To Our Clients and Friends
Memorandum
friedfrank.com
CFTC Adopts Final Amendments to Annual
Report Requirements for Commodity
Pool Operators
The Commodity Futures Trading Commission (the “Commission” or “CFTC”) recently adopted final rules
amending its rules governing the Annual Report requirements for commodity pool operators (“CPOs”) (the
“Final Rules”), 81 Fed. Reg. 85147 (Nov. 25, 2016). The Final Rules substantially track the rules
proposed by the Commission several months ago (the “Proposed Rules”), 81 Fed. Reg. 51828 (Aug. 5,
2016), albeit with certain modifications and clarifications made in response to comments received by the
Commission and the Commission’s further consideration of these issues. As contemplated in the
Proposed Rules, the Final Rules codify certain forms of exemptive relief which Commission staff has
previously issued to CPOs on a case-by-case basis. In summary, the Final Rules:
(1) permit CPOs to use certain alternative accounting standards when preparing their Annual
Reports in addition to those currently permitted;
(2) provide an exemption from the audit requirement applicable to the Annual Report for a commodity
pool’s first fiscal year when the period from the day that the CPO first receives non-insider funds
to the end of the pool’s first fiscal year is four months or less; and
(3) clarify that an audited Annual Report must be distributed and submitted at least once during the
life of a pool.
The Final Rules become effective on December 27, 2016.
Use of Alternative Accounting Standards
CFTC Rule 4.22 generally requires that each CPO registered (or required to be registered) with the CFTC
distribute to each participant in each commodity pool it operates, and submit to the National Futures
Association (“NFA”), an “Annual Report” for the pool within 90 calendar days after the end of such pool’s
fiscal year, containing financial statements presented and computed in accordance with U.S. generally
accepted accounting principles (“GAAP”). The rule also includes an exception to this requirement that
permits the use of International Financial Reporting Standards (“IFRS”) when certain criteria are met.
Specifically, under Rule 4.22(d)(2), a CPO seeking to rely on the exception must claim the relief by filing a
signed notice with NFA representing that the following conditions are met:

the pool is organized under the laws of a foreign jurisdiction;
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A Delaware Limited Liability Partnership
12/05/16
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Fried Frank Client Memorandum

the Annual Report will include a schedule of investments (condensed, unless a full schedule is
required under IFRS);

the use of IFRS to prepare the Annual Report is not inconsistent with representations set forth in
the pool’s offering memorandum or other operative documents made available to participants;

any special allocations of ownership equity will be reported in accordance with the requirements
for the pool’s Statement of Operations to be included in the Annual Report; and

in the event that IFRS requires consolidated financial statements for the pool (e.g., in a masterfeeder fund structure), all applicable disclosures required by U.S. GAAP will be provided.
In practice, the CFTC staff has also been providing relief on a case-by-case basis to CPOs to use the
accounting principles, standards or practices followed in the U.K., Ireland, Luxembourg or Canada (each,
an “Additional Alternative GAAP”) in their Annual Reports.
The Final Rules amend Rule 4.22(d)(2) to permit the use of the accounting practices of these jurisdictions
in the same manner as for IFRS. Thus, a CPO may now claim this relief by filing a notice with NFA
containing the same representations required for a CPO seeking to use IFRS.
In response to commenters concerned about disparate treatment of Annual Reports under revised Rule
4.22 and periodic reports under Rule 4.7(b), the Commission also is amending Rule 4.7(b)(2)(v) to permit
the use of an Additional Alternative GAAP for periodic financial statements prepared and distributed for a
pool for which the CPO has claimed relief under Rule 4.7(b).
In a similar conforming change, the Commission is amending Rule 4.27(c)(2) to allow CPOs that elect to
use an Additional Alternative GAAP for the pool’s Annual Report also to use such Additional Alternative
GAAP in connection with reporting financial information on Form CPO-PQR.
Relief from the Audit Requirement Where the First Fiscal Year Is a Period of Four Months or Less
from the Date on Which the CPO First Receives Non-Insider Funds
Rule 4.22 also generally requires that the Annual Report distributed to pool participants and submitted to
NFA within 90 days of the fiscal year-end be audited. For example, the CPO of a pool formed two
months before the end of the pool’s first fiscal year is required to distribute and submit an audited Annual
Report for that two-month fiscal year, regardless of the particular circumstances involved, even where the
pool has few investors and has accepted limited contributions, absent exemptive relief. The Commission
recognized in the Proposed Rules that this audit requirement may be unduly burdensome in the case of
pools formed close to the end of the fiscal year and, consistent with that view, CFTC staff has previously
issued exemptive relief in such circumstances.1
Accordingly, the Commission is amending Rule 4.22 to provide for an exemption from the audit
requirement for a pool’s first fiscal year when the period from the date that the CPO first receives funds,
securities or other property from a person who is not a pool “insider”, as further discussed below (the
“Initial Date”) to the end of the pool’s first fiscal year is four months or less, subject to certain terms
and conditions.
1
See Commodity Pool Operator Financial Reports, 81 Fed. Reg. 85147, 85150 (Nov. 25, 2016).
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Fried Frank Client Memorandum
Among other things, the exemption is subject to compliance with the condition that the next Annual
Report that the CPO distributes and submits is audited and covers the time period from the Initial Date to
the end of the pool’s first 12-month fiscal year.
Specifically, a CPO may claim this relief where:

the time period from the Initial Date to the end of the pool’s first fiscal year is four months or less
(referred to as the “stub period”);

throughout the stub period, the pool has no more than fifteen participants; and

throughout the stub period, the aggregate gross capital contributions received by the CPO for
units of participation in the pool (notwithstanding any subsequent withdrawals) does not
exceed $3,000,000.
For purposes of determining eligibility for the relief, the following persons are considered pool “insiders” –
they do not need to be counted towards the fifteen-participant limit and their capital contributions do not
need to be counted toward the $3,000,000 limit:
(1) the pool’s CPO, its commodity trading advisor, any person controlling, controlled by, or under
common control with the CPO or trading advisor, and any principal of the foregoing;
(2) a child, sibling or parent of the participants described in item (1);
(3) the spouse of any of the participants described in item (1) or (2);
(4) any relative of one of the participants described in items (1) through (3), their spouse or a relative
of their spouse, who has the same principal residence as such participant; and
(5) an entity that is wholly-owned by one or more of the participants described in items (1) – (4)
above.
In addition to the criteria described above, a CPO claiming this relief must:

obtain, prior to the date on which the Annual Report for the pool’s first fiscal year is due, a written
waiver of the right to receive an audited Annual Report for that fiscal year from each pool
participant other than the pool’s CPO, its commodity trading advisor, any person controlling,
controlled by, or under common control with the CPO or trading advisor, and any principal of
the foregoing;

Note that the waiver may be included in the subscription agreement for the pool or other
agreement with the participant, but the waiver must be on a separate page in the agreement
that the participant must separately sign and date.

The language of the waiver must be in a form substantially as follows:
“[Name of participant], a participant in [Name of pool], voluntarily waives the right under
CFTC Regulation 4.22(d) to receive an audited Annual Report for the fiscal year ended [end
date of the pool’s first fiscal year] and will accept in lieu thereof an unaudited Annual Report
covering [the stub period] and an audited Annual Report covering [the start date of the stub
period] through [the end date of the pool’s first twelve-month fiscal year].”
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Fried Frank Client Memorandum

retain the waiver in accordance with the CPO recordkeeping rules in CFTC Rule 4.23; and

on or before the date on which the Annual Report for the pool’s first fiscal year is due, file a notice
of claim with NFA, along with a certification that the CPO received the specified written waiver
from each of the pool’s participants (other than the CPO, its commodity trading advisor, any
person controlling, controlled by, or under common control with the CPO or trading advisor, and
any principal of the foregoing).
This notice filing is based substantially on the notice required to claim relief to present and compute an
Annual Report in accordance with IFRS.
Additionally, the CPO is required to include on the cover of each Annual Report for which relief has been
claimed a prescribed statement that provides information regarding whether the Annual Report is
unaudited or audited and the period of time that the Annual Report covers.
In response to commenters’ questions, the Commission further clarified that, once the Final Rules are
effective, it will entertain requests for relief from the audit requirement with respect to stub-period Annual
Reports only under exceptional circumstances involving unique situations.
The Final Rules also provide that a pool’s Annual Report does not need to be audited for any fiscal year
during which the only participants in the pool are one or more of the following: the pool’s CPO, its
commodity trading advisor, any person controlling, controlled by, or under common control with the CPO
or trading advisor, and any principal of the foregoing; provided that the CPO: (1) obtains written waivers
from the participants of their right to receive an audited Annual Report for that fiscal year; (2) keeps those
waivers as records pursuant to Rule 4.23; and (3) distributes an audited Annual Report at least once
during the life of the pool.
Limitation on Availability of Existing Audit Requirement Relief
Finally, Rule 4.22(c)(7) generally allows CPOs to provide pool participants with certain information and
disclosures (a “Final Report”) in lieu of an Annual Report if the pool ceases operation prior to, or as of, the
end of its fiscal year. Generally, the Final Report information must be audited, but the rule provides a
mechanism for relief in that auditing is not required if the CPO obtains waivers from all of the pool’s
participants.2 However, to ensure that an audit is conducted at least once during the life of a commodity
pool, the Commission is making the audit relief unavailable where a CPO has not previously distributed
an audited Annual Report to pool participants or submitted the audited Annual Report to NFA, pursuant to
amendments adopted as part of the Final Rules.
For example, the option to provide participants with an unaudited Final Report will no longer be available
where the CPO has claimed relief from issuing an audited Annual Report in respect of a pool formed
close to the end of the fiscal year (as discussed above), and the pool has ceased operations before the
end of its first twelve-month fiscal year. Thus, the CPO of a pool that is opened and closed in the same
fiscal year would be required to distribute and submit an audited Annual Report.
2
Note that the Final Rules further clarify that the waivers do not need to be obtained from the pool’s CPO, its
commodity trading advisor, any person controlling, controlled by, or under common control with the CPO or
trading advisor, and any principal of the foregoing.
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Fried Frank Client Memorandum
Conclusion
The Final Rules generally provide somewhat greater flexibility for CPOs with respect to their reporting
obligations under Rule 4.22. The restriction on the availability of audit requirement relief for Final Reports
may be problematic in certain circumstances, but the fact that CPOs now are able to forego providing
audited Annual Reports if the pool’s participants are solely insiders (as long as at least one audited
Annual Report has been issued during the life of the pool) may assist in ameliorating some of those
concerns. Ultimately, the Final Rules ease burdens on CPOs by permitting them greater flexibility with
respect to accounting standards for Annual Reports and affording them relief from the Annual Report
audit requirement where it would be costly and not obviously beneficial. Note that, although CPOs may
continue to request relief from the staff with respect to financial reporting requirements, the Commission
intends that staff restrict the issuance of any such relief from the standards set forth in the Final Rules to
exceptional circumstances involving unique situations. 3
*
*
*
Authors:
David S. Mitchell
Victoria T. Mazgalev
This memorandum is not intended to provide legal advice, and no legal or business decision should be
based on its contents. If you have any questions about the contents of this memorandum, please call your
regular Fried Frank contact or an attorney listed below:
3
See 81 Fed. Reg. 85147 at 85148.
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Fried Frank Client Memorandum
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