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February 09, 2006
Effective March 6, 2009, NFA withdrew this petition for rulemaking. View the Withdrawal of February 9, 2006 Petitions for Rulemaking letter for more information.
Via Overnight Delivery
Ms. Jean A. Webb
Re: Petition for Rulemaking to Amend CFTC Regulation 4.7
Dear Ms. Webb:
National Futures Association (NFA) respectfully petitions the Commission under CFTC Regulation 13.2 to amend Commission Regulation 4.7 to modify the annual reporting and notice of exemption requirements currently imposed upon commodity pool operators. The information required by CFTC Regulation 13.2 follows.
I. Text of Proposed Rule Amendments
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§ 4.7 Exemption from certain Part 4 requirements for commodity pool operators with respect to offering to qualified eligible persons and for commodity trading advisors with respect to advising qualified eligible persons.
(b) Relief available to commodity pool operators.
(3) Annual Report Relief.
(v) During any fiscal year a commodity pool operator does not trade a commodity interest as defined in §4.10(a) in an exempt pool, the pool operator is exempt from the Annual Report requirements under paragraphs 4.22(c) and (b)(3)(i) of this section for that pool, provided the commodity pool operator, within 90 calendar days after the end of such fiscal year, files with National Futures Association a statement to that effect and notifies each of the pool's current participants that it has no Annual Report filing requirement with National Futures Association for that fiscal year because the pool traded no commodity interests.
(d) Notice of claim for Exemption
(1) A notice of claim for exemption under this section must:
(viii) Be filed with the National Futures Association at its headquarters office (Attn: Director of Compliance, Compliance Department); and
(ix)(A)(1) Where the claimant is a commodity pool operator, except as provided in paragraph (d)(1)(iii)(A) of the section with respect to single investor pools and in paragraph (d)(1)(ix)(A)(2) of this section, be received by National Futures Association
(ii) Prior to any offer or sale of any participation in the exempt pool if the claimed relief includes that provided under paragraph (b)(1) of this section.
II. Nature of NFA's Interest
NFA is a futures association registered under Section 17 of the Commodity Exchange Act. Pursuant to a December 18, 2002 Order, the Commission authorized NFA to maintain and serve as the official custodian of commodity pool operator (CPO) Annual Reports. As a result, CPOs are required to file their Annual Reports, including those filed for pools operating under a claim for exemption under Commission Regulation 4.7, with NFA in accordance with Commission requirements. NFA is interested in ensuring that NFA's resources are properly allocated in order to regulate CPOs in the most efficient and effective manner. For the reasons explained below, NFA believes the proposed changes to Commission Regulations are designed to ensure that NFA does not expend resources in an area that does not further NFA's regulatory mission.
III. Supporting Arguments
The CFTC and NFA have worked collaboratively over the years to meet our shared mission of ensuring the integrity of the commodity futures markets. Throughout this collaboration, there has been an underlying theme of allocating the resources of our two regulatory bodies to areas where they are most needed in order to achieve this important mission. In addition to a proper allocation between NFA and the CFTC, however, it is also important for each regulatory body to properly allocate its own resources to its particular areas of responsibility.
In 2004, CFTC registered/NFA Member CPOs operated over 3,200 "commodity" funds. Although fifty percent of these funds did not trade a single futures contract in 2004, directly or indirectly, each was required to file an Annual Report (audited or unaudited) with NFA. NFA, in turn, expended over 4,700 staff hours collecting and analyzing annual financial statements filed on behalf of the 1,600 funds that did not trade any futures contracts.
Virtually all of the these 1,600 funds qualify for regulatory relief under CFTC Regulation 4.7 and their CPOs may file an uncertified financial statement for these funds. Unfortunately, collecting and analyzing uncertified financial statements consumes the same amount of staff resources as certified statements.
NFA does not believe that it is an effective use of our resources to collect and analyze financial statements for pools that did not trade any commodity interest in the preceding fiscal year and all of whose participants are qualified eligible participants under CFTC Regulation 4.7. These efforts do not further the mission of either the CFTC or NFA and actually detract from NFA's ability to focus our resources on matters involving commodity futures-where they should be utilized to ensure the integrity of those markets.
In its current form, CFTC Regulation 4.7 does not draw any distinction between those funds that traded futures, either directly or indirectly, in the prior year and those that did not. Therefore, NFA proposes that CFTC Regulation 4.7 be amended to provide that a CPO that operates a fund under a notice of exemption under Regulation 4.7 would not be required to file an Annual Report for that fund in a given year if the fund did not trade any commodity interest transactions in that year.
In lieu of the Annual Report, the CPO would be required to file a statement with NFA notifying NFA of this fact and would also be required to notify each of the pool's current participants that it is not required to file an Annual Report with NFA for the preceding fiscal year because the fund did not trade any commodity interests. NFA notes that a similar notification requirement is already in place for the disclosure relief contained in Regulation 4.7(b)(1)(i). This would be an ongoing notification requirement and would be required for each fiscal year until such time the fund either traded futures (and therefore would have to file an Annual Report) or was not otherwise subject to any Annual Report requirements. The CPO would continue to be subject to other NFA oversight for these pools, including examinations.
NFA also proposes that the timing of the notice of exemption for pools claiming relief under 4.7 be modified. Regulation 4.7(d)(1) currently requires a CPO to file the notice of exemption before the date a pool enters into any commodity interest transactions for all relief other than relief from the disclosure document requirements. For relief from the disclosure document requirements, the CPO is required to file the notice prior to any offer or sale of participation in the exempt pool. NFA does not see any current regulatory reason for this distinction. Many 4.7 exempt funds include information about commodity trading in their offering memoranda to preserve the ability to trade those interests in the future if the need arises in their trading strategies. However, prior to the time a fund that would be exempt under 4.7 actually trades a commodity interest, there is no compelling regulatory reason why the CFTC or NFA needs to be notified that the CPO is soliciting for the fund without a disclosure document. NFA can recall few, if any, regulatory actions relating to the sales practices of a 4.7 fund. Therefore, NFA recommends that Regulation 4.7 be amended to require a CPO to file the notice of exemption prior to the time the pool enters into any commodity transaction, regardless of the relief being sought.
IV. Request for No Action Relief
We recognize that, due to the requirements of the Administrative Procedures Act, proposes changes are unlikely to become effective before the 2005 Annual Reports are due. Therefore, we request that the Commission grant no-action relief to 4.7 exempt pools and CPOs that comply with the proposed requirements and include that relief in the proposing release.
NFA respectfully requests that the Commission amend Regulation 4.7 and provide temporary no-action relief as described above.
Very truly yours,