Performance of Certain Functions by National Futures Association with Respect to Commodity Pool Operators and Commodity Trading Advisors

COMMODITY FUTURES TRADING COMMISSION

Performance of Certain Functions by National Futures Association

with Respect to Commodity Pool Operators and Commodity Trading Advisors

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and Order.

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SUMMARY:The Commodity Futures Trading Commission (Commission) is

authorizing the National Futures Association (NFA) to conduct reviews

of disclosure documents required to be filed with the Commission by

commodity pool operators (CPOs) and commodity trading advisors (CTAs)

pursuant to Rules 4.26(d) and 4.36(d), respectively. In addition, the

Commission is authorizing NFA to process the following: (1) Notices of

eligibility for exclusion for certain otherwise regulated persons from

the definition of CPO, pursuant to Rule 4.5; (2) notices of claim for

exemption from certain Part 4 requirements with respect to commodity

pools (pools) and CTAs whose participants or clients are qualified

eligible participants (QEPs) or qualified eligible clients (QECs),

respectively, pursuant to Rule 4.7; (3) claims of exemption from

certain Part 4 requirements for CPOs with respect to pools that

principally trade securities, pursuant to Rule 4.12(b); (4) statements

of exemption from registration as a CPO, pursuant to Rule 4.13; (5)

notices of exemption from registration as a CTA for certain persons

registered as an investment adviser, pursuant to Rule 4.14(a)(8); and

(6) notices of claim for exemption from provisions of Part 4 for

certain registered CPOs operating offshore pools, pursuant to Advisory

18-96. Further, the Commission is authorizing NFA to maintain and serve

as the official custodian of certain Commission records.

EFFECTIVE DATE: November 1, 1997.

FOR FURTHER INFORMATION CONTACT: Until the effective date of November

1, 1997, comments regarding this Notice and Order may be directed to

Paul H. Bjarnason, Jr., Deputy Director, or Kevin P. Walek, Senior

Special Counsel, Division of Trading and Markets, Commodity Futures

Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W.,

Washington, DC 20581. Telephone: (202) 418-5430.

United States of America

Before the Commodity Futures Trading Commission Order Authorizing the

Performance of Certain Functions With Respect to Commodity Pool

Operators and Commodity Trading Advisors

I. Authority and Background

Section 8a(10) of the Commodity Exchange Act \1\ (Act) provides

that the Commission may authorize any person to perform any portion of

the registration functions under the Act, notwithstanding any other

provision of law, in accordance with rules adopted by such person and

submitted to the Commission for approval or, if applicable, for review

pursuant to Section 17(j) of the Act \2\ and subject to the provisions

of the Act applicable to registrations granted by the Commission.

Section 17(o)(1) of the Act \3\ provides that the Commission may

require NFA to perform Commission registration functions in accordance

with the Act and NFA rules. NFA has confirmed its willingness to

perform certain functions now performed by the Commission and has

provided the Commission with a detailed proposal setting forth

standards and procedures to be followed and reports to be generated in

administering the functions discussed below.\4\

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\1\ 7 U.S.C. 12a(10)(1994).

\2\ 7 U.S.C. 21(j)(1994).

\3\ 7 U.S.C. 21(o)(1)(1994).

\4\ Letter from Robert K. Wilmouth, President of NFA, to

Brooksley Born, Chairperson of the Commission, dated June 20, 1997.

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Upon consideration, the Commission has determined to authorize NFA,

effective November 1, 1997, to perform the following functions: (1) to

conduct reviews of disclosure documents required to be filed with the

Commission by CPOs and CTAs pursuant to Rules 4.26(d) \5\ and 4.36(d),

respectively; (2) to process \6\ notices of eligibility for exclusion

for certain otherwise regulated persons from the definition of CPO,

pursuant to Rule 4.5; (3) to process notices of claim for exemption

from certain Part 4 requirements with respect to commodity pools and

CTAs whose participants or clients are QEPs or QECs, respectively,

pursuant to Rule 4.7; (4) to process claims of exemption from certain

Part 4 requirements for CPOs with respect to pools that principally

trade securities, pursuant to Rule 4.12(b); (5) to process statements

of exemption from registration as a CPO, pursuant to Rule 4.13; (6) to

process notices of exemption from registration as a CTA for certain

persons registered as an investment adviser, pursuant to Rule

4.14(a)(8); (7) to process notices of claim for exemption from

provisions of Part 4 for certain registered CPOs operating offshore

pools, pursuant to Advisory 18-96; \7\ and (8) to maintain and to serve

as the official custodian of records for the filings, notices and

claims required by the rules listed above. As discussed below, each of

these functions involves disclosure requirements or exemptions from

disclosure, reporting, recordkeeping and registration requirements for

CPOs and CTAs.

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\5\ Commission rules referred to herein can be found at 17 CFR

Ch. I (1997).

\6\ As used in this Notice and Order, the term ``process''

generally refers to the review of the filing, notice or claim for

compliance with applicable requirements and, as appropriate,

provision of notice of any deficiency in the filing, notice or

claim.

\7\ Advisory No. 18-96, (1994-1996 Transfer Binder) Comm. Fut.

L. Rep. (CCH) para.26,659 (April 11, 1996).

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A. CPO and CTA Compliance with Rule 4.26(d) and 4.36(d)

Rule 4.26(d)(1) requires that a CPO file a disclosure document \8\

with the Commission for each pool that it operates or intends to

operate not less

[[Page 52089]]

than 21 calendar days prior to the date the CPO first intends to

deliver the document to a prospective participant in the pool.\9\

Similarly, Rule 4.36(d)(1) requires that a CTA file a disclosure

document \10\ with the Commission for each trading program that it

offers or intends to offer not less than 21 calendar days prior to the

date the CTA first intends to deliver the document to a prospective

client in the trading program. Further, pursuant to Rules 4.26(d)(2)

and 4.36(d)(2), CPOs and CTAs, respectively, must file with the

Commission all subsequent amendments to their disclosure documents

within 21 calendar days of the date upon which the CPO or CTA first

knows or has reason to know of the defect requiring the amendment. In

addition, CPOs and CTAs may not use their disclosure documents for more

than nine months from the effective dates of such documents, in

accordance with Rules 4.26(a)(2) and 4.36(b), respectively. The

Commission's Division of Trading and Markets reviews disclosure

documents filed by CPOs and CTAs, issues comment letters noting any

compliance issues, and works with registrants to resolve these

issues.\11\

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\8\ Pursuant to Rule 4.21(a), a CPO may not solicit, accept or

receive funds, securities or other property from a prospective

participant in a pool that it operates or intends to operate unless,

on or before the date it engages in that activity, the COP delivers

or causes to be delivered to the prospective participant a

Disclosure Document for the pool containing the information set

forth in Rule 4.24.

\9\ Rule 4.8 provides an exemption from the 21-day prefiling

requirement of Rule 4.26(d)(1) to CPOs with respect to pools offered

or sold solely to ``accredited investors'' in an offering exempt

from registration under the Securities Act of 1933, as well as to

CPOs of 4.12(b) pools in an exempt offering under the Securities Act

of 1933.

\10\ Pursuant to Rule 4.31(a), a CTA may not solicit or enter

into an agreement with a prospective client to direct or to guide

the client's commodity interest account or trading unless, at or

before the time it engages in the solicitation or enters into the

agreement (whichever is earlier), the CTA delivers or causes to be

delivered to the prospective client a disclosure document for the

trading program containing the information set forth in the Rule

4.34.

\11\ 45 FR 51600, 51603 (August 4, 1980); 46 FR 26004, 26010

(May 8, 1981).

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NFA Compliance Rule 2-13 requires that NFA members file with NFA a

copy of any document required to be filed with the Commission pursuant

to Part 4 of the regulations. NFA staff review CPO and CTA disclosure

documents during the course of on-site audits as well as through a desk

review program, as part of its audit priority system. In light of NFA's

experience in receiving and reviewing disclosure documents of CPOs and

CTAs, the Commission believes that it is appropriate for NFA to

undertake the performance of this function. Accordingly, by this Order,

NFA is authorized to review all disclosure documents filed by CTAs and

all disclosure documents filed by CPOs for privately offered commodity

pools \12\ and to provide notice of deficiencies. Such review of CTA

and CPO disclosure documents will include those documents filed

pursuant to the instant filing procedure set forth in Commission

Advisory 95-44.\13\

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\12\ Pursuant to Rule 4.24(d)(3)(i), privately offered commodity

pools are those offered pursuant to section 4(2) of the Securities

Act of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to

Regulation D thereunder (17 CFR 230.501 et seq.).

\13\ CFTC Interpretative Letter No. 95-44, [1994-1996 Transfer

Binder] Comm. Fut. L. Rep. (CCH) para. 26,385 (April 20, 1995).

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B. Notices of Eligibility for Exclusion From the Definition of CPO

Rule 4.5 provides an exclusion from the definition of commodity

pool operator for certain persons who would otherwise be considered

commodity pool operators. This exclusion is available for certain

otherwise regulated persons, as set forth in Rule 4.5 (a)(1) through

(a)(4) in connection with the operation of a qualified entity as

described in Rule 4.5(b).\14\ Eligible persons claiming exclusion

pursuant to Rule 4.5 must file with the Commission and NFA a notice of

eligibility containing the information specified in Rule 4.5(c). By

this Order, NFA is authorized to process notices of eligibility for

exclusion from the definition of the term commodity pool operator

pursuant to Rule 4.5.

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\14\ Rule 4.5 also excludes certain trading vehicles from the

commodity pool definition, and thus, their operators are not

required to file any notice or make any specified representations to

claim exclusion from the commodity pool operator definition.

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C. Claims for Exemption From Certain Part 4 Requirements With Respect

to Commodity Pools and CTAs Whose Participants or Clients Are QEPs or

QECs

Rule 4.7 provides an exemption from certain Part 4 requirements

with respect to the operators of commodity pools whose participants are

limited to QEPs and with respect to commodity trading advisors whose

clients are QECs, as those terms are defined by the Rule. Any

registered commodity pool operator meeting the requirements of Rule

4.7(a)(2) may claim relief from certain disclosure, reporting, and

recordkeeping requirements by filing with the Commission and NFA a

notice of claim for exemption pursuant to Rule 4.7(a)(3). Any

registered commodity trading advisor meeting the requirements of Rule

4.7(b)(2) may claim relief from disclosure and recordkeeping

requirements with respect to the accounts or qualified eligible clients

who have given due consent to their account being an exempt account

under Rule 4.7 by filing with the Commission and NFA a notice of claim

for exemption pursuant to paragraph 4.7(b)(3). By this Order, NFA is

authorized to process notices of claim for exemption filed by

qualifying CPOs and CTAs pursuant to Rule 4.7.

D. Exemption From Certain Part 4 Requirements for CPOs With Respect to

Pools That Principally Trade Securities

Rule 4.12(b) provides an exemption from certain disclosure and

reporting requirements for registered CPOs of pools which principally

trade securities and meet the criteria set forth in Rule 4.12(b)(1).

Eligible CPOs must file a claim of exemption with the Commission and

NFA pursuant to Rule 4.12(b)(3). By this Order, NFA is authorized to

process claims for exemption filed by qualifying CPOs pursuant to Rule

4.12(b).

E. Exemption From Registration as a CPO

Rule 4.13 provides for an exemption from registration as a CPO for

persons operating pools which meet the criteria set forth in either

Rule 4.13(a)(1) or Rule 4.13(a)(2). Eligible persons must file with the

Commission and NFA copies of the statement provided to pool

participants setting forth the information specified in Rule

4.13(b)(1). By this Order, NFA is authorized to process statements of

exemption from CPO registration filed by qualifying persons pursuant to

Rule 4.13.

F. Exemption From Registration as a CTA for Certain Persons Registered

as Investment Advisers

Rule 4.14(a)(8) provides exemption from registration as a CTA for

registered investment advisers whose commodity advice is directed to

Rule 4.5 entities and who meet the other criteria set forth in Rule

4.14(a)(8) (i)-(ii). Persons claiming exemption from CTA registration

pursuant to Rule 4.14(a)(8) must file with the Commission and NFA a

notice of exemption in accordance with Rule 4.14(a)(8) (iii) and (v).

By this Order, NFA is authorized to process notices of exemption from

CTA registration filed by qualifying persons pursuant to Rule

4.14(a)(8).

G. Claims for Exemption From Provisions of Part 4 for Certain

Registered CPOs Operating Offshore Pools

Commission Advisory 18-96 makes generally available to certain

registered CPOs relief from disclosure, reporting and certain

recordkeeping requirements in connection with the operation of offshore

commodity pools. Registered CPOs who operate offshore commodity pools

may claim such relief by filing a notice of a claim for exemption with

the

[[Page 52090]]

Commission and NFA that sets forth the representations specified in the

Advisory. By this Order, NFA is authorized to process notices of claims

for exemption filed by qualifying CPOs pursuant to Advisory 18-96.

H. Recordkeeping Requirements

By prior orders, the Commission has authorized NFA to maintain

various other Commission registration records and has certified NFA as

the official custodian of such records for this agency.\15\ The

Commission has now determined, in accordance with its authority under

Section 8a(10) of the Act, to authorize NFA to maintain and to serve as

the official custodian of records for the filings, notices and claims

required by Rules 4.26(d), 4.36(d), 4.5, 4.7, 4.12(b), 4.13 and

4.14(a)(8) and Commission Advisory 18-96. This determination is based

upon NFA's representations regarding the implementation of rules and

procedures for maintaining and safeguarding all such records, in

connection with NFA's assumption of responsibility for the above-

mentioned activities.

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\15\ 49 FR 39593 (October 9, 1984); 50 FR 34885 (August 28,

1985); 51 FR 25929 (July 17, 1986); 54 FR 19594 (May 8, 1989); 54 FR

41133 (October 5, 1989); 58 FR 19657 (April 15, 1993).

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In maintaining the Commission's records pursuant to this Order, NFA

shall be subject to all other requirements and obligations imposed upon

it by the Commission in existing or future orders or regulations. In

this regard, NFA shall also implement such additional procedures (or

modify existing procedures) as are acceptable to the Commission and as

are necessary: to ensure the security and integrity of the records in

NFA's custody; to facilitate prompt access to those records by the

Commission and its staff, particularly as described in other Commission

orders or rules; to facilitate disclosure of public or nonpublic

information in those records when permitted by Commission orders or

rules and to keep logs as required by the Commission concerning

disclosure of nonpublic information; and otherwise to safeguard the

confidentiality of the records.

II. Conclusion and Order

The Commission has determined, in accordance with the provisions of

Sections 8a(10) and 17(o)(1) of the Act and NFA's letter dated August

27, 1997, to authorize NFA to perform the following functions:

(1) To conduct reviews of disclosure documents required to be filed

with the Commission by CPOs and CTAs pursuant to Rules 4.26(d) and

4.36(d), respectively;

(2) To process notices of eligibility for exclusion for certain

otherwise regulated persons from the definition of CPO, pursuant to

Rule 4.5;

(3) to process notices of claim for exemption from certain Part 4

requirements with respect to commodity pools and CTAs whose

participants or clients are QEPs or QECs, respectively, pursuant to

Rule 4.7;

(4) To process claims of exemption from certain Part 4 requirements

for CPOs with respect to pools that principally trade securities,

pursuant to Rule 4.12(b);

(5) To process statements of exemption from registration as a CPO,

pursuant to Rule 4.13;

(6) To process notices of exemption from registration as a CTA for

certain persons registered as an investment adviser, pursuant to Rule

4.14(a)(8);

(7) To process notices of claim for exemption from provisions of

Part 4 for certain registered CPOs operating offshore pools, pursuant

to Advisory 18-96; and

(8) To maintain and to serve as the official custodian of records

for the filings, notices and claims required by the rules listed above.

NFA shall perform these functions in accordance with the standards

established by the Act and the regulations and orders promulgated

thereunder, particularly Part 4 of the regulations and Commission

orders issued thereunder, and shall provide the Commission with such

summaries and periodic reports as the Commission may determine are

necessary for effective oversight of this program.

These determinations are based upon the Congressional intent

expressed in Sections 8a(10) and 17(o) of the Act that the Commission

have the authority to delegate to NFA any portion of the Commission's

registration responsibilities under the Act for purposes of carrying

out these responsibilities in the most efficient and cost-effective

manner and upon NFA's representations concerning the standards and

procedures to be followed and the reports to be generated in

administering these functions.

This Order does not, however, authorize NFA to render ``no-action''

positions, exemptions or interpretations with respect to applicable

disclosure, reporting, recordkeeping and registration requirements.

Nothing in this Order or in Sections 8a(10) or 17(o) of the Act

shall affect the Commission's authority to review NFA's performance of

the Commission functions listed in paragraphs 1-8 above.

NFA is authorized to perform all functions specified herein until

such time as the Commission orders otherwise. Nothing in this Order

shall prevent the Commission from exercising the authority delegated

herein. NFA may submit to the Commission for decision any specific

matters that have been delegated to it, and Commission staff will be

available to discuss with NFA staff issues relating to the

implementation of this Order. Nothing in this Order affects the

applicability of any previous orders issued by the Commission under

Part 4.

Issued in Washington, D.C., on September 30, 1997 by the

Commission.

Catherine D. Dixon,

Assistant Secretary of the Commission.

[FR Doc. 97-26389 Filed 10-3-97; 8:45 am]

BILLING CODE 6351-01-P