Division of Swap Dealer and Intermediary Oversight issued a no-action letter stating that it will not recommend that the Commission take enforcement action against commodity pool operators of registered funds for fail...

Summary: Division of Swap Dealer and Intermediary Oversight issued a no-action letter stating that it will not recommend that the Commission take enforcement action against commodity pool operators of registered funds for failure to provide a separate report for their controlled foreign corporations to the National Futures Association pursuant to Commission regulation 4.27(c) and a separate annual report for their controlled foreign corporations to the National Futures Association pursuant to Commission regulation 4.22(c); provided that such commodity pool operators consolidate the reporting for the controlled foreign corporations under Commission regulations 4.27(c) and 4.22(c) with those of the registered fund.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5977

Facsimile: (202) 418-5407

gbarnett@cftc.gov

Division of Swap Dealer and

Intermediary Oversight

Gary Barnett

Director

CFTC Letter No. 13-51

No-Action

September 5, 2013

Division of Swap Dealer and Intermediary Oversight

Karrie McMillan

General Counsel

Investment Company Institute

1401 H Street, NW, Suite 1200

Washington, DC 20005

Timothy W. Cameron, Esq.

Managing Director, Asset Management Group

Securities Industry and Financial Markets Association

120 Broadway, 35th Floor

New York, NY 10271

Matthew J. Nevins, Esq.

Managing Director and Associate General Counsel,

Asset Management Group

Securities Industry and Financial Markets Association

120 Broadway, 35th Floor

New York, NY 10271

Re:

Request for Confirmation and No-Action Relief Regarding Application of Certain

Reporting Obligations under Part 4 of the Commission’s Regulations Concerning

Certain Subsidiaries of Registered Investment Companies

Dear Ms. McMillan and Messrs

e General Counsel,

Asset Management Group

Securities Industry and Financial Markets Association

120 Broadway, 35th Floor

New York, NY 10271

Re:

Request for Confirmation and No-Action Relief Regarding Application of Certain

Reporting Obligations under Part 4 of the Commission’s Regulations Concerning

Certain Subsidiaries of Registered Investment Companies

Dear Ms. McMillan and Messrs. Cameron and Nevins:

This letter is in response to your correspondence, dated April 10, 2013, to the Division of

Swap Dealer and Intermediary Oversight (“Division”) of the U.S. Commodity Futures Trading

Commission (“Commission”)1 on behalf of the members of the Investment Company Institute

(“ICI”) and the Asset Management Group of the Securities Industry and Financial Markets

1 See letter from Investment Company Institute and Securities Industry and Financial Markets Association Asset

Management Group to Gary Barnett, Director of the Division of Swap Dealer and Intermediary Oversight, dated

April 10, 2013 (“Correspondence”).

ICI and SIFMA AMG

Page 2

Association (“SIFMA AMG”) for whom you requested confirmation and no-action relief

regarding the application of certain reporting obligations under Part 4 of the Commission’s

regulations (“Regulations”) to commodity pool operators (“CPOs”) of registered investment

companies (“registered funds”)2 that trade in commodity interests through wholly-owned

subsidiaries3 (known as controlled foreign corporations or “CFCs”) that are consolidated with

such registered funds for financial reporting purposes.4

Request for Confirmation and No-Action Relief

Regulation 4.27(c)

In the Correspondence, you requested confirmation that CPOs of registered funds that

consolidate their CFCs for financial reporting purposes may report for a registered fund and its

CFCs on a consolidated basis under Commission Regulation 4.27(c).5

In support, you noted that, in most cases, registered funds that trade in commodity

or Confirmation and No-Action Relief

Regulation 4.27(c)

In the Correspondence, you requested confirmation that CPOs of registered funds that

consolidate their CFCs for financial reporting purposes may report for a registered fund and its

CFCs on a consolidated basis under Commission Regulation 4.27(c).5

In support, you noted that, in most cases, registered funds that trade in commodity

interests through CFCs consolidate the financial statements of the CFC into the registered fund’s

financial statements for financial reporting purposes, which results in the financial statements’

disclosing the CFC’s investments as if the registered fund held them directly, and that this

practice is permitted by U.S. generally accepted accounting principles (“U.S. GAAP”) and has

been explicitly permitted by the U.S. Securities and Exchange Commission (“SEC”) staff for

SEC reporting purposes.6 You also noted that, recently, the SEC has required registered funds to

consolidate wholly-owned subsidiaries when that subsidiary is an extension of the parent

investment company’s operations.7

In addition, you noted that registered fund complexes that consolidate their funds’ CFCs

have established financial reporting systems that combine the assets, liabilities, income, and

expenses of the registered fund and the CFC for reporting purposes.8 You noted that, in order to

gather the CFC’s data, CPOs of such registered funds would need to either manually isolate the

CFC’s data, which may increase the likelihood of error, or implement, on a temporary basis,

2 The Correspondence does not explicitly indicate what constitutes “registered funds.” For purposes of this Division

letter, “registered funds” means investment companies registered as such under the Investment Company Act of

1940 (“Investment Company Act”)

’s data, which may increase the likelihood of error, or implement, on a temporary basis,

2 The Correspondence does not explicitly indicate what constitutes “registered funds.” For purposes of this Division

letter, “registered funds” means investment companies registered as such under the Investment Company Act of

1940 (“Investment Company Act”).

3 The Correspondence does not explicitly indicate what constitutes “wholly-owned subsidiaries.” For purposes of

this Division letter, the term “wholly-owned subsidiary” incorporates the definition provided in section 2 of the

Investment Company Act. 15 U.S.C. 80a-2.

4 See Correspondence, supra n.1.

5 Correspondence, at 4. To illustrate the timing under your request, you noted that if the Compliance Date (defined

below) is August 1, 2013, a quarterly Form CPO-PQR filer would file its first Form CPO-PQR with respect to the

quarter ending September 30, 2013.

6 Correspondence, at 3.

7 Id.

8 Correspondence, at 4.

ICI and SIFMA AMG

Page 3

financial reporting systems that would isolate the CFC’s data until the date upon which the CPOs

of registered funds are required to comply with Part 4 of the Regulations following the adoption

of a final rule harmonizing the Commission’s compliance regime with that of the SEC

(“Compliance Date”),9 at which point the CPOs would have to revert to the previous

consolidated financial reporting system.10

In addition, you requested in a footnote that the relief be extended to CPOs that are in the

process of converting from separate financial reporting to consolidated financial reporting for the

registered funds and the CFCs they operate, and that such relief should apply to a CPO that

operates at least one registered fund that consolidates its CFC for financial reporting purposes;

provided that such CPO’s remaining registered funds’ next audited financial statements

consolidate their CFCs for financial reporting purposes.11

Regulation 4.22(c)

In the Corre

cial reporting for the

registered funds and the CFCs they operate, and that such relief should apply to a CPO that

operates at least one registered fund that consolidates its CFC for financial reporting purposes;

provided that such CPO’s remaining registered funds’ next audited financial statements

consolidate their CFCs for financial reporting purposes.11

Regulation 4.22(c)

In the Correspondence, you also requested that the Division provide no-action relief to

permit CPOs of registered funds that consolidate their CFCs for financial reporting purposes to

file with the National Futures Association (“NFA”) an annual report for the CFC, to the extent

required by Regulation 4.22(c), that contains audited consolidated financial statements of the

registered fund, in lieu of a separate annual report for the CFC.12 In addition, you requested that

the Division permit registered fund CPOs to file the CFC’s first such annual report with respect

to the fiscal year of the registered fund that ends after the Compliance Date.13

In support, you noted that preparing the annual report in this manner would be consistent

with how these registered funds provide financial information in their audited financial

statements, as included in annual reports provided to shareholders and filed with the SEC.14 You

also noted that the annual reports to shareholders must contain audited financial statements

prepared in accordance with U.S. GAAP.15

You also stated, as discussed above, that most registered funds that own CFCs prepare

their audited financial statements on a consolidated basis, and such registered funds would not

9 To illustrate the timing under your request, you noted that if the Compliance Date is August 1, 2013, a quarterly

Form CPO-PQR filer would file its first Form CPO-PQR with respect to the quarter ending September 30, 2013

funds that own CFCs prepare

their audited financial statements on a consolidated basis, and such registered funds would not

9 To illustrate the timing under your request, you noted that if the Compliance Date is August 1, 2013, a quarterly

Form CPO-PQR filer would file its first Form CPO-PQR with respect to the quarter ending September 30, 2013.

Note, that the harmonization final rule was published in the Federal Register starting at 78 FR 52308 on August 22,

2013.

10 Id.

11 Correspondence, at 3

12 Correspondence, at 4.

13 Id. To illustrate the timing under your request, you noted that if the Compliance Date is August 1, 2013, and a

registered fund’s fiscal year end is September 30, then the first such annual report would be for the fiscal year

ending September 30, 2013.

14 Id.

15 Correspondence, at 5.

ICI and SIFMA AMG

Page 4

prepare separate audited financial statements for the CFCs.16 You further noted that preparing

separate audited financial statements for the CFC would require registered funds to incur

unnecessary and redundant costs associated with preparing financial statements for the CFC, as

well as costs associated with an audit of the CFC’s financial statements.17 You noted that it

would be costly and inefficient, and would provide no additional benefit to the Commission to

require the CPO to such CFC to file an annual report with the NFA that includes separate audited

financial statements of the CFC, as the registered fund’s audited consolidated financial

statements would include all required financial information for the registered fund, including the

holdings, gains and losses, and other financial statement amounts attributable to the CFC.18

Regulatory Background

The Commodity Exchange Act (“Act”)19 defines “commodity pool” as follows:

The term “commodity pool” means any investment trust, syndicate, or similar

form of enterprise operated for the purpose of trading in commodity interests, including

any—

(

tered fund, including the

holdings, gains and losses, and other financial statement amounts attributable to the CFC.18

Regulatory Background

The Commodity Exchange Act (“Act”)19 defines “commodity pool” as follows:

The term “commodity pool” means any investment trust, syndicate, or similar

form of enterprise operated for the purpose of trading in commodity interests, including

any—

(i) commodity for future delivery, security futures product, or swap;

(ii) agreement, contract, or transaction described in section 2(c)(2)(C)(i) of this

title or section 2(c)(2)(D)(i) of this title;

(iii) commodity option authorized under section 6c of this title; or

(iv) leverage transaction authorized under section 23 of this title.20

A definition of a “pool” is also provided in Regulation 4.10(d), which is substantively

identical to the statutory definition of a commodity pool.21

A definition of CPO is provided in section 1a(11) of the Act, which states, in part:

The term “commodity pool operator” means any person—

(i) engaged in a business that is of the nature of a commodity pool, investment

trust, syndicate, or similar form of enterprise, and who, in connection therewith,

solicits, accepts, or receives from others, funds, securities, or property, either

16 Id.

17 Id.

18 Id.

19 7 U.S.C. § 1 et seq.

20 7 U.S.C. § 1a(10).

21 See 17 CFR § 4.10(d).

ICI and SIFMA AMG

Page 5

directly or through capital contributions, the sale of stock or other forms of

securities, or otherwise, for the purpose of trading in commodity interests,

including any—

(I) commodity for future delivery, security futures product, or swap;

(II) agreement, contract, or transaction described in section 2(c)(2)(C)(i)

of this title or section 2(c)(2)(D)(i) of this title;

(III) commodity option authorized under section 6c of this title; or

(IV) leverage transaction authorized under section 23 of this title; or

ng in commodity interests,

including any—

(I) commodity for future delivery, security futures product, or swap;

(II) agreement, contract, or transaction described in section 2(c)(2)(C)(i)

of this title or section 2(c)(2)(D)(i) of this title;

(III) commodity option authorized under section 6c of this title; or

(IV) leverage transaction authorized under section 23 of this title; or

(ii) who is registered with the Commission as a commodity pool operator.22

A CPO is also defined in Regulation 1.3(cc), which is substantively identical to the

statutory definition of a CPO.23

Thus, as recently stated by the Commission, a CFC that is used for the purpose of trading

in commodity interests and is a wholly-owned subsidiary of a registered fund is considered to be

a separate “commodity pool” or a “pool” apart from the parent registered fund.24 If a person is a

CPO of a registered fund that uses a CFC meeting the definition of “commodity pool” or “pool,”

that CPO is required to register with the Commission as the CPO of such CFC and is subject to

compliance with Part 4 of the Regulations with respect to such CFC, unless such CFC can satisfy

the criteria for an exemption or exclusion for its CPO from registration. Moreover, the analysis

of whether a CPO of a CFC is subject to registration and compliance with Part 4 of the

Regulations is independent of whether the activities of the parent registered fund trigger

registration of such parent registered fund’s CPO. Therefore, it is possible for a CPO of a CFC

to be required to be registered and subject to Part 4 of the Regulations, even if the CPO of the

parent registered fund is excluded from the definition of a CPO pursuant to Regulation 4.5.

Under the Regulations, a registered CPO has various reporting and filing requirements

gistered fund trigger

registration of such parent registered fund’s CPO. Therefore, it is possible for a CPO of a CFC

to be required to be registered and subject to Part 4 of the Regulations, even if the CPO of the

parent registered fund is excluded from the definition of a CPO pursuant to Regulation 4.5.

Under the Regulations, a registered CPO has various reporting and filing requirements.

Regulation 4.27(c) requires, among other things, a registered CPO to file with NFA a report with

respect to the directed assets of each pool under the advisement of the registered CPO consistent

with Appendix A of Part 4 of the Regulations (i.e. Form CPO-PQR).25

22 7 U.S.C. § 1a(11).

23 See 17 CFR § 1.3(cc).

24 See 77 FR 11260. Such CFCs are typically not eligible for exclusion under the terms of Regulation 4.5, because

CFCs, by virtue of being foreign entities, are generally not eligible for registration under the Investment Company

Act. See 15 U.S.C. § 80a-7(d). You do not dispute that the CFC is a separate legal entity, which the Commission

considers to be a commodity pool, and that, absent relief, the CPO of the CFC would be required to report to the

Commission independent of any exemption or exclusion applicable to the CPO of the parent registered fund.

25 17 CFR § 4.27(c)(1).

ICI and SIFMA AMG

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Also, Regulation 4.22(c) requires that, “[e]xcept as provided in paragraph…(c)(8) of this

section, each commodity pool operator registered or required to be registered under the Act must

distribute an Annual Report to each participant in each pool that it operates, and must

electronically submit a copy of the Report and key financial balances from the Report to the

National Futures Association pursuant to the electronic filing procedures of the National Futures

Association, within 90 calendar days after the end of the pool’s fiscal year….”26 Regulation

4.22(c)(8) states that, “[f]or the purpose of the Annual Report distribution require

that it operates, and must

electronically submit a copy of the Report and key financial balances from the Report to the

National Futures Association pursuant to the electronic filing procedures of the National Futures

Association, within 90 calendar days after the end of the pool’s fiscal year….”26 Regulation

4.22(c)(8) states that, “[f]or the purpose 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 has invested; Provided, That the Annual Report of such

investing pool contain financial statements that include such information as the Commission may

specify concerning the operations of the pool in which the commodity pool has invested.”27

Consequently, with respect to the requirements of Regulation 4.27(c), a registered CPO

of a wholly-owned CFC is required to file a Form CPO-PQR with NFA with respect to the CFC

for each reporting period as defined in Regulation 4.27 and the instructions to Form CPO-PQR

(“Reporting Period”), independent of any obligations of the CPO of the parent registered fund.

With respect to the requirements of Regulation 4.22(c), although the CPO of a CFC does not

have to distribute an annual financial statement to the CFC’s parent registered fund where such

CPO is also the CPO of the parent registered fund,28 the CPO of the CFC must still file an annual

financial statement with NFA pursuant to Regulation 4.22(c).

No-Action Relief Granted

Regulation 4.27(c)

Based on the foregoing and the representations made in your correspondence requesting

confirmation and no-action relief, the Division believes that granting no-action relief is

warranted with respect to certain requirements of Regulation 4.27(c)

of the CFC must still file an annual

financial statement with NFA pursuant to Regulation 4.22(c).

No-Action Relief Granted

Regulation 4.27(c)

Based on the foregoing and the representations made in your correspondence requesting

confirmation and no-action relief, the Division believes that granting no-action relief is

warranted with respect to certain requirements of Regulation 4.27(c). Accordingly, the Division

will not recommend that the Commission take an enforcement action against a CPO of a

registered fund that uses a wholly-owned CFC for the purpose of trading in commodity interests

for failure to provide a report with respect to such CFC to NFA pursuant to Regulation 4.27(c)

until the deadline for the next applicable Reporting Period following the Compliance Date,

where the CPO of the CFC is also the CPO of the parent registered fund;29 provided that:

26 17 CFR § 4.22(c).

27 17 CFR § 4.22(c)(8).

28 Id.

29 This relief does not apply in a scenario where an entity operating both a CFC and a registered fund is excluded

from the definition of CPO with respect to the operation of that registered fund.

ICI and SIFMA AMG

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(i) the CPO provides a consolidated report for the registered fund that includes the data

for its CFCs to NFA pursuant to Regulation 4.27(c) for the next applicable Reporting

Period following the Compliance Date; and

(ii) the CPO either:

(I) currently consolidates the registered fund’s wholly-owned CFC’s financial

statements with those of the parent registered fund’s financial statements for

financial reporting purposes; or

(II) is in the process of converting from separate financial reporting to

consolidated financial reporting for the registered fund and CFCs it operates;

provided that:

(1) such CPO operates at least one registered fund that currently

consolidates its CFC for financial reporting purposes; and

ose of the parent registered fund’s financial statements for

financial reporting purposes; or

(II) is in the process of converting from separate financial reporting to

consolidated financial reporting for the registered fund and CFCs it operates;

provided that:

(1) such CPO operates at least one registered fund that currently

consolidates its CFC for financial reporting purposes; and

(2) such CPO’s other registered funds consolidate their CFCs for financial

reporting purposes for the next applicable Reporting Period following the

Compliance Date.

For all subsequent Reporting Periods after the Compliance Date, the CPO must either file

a consolidated report consistent with the relief provided herein or make a separate filing on

behalf of the CFC pursuant to Regulation 4.27(c).

This no-action relief is not self-executing. Rather, a CPO that is eligible for this relief

must file a claim to perfect the use of this relief consistent with the procedures set forth below.

A claim submitted by a CPO will be effective upon filing, so long as the claim is materially

complete, and must be filed by before the end of the next applicable Reporting Period following

the Compliance Date.

Regulation 4.22(c)

Based on the foregoing and the representations made in your correspondence requesting

confirmation and no-action relief, the Division also believes that granting no-action relief is

warranted with respect to certain requirements of Regulation 4.22(c). Accordingly, the Division

will not recommend that the Commission take an enforcement action against a CPO of a

registered fund that uses a wholly-owned CFC for the purpose of trading in commodity interests

for failure to distribute an annual report with respect to such CFC to NFA pursuant to Regulation

4.22(c) where the CPO of the CFC is also the CPO of the parent registered fund;30 provided that:

30 Id.

ICI and SIFMA AMG

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gainst a CPO of a

registered fund that uses a wholly-owned CFC for the purpose of trading in commodity interests

for failure to distribute an annual report with respect to such CFC to NFA pursuant to Regulation

4.22(c) where the CPO of the CFC is also the CPO of the parent registered fund;30 provided that:

30 Id.

ICI and SIFMA AMG

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(i) the CPO prepares an annual report of the registered fund that contains consolidated

audited financial statements for the registered fund that includes, and also separately

indicates, the holdings, gains and losses, and other financial statement amounts

attributable to the CFC; and

(ii) the CPO submits such annual report of the registered fund to NFA, in lieu of a

separate annual report of the CFC, for the next fiscal year of the registered fund that ends

after the Compliance Date, and, going forward, for all subsequent fiscal years (as

applicable).

This no-action relief is not self-executing. Rather, a CPO that is eligible for this relief

must file a claim to perfect the use of this relief consistent with the procedures set forth below.

A claim submitted by a CPO will be effective upon filing, so long as the claim is materially

complete, by the end of the next fiscal year of the registered fund that ends after the Compliance

Date.

Procedures to Claim No-Action Relief

To obtain the no-action relief provided in this letter, the notice of claim must:

t the use of this relief consistent with the procedures set forth below.

A claim submitted by a CPO will be effective upon filing, so long as the claim is materially

complete, by the end of the next fiscal year of the registered fund that ends after the Compliance

Date.

Procedures to Claim No-Action Relief

To obtain the no-action relief provided in this letter, the notice of claim must:

(i) state the name, main business address, and main business telephone number of the

CPO claiming the relief;

(ii) state the capacity (i.e. CPO) and the name of the CFC(s) for which the claim is being

filed and the name of the parent registered fund matched with each CFC;

(iii) be signed by the CPO;31 and

(iv) be filed with the Division via email using the email address dsionoaction@cftc.gov

with the subject line of such email “CFC Letter 13-51).”

The no-action relief provided herein contains a collection of information, as that term is

defined in the Paperwork Reduction Act.32 Therefore, a control number for the collection must

be obtained from the Office of Management and Budget. In accordance with 44 U.S.C. §

3507(d) and 5 C.F.R. §§ 1320.8 and 1320.10, the Division will, by separate action, prepare an

information collection request for review and approval by OMB, and will publish in the Federal

Register a notice and request for public comments on the collection burdens associated with the

no-action relief.

31 This may be accomplished by attaching a PDF with a signature of the CPO.

32 44 U.S.C. § § 3501 et. seq.

arate action, prepare an

information collection request for review and approval by OMB, and will publish in the Federal

Register a notice and request for public comments on the collection burdens associated with the

no-action relief.

31 This may be accomplished by attaching a PDF with a signature of the CPO.

32 44 U.S.C. § § 3501 et. seq.

ICI and SIFMA AMG

Page 9

This letter, and the positions taken herein, represent the view of this Division only, and

do not necessarily represent the position or view of the Commission or of any other office or

division of the Commission. The relief issued by this letter does not excuse persons relying on it

from compliance with any other applicable requirements contained in the Act or in the

Regulations issued thereunder. Further, this letter, and the relief contained herein, is based upon

the representations made to the Division. Any different, changed or omitted material facts or

circumstances might render this no-action relief void.

Should you have any questions, please do not hesitate to contact Amanda Olear,

Associate Director, at 202-418-5283, or Chang Jung, Attorney-Advisor, at 202-418-5202.

Very truly yours,

Gary Barnett

Director

Division of Swap Dealer and

Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago