely because certain registered CPOs may 
be eligible for significant compliance relief for their pools 
pursuant to Advisory 18-96.
    \221\ Advisory 18-96, at 1-2.
    \222\ Id.
---------------------------------------------------------------------------

    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 Advisory 18-96 notices. However, the Commission 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 notices must be filed by 
hardcopy, the Commission believes the administrative costs are 
low.\223\ CPOs must employ at least one employee 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 the CPO and 
its principals are not statutorily disqualified; enumerated rules from 
which the CPO seeks relief; and contact information for person(s) who 
will maintain the offshore books and records.\224\
---------------------------------------------------------------------------

    \223\ Exemptions Available to CPOs, NFA, available at https://www.nfa.futures.org/members/cpo/cpo-exemptions.html (noting that, 
while CPOs must generally claim exemptions electronically through 
NFA's Exemption System, ``[e]xemptions pursuant to CFTC Advisory No. 
18-96 must be filed with NFA in hardcopy'').
    \224\ Advisory 18-96, at 1.
---------------------------------------------------------------------------

    Pursuant to the Final Rule, the current 23 registered non-U.S. CPOs 
that file Advisory 18-96 notices will be able to delist their offshore 
pools and no longer file Advisory 18-96 notices claiming relief for the 
84 offshore pools. Upon delisting 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 a relatively substantial cost 
savings for those non-U.S. CPOs and their offshore pool operations. The 
20 U.S. CPOs, however, currently claiming relief under Advisory 18-96 
will continue to do so because they remain ineligible for the 3.10 
Exemption, due to their location in the United States, and as such, are 
not directly impacted by the Final Rule.
    Currently, any registered CPO may avoid the requirement to list its 
offshore pools with the Commission by establishing a separate, foreign-
domiciled non-U.S. CPO for all of the operated offshore pools 
qualifying for the 3.10 Exemption. The Commission believes that the 
Final Rule will effectively eliminate this incentive to establish a 
separately organized CPO solely for the purpose of operating offshore 
pools that qualify for the 3.10 Exemption. The costs associated with 
establishing a non-U.S. CPO vary, depending on the operating size and 
structure of the registered CPO and its pools, and the jurisdiction 
where the non-U.S. CPO is formed. For instance, these incentives to 
establish additional CPOs may be affected by the financial outlay 
required to establish foreign-domiciled CPOs given that set-up costs, 
e.g., 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 
non-U.S. CPO, the Commission finds that such costs may vary widely and 
are highly dependent on the organization and footprint of the 
registered CPO and its operated pools, as well as the relevant 
jurisdiction where the additional non-U.S. CPO would be formed.
    The Commission believes, however, that permitting non-U.S. CPOs to 
claim the 3.10 Exemption on a pool-by-pool basis pursuant to the Final 
Rule will likely result in CPO complexes generally saving the costs 
associated with forming and maintaining separate CPOs to operate the 
other pools in its structure, thereby reducing unnecessary complexity 
in overall corporate structure and pool operations. Amending the 3.10 
Exemption such that non-U.S. CPOs may claim the exemption on a pool-by-
pool basis, the Commission believes, will eliminate a large portion of 
the compliance costs associated with CFTC-registered, non-U.S. CPOs' 
offshore pool operations, which, by their very characteristics, 
implicate fewer of the Commission's regulatory interests.\225\ The 
Commission notes that this reduction only relates to U.S. compliance 
costs, as the Final Rule has no impact on the costs non-U.S. CPOs incur 
related to foreign regulatory regimes. As mentioned above, the 
Commission concludes that targeting its CPO oversight in this manner 
appropriately recognizes the increasingly global nature of the asset 
management industry.
---------------------------------------------------------------------------

    \225\ See supra II.C.
---------------------------------------------------------------------------

    The Commission also does not anticipate that non-U.S. CPOs will 
experience any increased costs associated with claiming the 3.10 
Exemption on a pool-by-pool basis. The 3.10 Exemption has never 
required a filing or notice to claim the relief it provides, and that 
remains true under the Final Rule. Prior to the Final Rule, the terms 
of the 3.10 Exemption required a non-U.S. CPO to continuously monitor 
the operations of its offshore pools to ensure that they are neither 
offered nor sold to any participants located in the United States. 
Under the terms of the Final

[[Page 78736]]

Rule, and with the exception of the safe harbor discussed below, the 
3.10 Exemption will continue to require such non-U.S. CPOs to monitor 
their offshore pool operations to ensure compliance with the 3.10 
Exemption, as amended by the Final Rule.
    The Commission believes that the Final Rule may result in some loss 
of information available to the public, specifically regarding offshore 
pools operated by registered non-U.S. CPOs, because such offshore pools 
will no longer be required to be listed with the Commission. 
Consequently, the offshore pools' existence and identifying information 
will no longer be publicly disclosed on NFA's BASIC database, once the 
non-U.S. CPO claims the 3.10 Exemption for such offshore pools. The 
Commission concludes that this loss of information will likely have a 
minimal practical effect on the investing public because persons 
located within the United States are typically not permitted by non-
U.S. CPOs to participate in offshore pools, consistent with the 
conditions of the 3.10 Exemption, as amended by the Final Rule.
3. Commission Regulation 3.10(c)(5)(iii): Providing a Safe Harbor for 
Non-U.S. CPOs Whose Offshore Pools May Have Inadvertent U.S. 
Participants
    As explained previously, the Commission is adopting Commission 
regulation 3.10(c)(5)(iii), which establishes a 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; the safe harbor requires that such non-U.S. CPOs take 
specifically enumerated actions to minimize the possibility that U.S. 
persons are participating in the offshore pool.\226\ Commission 
regulation 3.10(c)(5)(iii), as adopted, benefits non-U.S. CPOs by 
making the registration relief provided under the 3.10 Exemption more 
widely available and by recognizing the informational limitations 
inherent in certain pool structures. Therefore, the Commission believes 
that this safe harbor could result in more non-U.S. CPOs relying upon 
the 3.10 Exemption with respect to more offshore pools. At this time, 
the Commission lacks sufficient information to estimate or quantify the 
number of non-U.S. CPOs and offshore pools that may claim relief under 
Commission regulation 3.10(c)(5)(iii), because the Commission does not 
currently receive the information 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 
believes, it is reasonable to estimate the number of offshore pools 
operated in a similar manner to be equally small.
---------------------------------------------------------------------------

    \226\ See infra new Commission regulation 3.10(c)(5)(iii)(A)-
(F).
---------------------------------------------------------------------------

    The Commission believes that non-U.S. CPOs that would be eligible 
for registration relief under the safe harbor in Commission regulation 
3.10(c)(5)(iii) will avail themselves of that relief. This could result 
in the Commission receiving less information regarding the operation of 
such offshore pools. As noted above, the Commission 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 qualifying non-
U.S. CPOs and offshore pools, relative to the total population of 
registered CPOs and listed pools.
    The Commission also anticipates that there may be some inadvertent 
U.S. participants in offshore pools, who would lose the customer 
protections 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 in reliance on this safe harbor. The 
Commission believes that its enumerated conditions, however, should 
result in a small number of U.S. participants being impacted. Moreover, 
the Commission believes that such U.S. participants, to the extent that 
they are aware that they are participating in what is known to be an 
offshore pool through the purchase of 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.
4. Commission Regulation 3.10(c)(5)(iv): Utilizing the 3.10 Exemption 
Concurrent With Other Available Exclusions and Exemptions
    As explained above, the Commission is also adding Commission 
regulation 3.10(c)(5)(iv), such that non-U.S. CPOs may rely upon the 
3.10 Exemption concurrent with other exemptions and exclusions, or, 
alternatively, CPO registration. The Commission believes that 
Commission regulation 3.10(c)(5)(iv) therefore benefits non-U.S. CPOs 
due to its consistent treatment of CPOs of pools that are operated in a 
substantively identical manner, regardless of where the CPO is based. 
The Commission also anticipates that this amendment will benefit the 
non-U.S. CPO industry generally by providing regulatory certainty with 
respect to the ability of all non-U.S. CPOs to simultaneously rely upon 
the 3.10 Exemption and other applicable exclusions and exemptions under 
the Commission's regulations. This amendment is consistent with other 
provisions of the Commission's CPO regulatory program, where the 
Commission explicitly permits CPOs to claim more than one type of 
exemption or exclusion, or to register with respect to the variety of 
commodity pools that they operate.\227\
---------------------------------------------------------------------------

    \227\ See, e.g., 17 CFR 4.13(e)(2) and 4.13(f).
---------------------------------------------------------------------------

    The Commission further 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 pools that limit their commodity interest exposure to a de 
minimis amount, rather than registering and listing those pools. The 
Commission 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 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 2020 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 concludes that any resulting loss of insight into 
such pools and their CPOs is consistent with the Commission's

[[Page 78737]]

overall regulatory policy, and therefore, will likely have minimal 
negative impact on the public.\228\
---------------------------------------------------------------------------

    \228\ 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).
---------------------------------------------------------------------------

5. Commission Regulation 3.10(c)(5)(ii): The Affiliate Contribution 
Exception
    The Commission is also adopting amendments permitting non-U.S. CPOs 
to rely upon the 3.10 Exemption for the operation of an offshore pool, 
even if an affiliate within the United States provides initial capital 
for the offshore pool, pursuant to the Affiliate Contribution 
Exception. Absent the relief provided by Commission regulation 
3.10(c)(5)(ii), a non-U.S. CPO of an offshore pool receiving initial 
capital from an affiliate within the United States 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 concluded that 
participation in an offshore pool by a U.S. affiliate does not raise 
the same regulatory concerns as an investment in the same pool by an 
unaffiliated participant located within the United States.\229\ In 
addition to the reasons outlined above, the Commission believes that 
the Affiliate Contribution Exception will provide regulatory relief for 
a small number of currently-registered CPOs. As mentioned above, 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. 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 believes that the 
number of these CPOs that would be eligible for relief under the 
Affiliate Contribution Exception would likely be less than the 23. The 
Commission 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 provision 
could also be higher. In addition, as a result of the Commission being 
unaware of the current number of offshore pools operated by a non-U.S. 
CPO receiving seed capital from a U.S. affiliate, it is unable to 
predict how many pools will utilize the Affiliate Contribution 
Exception in the future.
---------------------------------------------------------------------------

    \229\ See supra pt. II.F.
---------------------------------------------------------------------------

    The Commission also believes that the Affiliate Contribution 
Exception will result in reduced costs for non-U.S. CPOs by removing 
initial capital investments by U.S. affiliates in offshore pools from 
the analysis for 3.10 Exemption eligibility, and by eliminating any 
registration and compliance costs for such pools. This amendment will, 
however, result in U.S. 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 initial capital 
investments in an offshore pool operated by their affiliated non-U.S. 
CPO.\230\ The Commission believes that this loss will likely be 
mitigated by a U.S. affiliate's ability to obtain whatever information 
regarding the offshore pool a U.S. affiliate may deem material to its 
investment, by virtue of its relationship with the non-U.S. CPO as 
affiliated entities. Moreover, the Commission believes this approach is 
consistent with the Commission's focus on protecting U.S. investors 
participating in commodity pools.
---------------------------------------------------------------------------

    \230\ For example, a U.S. 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 affiliate with disclosures and reporting 
generally mandated by those rules.
---------------------------------------------------------------------------

    In the event 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. affiliate, and such non-U.S. 
CPO determines to delist the offshore pool in question and instead rely 
upon the 3.10 Exemption by virtue of the Affiliate Contribution 
Exception, the Commission will no longer receive financial reporting 
with respect to such offshore pool, including on Form CPO-PQR. Because 
the Commission has determined that initial capital contributions by a 
U.S. affiliate do not raise the same customer protection concerns as 
capital received from other unaffiliated U.S. participants, however, 
the Commission concludes that any loss of insight into such offshore 
pools and their non-U.S. CPOs resulting from the Affiliate Contribution 
Exception is generally consistent with the Commission's overall 
regulatory policy concerning CPOs and commodity pools.
6. Section 15(a) Factors
a. Protection of Market Participants and the Public
    The Commission believes that the Final Rule will not have a 
material negative effect on the protection of market participants and 
the public. 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 an affiliate in the United 
States, the Commission believes that although those offshore pools may 
no longer be subject to part 4 of the Commission's regulations, such 
U.S. affiliates, by virtue of their relationship with the non-U.S. CPO, 
are generally not as dependent upon the customer protections provided 
by the Commission's regulations. The Commission comes to this 
conclusion on the basis of its detailed analysis above of ``affiliate'' 
relationships generally, finding that, where a U.S. affiliate is 
controlled by, controlling, or under common control with the non-U.S. 
CPO of an offshore pool, as set forth in Commission regulation 
4.7(a)(1)(i), the U.S. affiliate typically has access to information 
and disclosures that allow it to make an informed decision regarding 
its initial capital contributions to that offshore pool, even in the 
absence of express regulatory requirements from the Commission. The 
Commission also anticipates that some U.S. participants in offshore 
pools operated pursuant to the adopted safe harbor may lose the 
customer protections afforded by part 4 of the Commission's 
regulations; however, the Commission believes that the number of 
impacted U.S participants will be small, due to the specific criteria 
required for reliance upon the safe harbor and the small number of 
exchange-traded commodity pools, generally. With respect to those 
aspects of the Final Rule that are derived from the 2016 Proposal, the 
Commission believes that the Final Rule will foster the protection of 
market participants and the public by providing greater legal certainty 
with respect to the commodity interest activities of persons located 
outside the U.S.

[[Page 78738]]

b. Efficiency, Competitiveness and Financial Integrity of the Futures 
Markets
    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of efficiency, 
competitiveness, and financial integrity considerations. The Commission 
believes that the Final Rule will benefit the efficiency, 
competitiveness and financial integrity of the futures markets because, 
among other things, the Final Rule will effectively eliminate the 
current incentive to establish a separately organized CPO solely for 
the purpose of operating offshore pools that qualify for the 3.10 
Exemption. As discussed above, permitting non-U.S. CPOs to claim the 
3.10 Exemption on a pool-by-pool basis pursuant to the Final Rule will 
likely result in CPO complexes generally saving the costs associated 
with forming and maintaining separate CPOs to operate the other pools 
in their structure, thereby reducing unnecessary complexity in overall 
corporate structure and pool operations. The Commission believes this 
reduction in the complexity of CPO operations, specifically with 
respect to offshore pool operations, will positively affect the general 
financial integrity of market participants, and as discussed further 
above, may lead to more pools operated by non-U.S. CPOs being offered 
to U.S. participants, increasing competition and depth in U.S. 
commodity interest markets.
    Additionally, the Commission believes that the adoption of the 
Affiliate Contribution Exception, the safe harbor, as well as the 
amendments from the 2016 Proposal, by the Final Rule clarifies 
Commission regulation 3.10(c), including the 3.10 Exemption, making the 
provision overall easier to understand and apply, providing additional 
flexibility in light of the increasingly global nature of the asset 
management industry as a whole, and likely, increasing the number of 
non-U.S. CPOs and offshore pools able to participate in the U.S. 
commodity interest markets without additional requirements. For these 
reasons, the Commission believes the Final Rule will have a positive 
impact on the efficiency, competitiveness and financial integrity of 
the futures markets, as contemplated by CEA section 15(a)(2)(B).
c. Price Discovery
    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of price discovery 
considerations. The Commission believes that the legal certainty 
provided by the amendments to the registration exemptions in the Final 
Rule may increase participation in the U.S. commodity interest markets 
by foreign located persons, and thus, ensure greater depth in such 
markets accessed by persons in the U.S. Thus, the Commission believes 
that the Final Rule, in its totality, will result in deeper commodity 
interest markets in the United States, which facilitates the price 
discovery function thereof.
d. Sound Risk Management Practices
    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate 
a regulation in light of sound risk management practices. The 
Commission believes that the Final Rule, as specifically related to 
non-U.S. CPOs, will not have a significant impact on the practice of 
sound risk management because the manner in which various funds, 
operators, and advisors organize, register, or claim relief from such 
regulation has only a small influence on how market participants manage 
their risks overall. The Commission believes, however, that the Final 
Rule, through the legal certainty provided by the amendments to these 
registration exemptions may increase participation in the U.S. 
commodity interest markets by foreign located persons, and thus, ensure 
greater depth in such markets accessed by persons in the U.S. The 
greater depth in such markets in turn will facilitate sound risk 
management.
e. Other Public Interest Considerations
    Section 15(a)(2)(E) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of other public 
interest considerations. The Commission has not identified any other 
public interest considerations impacted by the Final Rule beyond those 
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 CEA 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 CEA.\231\ The Commission believes that 
the public interest to be protected by the antitrust laws is generally 
to protect competition. The Commission requested comment on whether the 
2016 and 2020 Proposals implicate any other specific public interest to 
be protected by the antitrust laws, and it received no comments 
addressing this issue.
---------------------------------------------------------------------------

    \231\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission has considered the Final Rule to determine whether 
its amendments are anticompetitive and has identified no 
anticompetitive effects. Because the Commission has determined the 
Final Rule amendments are not anticompetitive and have no 
anticompetitive effects, the Commission has not identified any less 
anticompetitive means of achieving the purposes of the CEA.

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 amends 17 CFR part 3 as follows:

PART 3--REGISTRATION

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

    Authority:  5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 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. In Sec.  3.10, revise paragraph (c) to 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) Exemption from registration for certain persons--(1) 
Definitions. For purposes of this paragraph (c), the following terms 
shall have the meanings set forth below.
    (i) Covered transaction means a commodity interest transaction, as 
defined in Sec.  1.3 of this chapter, executed bilaterally or made on 
or subject to the rules of any designated contract market or registered 
swap execution facility.
    (ii) Foreign located person means a person located outside the 
United States, its territories, or possessions.
    (iii) International financial institution means the International 
Monetary Fund, the International Bank for Reconstruction and 
Development, the Inter-American Development Bank, the Asian Development 
Bank, the African Development Bank, the United Nations,

[[Page 78739]]

the European Stability Mechanism, the North American Development Bank, 
those institutions defined as ``international financial institutions'' 
in 22 U.S.C. 262r(c)(2), those institutions defined as ``multilateral 
development banks'' in Article 1(5(a)) of Regulation (EU) No. 648/2012 
of the European Parliament and of the Council on OTC Derivative 
Transactions, Central Counterparties and Trade Repositories, their 
agencies and pension plans, and any other similar international 
organizations, and their agencies and pension plans.
    (2) Exempt futures commission merchants--(i) Proprietary accounts. 
A person trading solely for proprietary accounts, as defined in Sec.  
1.3 of this chapter, is not required to register as a futures 
commission merchant; provided, that such person remains subject to all 
other provisions of the Act and of the rules, regulations and orders 
thereunder.
    (ii) Foreign located persons. (A) A foreign located person engaging 
in the activity of a futures commission merchant, as defined in Sec.  
1.3 of this chapter, in connection with any covered transaction only on 
behalf of foreign located persons or international financial 
institutions is not required to register in such capacity; provided, 
that if any such covered transaction is required or intended to be 
cleared on a registered derivatives clearing organization and the 
foreign located person or international financial institution that is 
party to the covered transaction is not a clearing member of such 
registered derivatives clearing organization, the covered transaction 
is submitted for clearing through a futures commission merchant 
registered in accordance with section 4d of the Act.
    (B) A foreign located person acting in accordance with paragraph 
(c)(2)(ii)(A) of this section is not required to comply with those 
provisions of the Act and of the rules, regulations and orders 
thereunder applicable solely to any registered futures commission 
merchant or any person required to be so registered.
    (3) Exempt introducing brokers--(i) Foreign located persons. (A) A 
foreign located person engaged in the activity of an introducing 
broker, as defined in Sec.  1.3 of this chapter, in connection with any 
covered transaction only on behalf of foreign located persons or 
international financial institutions is not required to register in 
such capacity; provided, that if any such covered transaction is 
required or intended to be cleared on a registered derivatives clearing 
organization and the foreign located person or international financial 
institution that is party to the covered transaction is not a clearing 
member of such registered derivatives clearing organization, the 
covered transaction is submitted for clearing through a futures 
commission merchant registered in accordance with section 4d of the 
Act.
    (B) A foreign located person acting in accordance with paragraph 
(c)(3)(i)(A) of this section is not required to comply with those 
provisions of the Act and of the rules, regulations and orders 
thereunder applicable solely to any registered introducing broker or 
any person required to be so registered.
    (ii) Exempt foreign brokers. (A) A foreign located person that is 
exempt from registration as a futures commission merchant in accordance 
with Sec.  30.10 of this chapter is not required to register as an 
introducing broker in accordance with section 4d of the Act if:
    (1) Such person is affiliated with a futures commission merchant 
registered in accordance with section 4d of the Act;
    (2) Such person introduces, on a fully-disclosed basis in 
accordance with Sec.  1.57 of this chapter, any institutional customer, 
as defined in Sec.  1.3 of this chapter, to a registered futures 
commission merchant for the purpose of trading on a designated contract 
market;
    (3) Such person's affiliated futures commission merchant has filed 
with the National Futures Association (Attn: Vice President, 
Compliance) an acknowledgement that the affiliated futures commission 
merchant will be jointly and severally liable for any violations of the 
Act or the Commission's regulations committed by such person in 
connection with those introducing activities, whether or not the 
affiliated futures commission merchant submits for clearing any trades 
resulting from those introducing activities; and
    (4) Such person does not solicit any person located in the United 
States, its territories or possessions for trading on a designated 
contract market, nor does such person handle the customer funds of any 
person located in the United States, its territories or possessions for 
the purpose of trading on any designated contract market.
    (B) For the purposes of this paragraph, a person shall be 
affiliated with a futures commission merchant if such a person owns 50 
percent or more of the futures commission merchant, is owned 50 percent 
or more by the futures commission merchant, or is owned 50 percent or 
more by a third person that also owns 50 percent or more of the futures 
commission merchant.
    (4) Exempt commodity trading advisors. (i) A foreign located person 
engaging in the activity of a commodity trading advisor, as defined in 
Sec.  1.3 of this chapter, in connection with any covered transaction 
only on behalf of foreign located persons or international financial 
institutions is not required to register in such capacity; provided, 
that if any such covered transaction is required or intended to be 
cleared on a registered derivatives clearing organization and the 
foreign located person or international financial institution that is 
party to the covered transaction is not a clearing member of such 
registered derivatives clearing organization, the covered transaction 
is submitted for clearing through a futures commission merchant 
registered in accordance with section 4d of the Act.
    (ii) A foreign located person acting in accordance with paragraph 
(c)(4)(i) 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 registered commodity trading advisor or any person required to 
be so registered.
    (5) Exempt commodity pool operators. (i) A foreign located person 
engaged in the activity of a commodity pool operator, as defined in 
Sec.  1.3 of this chapter, in connection with any covered transaction 
is not required to register in such capacity, when such covered 
transactions are executed on behalf of a commodity pool, the 
participants of which are all foreign located persons or international 
financial institutions; provided, that if any such covered transaction 
is required or intended to be cleared on a registered derivatives 
clearing organization and the commodity pool that is party to the 
covered transaction is not a clearing member of such registered 
derivatives clearing organization, the covered transaction is submitted 
for clearing through a futures commission merchant registered in 
accordance with section 4d of the Act.
    (ii) With respect to paragraph (c)(5)(i) of this section, initial 
capital contributed to a commodity pool by an affiliate, as defined by 
Sec.  4.7(a)(1)(i) of this chapter, of the pool's commodity pool 
operator shall not be considered 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 foreign located persons; provided, that:
    (A) The affiliate is not a natural person;

[[Page 78740]]

    (B) The affiliate and its principals are not barred or suspended 
from participating in commodity interest markets in the United States, 
its territories or possessions; and
    (C) Interests in the affiliate are not marketed as providing access 
to trading in commodity interest markets in the United States, its 
territories or possessions.
    (iii) A commodity pool operated by a foreign located person shall 
be considered to be operated in accordance with the terms of paragraph 
(c)(5)(i) 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:
    (1) are reasonably designed to preclude persons located in the 
United States from participating therein; and
    (2) include mechanisms reasonably designed to enable its operator 
to exclude any persons located in the United States that 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.
    (iv) Utilizing the relief under paragraph (c)(5)(i) of this section 
for a qualifying commodity pool will not affect the ability of a person 
to register with the Commission as a commodity pool operator, or to 
qualify for, rely upon, or claim other relief from regulation as such 
by the Commission, with respect to the operation of commodity pools or 
trading vehicles not otherwise eligible for the relief offered in this 
section.
    (v) A person acting in accordance with paragraph (c)(5)(i) 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.
    (6) Associated persons of swap dealers. In determining whether a 
person is a swap dealer, the activities of a registered swap dealer 
with respect to which such person is an associated person shall not be 
considered.
* * * * *

    Issued in Washington, DC, on October 22, 2020, by the 
Commission.
Christopher Kirkpatrick,
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 
Intermediaries--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--Statement of Support of Chairman Heath P. Tarbert

    When the Commission considered the proposal to amend the 
registration exemption for foreign commodity pool operators 
(CPOs),\1\ I noted that, in his second inaugural address in 1893, 
President Grover Cleveland remarked ``[u]nder our scheme of 
government the waste of public money is a crime against the 
citizen.'' \2\ 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.\3\
---------------------------------------------------------------------------

    \1\ Exemption From Registration for Certain Foreign Persons 
Acting as Commodity Pool Operators of Offshore Commodity Pools, 85 
FR 35820 (June 12, 2020).
    \2\ Statement of Chairman Heath P. Tarbert in Support of 
Amending the Registration Exemption for Foreign CPOs (May 28, 2020), 
available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement052820b. See 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).
    \3\ See Statement of Chairman Heath P. Tarbert in Support of 
Amending the Registration Exemption for Foreign CPOs, supra note 2.
---------------------------------------------------------------------------

    The CFTC's framework for regulating foreign commodity 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 
pools 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 final rule to 
amend the exemption for CPOs in regulation 3.10(c) (3.10 Exemption). 
The final rule eliminates 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 final rule additionally exempts U.S.-based 
affiliates of pool sponsors who put seed money into offshore funds 
that have only foreign investors. In so doing, the final rule 
provides 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 final rule amends the conditions under which a foreign CPO, 
in connection with commodity interest transactions on behalf of 
persons located outside the United States, will qualify for an 
exemption from CPO registration and regulation with respect to an 
offshore pool. Specifically, through amendments to our regulation 
3.10(c), a non-U.S. CPO will be able to operate pools offered to 
U.S. persons as either a registered or exempt CPO, while 
simultaneously claiming the 3.10 Exemption with respect to its 
qualifying offshore commodity pools.\4\
---------------------------------------------------------------------------

    \4\ The final rule adds 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.\5\ The

[[Page 78741]]

protection of non-U.S. customers of non-U.S. firms is best left to 
foreign regulators with the relevant jurisdiction and mandate.\6\ 
Therefore, I believe it is appropriate for the final 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.
---------------------------------------------------------------------------

    \5\ 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 56924, 56928 (Sep. 14, 2020).
    \6\ 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).
---------------------------------------------------------------------------

    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 
with respect to all its funds, the CFTC ends up regulating some 
foreign-based funds without any U.S. investors. Second, if the CPO 
refuses to register for 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, the final rule 
amends the 3.10 Exemption to align the plain text of the exemption 
with our longstanding policy goal of regulating foreign CPOs only 
when they offer their funds to U.S. investors. In effect, the 
Commission's walk finally conforms to our talk.\7\
---------------------------------------------------------------------------

    \7\ 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 final rule conforms to their 
reading.
---------------------------------------------------------------------------

Affiliate Investment Exemption

    The final rule also permits U.S. 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 final rule allows a U.S. 
affiliate of a foreign CPO to invest in the offshore fund without 
triggering registration requirements because of the nature of the 
relationship between the affiliate and the non-U.S. CPO.
    It is hard to imagine how an entity that controls, is controlled 
by, or is under common control with, 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 very same foreign CPO. In short, a U.S. 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 affiliate 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. 
affiliates of foreign CPOs who are far better positioned than us to 
safeguard their own interests.

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I am pleased to support today's final rule that expands an 
existing exemption from registration for foreign commodity pool 
operators (CPOs) trading on U.S. markets on behalf of foreign 
investors. Building on previously granted staff no-action relief, 
the final rule creates new possibilities for fund managers, 
appropriately focuses the Commission's resources and customer 
protection activities upon domestic firms and U.S. customers, and 
provides for simplified compliance. For example, the final rule 
permits non-U.S. CPOs to claim the exemption on a pool-by-pool 
basis, which I believe is appropriate given that many large, foreign 
CPOs operate both U.S. and non-U.S. pools. The final rule also 
permits a foreign fund manager to satisfy the exemption's 
requirement that its pool does not contain funds of U.S. customers 
by complying with certain safe harbors, such as fund documentation 
requirements. In doing so, the final rule 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.
    Finally, for the first time, the final rule would permit U.S. 
affiliates of foreign pools to contribute initial capital to those 
pools. Allowing U.S. affiliates to contribute seed money to offshore 
pools operated by their affiliated non-U.S. CPOs should facilitate 
innovation and fund development by enabling those offshore pools to 
establish a performance history for solicitation purposes.

Appendix 4--Statement of Commissioner Dan M. Berkovitz

    I am voting for the final rule amending regulation 3.10(c) 
(``Final Rule''). Regulation 3.10(c) provides an exemption from 
registration to foreign persons who operate commodity pools 
(``CPOs'') located outside of the United States. The Final Rule 
makes pragmatic adjustments to certain conditions for claiming the 
exemption that will allow the Commission to focus its limited 
resources on protecting U.S. persons who participate in commodity 
pools, rather than on commodity pools operated outside the U.S. in 
which non-U.S. persons participate.
    A fundamental goal of the Commission's registration and 
regulation of CPOs is the protection of U.S. customers.\1\ The CFTC 
has long held that CPOs trading commodity interests in our markets 
are not required to register as CPOs if they are located offshore 
and only operate pools for non-U.S. persons.\2\ In 2007, the 
Commission codified the exemption in regulation 3.10(c).
---------------------------------------------------------------------------

    \1\ The regulation of CPOs also facilitates the Commission's 
ability to oversee the derivative markets, manage systemic risks, 
and fulfill its 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 by 
Investment Company Institute v. CFTC, 720 F.3d 370 (D.C. Cir. 2013).
    \2\ See CFTC Staff Interpretative Letter 76-21 (Aug. 15, 1976).
---------------------------------------------------------------------------

    The Final Rule: (i) Exempts 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; \3\ (ii) provides 
that this exemption for some pools may be used with other exemptions 
or exclusions; and (iii) provides a safe harbor to non-U.S. CPOs in 
the event that U.S. persons inadvertently become participants in the 
offshore pools, provided that a number of conditions are met to 
minimize that possibility. Lastly, the Final Rule permits U.S. 
affiliates of non-U.S. CPOs to contribute ``initial capital'' to 
exempt offshore pools without being treated as ``participants'' in 
the pools themselves if certain conditions are satisfied.
---------------------------------------------------------------------------

    \3\ 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.
---------------------------------------------------------------------------

    In my statement for the proposed amendments to regulation 
3.10(c), I noted some concern that the U.S. affiliate provision 
might result in persons in the U.S. investing--either knowingly or 
unknowingly--in unregulated foreign commodity pools if they invested 
in the U.S. affiliates. The proposal included specific ``anti-
evasion'' provisions that would prevent certain ``bad actors'' from 
using the exemption and prohibit the marketing of the U.S. affiliate 
as a vehicle for U.S. commodity interest investments.\4\ At my 
request, several questions regarding potential abuse of the U.S. 
affiliate provision were included in the proposed rule.
---------------------------------------------------------------------------

    \4\ As noted in section II.F.3 of the Final Rule, if the U.S. 
affiliate is marketed as providing access to commodity interests 
traded outside the United States, then the affiliate would be 
subject to the registration regime provided for such entities in 
part 30 of the Commission's regulations.
---------------------------------------------------------------------------

    The letters commenting on the proposed rule generally expressed 
support. A joint letter from asset management industry associations 
addressed the questions in the proposal regarding the U.S. affiliate 
provision and provided rationales in support thereof. The letter 
explained that the initial capital investments from U.S. affiliates 
intended to help demonstrate fund performance or facilitate fund 
operations, for example, are not the types of investments that need 
the full array of customer protections provided for individual 
commodity pool investors.

[[Page 78742]]

    Furthermore, comment letters explained how the conditions in the 
U.S. affiliate provision, coupled with the anti-evasion provisions 
(with some modifications), balance the flexibility needed by CPOs to 
make prudent capital allocation decisions with preventive measures 
reducing the likelihood of abuse. While it is possible that some 
less than forthright actors could attempt to use the regulation 
3.10(c) exemption to skirt the CPO registration requirements when 
soliciting commodity interest investments from U.S. persons, the 
Final Rule has appropriate restrictions that will facilitate 
enforcement when necessary.
    In conclusion, the Final Rule makes prudent, limited amendments 
that reduce the burdens on the Commission's limited resources while 
maintaining the necessary protections intended for U.S. commodity 
pool participants. I would like to thank the commenters for their 
contribution to improving the Final Rule and the CFTC staff for 
working with my office to address my concerns.

[FR Doc. 2020-23810 Filed 12-2-20; 4:15 pm]
BILLING CODE 6351-01-P