The Division of Clearing and Intermediary Oversight granted exemptive relief from certain of the Part 4 regulations to the registered CPO of three commodity pools, whose shares had been publicly offered and listed for...

Summary: The Division of Clearing and Intermediary Oversight granted exemptive relief from certain of the Part 4 regulations to the registered CPO of three commodity pools, whose shares had been publicly offered and listed for trading on a national securities exchange. Prior to issuance of the Division’s letter, the pools had been operated in compliance with Part 4. As is discussed in the letter, relief granted by the Division was in the nature of substituted compliance with the regulations from which relief was sought. Exemptive relief was also provided with respect to future commodity pools with the same structural and operational features as the CPO’s existing pools.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5547

aradhakrishnan@cftc.gov

Division of Clearing and

Intermediary Oversight

Ananda Radhakrishnan

Director

CFTC Letter No. 08-02

January 29, 2008

Exemption

Division of Clearing and Intermediary Oversight

Re:

Regulations 4.21, 4.22 and 4.23

Request for exemption from certain Disclosure Document, reporting and

recordkeeping requirements in connection with the operation of certain

commodity pools listed for trading on a national securities exchange

Dear :

This is in response to your letter dated November 21, 2007, to the Division of Clearing

and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission

(the “Commission”), as supplemented by subsequent letters and e-mail messages (the

“correspondence”).1 By the correspondence, you request, on behalf of “A”, a registered

commodity pool operator (“CPO”), exemption from certain provisions of Commission

Regulations 4.21, 4.22, and 4.23,2 which concern, respectively, the disclosure, reporting and

recordkeeping requirements applicable to registered CPOs, in connection with “A” serving as the

registered CPO of certain commodity pools

respondence”).1 By the correspondence, you request, on behalf of “A”, a registered

commodity pool operator (“CPO”), exemption from certain provisions of Commission

Regulations 4.21, 4.22, and 4.23,2 which concern, respectively, the disclosure, reporting and

recordkeeping requirements applicable to registered CPOs, in connection with “A” serving as the

registered CPO of certain commodity pools. Specifically, those pools are the “B” (in operation

since __________); the “C” (in operation since __________); and the “D” (in operation since

__________) (each a “Fund” and collectively the “Funds”). We note, as a preliminary matter,

your representation that to date, “A” has been in compliance with the regulations from which it

now seeks exemption with respect to its operation of each Fund.

Based upon the representations made in the correspondence, we understand the facts to

be as follows: The offering and sale of units of participation (“Shares) of each Fund has been

made pursuant to an effective registration statement filed with the Securities and Exchange

Commission (“SEC”) (the “Registration Statement”), and each Fund’s Shares have been listed

1

The letters were dated November 28, 2007, December 10, 2007 and December 26, 2007,

and the e-mail messages were sent November 28, 2007 and January 23, 2008.

2

Commission regulations referred to in this letter are found at 17 C.F.R. Ch. I (2007).

They can be accessed through the Commission’s website, at:

http://www.cftc.gov/cftc/cftclawreg.htm.

1

The letters were dated November 28, 2007, December 10, 2007 and December 26, 2007,

and the e-mail messages were sent November 28, 2007 and January 23, 2008.

2

Commission regulations referred to in this letter are found at 17 C.F.R. Ch. I (2007).

They can be accessed through the Commission’s website, at:

http://www.cftc.gov/cftc/cftclawreg.htm.

Page 2

for trading on a national securities exchange (the “E”).3 Each Fund has been structured and will

be operated in a manner substantially similar to an exchange-traded fund, or ETF. The sale of

Shares of a Fund to the Authorized Purchasers (as defined in the correspondence) will be

conducted only in compliance with Regulation 4.21. Authorized Purchasers have received (and

they have provided to “A” written acknowledgement of such receipt) a Disclosure Document,

which complies in full with the requirements in Part 4 of the Commission’s regulations, and

which “A” updates in accordance with Commission requirements. The current Disclosure

Document for each Fund is posted on the Internet websites maintained by “A” or the Fund (the

“Website Sources”), and “A” expects that prospective or actual investors utilize the services of a

registered broker-dealer, who either informs them where they can obtain the current Disclosure

Document, or, upon request, delivers a copy of the current Disclosure Document. The same

information that would otherwise be provided in each Fund’s monthly Account Statements,

including the Funds’ net asset value and the certification required by Rule 4.22(h), is readily

available via the Website Sources, of which availability the Disclosure Document advises

participants.

You state that certain books and records of each Fund are kept by the Funds’

administrator, “F”, a banking corporation subject to regulation by the “G”, at the address as

specified in your November 21, 2007 letter

net asset value and the certification required by Rule 4.22(h), is readily

available via the Website Sources, of which availability the Disclosure Document advises

participants.

You state that certain books and records of each Fund are kept by the Funds’

administrator, “F”, a banking corporation subject to regulation by the “G”, at the address as

specified in your November 21, 2007 letter. “F” has provided the Division with a signed

acknowledgment (“Acknowledgment”) that the books and records of the Funds may be inspected

and copied by any representative of the Commission or the United States Department of Justice

and may be inspected and copied during normal business hours by Fund participants. Included

are schedules specifying the classes of books and records, by subparagraph of Regulation 4.23,

that “F” will be keeping.

You further ask for confirmation that “F” will not be deemed to be acting as a CPO solely

by reason of keeping the Funds’ records in the manner described in your correspondence, which

the Division hereby so confirms. In this regard, the Division notes that “F” will not be acting in

the manner contemplated by the statutory definition of a “commodity pool operator” – e.g., it

will not be promoting the pool by soliciting, accepting or receiving from others property for the

purpose of commodity interest trading, and will not have the authority to hire (and to fire) a

3

Your request assumes, and each Fund’s Registration Statement states, that the Shares are

securities for purposes of the U.S. federal securities laws and will be offered, sold and transferred

as such. While we may not necessarily agree with this categorization, the Division will not

recommend that the Commission commence any enforcement action against a Fund or market

participants in connection with the offer, sale and transfer of Shares in the manner contemplated

by your request and the Disclosure Documents for the Funds

l securities laws and will be offered, sold and transferred

as such. While we may not necessarily agree with this categorization, the Division will not

recommend that the Commission commence any enforcement action against a Fund or market

participants in connection with the offer, sale and transfer of Shares in the manner contemplated

by your request and the Disclosure Documents for the Funds.

Further, you have represented that “E” listing does not affect “A’s” obligation to comply

with any other provision of the Commodity Exchange Act (the “Act”) or the Commission’s

regulations issued thereunder applicable to CPOs in particular or to persons in general. The Act

is found at 7 U.S.C. §1, et seq. (2000), and also may be accessed through the Commission’s

website, at: http://www.cftc.gov/cftc/cftclawreg.htm.

Page 3

Fund’s commodity trading advisor, and to select (and to change) a Fund’s futures commission

merchant.4

Based upon the representations made in the correspondence, the Division believes that

granting your request would not be contrary to the public interest and to the purposes of the

regulations at issue. Accordingly, pursuant to the authority delegated in Regulation 140.93(a)(1),

the Division hereby exempts “A” in connection with the operation of the Funds from: (1) the

requirement of Regulation 4.21(b) to obtain a signed acknowledgment of receipt of a Disclosure

Document before accepting funds, securities or property from a prospective pool participant with

respect to sales of Shares by Authorized Purchasers when Authorized Purchasers create

additional Creation Baskets, provided that the information required to be contained in the

Disclosure Document is maintained and kept current on the Website Sources; (2) the requirement

of Regulation 4.22 to deliver monthly Account Statements to purchasers of Shares, provided that

the information that would otherwise be contained in such reports is maintained on the Fund and

“A”

hasers create

additional Creation Baskets, provided that the information required to be contained in the

Disclosure Document is maintained and kept current on the Website Sources; (2) the requirement

of Regulation 4.22 to deliver monthly Account Statements to purchasers of Shares, provided that

the information that would otherwise be contained in such reports is maintained on the Fund and

“A” websites; and (3) the requirement of Regulation 4.23 to keep required books and records at

“A’s” main business office to the extent that such books and records are maintained at the offices

of “F” (collectively, the “Relief”).

Your letter also seeks the Relief for pools that “A” is in the process of establishing, as

well as “any similarly structured funds it may establish in the future.” (“Future Funds”)5 In this

regard, by the correspondence you represent the following (the “Future Fund Representations”)

for each such Future Fund: (1) Shares will be offered to the public pursuant to an effective

registration statement under the Securities Act of 1933; (2) Shares will be listed for trading on a

national securities exchange; (3) “A” will sell Future Fund Shares directly only to Authorized

Purchasers; (4) “A” will maintain each Future Fund’s Disclosure Document on “A’s” or the

Future Fund’s Internet website and will keep the Disclosure Document current pursuant to

Regulation 4.26; (5) “A” will make the Future Fund’s monthly Account Statements available on

“A’s” or the Future Fund’s Internet website, and will clearly disclose such availability in the

Future Fund’s Disclosure Document; and (6) Future Fund books and records not maintained at

“A’s” main business office will be kept by “F”, who, as a condition precedent to “A’s” availing

itself of the Relief for the Future Fund, will have submitted to NFA an Acknowledgment and

4

See, e.g., 49 Fed. Reg. 4778, 4780 (Feb

d’s Internet website, and will clearly disclose such availability in the

Future Fund’s Disclosure Document; and (6) Future Fund books and records not maintained at

“A’s” main business office will be kept by “F”, who, as a condition precedent to “A’s” availing

itself of the Relief for the Future Fund, will have submitted to NFA an Acknowledgment and

4

See, e.g., 49 Fed. Reg. 4778, 4780 (Feb. 2, 1984) (Commission acknowledged staff

practice of employing these criteria in determining whether a person is, or is not, a CPO); and

CFTC Staff Letter No. 06-27 92005-2007 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶30,397

(Sep. 26, 2006) (Division granted a CPO an exemption to keep pool books and records with the

pool’s administrator and its distributor, neither of which was thereby deemed to be acting as a

CPO of the pool.)

5

Three new funds are currently in the process of registration with the Securities and

Exchange Commission (“SEC”) and have had their prospectuses/Disclosure Documents

reviewed by the National Futures Association (“NFA”) and the Financial Industry Regulatory

Authority (“FINRA”).

Page 4

schedule of books and records it intends to keep under the Relief, in the same form as it has

submitted in connection with “A’s” request of Relief for the Funds.

Accordingly, pursuant to the authority delegated in Regulation 140.93(a)(1), “A” may

claim the Relief for any Future Fund it operates by filing a notice with NFA identifying the

Future Fund and stating therein that the Future Fund Representations are true and correct with

respect to the Future Fund so identified

as it has

submitted in connection with “A’s” request of Relief for the Funds.

Accordingly, pursuant to the authority delegated in Regulation 140.93(a)(1), “A” may

claim the Relief for any Future Fund it operates by filing a notice with NFA identifying the

Future Fund and stating therein that the Future Fund Representations are true and correct with

respect to the Future Fund so identified.

Consistent with prior practice,6 any exemption effective hereunder from the books and

records location requirement of Regulation 4.23 is subject to the conditions that: (1) “A” notify

the Division and NFA if the location of any of the books and records required to be kept by

Regulation 4.23 changes from that as represented to the Division; (2) “A” remain responsible for

ensuring that all books and records required by Regulation 4.23 are kept in accordance with

Regulation 1.31 and for assuring the availability of such books and records to the Commission,

NFA, and any other agency authorized to review such books and records in accordance with the

Act and Commission regulations; (3) within forty-eight hours after a request by a representative

of any of the foregoing, “A” obtain the original books and records from “F’s” offices in

__________, and will provide them for inspection at “A’s” main business office in __________;

(4) “A” disclose in the Disclosure Document of each Fund or Future Fund, as the case may be,

the location of its books and records that are required under Regulation 4.23; and (5) “A” remain

fully responsible for compliance with Regulation 4.23.

This letter exempts “A” from Regulations 4.21, 4.22 and 4.23, as stated above. It does

not excuse “A” from compliance with any other aspect of the Commission’s disclosure, reporting

and recordkeeping requirements for registered CPOs, nor does it excuse “A” from compliance

with any other applicable requirements contained in the Act or in the Commission’s regulations

issued thereunder

4.23.

This letter exempts “A” from Regulations 4.21, 4.22 and 4.23, as stated above. It does

not excuse “A” from compliance with any other aspect of the Commission’s disclosure, reporting

and recordkeeping requirements for registered CPOs, nor does it excuse “A” from compliance

with any other applicable requirements contained in the Act or in the Commission’s regulations

issued thereunder. For example, “A” remains subject to Regulation 1.31, and the Commission

maintains its right under that regulation to inspect the required books and records of “A” at “F’s”

offices in __________. Additionally, “A” remains subject to all antifraud provisions of the Act

and the Commission’s regulations, to the reporting requirements for traders set forth in Parts 15,

18 and 19 of the Commission’s regulations, and to all other applicable provisions of Part 4.

This letter is based upon the representations made to us and is subject to compliance with

the conditions set forth above. Any different, changed or omitted material facts or circumstances

might render this letter and the exemptions granted herein void. In this connection, you must

notify us immediately in the event that the operations of “A”, a Fund or a Future Fund change in

any material way from those represented to us.

6

See, e.g., Staff Letter 06-27.

Page 5

If you have any questions concerning this correspondence, please contact me or

Christopher W. Cummings, Special Counsel, at (202) 418-5445.

Very truly yours,

Ananda Radhakrishnan

Director