[Federal Register Volume 59, Number 93 (Monday, May 16, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-11380] [[Page Unknown]] [Federal Register: May 16, 1994] VOL. 59, NO. 93 Monday, May 16, 1994 COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 4, 30, 150 Proposed Amendments to Commodity Pool Operator and Commodity Trading Advisor Disclosure Rules AGENCY: Commodity Futures Trading Commission. ACTION: Proposed rules. ----------------------------------------------------------------------- SUMMARY: The Commodity Futures Trading Commission (``Commission'' or ``CFTC'') is proposing substantial revisions to the disclosure framework applicable to commodity pool operators (``CPOs'') and commodity trading advisors (``CTAs''). The proposed amendments reflect the Commission's experience in applying the disclosure requirements set forth in part 4 of the Commission's rules and significant evolution in the purposes, structure and activities of the managed funds marketplace. These proposed modifications of the CPO and CTA disclosure framework are designed to achieve greater simplicity, focus and clarity in performance history presentations; streamlining of other required disclosures; and a more concise and readable format for disclosure documents. DATES: Comments on the proposed rules must be received on or before July 15, 1994. ADDRESSES: Comments must be sent to Jean A. Webb, Secretary of the Commission, Commodity Futures Trading Commission, 2033 K Street, NW, Washington, DC 20581. FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief Counsel, or France M.T. Maca, Division of Trading and Markets, Commodity Futures Trading Commission, 2033 K Street NW., Washington, DC 20581. Telephone: (202) 254-8955. SUPPLEMENTARY INFORMATION: Commission Rule 4.211 requires that each CPO registered or required to be registered under the Commodity Exchange Act (``Act'' or ``CEA''), 7 U.S.C. 1 et seq. (1988 & Supp. 1992), provide prospective participants with a disclosure document containing the information specified in the rule on or before the date it solicits, accepts or receives funds, securities or other property from prospective participants for a pool it operates or intends to operate. Each CTA who is registered or required to be registered is also required, by Rule 4.31, to deliver a disclosure document prior to or at the time of soliciting or entering into an agreement to direct or guide the commodity interest account of a prospective client. These requirements were first promulgated on January 8, 1979, when the Commission published part 4 of its regulations relating to the operations and activities of CPOs and CTAs.2 --------------------------------------------------------------------------- \1\Commission rules referred to herein are found at 17 CFR Ch. I (1993). \2\44 FR 1918 (January 8, 1979). --------------------------------------------------------------------------- I. Summary of Proposed Rule Changes Based upon more than fifteen years of experience with administering the part 4 disclosure framework for CPOs and CTAs, the Commission has undertaken a comprehensive review of the disclosure requirements for CPOs and CTAs to identify areas in which the regulatory structure can be streamlined or simplified, while continuing to provide appropriate customer protection. Rules 4.7 and 4.8 were adopted in August 1992 as a result of the first phase of this review.3 This proposal represents the second phase of the Commission's review of part 4, which will also include consideration of the appropriateness of a two-part format for pool disclosure documents.4 The Commission is seeking public comment on proposed revisions of Rules 4.21 and 4.31. The amendments have three major purposes: (1) Simplification of past performance disclosures; (2) reduction of required disclosures as to matters of secondary relevance; and (3) clarification and modernization of various requirements. In addition, Rules 4.21 and 4.31 would be redrafted, reorganized and renumbered with a view towards greater clarity, simplicity and congruence with contemporary managed funds practices. --------------------------------------------------------------------------- \3\57 FR 34853 (August 7, 1992). Subject to certain conditions, Rule 4.7(a) provides relief from the specific requirements of Rules 4.21 and 4.23 and from certain of the requirements of Rule 4.22 to registered CPOs with respect to pools sold only to ``qualified eligible participants'' and satisfying the other conditions set forth in the rule. Rule 4.7(b) provides relief from the specific requirements of Rules 4.31 and 4.32 to registered CTAs with respect to the accounts of ``qualified eligible clients'' as defined in the rule. Rule 4.8 permits the CPOs of certain privately offered pools to solicit participants for those pools upon filing with the Commission and delivering to prospective participants the disclosure document required by Rule 4.21, eliminating the twenty-one day pre- filing requirement of Rule 4.21(g) for such pools. \4\If determined to be appropriate, such a document could consist of: A summary disclosure document, provided to all prospective pool participants, containing core information relevant to a determination to participate in the pool; and a supplemental document, which would be made available upon request, containing additional and more detailed information of interest to some investors. --------------------------------------------------------------------------- Proposed revisions to the disclosure requirements for CPO disclosure documents include the following. A. Performance Disclosures Under the proposal, past performance disclosures would be simplified and streamlined as follows. 1. All past performance presentations for pools would be reduced to a summary format containing specified core information. 2. For pools which have been in operation for at least three years, the only past performance record required generally would be that of the pool offered. 3. For pools with less than a three-year history, only the performance records of the pool offered, other pools operated by the CPO, CTAs allocated at least twenty-five percent of the aggregate initial futures margins and commodity option premiums for the pool offered and investee pools allocated at least twenty-five percent of the assets of the pool offered generally would be required. If the CPO has less than a three-year history, the past performance records of the CPO's principals would be required to be disclosed. 4. Certain performance data of secondary relevance to the pool offering would be replaced by a statement indicating whether that performance was ``adverse,'' i.e., the performance was one hundred basis points lower than the relevant Treasury Bill rate or the pool had to be terminated due to poor performance pursuant to a loss termination provision. B. Non-Performance Disclosures Non-performance disclosures would be revised as follows. 1. Required disclosures concerning the litigation history of futures commission merchants (``FCMs'') would be significantly reduced. 2. Disclosure of the business backgrounds of principals would be limited to principals who participate in making trading or operational decisions for the pool or CTA. 3. Requirements for disclosure of conflicts of interest would no longer make specific reference to FCMs and introducing brokers (``IBs''). However, a general requirement to disclose conflicts of interest on the part of any persons providing services to the pool, which would encompass FCMs and IBs as well as persons who may not be Commission registrants, would be included. 4. The required description of each fee and expense of the pool would be supplemented by a tabular presentation of fees and expenses setting forth how the ``break-even point'' for the pool is calculated. The break-even point is the per-unit profit that the pool must realize during its first year for a participant to recoup his initial investment in the pool. C. Format Improvements to Enhance Readability A number of revisions to the rules are being proposed to enhance the accessibility and prominence of relevant disclosures. Disclosure documents would be required to contain a table of contents. General information concerning the pool, including the break-even point, would be required to be set forth in the forepart of the document. The number and content of various previously required bold-face ``boilerplate'' cautionary statements would be reduced and all information voluntarily provided would be required to follow the relevant required disclosures. D. Other Revisions Changes are also proposed to generally facilitate pool offerings, particularly with respect to areas of overlap or potential inconsistency with Securities and Exchange Commission (``SEC'') rules. Thus, under the revisions, CPOs may update pool disclosure documents every nine months, consistent with SEC requirements, rather than every six months, as under current CFTC rules. In addition, CPOs may provide accredited investors with a notice of intended offering and term sheet, prior to delivery of a disclosure document. Similar changes are proposed to be made to the requirements applicable to CTA disclosure documents. The proposed changes are more specifically discussed in the section-by-section analysis. II. Background In announcing the adoption of part 4 in 1979, the Commission stated that Rule 4.21, the basic disclosure document requirement for CPOs, was intended ``to protect pool participants--particularly those who are unsophisticated in financial matters--by ensuring that they are informed about the material facts regarding the pool before they commit their funds.''5 Similarly, Rule 4.31 was premised, in part, upon the view that ``a prospective [CTA] client or subscriber should be aware of the advisor's commodity and general business experience if he is to make an informed decision as to whether or not to avail himself of the advisor's services.''6 --------------------------------------------------------------------------- \5\44 FR 1918, 1920. \6\42 FR 9278, 9279 (February 15, 1977). --------------------------------------------------------------------------- Section 4.21 requires the disclosure document for commodity pools to contain various types of information concerning the pool; the pool's CPO and CTA, and their principals; the FCM through which the pool's trades will be executed and cleared; and the pool's IB, if applicable. This information includes, among other things, the pool's and CPO's form of organization (Rule 4.21(a)(1)(i)); the pool's investment objectives (Rule 4.21(a)(1)(viii)); the business backgrounds of the CPO and CTA and their principals (Rule 4.21(a)(2)); material administrative, civil or criminal actions within the five years preceding the date of the disclosure document against the CPO, CTA, FCM and IB and their principals (Rule 4.21(a)(13)(i)); conflicts of interest on the part of the CPO, CTA, FCM, IB and their principals with respect to the pool (Rule 4.21(a)(3)(i)); the performance records of the pool and its CTA (Rules 4.21 (a)(4) and (a)(5), respectively) and, if the pool has traded commodity interests for less than twelve months, the performance of each other pool operated by the CPO and by each of its principals (Rule 4.21(a)(4)(i)(B)); a complete description of each kind of expense that the pool has incurred in its preceding fiscal year or is expected to incur in its current fiscal year (Rule 4.21(a)(7)) and of commissions or other fees that are paid or may be paid by the pool, its CPO, CTA or their principals in connection with solicitations for the pool (Rule 4.21(a)(14)); and risk disclosure and cautionary statements (Rules 4.21(a)(17) and 4.21(a)(18), respectively). The disclosure document for CTAs must contain, among other matters, the name and business background of the CTA and each principal thereof (Rules 4.21(a)(1) and 4.21(a)(2), respectively); a description of the trading program (Rule 4.31(a)(1)(iii)); the types of commodity interests the CTA intends to trade (Rule 4.31(a)(v)); the performance record of the CTA and its principals (Rule 4.31(a)(3)); a description of any conflict of interest regarding the trading program on the part of the CTA, FCM, IB and their principals (Rule 4.31(a)(5)); material actions against the foregoing persons (Rule 4.31(a)(7)); and risk disclosure and cautionary statements (Rules 4.31(a)(8) and 4.31(a)(9), respectively). Since the adoption of Rules 4.21 and 4.31 in 1979, the number of registered CPOs has more than doubled and the number of CTAs has increased nearly threefold.7 Assets under the management of CPOs have also grown dramatically8 and the range of available futures and option contracts has increased substantially.9 In addition, during the past decade, pool operations and investments have reflected increased diversity and complexity. When Rule 4.21 came into effect, most CPOs operated one or two pools, and pools usually had one CPO which generally directed the commodity interest trading for the pool or engaged the services of a CTA who invested pool assets directly in commodity interest contracts. Increasingly, however, CPOs operate multiple pools, and commodity pools' and CTAs' investments are more diverse and complex.10 A single commodity pool may engage multiple CTAs to provide advisory services for the pool and also invest in other commodity pools (``investee pools'') or securities funds in order to access the services of particular traders or advisors, to employ multiple trading strategies or programs, or to diversify its portfolio.11 ``Investee pools'' may also hold investments in other funds, resulting in multi-tiered structures of commodity pools and other investment vehicles. Because of the proliferation of trading strategies and growing specialization of CTAs, an increasing number of pools also retain ``trading managers'' to recommend or select CTAs for the pool or to select funds for investment of the pool's assets. Many CPOs and trading managers follow dynamic asset allocation strategies whereby the performance of the pool's CTAs is continuously reviewed and the selection of CTAs and allocation of assets among them are subject to frequent modification. Other commodity pools are formed as vehicles for collective access to particular CTAs whose services would not be readily available on a managed account basis and who are expected to provide advisory services to the pool throughout its existence. --------------------------------------------------------------------------- \7\In April 1979, 619 persons were registered as CPOs and 976 persons as CTAs. As of February 28, 1994 there were 1,265 registered CPOs and 2,511 registered CTAs. \8\Figures compiled by the National Futures Association indicate that the assets of commodity pools (both public and private) have more than doubled from 1988 to 1991, from approximately $8.6 billion to approximately $19 billion. Managed Accounts Reports (``MAR'') estimates public pool assets at $15 million in 1975, $250 million in 1980 and $435 million in 1983. These data reflect, in part, the increased use of managed futures by collective investment vehicles seeking to diversify their portfolios or manage the risks of securities, fixed income instruments or other assets. Concomitantly, institutional users such as state pension plans have increased their participation in managed futures. See Peltz, The road to managed futures--the institutional perspective, MAR Issue No. 181 (March 1994). In addition, many primarily securities vehicles invest a small portion of their assets in commodity interests pursuant to Rule 4.12(b), which went into effect on November 2, 1987. See note 13 infra. \9\Commodity futures and option contracts designated by the CFTC numbered 90 in 1978 and 419 as of April 18, 1994. \1\0For example, in addition to investing directly and indirectly in commodity interest contracts traded on U.S. contract markets, pools and managed accounts may engage in a variety of other transactions, such as swaps, Separate Trading of Registered Interest and Principal of Securities (also known as STRIPS), and repurchase and reverse repurchase agreements. \1\1For its Survey of Commodity Pool Operators, (the ``Pool Survey'') dated January 1991, the Commission's Division of Economic Analysis surveyed sixty-five large CPOs (defined as those with over $10 million in net assets under management) representing about 94 percent of the total $7.8 billion in net assets reported by the approximately 1,200 CPOs registered as of September 30, 1988. The Pool Survey indicated that, on average, each large CPO operated about four pools and employed about two CTAs per pool. At the upper end of the range, the Pool Survey showed two CPOs accounting for 20 or more pools each and three pools employing the services of as many as 14 CTAs each. The National Futures Association reported that, as of October 1993, for 300 pools the CPO also served as CTA, 376 pools had one CTA and 216 pools had more than one CTA. --------------------------------------------------------------------------- In implementing its statutory mandate to regulate the activities of CPOs and CTAs, the Commission has endeavored to refine its rules as appropriate to respond to changing market conditions and to simplify and streamline the disclosure process in a manner consistent with customer protection. For example, in 1985, the Commission adopted Rule 4.5, which, as last amended,12 provides an exclusion from the definition of the term ``commodity pool operator'' for the operators of specified types of collective investment vehicles operating pursuant to other regulatory frameworks, i.e., certain pension plans, registered investment companies, bank or trust company collective funds and insurance company separate accounts, whose use of futures and commodity option transactions is limited to hedging and to non-hedging transactions for which initial margin deposits and option premiums do not exceed five percent of the liquidation value of the entity's portfolio.\13\ --------------------------------------------------------------------------- \1\258 FR 43791 (August 18, 1993), effective September 17, 1993. \1\3Rule 4.12(b) allows the use of a simplified disclosure document that does not contain, among other things, the past performance records, risk disclosure and cautionary statements otherwise required by Rule 4.21. Thus, a pool's securities offering memorandum should require little supplementation to meet the requirements for a pool disclosure document under Rule 4.12(b). --------------------------------------------------------------------------- In 1987, the Commission adopted Rule 4.12(b), which provides relief from certain requirements of Rules 4.21, 4.22 and 4.23 with respect to pools that commit no more than ten percent of the fair market value of their assets to establish commodity interest positions and trade such commodity interests in a manner solely incidental to their securities trading. Also in 1987, the Commission adopted Rule 4.14(a)(8), which provides registration relief to investment advisers registered as such with the SEC, who provide commodity interest trading advice to trading vehicles that are excluded from the definition of the term ``pool'' under Rule 4.5 or are qualifying entities for which a notice of eligibility has been filed under Rule 4.5, provided that the investment adviser's commodity interest trading advice is solely incidental to the adviser's business of providing securities advice and consistent with Rule 4.5, and that the investment adviser does not otherwise hold itself out as a CTA. In August 1992, the Commission adopted Rule 4.7, which provides relief from certain part 4 requirements to CPOs offering pool participations and to CTAs offering managed accounts to certain highly accredited investors.14 Rule 4.7 also facilitates multi- jurisdictional offerings by making relief available for private offerings exempt from registration pursuant to section 4(2) of the Securities Act of 1933 (``Securities Act'') and pursuant to the SEC's Regulation S15 and by including certain foreign persons as eligible participants in pools qualifying for Rule 4.7 exemption.16 --------------------------------------------------------------------------- \1\4See note 3 supra. \1\5Regulation S generally provides that the registration requirements of the Securities Act do not apply to offers and sales of securities that occur outside the United States and provides two safe harbors from those requirements for specified offerings where no ``directed selling efforts'' are made in the United States. ``Directed selling efforts'' are activities undertaken for the purpose of, or that could reasonably be expected to result in, conditioning of the market in the United States for the securities being offered. See 55 FR 18306 at 18307 (May 2, 1990). \1\6As of April 5, 1994, relief has been claimed under Rule 4.7(a) for 360 pools, and 150 CTAs have claimed relief under Rule 4.7(b). --------------------------------------------------------------------------- In addition, the Division of Trading and Markets (``Division'') has issued relief on a case-by-case basis to facilitate application of the disclosure requirements in the context of new market conditions not contemplated by the existing regulatory framework, such as multiple CTA and fund-of-funds structures, with the objective of fostering clear and succinct disclosure of material information, especially concerning fees and the manner in which proceeds of the offering will be used. In many cases, strict application of existing disclosure requirements to pools whose CPOs have voluminous performance histories or which retain multiple CTAs or invest in multiple investee funds may result in such extensive track record disclosure that past performance records generally may be given undue emphasis and the most germane data given insufficient prominence. These effects have been mitigated in appropriate circumstances through grants of exemptive or no-action relief. For example, in Interpretative Letter No. 92-12,17 the Division granted relief from required disclosures (including disclosure of past performance records) concerning CTAs and investee pools allocated less than ten percent of the assets of the investor pool. The CPO had an operating history of more than three years and changed the pools' CTAs frequently based on its continuous analysis of over 500 CTAs. This relief has since been made available to other CPOs in similar circumstances. --------------------------------------------------------------------------- \1\7(1990-1992 Transfer Binder), Comm. Fut. L. Rep. (CCH) 25,343 (July 28, 1992). --------------------------------------------------------------------------- In Interpretative Letter 94-10, the Division granted relief permitting a CPO to use a summary format containing specified core information to present, in the disclosure document of a single-advisor pool, its past performance with respect to other pools operated by the CPO, none of which was advised by the same CTA as the single-advisor pool. The CTA advising the single-advisor pool had a ten-year track record that would be fully disclosed in the disclosure document of the single-advisor pool and the full performance record of the CPO's other pools would be available upon request.18 --------------------------------------------------------------------------- \1\8[Current Transfer Binder], Comm. Fut. L. Rep. (CCH) 25,991 (December 16, 1993). The Division also allowed the use of a capsule performance disclosure format in Interpretative Letter 94-12 under similar circumstances. [Current Transfer Binder], Comm. Fut. L. Rep. (CCH) 25,993 (December 27, 1993). In Interpretative Letter No. 93- 107 the Division granted relief permitting a CPO to omit disclosure of the past performance of certain single-advisor pools in the CPO's disclosure documents for two multi-advisor pools, provided that the CPO gave a brief description of the single-advisor pools and made their performance records available upon request. This relief was based upon representations that the CPO, which played an active role as an administrator and asset allocator for the multi-advisor pools, performed no asset allocation functions for the single-advisor pools and that the single-advisor pools served as vehicles to provide access to commodity pools advised by certain experienced CTAs whose minimum investment levels for managed accounts would otherwise have been prohibitive for individual investors. The CPO's track record as an asset allocator would be more significant in the context of multi-advisor funds than its track record in the context of single advisor funds, where the skill of the individual CTA would be of greater interest to prospective participants. [Current Transfer Binder], Comm. Fut. L. Rep. (CCH) 25,899 (October 26, 1993). --------------------------------------------------------------------------- In Interpretative Letter No. 92-9,19 the Division permitted a CPO to use a two-part disclosure document for a commodity pool provided, among other things, that both parts of the disclosure document were delivered at the same time and that the first part of the document contained all of the disclosures required by Rule 4.21 except for the disclosures required by Rule 4.21(a)(5) with respect to the performance records of the pool's CTAs, which were required to be included in the second part. By Advisory 27-92 (June 3, 1992), the Division gave notice that it had no objection to the use of a two-part disclosure document of the nature described above by other CPOs, subject to the conditions set forth in the foregoing letter. --------------------------------------------------------------------------- \1\9(1990-1992 Transfer Binder), Comm. Fut. L. Rep. (CCH) 25,300 (June 1, 1992). --------------------------------------------------------------------------- In reviewing CPO disclosure documents, Division staff has addressed fund-of-funds structures by requiring that certain disclosures be made with respect to investee pools but limiting these disclosures with respect to investee pools allocated less than twenty-five percent of the assets of the pool offered.20 The Division has also issued interpretative statements and advisories giving guidance with respect to the presentation of past performance in disclosure documents.21 --------------------------------------------------------------------------- \2\0Staff comment letters have stated that pool disclosure documents should provide all information required by Rule 4.21 for each investee pool, ``generally at the same level of detail as though the investee pool were providing its own separate disclosure document,'' but that reduced disclosures were appropriate where less than twenty-five percent of the assets of the pool offered is invested in the investee pool. Moreover, the staff indicated that it is always willing to address specific requests for relief and has done so in appropriate circumstances. \2\1See, e.g., CFTC Advisory 87-2, (1986-1987 Transfer Binder) Comm. Fut. L. Rep. (CCH) 23,624 (June 2, 1987), defining the term ``beginning net asset value'' for purposes of computing rate of return; CFTC Advisory dated February 27, 1991 (1990-1992 Transfer Binder) Comm. Fut. L. Rep. (CCH) 25,005, permitting CPOs and CTAs to use alternative rate of return computation methods to more accurately reflect the return on funds available for trading during the period; and CFTC Advisory 93-13, (Current Transfer Binder) Comm. Fut. L. Rep. (CCH) 25,554 (February 12, 1993), permitting the use of an alternative method for computing CTAs' rates of return. The use of this method may result in fewer and simplified performance tables. --------------------------------------------------------------------------- In developing this proposal, the Commission has taken into account its experience in administering the current regulatory framework, reviewing disclosure documents and responding to requests for relief from registrants. The Commission has also taken into consideration the evolution of the industry, the views of the public and of market participants and the disclosure implications of recently developed trading structures. The Commission also has had the benefit of the work of a Special Committee for the Review of CPO/CTA Disclosure Issues established by the National Futures Association (``NFA'')22 to review and make recommendations concerning CPO and CTA disclosure documents. The Special Committee's recommendations were presented to NFA's Board of Directors in February 1994. On March 15, 1994, the NFA submitted to the Commission proposed amendments to, and interpretations of, its Compliance Rules which were based upon the Special Committee's recommendations. NFA's rule submission consists of several parts. Proposed revisions of NFA Compliance Rule 2-13(a) would require CPOs to comply, not only with specified Commission rules applicable to CPOs' and CTAs' activities and disclosures, but also with interpretations of those rules issued by NFA's Board of Directors and approved by the Commission. Separately, new paragraph (b) would be added to Compliance Rule 2-13 to require CPO disclosure documents to include a ``break- even'' analysis, i.e., a computation of the trading profit that a pool must realize in its first year for a participant to recoup its initial investment, presented in the manner prescribed by the NFA's Board of Directors, including a tabular presentation of fees and expenses. NFA is also proposing interpretations of proposed Compliance Rule 2-13 relating to disclosure of past performance information, the computation and presentation of the break-even analysis, the use of pro forma and extracted results in past performance presentations and other topics addressed by this proposal, including the disclosure of business backgrounds of CPO and CTA principals, material litigation against FCMs and other past performance issues. In addition, NFA is proposing to replace paragraph (b)(4) of NFA Rule 2-29 with a new, more detailed, paragraph (c) concerning the use of hypothetical trading results. References to the NFA proposal are made in appropriate sections of this release.23 Certain portions of that proposal are being published for comment contemporaneously with this release. The NFA submission is available from the Commission's Office of the Secretariat. --------------------------------------------------------------------------- \2\2NFA is presently the only futures association registered with the Commission pursuant to section 17 of the Act. It has responsibilities with respect to, among others things, oversight of sales practices, including the use of promotional material. \2\3The NFA submission also includes proposed new Compliance Rule 2-34 which would govern the use of non-fully funded accounts. This part of NFA's submission has been remitted by the Commission to NFA for further explanation and supporting material. --------------------------------------------------------------------------- The Commission is exploring possible mechanisms for addressing CPO and CTA disclosure issues with the benefit of industry and other external input on an ongoing basis. III. Section-by-Section Analysis Current Rule 4.21 would be reorganized with a view towards simplification of presentation. Rule 4.21 would continue to require CPOs to deliver a disclosure document. New Rule 4.24 sets forth general disclosure requirements, i.e., requirements applicable to disclosure of all matters other than past performance. Past performance disclosure requirements would be codified in new Rule 4.25. New Rule 4.26 would contain requirements with respect to the use, amendment and filing of the disclosure document.24 --------------------------------------------------------------------------- \2\4The disclosure requirements for CTAs would be correspondingly reorganized and set forth in Rules 4.31, 4.33, 4.34 and 4.35. Many of the proposed changes for pool disclosure documents are also proposed for CTA documents. Rather than repeating the discussion of these changes, the text or footnotes thereto indicate where amendments similar to those discussed for pool disclosure documents are also proposed for CTA disclosure documents. --------------------------------------------------------------------------- A. Section 4.25--Performance Disclosures Simplification of past performance disclosure requirements has been a primary objective of this rulemaking. The proposed revisions of the past performance disclosure requirements are predicated upon the view that past performance is not predictive of future performance results and that inclusion of multiple performance records in disclosure documents may tend to give undue importance to past performance data. Nonetheless, the Commission believes that past performance disclosure may serve to reveal negative performance results and the volatility of pool returns. Consequently, the Commission is proposing to substantially simplify past performance requirements with the objective of eliminating required disclosure of past performance that is of secondary relevance to the pool offered. The proposed rules are designed to foster clarity and simplicity. This objective would be achieved in part by substituting a summary of core performance data for the multicolumnar presentations called for under current rules. This new ``capsule'' format, which has recently been used by some CPOs pursuant to exemptive relief issued by the Division of Trading and Markets on a case-by-case basis,25 provides a simple, readable and succinct overview of pool performance and substantially reduces the overall quantity of performance data required to be presented without sacrificing the elements important to customers. --------------------------------------------------------------------------- \2\5The proposed summary format differs in minor respects from that used by those CPOs. --------------------------------------------------------------------------- The past performance disclosure requirements have also been comprehensively reviewed and revised with a view towards eliminating or reducing past performance disclosures of secondary importance. As a result, the primary focus of past performance disclosure would be the performance of the pool offered and for most pools with less than a three year operating history, upon pools of a similar nature. Only the past performance records of CTAs with responsibility for managing substantial amounts of a pool's futures or commodity option trading would be required. The performance of CTAs managing lesser amounts of the pool's futures trading and other performance data of secondary relevance to the offering would generally not be required except to the extent that such performance was below a specified benchmark rate of return or resulted in significant losses. The performance of pools dissimilar to the pool offered would be permitted to be shown in composites, subject to limitations on the types of pools that may be included in a composite. The proposed rules also take into account structures in which a trading manager, rather than the pool's CPO, allocates pool assets, and fund-of-funds structures. In addition, because, under the proposal, the volume of required performance disclosures would be considerably reduced, the time period for these disclosures would be increased from three to five years to provide pool participants with a better chronological perspective of the track records presented in the disclosure document.\26\ --------------------------------------------------------------------------- \26\This recommendation is consistent with a similar recommendation by the NFA Special Committee. --------------------------------------------------------------------------- Thus, the proposed past performance requirements require presentation of the past performance of the pool itself. For most pools with at least a three-year track record this would be the only past performance required to be disclosed. Proposed Rule 4.25(c) would require the following additional disclosures with respect to pools with less than a three-year history. If the pool has not commenced trading, a short statement to that effect would be required to be prominently disclosed. The performance of the CPO (or of the pool's trading manager, if applicable) would be required to be disclosed and if the CPO (trading manager) had less than a three-year trading history, the performance of its trading principals also would be required.\27\ If applicable, a legend would be required to disclose the fact that neither the CPO (or trading manager), nor its principals has any commodity interest trading experience. --------------------------------------------------------------------------- \27\This performance would be presented in a capsule format and the performance of pools of a different class than the pool offered could be presented in a composite format. See discussion of proposed Rule 4.25(a)(3)(ii) relating to composites, infra. --------------------------------------------------------------------------- With respect to CTAs and investee pools, proposed Rule 4.25(c)(3) would provide for disclosure of the performance of ``major'' CTAs and investee pools, i.e., CTAs allocated at least twenty-five percent of the pool's aggregate initial futures margins and commodity option premiums and investee pools allocated at least twenty-five percent of the pool's assets, to be set forth in the specified capsule format. The CPO would only be required to indicate any ``adverse performance'' as defined in proposed Rule 4.25(a)(8) on the part of CTAs allocated less than twenty-five but at least ten percent of the pool's futures margins and commodity option premiums and investee pools allocated less than twenty-five percent but at least ten percent of the assets of the pool offered. No performance disclosure would be required for CTAs allocated less than ten percent of the pool's futures margins and commodity option premiums or investee pools allocated less than ten percent of the pool's assets. If a major CTA or investee pool had no experience in trading commodity interests, a prominent legend would be required to so indicate. The legend would also indicate the percentage of futures margins and option premiums allocated to the particular CTA or pool assets allocated to the investee pool. Past performance disclosure requirements would be codified in Rule 4.25, which would contain three sections. Paragraph (a) would set forth general principles applicable to pool performance disclosure; paragraph (b) would set forth the requirements applicable to pools with three or more years history; and paragraph (c) would address other pools.\28\ The proposed changes are more fully described below. --------------------------------------------------------------------------- \28\Rule 4.34, which sets forth performance disclosure requirements for CTA disclosure documents, would include paragraph (a), setting forth general principles applicable to CTA performance disclosures, and paragraph (b) setting forth specific requirements. --------------------------------------------------------------------------- 1. Capsule Performance Presentation Rule 4.21(a)(4) currently requires performance to be disclosed in tables showing at least quarterly the beginning and ending net asset values for the period, all additions, withdrawals and redemptions, whether voluntary or involuntary, the net performance for the period, net of additions, withdrawals and redemptions, and the rate of return for the period. These requirements have been applied in practice such that multiple pages of small-type numerical tables, frequently including performance data not required by Commission rules, are presented, often mixing without differentiation the performance of trading vehicles similar to the pool offered and of vehicles different in material respects. Such performance presentations are voluminous and may give equal weight to relevant data and to data of secondary or marginal pertinence. The Commission is proposing a new summary format for presentation of all required past performance history.\29\ This format is intended to capture the most significant information concerning a pool's history in a reader-friendly, largely nontabular form, which would generally permit multiple performance track records to be provided on a single page. The proposed new format, which is set forth in Rule 4.25(a)(1)(i) for pools and Rule 4.25(a)(1)(ii) for accounts, calls for core information intended to convey relevant data in a condensed format. The capsule format for pools would set forth the date when the pool commenced trading, the aggregate gross capital subscriptions for the pool, and the pool's current net asset value. The ``largest monthly draw-down'' and ``worst continuous peak-to-valley draw-down'' are intended to show that material changes in rates of return may occur. Rates of return would also be included, on a monthly basis for the pool offered, and on an annual basis for other pools. --------------------------------------------------------------------------- \29\The only exception to the summary format presentation is that a CTA disclosure document would be required to present the performance of the program offered in the full format currently required by current Rule 4.31. --------------------------------------------------------------------------- The ``largest monthly drawn-down'' and the ``worst continuous peak- to-valley draw-down'' would demonstrate the significant one-month and sustained declines to which commodity pool returns may be subject. Both draw-down figures would be expressed as a percentage of the pool's net asset value. The largest monthly draw-down would indicate the largest net asset loss experienced by the pool in any calendar month and the month and year in which it occurred. The peak-to-valley draw-down would indicate the largest calendar month-to-calendar month continuous net asset loss experienced by the pool during any period and the months and year in which it occurred. Dating the monthly and peak-to-valley draw- downs would permit participants to assess whether the losses were connected to market conditions by comparing the draw-downs of several pools. As explained in the rule, a peak-to-valley draw-down of 4 to 8- 91/25% would indicate that the peak-to-valley lasted from April to August of 1991 and resulted in a twenty-five percent draw-down of the pool's net asset value. The rate of return would be presented for each month for the pool offered and for each year for other pools. It would be computed on a monthly compounded basis in order that the rate of return for a given month will take into account the prior months' trading profits. Annual rates of return computed on a monthly compounded basis assume reinvestment of accrued profits and therefore the investment base on which rates of return are calculated is effectively adjusted by these amounts, presenting a more accurate picture of actual returns realized on an investment. Information currently required by Rule 4.21(a)(4) concerning additions, withdrawals and redemptions, the beginning and ending net asset values and the number of units outstanding at the end of each period at least for each quarter, would not be required. The proposed capsule format for CTA accounts would contain similar core information, i.e., the name of the CTA or other person trading the account and the name of the trading program; the date when the CTA began trading client funds and the date of inception of the program being disclosed; the number of accounts in the program; the total assets under the management of the CTA and in the trading program; the largest monthly and worst continuous peak-to-valley draw-downs for the program; and the annual and year-to-date rates of return. Registrants who compute rates of return for CTA programs on the basis permitted by Advisory 93-13 would continue to be required to state the actual and nominal account sizes, as required therein.\30\ --------------------------------------------------------------------------- \30\But see note 23. --------------------------------------------------------------------------- The summary format is designed for presentation purposes only. CPOs and CTAs must continue to compute pool performance on the basis set forth in current Rule 4.21(a)(4)(ii) (proposed to be renumbered as Rule 4.25(a)(6)), as interpreted by the Commission and to maintain records substantiating such computations in accordance with Rule 1.31.\31\ --------------------------------------------------------------------------- \31\Among other things, Rule 1.31 requires all books and records to be kept for a period of five years and available for inspection by any representative of the Commission or the U.S. Department of Justice. --------------------------------------------------------------------------- An example of capsule past performance presentation follows. This table sets forth on a single page capsule past performance for eight pools. Sample.--Capsule Performance of All Pools Operated by X [As of March 2, 1994] -------------------------------------------------------------------------------------------------------------------------------------------------------- Current Rate of return Aggregate total Worst monthly Worst continuous --------------------------------------------- Name of pool Type of Start date subscription NAV ($ percent draw-down peak-to-valley Year-to- pool ($ x 1,000) x draw-down 1989 1990 1991 1992 1993 date 1,000) (percent) -------------------------------------------------------------------------------------------------------------------------------------------------------- A; B............... 2, 3, 6 8/93; 10/89 9,101 20,701 *(1.09%) 12/93 *(1.09%) 10-12/93 6.8 8.9 9.6 11.2 12.6 0.51 C.................. 2, 4, 6 4/86 2,104 3,313 (11.70%) 4/90 (20.47%) 1-4/90 4.2 9.8 6.5 9.3 5.7 (9.08) D.................. 2, 3, 5 8/87 3,964 5,144 (10.13%) 11/91 (16.11%) 10-11/91 9.6 9.5 2.5 5.8 8.6 (0.28) E.................. 1, 3, 6 6/87 534 292 (9.86%) 9/93 (21.14%) 9-11/93 3.4 7.8 8.2 7.6 (5.2) (2.98) F.................. 1, 4, 6 8/86 617 730 (11.73%) 7/93 (19.61%) 4-8/91 11.17 6.2 3.4 10.6 6.8 6.82 G.................. 1, 4, 5 1/90 931 379 (16.01%) 6/92 (40.81%) 5-8/92 (2.3) 4.3 6.2 (8.2) 13.9 (17.26) H.................. 1, 3, 6 9/91 278 N/A (12.20%) 6/93 (28.41%) 1-6/89 (7.8) 6.3 2.3 (0.7) 8.1 N/A -------------------------------------------------------------------------------------------------------------------------------------------------------- *Worst draw-down for any of the pools included in the composite. Key to type of pool: 1--Private; 2--Public; 3--Multi-advisor; 4--Non-multi-advisor; 5--Limited risk; 6--Non-limited risk. 2. Pools With Three or More Years Operating History Current Rule 4.21(a)(4) requires disclosure of the performance of the pool offered and of its CTAs and their principals for all pools. If the pool offered has less than a twelve-month track record, the performance of the CPO and of each of its principals must also be disclosed. Under the proposed rules, past performance disclosure requirements would differ based on whether the pool had a three-year, rather than twelve-month, track record. Generally, where a pool has at least a three-year track record, the only performance required to be disclosed would be that of the pool offered. The Commission believes that, generally, where a pool has an extensive operational history, presentation of the pool's own past performance record should fulfill the objectives of past performance disclosure. If, however, the pool's historical track record occurred under materially different conditions, the track record of the pool alone may not be sufficient. For example, if the pool was essentially a proprietary trading vehicle investing a relatively small amount of funds contributed by third party sources, the track record generated may have little or no relevance to a publicly offered pool. To assure that a pool's three-year history was not acquired under circumstances in which the pool was essentially a proprietary trading vehicle, proposed Rule 4.25(b) would provide for past performance disclosure to be limited to that of the pool offered for pools that have traded commodity futures and option contracts for at least three years with no fewer than fifteen participants who are unaffiliated with the pool's CPO and in which no more than ten percent of the assets were contributed by the CPO. The pool's performance would be required to be disclosed for five full calendar years and year-to-date (or, if the pool had less than a five-year history, for the pool's entire operating history), in the specified capsule format with monthly rates of return. The CPO would be free to include additional performance records in compliance with the provision relating to voluntary information. The Commission requests comment as to whether the performance record of a pool with a three-year operating history is generally sufficient without supplementary performance data concerning the pool's CTAs or other pools operated by the CPO. The Commission also requests comment as to whether the offered pool's operating history should be considered for purposes of the three-year minimum if such history was acquired when the pool differed in some material respect from the pool as offered, for example, in cases in which the pool's CTA, types of interests traded or the trading program have been significantly modified or the pool was initially privately offered but is now offered to the public. 3. Pools With Less Than Three Years History As noted above, current Rule 4.21(a)(4) requires a pool disclosure document to disclose the performance of the pool offered, of each of the pool's CTAs and of each principal of the CTAs, and, if the pool offered has traded commodity interests for less than twelve months, the performance of the CPO and each of its principals. As discussed in the preceding section, the Commission is proposing to limit required performance disclosures to the performance of the pool offered if the pool has at least a three-year performance history. With respect to pools that have less than a three-year history, proposed Rule 4.25(c) would require presentation of the performance records of the pool offered, the CPO (or trading manager), the CPO's (or trading manager's) trading principals if the CPO (or trading manager) has less than a three-year history, and the performance of each ``major'' CTA and investee pool, i.e., CTAs allocated at least twenty-five percent of the pool's futures margins and commodity option premiums and investee pools allocated at least twenty-five percent of the assets of the pool offered.32 For CTAs allocated less than twenty-five percent of the pool's futures margins and commodity option premiums and investee pools allocated less than twenty-five percent of the pool's assets, the sole requirement would be to indicate any ``adverse'' performance as defined in the rule. No disclosure would be required for CTAs allocated less than ten percent of the pool's futures margins and option premiums or investee pools allocated less than ten percent of the pool's assets. --------------------------------------------------------------------------- \3\2The lack of prior trading history of the specified persons would be indicated by legends set forth in the rule. --------------------------------------------------------------------------- The proposed rules would require that the performance history for the pool offered be presented before any other performance history in the disclosure document. The performance of pools similar to the pool offered would be presented after that of the pool offered, on a pool- by-pool basis. The performance disclosure requirement of current Rule 4.21(a)(4) focuses on the past performance of the pool offered, its CTAs, principals of the CTAs and, if the pool has less than a year history, the CPO and each of its principals. As noted above, these requirements would be largely eliminated for pools with at least a three-year operating history. For pools with a shorter history, additional past performance records would be required to be disclosed. These requirements were devised to focus upon the performance of pools similar to the pool offered and of persons responsible for management of a significant portion of the offered pool's assets. Further, to the extent that performance of principals is required, unlike the current rule which requires disclosure of the performance of all principals, the proposed rule would require disclosure of the past performance of ``trading principals'' only. A ``trading principal'' would be defined in proposed Rule 4.10(m) to mean a principal of a CPO or CTA who participates in making commodity interest trading decisions for a pool or client or who supervises, or has authority to allocate pool assets to, persons so engaged. The proposed rules also would take into account arrangements in which pools use trading managers to direct their trading.33 The term ``trading manager'' is defined in proposed Rule 4.10(j) as any person, other than the pool's CPO, with authority to allocate pool assets to CTAs or investee pools. --------------------------------------------------------------------------- \3\3Trading managers are CTAs and are required to be registered as such. --------------------------------------------------------------------------- As noted above, the practice of retaining trading managers to select and monitor the performance of CTAs and investee pools to which pool assets will be committed has become commonplace. CPOs seek to maximize pool returns by allocating pool assets based on analysis of the returns achieved by CTAs retained for the pool and investee pools in which the pool has invested as compared to those of other CTAs and investee pools, and in response to changing market conditions. CPOs frequently rely on trading managers to continuously review the performance of CTAs and investee pools and allocate and reallocate pool funds. Because the trading manager, rather than the CPO, conducts the asset allocation activities for the pool, the Commission believes that the principal focus of the performance disclosure for a pool in which a trading manager is responsible for allocating the assets should be on the trading manager, rather than the CPO. Thus, when a pool has a trading manager, the trading manager's performance would replace that of the CPO. With respect to CTAs, the proposed rules would require disclosure of the past performance of CTAs only where they manage twenty-five percent or more of the pool's futures and commodity option trading and thus would constitute ``major CTAs,'' as defined in proposed Rule 4.10(k). The proposed rules also would require disclosure of past performance of investee pools constituting ``major investee pools, that is investee pools allocated twenty-five percent or more of the pool's assets. The term ``major CTA'' would be defined in Rule 4.10(k) to mean a CTA allocated or intended to be allocated twenty-five percent or more of the pool's initial margins for futures contracts and premiums for commodity options. Proposed Rule 4.10(l) would define ``major investee pool'' as an investee pool allocated or intended to be allocated at least twenty-five percent of the assets of a pool. These definitions are intended to include CTAs or investee pools to whom the CPO of a pool that has not commenced trading intends to make allocations at or above the specified thresholds. Similarly, CTAs and investee pools to whom the CPO of an operating pool intends to reallocate assets such that the allocations will total twenty-five percent or more under the margin or total asset standards also would be included. To further reduce the volume of performance data contained in the disclosure document, the proposed rules would eliminate the requirement to present performance data with respect to CTAs allocated less than twenty-five percent of the pool's initial margins and commodity option premiums and investee pools allocated less than twenty-five percent of the pool's assets and require only that ``adverse'' performance be disclosed as to CTAs allocated ten percent or more of the pool's initial futures margins and commodity option premiums and investee pools allocated ten percent or more of the pool's assets. ``Adverse performance'' would be defined in proposed Rule 4.25(a)(8) as an annual rate of return of one hundred basis points less than the ninety-day Treasury Bill rate on December 31 of the calendar year in which the performance occurred or the termination of any pool pursuant to a loss termination provision. To disclose adverse performance, the CPO would indicate the year in which the performance occurred, the rate of return for that year, and the name of the CPO, CTA or investee pool responsible for the performance. An indication of adverse performance would be required to be given for the pool's CPO (where the pool had a trading manager whose performance was disclosed in lieu of that of the CPO), any trading principal of the CPO or trading manager whose performance was not otherwise disclosed, any CTA, other than a major CTA, allocated at least ten percent of the pool's initial futures margins and commodity option premiums and any investee pool, other than a major investee pool, allocated at least ten percent of the assets of the pool offered and the trading principals of major CTAs and the CPOs of major investee pools that have no prior operating history. Proposed Rule 4.25(c)(3)(iii) would permit CPOs to provide capsule performance in lieu of giving an indication of adverse performance. Comment is requested concerning the proposed treatment of CTA and investee pool performance, including the definitions of major CTA and major investee pools. In particular, commenters may wish to address whether use of a twenty-five percent of futures margin or commodity premium benchmark as compared to twenty-five percent of total assets adequately reflects the relative risks of direct futures trading as compared to trading through vehicles which limit the risk of loss to the initial investment. Comment also is requested as to the definition of adverse performance, in particular, as to whether any additional benchmarks for identifying whether past performance is sufficiently ``adverse'' to warrant disclosure would be appropriate. For example, should the adverse performance definition be revised to include a one- month draw-down exceeding a specified percentage, e.g., twenty-five percent, of account equity traded pursuant to the trading program under which the CTA will trade for the offered pool. 4. Past Performance Disclosure in CTA Disclosure Documents CTA disclosure documents would be required to include the past performance of the CTA and its trading principals. The past performance of the program offered would be required to be disclosed in the full format currently required. For other programs, the CTA would be required to use the capsule format used by CPOs to present CTA past performance in pool disclosure documents. 5. Updating Past Performance Records Concurrently, Rule 4.22(a) is proposed to be revised by adding paragraph (a)(4) to require periodic account statements to include the names of all of the pool's CTAs and investee pools regardless of the amount of pool assets allocated to them. In addition, to provide a ready means of presenting the performance of newly added major CTAs and investee pools, account statements would be required to include the past performance of all CTAs and investee pools that are major CTAs and major investee pools as of the date of the statements and whose performance was not previously disclosed. Use of account statements to update major CTAs' and investee pools' performance records would provide a convenient means for CPOs to amend pool performance disclosures. In the event that the pool acquired a new major CTA or investee pool whose past performance had not previously been disclosed, the CPO would be required to notify pool participants of such event and provide the relevant performance records as required by proposed Rule 4.26(c) (current Rule 4.21(b)),34 within twenty-one calendar days after the CPO knows or should know of this occurrence, whether by way of the account statement (if this would provide timely notice under the twenty-one day requirement) or by other similar means. --------------------------------------------------------------------------- \3\4Rule 4.21(b) (proposed to be renumbered as Rule 4.26(c)) sets forth the requirements for amending pool disclosure documents to reflect a material change in the document. --------------------------------------------------------------------------- 6. Time Period for Which Past Performance Disclosure Would be Required Current Rule 4.21 generally requires past performance to be presented for a three-year period. However, the Commission is aware that some registrants nonetheless include longer performance periods in their disclosure documents for marketing purposes. The Commission believes that requiring performance to be disclosed for a period longer than three years will have the benefit of making performance disclosures more uniform and will provide a better picture of the evolution of performance over time, including positive and negative fluctuations in returns. In addition, under the proposed summary format for performance disclosure, lengthy tables to present performance data would not be required. Consequently, adoption of a five-year disclosure period would not result in any significant increase in the volume of performance disclosures. Accordingly, the Commission is proposing to increase the minimum time period for which performance would be disclosed from three to five years. CPOs may continue to provide additional performance disclosures provided the performance is calculated in compliance with proposed Rule 4.25 and is included in the document following the required performance disclosures as required by proposed Rule 4.24(v) for information voluntarily provided. A summary table of the proposed past performance disclosure requirements follows. Summary of Proposed Amendments to Performance Disclosure Pools with three or more Performance of pool offered for up to five years history. calendar years and year-to-date (``YTD''), with monthly rates of return (``RORs''). Pools with less than Performance of pool offered for life of pool three years history. (monthly RORs); statement if pool has no history. Performance of CPO's or trading manager's other pools and accounts (annual RORs). If CPO or trading manager has less than three years history in trading same type of pool, performance of its principals (annual RORs). Statement if no prior trading history of CPO or trading manager and its principals. Performance of major investee pools (``IPs'') (allocated at least 25% of pool assets) and major CTAs (allocated at least 25% of futures margins and option premiums). Statement if no prior history. Unless performance otherwise disclosed, indication of adverse performance of CPO, CPO's or trading manager's trading principals and IPs allocated 10% or more of the pool's assets and CTAs allocated 10% or more of the pool's futures margins and option premiums. 7. Composite Performance Presentations Rule 4.21(a)(4)(iv) currently permits the performance of pools operated by each person for whom performance is required to be disclosed to be presented on a composite basis provided that the performance of the pool offered is separately disclosed, the CPO describes how each composite was developed, and the composite is not misleading. Rule 4.31 also permits composite presentation of the performance of accounts directed by the CTA and each of its principals provided that material differences among the accounts and the manner in which the composite was developed are described. Composite presentations have the obvious advantage of reducing the volume of past performance data presented. However, composite presentations raise a number of regulatory concerns precisely because they supplant individualized presentations of potentially quite different types of pools and trading programs and may smooth or camouflage actual rates of return. Composite results not only fail to reflect differences among the pools and accounts whose results are presented but also merge potentially disparate trading results into average trading results and thus fail to reflect the actual dispersion of returns as well as the volatility of individual pools and accounts. For these reasons, the Commission considered prohibiting the use of composite performance data for pools as well as accounts. The Commission has carefully considered the benefits and disadvantages that may accrue from the use of composites and is proposing an approach designed to realize the benefits of reducing the volume of performance data created by the use of composites while reducing the potential for misleading result presentations. Under the proposal, past performance data for the pool offered and pools similar to the pool offered would be required to be separately disclosed. Pools of a different type from the pool offered would be permitted to be presented in composites with other pools of the same type, provided that such presentations would not be misleading. Pools would be considered to be of a different type or category if they differed in material respects. The proposed rule delineates several types of material distinctions among pools for this purpose, including the following: Pools privately offered pursuant to Regulation D of the Securities Act and public pools; pools traded with materially different leverages; limited risk pools and non-limited risk pools; pools using different commodity or trading methodologies; and multi-advisor pools35 and non-multi-advisor pools. --------------------------------------------------------------------------- \3\5Proposed Rule 4.10(h) would define the term ``multi-advisor pool'' as a pool in which no CTA is allocated twenty-five percent or more of the pool's aggregate initial margin and premiums for futures and commodity option contracts and no investee pool is allocated twenty-five percent or more of the pool's assets. --------------------------------------------------------------------------- A pool could be included in a composite with another pool only if both pools were of the same type with respect to each of these categories. For example, a publicly offered non-multi-advisor pool could not be included in the same composite as a privately offered non- multi-advisor pool and two limited risk pools that used different trading programs or materially different degrees of leverage could not be included in the same composite. Moreover, there may be instances in which even composites of pools of the same type may be misleading, such as where differences between the trading results of the pools are so great that a composite would materially distort their results. For example, two publicly offered multi-advisor pools with the same CTAs could show widely disparate results unless each CTA were allocated substantially the same portion of each pool's assets. Also, two single- advisor pools with different CTAs may achieve very different results. The proviso in proposed Rule 4.25(a)(3)(ii) that results may be presented in composite form ``unless such presentation would be misleading'' is intended to assure that composites are carefully reviewed to protect against any material distortion that may result from these types of situations. Proposed Rules 4.25(a)(6) and 4.34(a)(2) would require that records substantiating the performance data set forth in CPO and CTA documents, respectively, and documenting the underlying calculations be maintained in accordance with Rule 1.31. Naturally, this requirement also applies with respect to composite presentations. Pursuant to proposed Rule 4.25(a)(3)(ii), a CPO must be prepared to justify the inclusion in a composite of the pool results contained therein. To present capsule performance of pools in a composite, the CPO would name all pools included in the composite, set forth the categories of these pools (which, as discussed above, would be the same for each pool in the composite), including at a minimum the categories specified in proposed Rule 4.25(a)(3)(iii), and specify the dates on which each pool commenced trading. The aggregate gross capital subscriptions would be the total subscriptions for all pools in the composite. The draw-down figures would be the worst experienced by any one of the pools included in the composite and the rate of return would be the average rate of return for all pools included. The sample capsule past performance presentation table set forth above following the discussion on capsule performance includes an example of performance presentation for pools (pools A and B, in the example) whose performance is disclosed in composite form. The Commission requests comment as to whether the pool categories delineated in proposed Rule 4.25(a)(3)(iii) relating to composite presentations are appropriate for purposes of limiting composite presentations and as to whether any additional categories of pools should be identified for this purpose. Comment is also requested as to the costs and benefits of a general requirement of separate rather than composite presentation of pool performance in lieu of a qualified approach of the nature proposed. Proposed Rule 4.34(a)(5) would permit CTAs to include in a composite all accounts traded pursuant to the same trading program, provided that such a presentation would not be misleading and provided that the CTA describes how the composite was calculated. The term ``trading program'' would be defined in the rule as ``a trading strategy differentiated from others by commodity trading methodology, degree of risk or degree of leverage.'' Comment is requested as to the necessity and feasibility of providing a more detailed definition of the term ``trading program'' or additional guidance as to how trading programs can be differentiated. 8. Proprietary Trading Results Use of proprietary trading results in soliciting customer accounts is a practice which has long been of concern to the Commission. CPOs and CTAs may trade proprietary funds for a variety of purposes, including to test a new trading strategy before implementing it for customer funds or to establish a track record prior to trading customer funds. However, proprietary accounts may be traded in a different manner, for example, more aggressively, using higher leverage and assuming greater risk, than customer accounts. Also, proprietary accounts are usually not subject to the same fee schedule as customer accounts. Naturally, no management or incentive fee would apply where a CTA traded its own account, and clearing fees may be waived or reduced if the account is cleared by an affiliate. In addition, where proprietary and customer assets are combined for purposes of performance presentations, the total amount of assets under management is inflated and conceals the actual amount of customer funds being traded. For these reasons, proprietary trading results may, in many cases, be of little relevance to a prospective pool participant or CTA client and actually misleading in others. Currently, the Commission's rules do not specifically address the use of proprietary trading results in disclosure documents. However, in reviewing disclosure documents, because the rules require performance of ``directed accounts'' and because of the prohibition against misleading disclosures, Division staff have advised that any proprietary trading results provided must be clearly labeled as such and presented in a separate table to reduce the potential for misleading investors. The staff also has required that if fees, expenses, commissions, margin-to-equity ratios, or any other item pertaining to the proprietary trading is materially different from that relevant to the trading program offered to clients, the registrant must ``pro forma'' such items to correspond to those in the program offered. In reviewing the Part 4 rules, the Commission considered prohibiting the use of proprietary results in CPO and CTA disclosure documents given the potentially misleading nature of such presentations and their at best marginal relevance in the non-proprietary trading context. However, the Commission is aware that proprietary trading results may be the only performance results available to some new traders to present to customers as evidence of trading experience. Accordingly, rather than prohibiting disclosure of proprietary trading results, the Commission is proposing to permit such disclosure under appropriate restrictions. Under proposed Rule 4.25(a)(9), pools and accounts in which the pool operator, trading manager, CTA or other person providing services to the pool owned or controlled fifty percent or more of the beneficial interest could not be included in disclosure documents unless prominently labeled as such and set forth following all required performance and non-performance disclosures. The requirement that proprietary results follow all required disclosures, rather than just the required performance disclosures, would reflect the peripheral and potentially misleading nature of proprietary trading results and reduce the potential for confusion of proprietary and customer trading results.36 --------------------------------------------------------------------------- \3\6The NFA Special Committee also reached the conclusion that proprietary results should be displayed separately and labeled as such and that adjustments for fee differentials and other differences should be made. --------------------------------------------------------------------------- 9. Pro Forma, Hypothetical and Extracted Results The Commission also recognizes the potential for inappropriate use of certain other types of performance data. These include hypothetical, pro forma and extracted results. Hypothetical results are results calculated based upon the application of a given program to historical market prices and purport to present results that could have been obtained in trading a particular program during the specified historical period. Thus, hypothetical results are based on hindsight and can be readily manipulated. Rule 4.41 requires that any presentation of simulated or hypothetical trading results be accompanied by a specified cautionary statement describing the limited value of such results. In its rule submission, the NFA notes that a number of NFA disciplinary cases have involved NFA members who advertise hypothetical results to solicit unsophisticated customers. When the trading program is unsuccessful and causes substantial customer losses, the program is abandoned in favor of a new program for which hypothetical results, based on hindsight, are presented. The actual performance of customers whose accounts were traded under the prior program may never be disclosed. Pro forma results present trading results with adjustments to reflect certain factors, such as a particular fee schedule or degree of leverage, to permit easier comparison with other types of results. In its rule submission, the NFA notes that in some instances the use of pro forma results may have some of the same limitations as hypothetical results. For example, some CPOs may use pro forma data to present results that a multi-advisor pool could have achieved had assets been allocated differently among CTAs than occurred in actuality. As the NFA Special Committee concluded, ``[t]his use of pro forma results reflects the same sort of hindsight that hypothetical results do and invites the same sort of abuse.'' Extracted performance results isolate a single component of a trading strategy for presentation to customers, and although based on actual results, are subject to manipulation as they may disproportionately emphasize a small portion of the overall strategy. Although the Commission believes that the use of pro forma, hypothetical and extracted results must be closely scrutinized, it has determined not to prohibit them at the present time. Instead, like other disclosures voluntarily provided, the disclosure of these types of results would be subject to such restrictions as may be imposed under the rules of a registered futures association and to the Commission's general antifraud prohibitions. NFA's proposed Compliance Rule 2-29(c) would strictly limit the use of hypothetical results in promotional material, except in promotional material directed exclusively to qualified eligible participants, as defined in CFTC Rule 4.7(a)(1)(ii). NFA's proposed interpretation of Compliance Rule 2-13 would permit pro forma performance histories solely for the purpose of adjusting performance presentations to the same fee structure as that of the pool or program offered. No pro forma results which reflect a hindsight analysis, such as to show results a multi-advisor pool could have achieved using a different allocation of assets among CTAs, would be permitted. Extracted results would only be permitted to be presented based on the percentage of net asset value actually committed to the particular component extracted. 10. Voluntary Performance Disclosures Pursuant to proposed Rule 4.24(v), disclosures, including performance disclosures, other than those required by CFTC rules must follow all relevant required disclosures in the disclosure document\37\ and may not be misleading in their content or presentation or inconsistent with required disclosures.\38\ Performance disclosures voluntarily provided could have misleading effects if favorable performance data are given undue prominence. For example, if the performance of two pools other than the offered pool operated by the CPO were voluntarily provided, it may be misleading to show the favorable performance of Pool 1 but not the negative performance of Pool 2 or to show the performance of Pool 1 in capsule format and that of Pool 2 in full format. It may also be misleading to show the performance of a pool in capsule format for year one and in full format for year two or to show the pool's performance for 1991 and not 1992. Generally, inclusion of voluntarily provided performance data should be made on a result-neutral basis that results in inclusion of all similar data. For example, the past performance of two CTAs allocated an equal portion of a pool's assets should either be included or omitted, as should the performance of the CPO's other pools. --------------------------------------------------------------------------- \37\As noted above, proprietary trading results would be required to follow all required disclosures. \38\See general discussion on voluntary disclosures, infra. --------------------------------------------------------------------------- The Commission also notes that the practice of advertising the performance of a particular CTA with an excellent track record to attract prospective participants and shortly thereafter reallocating pool assets to another CTA, a practice commonly referred to as ``bait- and-switch,'' is misleading and that performance voluntarily provided for this purpose is prohibited under general antifraud standards. 11. Cautionary Legends The proposed rules would continue to require the inclusion of certain legends alerting pool participants and prospective participants to the lack of experience of the CPO (or trading manager), the pool's CTAs and their principals. However, these legends have been revised and substantially streamlined. Under current Rule 4.21, these legends are required to recite the relevant performance disclosure requirement. For example, Rule 4.21(4)(i)(B) requires a statement that the CFTC requires disclosure of the performance of the pool offered and of other pools operated by the CPO and its principals and that neither the CPO nor its principals have any prior performance history.\39\ The proposed rules would eliminate the prescribed statements concerning CFTC rules, with the effect of deleting the bulk of the bold-faced disclosures and of focusing attention upon the primary point to be conveyed, i.e., the fact that the CPO and its principals have not previously operated any commodity pools. Thus, the legend relating to the lack of trading history of a pool would read: ``THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY'',\40\ and the legend relating to the lack of experience of the CPO and its trading principals would read: ``NEITHER THIS POOL OPERATOR NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY OPERATED ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS.''\41\ Similar legends would be required, where applicable, with respect to trading managers and major investee pools. To further reduce the bulk of these disclosures, where several legends may be required, the proposed rules provide an alternate legend consolidating the several statements that would otherwise be required. For example, the proposed rules would require a CTA disclosure document to disclose, if true, the lack of experience of the CTA and its principals. If the CTA had no prior experience, the following legend should be included: ``THIS TRADING ADVISOR PREVIOUSLY HAS NOT DIRECTED ANY ACCOUNTS.'' The following legend would be used for trading principals: ``NONE OF THE TRADING PRINCIPALS OF THIS TRADING ADVISOR HAS PREVIOUSLY DIRECTED ANY ACCOUNTS.'' If neither the CTA nor any of its principals had prior trading experience, rather than displaying these two separate legends, the following single sentence would be included: ``NEITHER THIS TRADING ADVISOR NOR ITS TRADING PRINCIPALS HAVE PREVIOUSLY DIRECTED ANY ACCOUNTS.'' These proposals are designed to reduce disclosures that complicate and lengthen disclosure documents while preserving disclosures that may be important to prospective investors. --------------------------------------------------------------------------- \39\The entire legend reads as follows: ``THE COMMODITY FUTURES TRADING COMMISSION REQUIRES THE OPERATOR OF A POOL THAT HAS TRADED COMMODITY INTERESTS FOR LESS THAN 12 MONTHS TO DISCLOSE THE ACTUAL PERFORMANCE RECORD OF THE POOL FOR ITS ENTIRE OPERATING HISTORY AND THE ACTUAL PERFORMANCE RECORD OF EACH OTHER POOL OPERATED BY THE POOL OPERATOR AND ITS PRINCIPALS. YOU SHOULD NOTE THAT THIS POOL OPERATOR AND ITS PRINCIPALS PREVIOUSLY HAVE NOT OPERATED ANY OTHER COMMODITY POOL.'' \40\Proposed Rule 4.25(c)(1)(ii). \41\Proposed Rule 4.25(c)(2)(iii). Similarly, the legend concerning major CTAs who have never directed accounts would read: ``(name of CTA), A COMMODITY TRADING ADVISOR THAT HAS DISCRETIONARY AUTHORITY OVER (percentage of the pool's aggregate initial futures margin and commodity option premiums allocated to that CTA) OF THE POOL'S DIRECT FUTURES AND COMMODITY OPTION TRADING HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.'' --------------------------------------------------------------------------- A legend indicating that ``PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE'' would be required to precede any performance presentation, whether required or given voluntarily.\42\ --------------------------------------------------------------------------- \42\Numerous studies have shown the general lack of predictive value of past performance. See, e.g., Irwin, The Predictability of Managed Futures Returns: Evidence from Multiple CTA Public Commodity Pools, Working Paper Version, Ohio State University, Department of Agricultural Economics and Rural Sociology (April 1992) (unpublished). See also Futures Pools' Returns Are a Far Cry From Their Brochures and Prospectuses Wall St. J., Oct 2, 1992. --------------------------------------------------------------------------- 12. Order of Disclosures For pools with an operating history shorter than three years, the performance of the pool offered would be required to be the first performance record presented in the disclosure document. Performance data for pools of the same category as the pool offered would be required to appear after the performance history of the pool offered and to be presented on a pool-by-pool, that is non-composite, basis. Pools of a different category from the pool offered would be required to follow the performance of pools of the same category as the pool offered. As discussed above, for purposes of applying the requirement that composite presentations be used only for pools of the same category, the rule would identify a number of categories of pools. The Commission believes that the streamlined past performance disclosure requirements should substantially increase the clarity and readability of past performance disclosures. The Commission requests comment on all aspects of Rule 4.25 and, in particular, on the adequacy of the summary performance format to provide a basis upon which a prospective pool participant may make an informed judgment with respect to past performance results; whether a three-year history is a sufficient basis for eliminating any requirement for disclosure of past performance other than that of the pool offered; and whether the ten percent allocation thresholds for major CTAs and investee pools, below which no performance disclosures would be required, is appropriate. The Commission also requests comment as to whether past performance presentations would provide more meaningful information if they were required to include rates of return on a risk-adjusted basis, that is, reduced by the relevant Treasury Bill rate or comparable interest figure, or to break out trading results from passive interest income. B. Section 4.24--Required General Disclosures Under the proposal, non-performance disclosure requirements would be set forth in Rule 4.24. 1. Table of Contents and Order of Required Information As noted above, a primary objective of this proposal is to foster clarity and comprehensibility in the disclosure of relevant information to prospective pool participants. To this end, in addition to eliminating certain required disclosures, the Commission is proposing that certain information be presented in a required sequence which would be specified in proposed Rules 4.24(a) through (d). Like current Rule 4.21, proposed Rule 4.24 would require that a cautionary statement, i.e., a statement that the CFTC has not passed upon the merits of the pool investment or the adequacy of the disclosure document, and any other information required under any other applicable federal or state laws and regulations, appear on the cover page of the disclosure document. The risk disclosure statement specified in Rule 4.24(b) would be required to be set forth immediately after these disclosures. The next item in the disclosure document would be a table of contents.\43\ Prior to any detailed disclosures with respect to the pool and persons involved in operating and trading the assets of the pool, in what would constitute the ``forepart'' of the disclosure document, a prospective participant would find very basic information concerning the pool.\44\ This information would include the name and address of the pool and CPO; the type of pool being offered, i.e., whether the pool is privately offered pursuant to section 4(2) of the Securities Act of 1933, a multi-advisor pool\45\, or a limited risk pool\46\; a statement whether the pool is continuously offered or the closing date of the offering; the date of the disclosure document; and the ``break-even point'' for the pool, that is, the trading profit that the pool must realize in its first year for a participant to recoup its initial investment. The break-even point would provide a simple illustration of the costs of investing in the pool and facilitate comparisons among pools.\47\ --------------------------------------------------------------------------- \43\Rule 4.21 currently does not require a table of contents. However, most disclosure documents reviewed by the Division contain such a table. Further, Form S-1, the form most frequently used to register pool offerings with the SEC, requires ``a reasonably detailed table of contents showing the subject matter of the various sections or subdivisions of the prospectus and the page number on which each section or subdivision begins.'' See Item 502(g) of Regulation S-K, 17 CFR 229.502(g), incorporated by reference into Item 2 of Form S-1, 17 CFR 239.11. The Commission believes that a table of contents should contribute to making the disclosure document ``user-friendly''. \44\The cover page and forepart of CTA disclosure documents would be organized in a similar fashion and a table of contents would also be required. \45\Proposed Rule 4.10(h) would define a ``multi-advisor pool'' as a pool in which no CTA is allocated twenty-five percent or more of the pool's aggregate initial futures margins and commodity option premiums and no investee pool is allocated twenty-five percent or more of the pool's total assets. \46\Proposed Sec. 4.10(i) would define the term ``limited risk pool'' as a pool designed to limit the loss of the initial investment of its participants. \47\The break-even point is discussed in greater detail in the fees and expense section, infra. The break-even point would be required to account for hidden costs such as costs associated with investments in investee pools. In multi-advisor pools the potential consequences of incentive fees being calculated advisor-by-advisor should also be a disclosed risk. --------------------------------------------------------------------------- The Commission considered whether a particular order for all required information should be mandated in order to ``standardize'' the entire format of disclosure documents but determined to propose only the limited sequence requirements discussed above at this time. However, the Commission requests comment on the appropriateness and desirability of mandating that all required information be presented in a specified order to foster clarity in and comparability of disclosure documents, ease of regulatory review, and development of compliance guidance or instructions. 2. Voluntary Disclosures To address concerns that in many cases the disclosure process fails to achieve its intended purpose due to the high volume of information included in the disclosure document, the Commission is proposing a format for disclosure documents under which ``voluntary'' disclosures, i.e., those not required by Commission rules48 or those of other regulators, would be required to be placed in the disclosure document after all relevant required disclosures. Proposed Rule 4.24(v) would require all information, other than that required by the Commission, the antifraud provisions of the Act, and any federal or state securities laws and regulations, to appear following the related required disclosures. Such ``voluntary information'' could not be misleading in content or presentation or inconsistent with required disclosures. In addition, voluntary information would be subject to the antifraud provisions of the Act and the regulations thereunder and to rules regarding the use of promotional material promulgated by a registered futures association pursuant to section 17(j) of the Act. This format is designed to accommodate the apparent desire of some CPOs and CTAs to include in disclosure documents information that is not required under the Commission's rules or those of other regulators, while assuring that core disclosures are given due prominence. Naturally, CPOs and CTAs would continue to be subject to the antifraud prohibitions of sections 4b and 4o of the Act, 7 U.S.C. 6b and 6o,49 with respect to all disclosures, including disclosures voluntarily provided. --------------------------------------------------------------------------- \4\8CFTC-required disclosures include information required by Rules 4.21(h) (proposed to be renumbered as Rule 4.24(w)) for CPOs and 4.31(g) (proposed to be renumbered as Rule 4.33(o) for CTAs. These rules require CPOs and CTAs to disclose all material information to existing and prospective pool participants and clients even if the information is not specifically required by Commission rules. \4\9Generally, section 4b of the Act prohibits fraud in connection with the making of any contract of sale of any commodity for future delivery. Section 4o of the Act prohibits CPOs, CTAs and their associated persons from employing any device, scheme, or artifice to defraud a pool participant, prospective pool participant or client and from engaging in any transaction, practice or course of business which operates as a fraud or deceit upon such participant or client. In addition, CPOs, CTAs and their associated persons are precluded from representing or implying that they have been sponsored, recommended or approved by the United States or by any agency or officer thereof. --------------------------------------------------------------------------- 3. Investee Pools The proposed disclosure framework specifically addresses disclosures concerning investee pools. As discussed in the performance section, for purposes of past performance disclosures, investee pools would be treated comparably to CTAs, i.e., the scope of performance disclosure required would be based on the amount of assets of the offered pool committed to the investee pool. However, a different benchmark for applying the twenty-five percent (as used in the major investee pool definition) and ten percent (for adverse performance disclosure to be required) thresholds is used for investee pools in light of the fact that investments in other pools generally expose the pool only to loss of the initial investment and that the full amount of the investment is required to be paid at the inception of the investment. The relative importance of investee pools to prospective pool participants is thus more appropriately determined by reference to the proportion of the pool's total assets invested in the investee pool. The proposal would streamline other investee pool disclosures to obviate the need for CPOs to substantially incorporate in the document the contents of each investee pool's disclosure document.50 Non- performance disclosure requirements relating to investee pools also would be tailored to take into account the relative importance of the investee pool to the offered pool, as measured by the amount of assets of the pool offered allocated to it. Thus, no disclosures would be required for investee pools allocated less than ten percent of the assets of the pool offered and disclosures with respect to other investee pools would be limited based on the proportion of the pool's assets allocated to them. Specifically, with respect to each investee pool allocated at least ten percent of the assets of the pool offered, the CPO also would be required to disclose its name and that of its CPO and its principals and any conflicts of interest on the part of the investee pool's CPO in respect of the offered pool. --------------------------------------------------------------------------- \5\0See note 20 supra and accompanying text. --------------------------------------------------------------------------- With respect to major investee pools, i.e., those allocated twenty- five percent or more of the assets of the offered pool, the CPO would be required to disclose the business background of, material litigation against, and any ownership in the pool offered on the part of its CPO and its principals. In addition, the use of proceeds, risk factors, fees and expense, and redemption sections of the document would call for specific information relative to investments in investee pools. Risk disclosure relative to investee pools would be required because investments in investee pools may create both the risks inherent in the investee pool's own investments and liquidity risks due to restrictions upon redemption of the investment in the investee pool. Fees and expenses may accrue at each level of a multi-tier structure and should be disclosed. Investments in investee pools with redemption periods different from those of the pool offered or with minimum ``lock-in'' provisions51 may affect the ability of that pool to promptly honor redemption requests from its participants. --------------------------------------------------------------------------- \5\1Certain pools lock in initial investments for a specified period before allowing any redemptions. There are no rules requiring availability of redemption of pool interests in very short timeframes as for investment companies, hence the added importance of volatility disclosure. --------------------------------------------------------------------------- The Commission requests comment concerning the proposed treatment of investee pools. In particular, commenters are invited to address any special public policy or disclosure considerations presented by tiered investment structures by means of which a commodity pool can, in effect, appropriate the value of a second fund's management by investing all or a portion of its funds in the second fund. The Commission also requests comment concerning whether any additional protections, other than disclosure of applicable fees, are appropriate in light of the ``layering'' of fees that typically occurs at each level of a fund of funds structure. 4. Risk Disclosure Statement Rule 4.21 currently requires that disclosure documents include a prescribed bold-face statement alerting prospective pool participants to the risks involved in participating in a pool. This statement does not specifically address the risks of trading foreign futures or foreign option contracts. The risks attributable to foreign futures and foreign options were originally required to be addressed by a special disclosure statement, set forth in part 30 of the Commission's regulations, which generally governs transactions in foreign futures and foreign options.52 Thus, a CPO offering a pool expected to trade foreign and domestic futures or options was required to include in the disclosure document the Rule 4.21 risk disclosure statement, which does not refer to foreign futures or options, and the Rule 30.6 foreign futures and options risk disclosure statement. However, Rule 1.55, the basic risk disclosure requirement applicable to FCMs and IBs opening accounts for domestic futures and option contracts, was recently amended to consolidate the required disclosures concerning foreign futures and options into the domestic risk disclosure statement, and the separate Rule 30.6(a) disclosure statement was eliminated.53 Consequently, under the revised Rules 1.55 and 30.6, CPOs and CTAs offering pools and accounts, respectively, which may engage in foreign futures and option transactions would be required to include the new consolidated Rule 1.55 risk disclosure statement as well as the part 4 risk disclosure statement in the disclosure document. --------------------------------------------------------------------------- \5\2The Rule 30.6(a) statement was required to be provided by FCMs and IBs to clients opening foreign futures or foreign option accounts and, pursuant to Rule 30.6(b), by CPOs and CTAs trading foreign contracts for their pool or clients. \5\358 FR 17495 (April 5, 1993). --------------------------------------------------------------------------- The Commission is proposing to address the potential for duplicative disclosure created by the recent rule revisions and to eliminate the necessity for providing two prescribed risk disclosure statements by revising the part 4 risk disclosure statements for CPOs and CTAs to address the risks of foreign as well as domestic transactions. Rule 30.6(b) would be revised to cross-reference the part 4 statement. In addition, the terms ``domestic'' and ``foreign'' previously used to refer to contract markets or exchanges in foreign jurisdictions are proposed to be replaced with the terms ``United States'' and ``non-United States'' to avoid confusion in the context of offerings in non-United States jurisdictions to non-United States participants for whom the term ``foreign'' does not mean ``non-United States''.54 Rule 1.55 would also be amended to provide that pools need not be treated as customers for the purposes of delivery of the risk disclosure statement. --------------------------------------------------------------------------- \5\4This discussion also applies generally to CTA disclosure documents. --------------------------------------------------------------------------- 5. Business Background Rule 4.21(a)(2) currently requires disclosure of the business backgrounds of the pool's CPO and CTA, and their principals. This disclosure requirement would be streamlined by: (1) Eliminating the requirement to disclose business backgrounds of CTAs except those of major CTAs, i.e., CTAs allocated at least twenty-five percent of the fund's futures margins and commodity option premiums; and (2) limiting the requirement to disclose business backgrounds of principals55 of CPOs and CTAs to those principals ``who participate in making trading or operational decisions for the pool or who supervise those so engaged.''56 Comment is requested as to whether the business backgrounds of all principals, even those who hold a passive ownership interest in the CPO, should continue to be required to be disclosed. The business backgrounds of trading managers, who represent a subset of CTAs, and their principals who participate in making trading or operational decisions or supervise persons so engaged would also be required to be disclosed. --------------------------------------------------------------------------- \5\5Pursuant to current Rule 4.10(e), the term ``principal'' includes, with respect to an entity, a sole proprietor, general partner, officer or director, or person occupying a similar status or performing similar functions, having the power, directly or indirectly, to exercise a controlling influence over the activities of the entity. Holders and beneficial owners of at least ten percent of the CPO or CTA and persons who contributed at least ten percent of the CPO's or CTA's capital are also included. \5\6All principals would continue to be required to be named in the disclosure document. --------------------------------------------------------------------------- 6. Principal Risk Factors As noted above, current Rule 4.21(a)(17)(ii) requires the inclusion, at the front of the disclosure document, of a ``boiler- plate'' risk disclosure statement that describes generically the risks of pool investments. Proposed Rule 4.24(g) would require, in addition to this required disclosure, a discussion designed to address risk factors specific to the pool offered. This discussion would address the volatility of the pool investment as compared to investments in other types of trading vehicles and other risks relating to the particular trading program to be followed, such as risks resulting from concentration of investments in particular commodities or contracts or from trading foreign contracts that are subject to currency rate fluctuations. Risks relative to transactions in off-exchange instruments, e.g., counterparty creditworthiness risks,57 or to the lack of relevant experience of the CPO or CTAs should also be addressed. The Commission believes that a succinct ``plain English'' discussion of the risks of the investment being offered would be highly material to the prospective participant's evaluation of the proposed investment and that this type of disclosure warrants particular attention when complex over-the-counter transactions are contemplated. Establishment of an express requirement for disclosure of principal risk factors essentially codifies disclosures that would likely be required under the specific requirements of existing rules or as material information.58 --------------------------------------------------------------------------- \5\7These risks may differ materially from those entailed in exchange-traded futures and option transactions, which are backed by clearing organization guarantees, daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered directly between two counterparties generally do not benefit from such protections and expose the parties to the risk of counterparty default. \5\8This requirement is consistent with SEC requirements for public offerings and investment company offerings. See, e.g., Item 3 of Form S-1, which requires a discussion of the principal factors that make the offering speculative or one of high risk and Item 4(c) of Form N-1A which requires a brief discussion of the ``principal risk factors associated with investment in Registrant, including factors peculiar to the Registrant as well as those generally attendant to investment in an investment company with investment policies and objectives similar to Registrant's.'' --------------------------------------------------------------------------- The Commission welcomes comment as to whether additional guidance should be given in the rule as to the types of risk factors that should be discussed and as to any specific factors that should be identified in this context. 7. Use of Proceeds Under current Rule 4.21(a)(1)(viii), the pool operator must describe the types of commodity interests that the pool is expected to trade and any restrictions or limitations on such trading established by the CPO. Current Rule 4.21(a)(9) requires a description of the manner in which the pool will fulfill its margin requirements and of the form in which non-margin funds will be held. The nature of non-cash items must be described and the person to whom any income generated by such items will be paid must be identified. Taken together, Rules 4.21(a)(1)(viii) and (a)(9) call for information concerning all types of trading and investments in which the pool is expected to engage. As a result, under current rules, CPOs generally provide a description of the overall trading activities of the pool, such that the full range of transactions, whether in securities, commodity interests or other types of interests, is disclosed. Under the proposal, current Rules 4.21(a)(1)(viii) and 4.21(a)(9) would be consolidated into Rule 4.24(h) under the caption ``Use of Proceeds''59 and revised to better reflect changes in the nature of funds management. Proposed Rule 4.24(h) would require the description of the pool's trading60 to include not only transactions in commodity interests but also any other types of interests in which the pool is expected to trade. With respect to pool funds that are not deposited as margin or held in cash or cash equivalents, the proposed rule would require disclosure of the nature of such property, for example, whether it consists of securities listed on a national securities exchange, bonds, commercial paper or interests in commodity pools, whether such property is subject to state or federal regulation or to regulation by a foreign government, and any investment rating applicable to such property. The proposed rule also would require the CPO to indicate the type of custodian, e.g., bank, broker-dealer or other entity, which will hold property not deposited as margin or option premiums and the jurisdiction where held, if other than the United States. The Commission believes that the proposed use of proceeds provision should provide a more coherent statement of the matters called for by current requirements in a manner that is consistent with current practice. --------------------------------------------------------------------------- \5\9Captions are proposed to be added to increase ease of reference to the rules. \6\0The proposed rule would also call specifically for a description of the trading program that will be followed. --------------------------------------------------------------------------- 8. Fees and Expenses Rule 4.21(a)(7) currently requires a description of the expenses that the CPO knows or should know have been incurred in the past year or will be incurred in the current year. Expenses required to be disclosed include, without limitation, fees for management, trading advice, brokerage commissions, legal advice, accounting and organizational services. Rule 4.21(a)(14) requires disclosure of fees and commissions paid in connection with solicitations for the pool. Proposed new Rule 4.24(i) would combine the requirements of Rule 4.21 (a)(7) and (a)(14) to provide in a single section of the disclosure document a complete discussion of costs incurred by the pool for all purposes. The proposed provision relating to fees and expenses (Rule 4.24(i)) requires a detailed description of fees and expenses, including certain fees and expenses that are not specifically enumerated in current Rule 4.21 but that constitute material disclosures and are thus required to be disclosed.61 Thus, clearance fees and fees paid to national exchanges and self-regulatory organizations, incentive fees, including any disproportionate share of profits allocated to the CPO, i.e., a right of the CPO to receive a greater than pro-rata share of the pool's profits, and fees and expenses incurred as a result of investments in investee pools and other investment vehicles or to fund the guarantee of a limited risk pool, would be required to be set forth specifically in the table. In addition, the proposed rule would clarify that disclosure of fees paid in connection with solicitations for the pool must include trailing commissions as well as any type of benefit that may accrue to persons engaged in such solicitations. --------------------------------------------------------------------------- \6\1See note 48. --------------------------------------------------------------------------- Expenses, fees and commissions are assessed based on various factors. For example, brokerage fees are assessed based on a round-turn commission, management fees may be based on the net asset value of the pool's assets, incentive fees on trading profits, and sales commissions may be charged as a percentage of the proceeds of the offering. A description of each separate fee and expense may not, however, convey a clear understanding of the actual portion of each pool participation absorbed by fees and expenses. As the risk disclosure statement required by current Rule 4.21(a)(17) indicates, ``in some cases, commodity pools are subject to substantial charges for management, advisory and brokerage fees,'' and ``it may be necessary for those pools that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets.'' To foster a better understanding of the nature of those costs and their impact upon the investment, the proposal would require, in addition to a narrative description, a tabular presentation of fees and expenses from all sources setting forth how the break-even point for the pool is calculated (``break-even analysis''). As noted supra, the ``break-even point'' for the pool, i.e., the trading profit that a pool or trading program must realize in its first year to equal all fees and expenses such that a participant or client will recoup its initial investment,62 would be required to be set forth as a single figure in the forepart of the pool disclosure document, expressed as a percentage of a unit of initial investment. The break-even analysis would provide an explanation, in tabular form, of how the break-even point is calculated, taking into account all fees, expenses and commissions applicable to the pool. The proposal would require the break-even analysis to be prepared in accordance with rules promulgated by a registered futures association pursuant to section 17(j) of the Act. As noted above, NFA has filed with the Commission a proposed interpretation of Compliance Rule 2-13 which would set forth how a break-even point must be calculated and the format in which such calculation must be disclosed.63 The Commission believes that these proposed requirements with respect to fees and expenses will serve to better codify disclosures required under existing rules and assist readers of disclosure documents in understanding the nature and effect upon investment returns of costs incidental to the offering and operation of the pool. The Commission requests comment as to whether a description of fees and expenses should continue to be required or whether the break-even analysis is sufficient to accurately describe the costs of participation in a pool. --------------------------------------------------------------------------- \6\2This definition would be set forth in Rule 4.10(n). \6\3As set forth in NFA's proposed interpretation of Compliance Rule 2-13, to calculate the break-even point, the CPO would determine, per unit of participation, the amount of fees and expenses expected to be incurred by the pool during its first year of operation and subtract from that amount the amount of interest income expected to be earned by the pool in its first year, to obtain the pool's gross trading profit necessary for the pool to retain its initial net asset value per unit. The CPO would then determine the amount of additional trading profits necessary to offset the incentive fees which the CPO would charge for managing the pool. Finally, the CPO would calculate the total amount of trading income that the pool must earn to equal the initial selling price per unit after one year. This calculation would be required to be presented in tabular form. --------------------------------------------------------------------------- 9. Conflicts of Interest and Related Party Transactions Pursuant to current Rule 4.21(a)(3), a description of any actual or potential conflict of interest regarding the pool on the part of the CPO, CTA, FCM, IB and their principals must be included in the disclosure document. This discussion must include a description of any arrangement whereby the CPO, CTA or their principals may benefit from the maintenance of the pool account with the FCM or from its introduction to an FCM by an IB. Like current Rule 4.21(a)(3), proposed Rule 4.24(j) would require disclosure of any conflict of interest on the part of the pool's CPO and its principals. Subject to the requirement that all material information be disclosed, the proposal would eliminate such disclosure with respect to CTAs allocated less than ten percent of the pool's futures margins and commodity option premiums and investee pools allocated less than ten percent of the pool's assets.64 The proposed rule also would require disclosure of conflicts of interest with respect to any persons providing services to the pool or soliciting participants for the pool. This provision would encompass certain categories of Commission registrants specified in the existing rule, i.e., FCMs and IBs, as well as any other person providing services to the pool.65 The Commission believes that the purposes of conflict of interest disclosure are not limited to situations where such conflicts relate to a Commission registrant and that there may be unregulated parties, e.g., a CPO affiliate acting as counterparty to over-the-counter transactions with the pool, as to whom such disclosure may be equally material. Consequently, the Commission proposes to delete the specific reference in the current rule to the pool's FCM and IB and their principals and to substitute more general terminology intended to include but not to be limited to FCMs and IBs. Although the express requirement of disclosure of conflicts of interest on the part of FCM and IB principals would be eliminated, disclosure of such conflicts may be required as material information in specific situations, e.g., where an FCM's majority owner or other controlling person has such a conflict in regard to the pool. --------------------------------------------------------------------------- \6\4Under the general materiality standard, disclosure of conflicts of interest on the part of CTAs and CPOs of investee pools below the ten percent thresholds would be required if, in light of all relevant circumstances, including, for example, the nature and severity of the conflict, such disclosure would be material to prospective pool participants. \6\5However, current Rule 4.21(h) would require disclosure of all material conflicts of interest. --------------------------------------------------------------------------- In addition, the current provision requiring the description of carrying broker or introducing arrangements benefitting the CPO or CTA and their principals has been revised to make clear that payments for order flow and soft dollar arrangements must be included. Payment for order flow is a practice whereby FCMs and IBs compensate CPOs and CTAs for directing customers to them. Soft dollar arrangements consist of arrangements whereby customer or pool funds are used to pay for research or other services that benefit the CPO or CTA. Both practices have been of concern to regulators because, among other things, they are often inadequately disclosed.66 --------------------------------------------------------------------------- \6\6See, e.g., SEC Release No. 34-33026, 58 FR 52934 (October 6, 1993) and Market 2000, An Examination of Current Equity Market Developments: Study V, Best Execution (Division of Market Regulation, SEC, January 1994). --------------------------------------------------------------------------- Separately, under proposed Rule 4.24(k) (``Related Party Transactions''), any material transactions or arrangements for which there is no publicly disseminated price between the pool and any person affiliated with a person providing services to the pool, would be required to be disclosed, including the costs of such transactions to the pool.67 The Commission believes that this type of disclosure may be viewed as already required in many cases under the general requirement that material information be disclosed. However, given the increasing use of over-the-counter transactions in which pools contract with the pool operator or an affiliate of the pool operator, an express requirement for such disclosure appears warranted. --------------------------------------------------------------------------- \6\7The purpose of this requirement is illustrated by the events preceding the demise of Stotler Funds, Inc., a wholly-owned subsidiary of Stotler Group, Inc. (``Stotler Group''), a registered FCM. See Complaint, CFTC v. Stotler Funds, Inc., Civil Action No. 90 C 4387 (N.D. III., July 31, 1990). The defendant, Stotler Funds, Inc., was the general partner and CPO of, among other pools, Compass Futures Fund (``Compass'') and Advanced Portfolio Management, Limited Partnership (``Advanced''). The Commission's complaint included allegations that in December 1989, Compass used pool funds in the amount of approximately $4,550,000 (about 80% of its assets) to purchase commercial paper issued by Stotler Group and that Advanced used pool funds in the amount of approximately $1 million (about 10% of its assets) to make a loan to Stotler Group. The disclosure documents of Compass and Advanced did not disclose such uses of pool funds. The limited partnership agreement for Compass specifically precluded the use of pool funds to make loans. --------------------------------------------------------------------------- 10. Litigation Current Rule 4.21(a)(13) requires disclosure of any material administrative, civil or criminal action within the five years preceding the date of the disclosure document against the CPO, CTA(s), FCM, IB and their principals. Like the current rule, proposed Rule 4.24(1) would require the disclosure of administrative, civil or criminal actions against certain persons involved in operating or trading the pool during the five years preceding the date of the disclosure document. However, this requirement would be substantially simplified. Concluded actions that resulted in an adjudication on the merits in favor of such persons would not be required to be disclosed. In addition, disclosure of the litigation background of FCMs and IBs would be limited as follows. First, with respect to litigation brought by private parties, the proposed rule would provide for the materiality of the action to be determined by reference to the potential financial impact upon the FCM or IB. Specifically, an action would be considered material if it would be required to be disclosed in the notes to the registrant's financial statements prepared pursuant to generally accepted accounting principles (``GAAP''). Generally, under GAAP, certain information regarding litigation must be disclosed if the potential of a financial loss from the litigation is either probable (i.e., likely to occur) or reasonably possible (more than remote but less than likely).68 Except for events occurring subsequent to the issuance of the latest certified financial statements, under this paragraph, litigation required to be disclosed would already have been disclosed in the FCM's or IB's latest certified financial statements. --------------------------------------------------------------------------- \6\8See FASB-5 (Accounting for Contingencies) relating to disclosure of contingencies, including litigation. --------------------------------------------------------------------------- Second, the requirement to disclose actions brought by the Commission and other regulatory agencies against FCMs and IBs would be streamlined. Actions brought by the Commission would be treated differently from those brought by other regulatory agencies due to the presumptively greater significance of such actions to an investment decision. All actions brought by the Commission would be considered material other than concluded actions which did not result in fines exceeding $50,000 and did not involve allegations of fraud or other willful misconduct. Actions brought by any other federal or state agency or by a self-regulatory organization, whether domestic or foreign, would be considered material if they involved allegations of fraud or other willful misconduct.69 --------------------------------------------------------------------------- \6\9Litigation disclosures in CTA disclosure documents with respect to FCMs and IBs would be simplified in similar fashion. --------------------------------------------------------------------------- In addition, the proposed rule would eliminate the requirement to disclose litigation against CTAs allocated less than twenty-five percent of the pool's initial futures margins and commodity option premiums and the principals of FCMs and IBs. Of course, as noted above with respect to conflicts of interest on the part of FCM and IB principals, the requirement to disclose all material information may require such disclosure in particular cases. Proposed Rule 4.24(l) also requires disclosure of litigation against a pool's trading manager, if any, and its principals, a requirement which is encompassed within the existing requirement for disclosure of litigation against CTAs. 11. Limited Risk Pools So-called ``guaranteed pools,'' which generally are designed to assure participants the return of their initial investment, have been extensively offered in recent years. Such pools generally commit a significant portion of their assets to interest-bearing instruments, letters of credit or other investments to fund the ``guarantee'' and correspondingly reduce the level of their futures or other investments. Many ``guarantee'' structures require that the participant maintain his investment in the fund for a specified period of years in order to realize on the guarantee. Because such structures impose significant costs which limit the potential for futures and other investment- related returns, are often subject to significant conditions, e.g., that redemption rights not be exercised for a specified period of years from the date of the initial investment, and are subject to varying degrees of risk of nonfulfillment due to unforeseen trading losses or other reasons, the use of ``guarantee'' terminology in pool disclosure documents raises certain regulatory concerns. These concerns relate to such matters as the representations expressly or impliedly made as to the nature and security of the pool investment and the impact of the guarantee structure upon the overall investment. In Advisory 86- 170, the Division of Trading and Markets set forth certain disclosures that should be made in this context to assure that prospective investors are apprised of material information concerning guarantee structures. These include, for example, statements that a specified percentage of each unit of participation in the pool has been set aside to purchase the guarantee, that redemptions are not available for a specified period and that additional expenses and management fees are charged in connection with the guarantee, as applicable. --------------------------------------------------------------------------- \7\0(1984-1986 Transfer Binder), Comm. Fut. L. Rep. (CCH) 23,035 (April 25, 1986). --------------------------------------------------------------------------- Proposed Rule 4.24(o) would codify minimum disclosures relevant to limited risk pools. Under the proposal, the term ``limited risk pool'' would be defined in Rule 4.10(i) to mean ``a pool * * * that is designed to limit the loss of the initial investment of its participants.'' Rule 4.24(o) would generally codify Advisory 86-1 by requiring the CPO of a limited risk pool to describe the nature of the limitation on risk intended to be provided, the manner in which the limitation is achieved, including the cost of providing it, the conditions that must be satisfied for participants to receive the benefits of the risk limitation and the circumstances in which the risk limitation becomes operative.71 CPOs are also reminded of the admonition in Advisory 86-1 that ``(a)ny statements that suggest that the risks of futures trading are decreased by reason of this structure have a high potential to mislead or deceive and could result in serious violations of the Commission's regulations and anti-fraud provisions.'' --------------------------------------------------------------------------- \7\1Proposed Rule 4.24(p), which deals with transferability and redemption, would require a description of restrictions on redemption associated with the pool's investments. The Commission intends that this discussion include a description of any restrictions on transferability and redemption due to use of pool funds to support a guarantee and of any restrictions upon vesting of a guarantee. --------------------------------------------------------------------------- 12. Other Proposed Changes Current Rule 4.21 requires certain negative statements to be made in a pool disclosure document where there is no pertinent information to report. A CPO must state, if true, that there are no actual or potential conflicts of interest regarding any aspect of the pool on the part of certain persons, that certain persons do not own any beneficial interest in the pool, that no material litigation occurred within the past five years against the CPO, CTA, FCM, IB and their principals, and that the CPO, CTA, and their principals will not trade for their own accounts. These negative statements would no longer be required. Proposed Rule 4.21 would permit CPOs to provide prospective participants who are accredited investors as defined in Rule 501 of Regulation D of the Securities Act\72\ with a notice of intended offering and term sheet prior to delivery of the disclosure document. This provision should facilitate the offering of pools that qualify for relief from registration under the Securities Act as private offerings. --------------------------------------------------------------------------- \7\217 CFR Rule 230.501 (1993). --------------------------------------------------------------------------- The Commission is requesting comment as to whether there are specific situations in which the streamlined disclosure document proposed herein may not offer adequate protection to prospective and existing pool participants or managed account clients. Further, the Commission requests comment as to whether additional changes to further streamline the requirements of Rule 4.21 and 4.31 and improve the clarity of such disclosures could be made without reducing customer protection and on whether any additional disclosures should be required. The Commission also requests comment on whether the requirement in current Rule 4.21(d) (proposed to be numbered as Rule 4.21(b)) that a CPO must receive from a prospective pool participant an acknowledgment that the participant has received a disclosure document for the pool continues to be necessary. C. Section 4.26--Use, Amendment and Filing of Disclosure Documents Except as follows, the requirements for updating pool disclosure documents would remain substantially unchanged and are proposed to be set forth in Rule 4.26. The Commission is proposing to extend from six to nine months the maximum period between the date on a disclosure document and the date of its use. This would conform the updating requirements of pool disclosure documents to those of Section 10(a)(3) of the Securities Act for public securities offerings.73 As under current Rule 4.21(b), two copies of each amendment to the disclosure document must be filed within twenty-one calendar days of the date upon which the pool operator first knows or has reason to know of the defect requiring the amendment. There has been some uncertainty as to whether amendments are subject to the twenty-one day prefiling requirements of current Rule 4.21(g)(1) (renumbered as Rule 4.26(d)(1)). The Commission is confirming that such amendments may be used simultaneously with their filing with the Commission, i.e., not more than twenty-one days after the date on which the pool operator first knows or has reason to know that the disclosure document is materially inaccurate or incomplete. --------------------------------------------------------------------------- \7\3Section 10(a)(3) of the Securities Act requires that when a securities prospectus is used more than nine months after the effective date of the registration statement, information contained therein may not be as of a date more than sixteen months prior to such use if the information is known and can be furnished without unreasonable effort or expense. --------------------------------------------------------------------------- IV. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1988), requires that agencies, in proposing rules, consider the impact of those rules on small businesses. The rule amendments discussed herein would affect registered CPOs and CTAs. The Commission has previously established certain definitions of ``small entities'' to be used by the Commission in evaluating the impact of its rules on such entities in accordance with the RFA.74 The Commission previously determined that registered CPOs are not small entities for the purpose of the RFA.75 With respect to CTAs, the Commission has stated that it would evaluate within the context of a particular rule proposal whether all or some affected CTAs would be considered to be small entities and, if so, the economic impact on them of any rule.76 --------------------------------------------------------------------------- \7\447 FR 18618-18621 (April 30, 1982). \7\547 FR 18619-18620. \7\647 FR 18618, 18620. --------------------------------------------------------------------------- The amendments proposed herein would reduce rather than increase the requirements of Rule 4.21 for CPOs and the requirements of Rule 4.31 for CTAs. Accordingly, pursuant to Rule 3(a) of the RFA (5 U.S.C. 605(b)), the Acting Chairman, on behalf of the Commission, certifies that these proposed amendments would not have a significant economic impact on a substantial number of small entities. The Commission nonetheless invites comment from any registered CPO or CTA who believes that these rules would have a significant impact on its operations. B. Paperwork Reduction Act The Paperwork Reduction Act of 1980, (``PRA'') 44 U.S.C. 3501 et. seq., imposes certain requirements on federal agencies (including the Commission) in connection with their conducting or sponsoring any collection of information as defined by the PRA. In compliance with the PRA the Commission has submitted these proposed rule amendments and the associated information collection requirements to the Office of Management and Budget. The burden associated with this entire collection, including this proposed rule, is as follows: Average Burden Hours per Response: 124.65. Number of Respondents: 3,924. Frequency of Response: On Occasion. The burden associated with these specific proposed rules, is as follows: Average Burden Hours per Response: 8.05. Number of Respondents: 1,162. Frequency of Response: On Occasion. Persons wishing to comment on the estimated paperwork burden associated with this proposed rule should contact Gary Waxman, Office of Management and Budget, room 3228, NEOB, Washington, DC 20503, (202) 395-7340. Copies of the information collection submission to OMB are available from Joe F. Mink, CFTC Clearance officer, 2033 K Street, NW., Washington, DC 20581, (202) 254-9735. List of Subjects 17 CFR Part 1 Customer protection, risk disclosure statements. 17 CFR Part 4 Commodity pool operators and commodity trading advisors. 17 CFR Part 30 Foreign futures and foreign options transactions. 17 CFR Part 150 Limits on positions. In consideration of the foregoing, and pursuant to the authority contained in the Commodity Exchange Act, and in particular, sections 2(a)(1), 4b, 4c, 41, 4m, 4n, 4o, and 8a, 7 U.S.C. 2, 6b, 6c, 61, 6m, 6n, 6o, and 12a, the Commission hereby proposes to amend Chapter I of Title 17 of the Code of Federal Regulations as follows: PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 1. The authority citation for part 1 continues to read as follows: Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 61, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24. 2. Section 1.55 is proposed to be amended by adding paragraph (a)(1)(iii) to read as follows: Sec. 1.55 Distribution of ``Risk Disclosure Statement'' by futures commission merchants and introducing brokers. (a)(1) * * * (iii) Solely for purposes of this section, a pool operated by a commodity pool operator registered under the Commodity Exchange Act or exempt from such registration need not be treated as a customer. * * * * * PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS 3. The authority citation for part 4 continues to read as follows: Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 61, 6m, 6n, 6o, 12a and 23. Subpart A--General Provisions, Definitions and Exemptions 4. Section 4.10 is proposed to be amended by adding new paragraphs (h), (i), (j), (k), (l), (m), and (n) to read as follows: Sec. 4.10 Definitions. * * * * * (h) Multi-advisor pool means a pool in which no commodity trading advisor is allocated or intended to be allocated twenty-five percent or more of the pool's aggregate initial margin and premiums for futures and commodity option contracts and no investee pool is allocated or intended to be allocated twenty-five percent or more of the pool's total assets. (i) Limited risk pool means a pool (commonly referred to as a ``guaranteed pool'') that is designed to limit the loss of the initial investment of its participants. (j) Trading manager means, with respect to a pool, any person, other than the commodity pool operator of the pool, with authority to allocate pool assets to commodity trading advisors or investee pools. (k) Major commodity trading advisor means any commodity trading advisor that is allocated or is intended to be allocated at least twenty-five percent of the pool's aggregate initial margin and premiums for futures and commodity option contracts. (l) Major investee pool means any investee pool that is allocated or intended to be allocated at least twenty-five percent of the assets of the pool. (m) Trading principal means: (1) A principal of a commodity pool operator who participates in making commodity interest trading decisions for a pool, or who supervises, or has authority to allocate pool assets to, persons so engaged; and (2) A principal of a commodity trading advisor who participates in making commodity interest trading decisions for a client account or who supervises or selects persons so engaged. (n) Break-even point means the trading profit that a pool or trading program must realize in its first year to equal all fees and expenses such that a participant or client will recoup its initial investment, as calculated pursuant to rules promulgated by a registered futures association pursuant to section 17(j) of the Act. The break- even point must be expressed as a percentage of the minimum unit of initial investment and assume redemption of the initial investment at the end of the first year of investment. 5. Section 4.12 is proposed to be amended by revising paragraphs (b)(2)(i) and (b)(5)(i) to read as follows: Sec. 4.12 Exemption from provisions of part 4. * * * * * (b) * * * (2) * * * (i) In the case of Sec. 4.24, that the Commission accept in lieu and in satisfaction of the disclosure document specified by that section an offering memorandum for the pool which does not contain the information required by Secs. 4.24(a), 4.24(b), and 4.24(n), provided, that the offering memorandum: (A) Is prepared pursuant to the requirements of the Securities Act of 1933 or the exemption from said Act pursuant to which the pool is being offered and sold; (B) Contains the information required by Secs. 4.24(c) through (m) and (o) through (u); (C) Complies with the requirements of Secs. 4.24(v) and (w). * * * * * (5)(i) If a claim of exemption has been made under Sec. 4.12(b)(2)(i), the commodity pool operator must make a statement to that effect on the cover page of each offering memorandum, or amendment thereto, that it is required to file with the Commission pursuant to Sec. 4.26. * * * * * 6. Section 4.21 is proposed to be revised to read as follows: Sec. 4.21 Required Delivery of Pool Disclosure Document. (a) No commodity pool operator registered or required to be registered under the Act may, directly or indirectly, solicit, accept or receive funds, securities or other property from a prospective participant in a pool that it operates or that it intends to operate unless, on or before the date it engages in that activity, the commodity pool operator delivers or causes to be delivered to the prospective participant a disclosure document for the pool containing the information set forth in Sec. 4.24, Provided, however, That where the prospective investor is an accredited investor, as defined in 17 CFR 230.501, a notice of intended offering and term sheet may be provided subject to rules promulgated by a registered futures association pursuant to section 17(j) of the Act. (b) The commodity pool operator may not accept or receive funds, securities or other property from a prospective participant unless the pool operator first receives from the prospective participant an acknowledgment signed and dated by the prospective participant stating that the participant received a disclosure document for the pool. 7. Section 4.22 is proposed to be amended by adding new paragraph (a)(4) to read as follows: Sec. 4.22 Reporting to pool participants. (a) * * * (4) The Account Statement must provide the names of all commodity trading advisors directing trading for the pool and of all investee pools as of the date of the Account Statement, together with the percentage of pool assets each is allocated. In addition, if the performance of major commodity trading advisors and investee pools is required to be disclosed in a pool disclosure document, the Account Statements must include the past performance of each commodity trading advisor previously allocated less than ten percent of the pool's aggregate initial margin and premiums for futures and commodity option contracts and investee pool previously allocated less than ten percent of the pool assets that is a major commodity trading advisor or investee pool as of the date of the Account Statement. * * * * * 8. Section 4.23 is proposed to be amended by revising paragraph (a)(3) to read as follows: Sec. 4.23 Recordkeeping. * * * * * (a) * * * (3) The acknowledgement specified by Sec. 4.21(b) for each participant in the pool. * * * * * 9. Sections 4.24, 4.25 and 4.26 are proposed to be added as follows: Sec. 4.24 General disclosures required. Except as otherwise provided herein, a disclosure document must include the following information. (a) Cautionary statement. The following Cautionary Statement must be prominently displayed on the cover page of the disclosure document. THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. (b) Risk Disclosure Statement. (1) The following Risk Disclosure Statement must be prominently displayed immediately following any disclosures required to appear on the cover page of the disclosure document as provided by the Commission or any applicable federal or state securities laws and regulations. RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE (insert page number) AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE (insert page number). THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page number). (2) If the pool may trade foreign futures or options contracts, the Risk Disclosure Statement must further state: YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED. (c) Table of Contents. A table of contents showing, by subject matter, the location of the disclosures made in the disclosure document must appear immediately following the Risk Disclosure Statement. (d) Information Required In the Forepart of the Document: (1) The name, address of the main business office, main business telephone number and form of organization of the pool. If the mailing address of the main business office is a post office box number or is not within the United States, the pool operator must state where the pool's books and records will be kept and made available for inspection; (2) The name, address of the main business office, main business telephone number and form of organization of the commodity pool operator. If the mailing address of the main business office is a post office box number or is not within the United States, the pool operator must state where its books and records will be kept and made available for inspection; (3) A statement whether the pool is: (i) privately offered pursuant to 15 U.S.C. 4(2) of the Securities Act of 1933; (ii) A multi-advisor pool as defined in Sec. 4.10(h); (iii) A limited risk pool as defined in Sec. 4.10(i); and (iv) Continuously offered and if not, the closing date of the offering. (4) The date when the disclosure document will first be used; and (5) The break-even point per unit of initial investment, as specified in Sec. 4.10(n). (e) The name of: (1) Each principal of the pool operator; (2) The pool's trading manager, if any, and each principal thereof; and (3) Each investee pool allocated or intended to be allocated at least ten percent of the assets of the pool offered, each commodity trading advisor that is allocated or intended to be allocated at least ten percent of the pool's aggregate initial margin and premiums for futures and commodity option contracts, the operator of each such investee pool and each principal of such commodity trading advisor and of the commodity pool operator of such investee pool; (4) Which of the foregoing persons will make trading decisions for the pool; and (5) If known, the futures commission merchant through which the pool will execute its trades. (f) Business background. (1) The business background, for the five years preceding the date of the disclosure document, of: (i) The commodity pool operator, the pool's trading manager, if any, each major commodity trading advisor and the operator of each major investee pool; and (ii) Each principal of the foregoing persons who participates in making trading or operational decisions for the pool or supervises persons so engaged. (2) The pool operator must include in the description of the business background of each such person the name and main business of that person's employers, business associations or business ventures and the nature of the duties performed by such person for the employers or in connection with the associations or ventures. (g) Principal risk factors. As applicable, a discussion of the principal risk factors of this investment. This discussion must include, without limitation, risks relating to volatility, leverage, and counterparty creditworthiness. (h) Use of proceeds. The pool operator must disclose: (1) The types of commodity interests or other interests the commodity pool operator intends that the pool will hold or trade, with a description of the trading program that will be followed and any restrictions or limitations on such interests or trading required by the pool's organizational documents or otherwise. (2)(i) The manner in which the pool will fulfill its margin requirements and the approximate percentage of the pool's property that will be segregated pursuant to the Act and the Commission's regulations thereunder. (ii) If property deposited as margin generates income, to whom that income will be paid. (iii) If the pool will fulfill its margin requirements with other than cash deposits, the nature of such deposits. (3) With respect to pool property not deposited as margin, paid as premiums or held in cash or cash equivalents: (i) The nature of such property (e.g., securities listed on a national securities exchange, interests in commodity pools or other funds, bonds, commercial paper) including whether such property is subject to state or federal regulation or to regulation by a foreign government, and any investment rating thereof; and (ii) The custodian or other entity, e.g., bank or brokerdealer, which will hold pool property not deposited as margin or paid as premiums, and, if such property will be held or invested outside of the United States, its territories or possessions, the jurisdiction in which it will be held; (i) Fees and expenses. (1) A complete description of each fee, expense and commission which the commodity pool operator knows or should know has been incurred by the pool for its preceding fiscal year and is expected to be incurred by the pool in its current fiscal year, including fees and expenses occurring within investee pools. (2) This description shall include, but not be limited to: (i) Management fees; (ii) Brokerage fees and commissions, including interest income paid to futures commission merchants; (iii) Fees and commissions paid in connection with trading advice provided to the pool; (iv) Fees and expenses incurred within investments in investee pools and other collective investment vehicles, disclosed separately for each investment tier; (v) Incentive fees and any disproportionate share of profits allocated to the commodity pool operator, i.e., any right of the commodity pool operator to receive a greater than pro rata share of the pool's profits, based on the percentage of capital contributions made by the commodity pool operator. (vi) Commissions or other benefits, including trailing commissions paid or that may be paid or accrue, directly or indirectly, to any person in connection with the solicitation of participations in the pool; and (vii) Professional and general administrative fees and expenses, including legal and accounting fees and office supplies expenses; (viii) Organizational and offering expenses; (ix) Clearance fees and fees paid to national exchanges and self- regulatory organizations; (x) For limited risk pools, any costs of providing the limitation on risk as referred to in paragraph (o)(3) of this section; and (xi) Any other fee or expense. (3) Where any expense, fee or commission is determined by reference to a base amount including, but not limited to, ``net assets,'' ``gross profits,'' ``net profits,'' or ``net gains,'' the pool operator must specifically explain how such base amount will be calculated. (4) Where any expense, fee or commission is based on an increase in the value of the pool, the pool operator must specify how the increase is calculated, the period of time during which the increase is calculated, the expense, fee or commission to be charged at the end of that period and the value of the pool at which payment of the expense, fee or commission commences. (5) Where any expense, fee or commission of the pool has been paid or is to be paid by a person other than the pool, the pool operator must disclose the nature and amount thereof and the person who paid or who is expected to pay it. (6) The pool operator must provide, in a tabular format, an analysis setting forth how the break-even point for the pool was calculated. The analysis must include all fees, expenses and commissions of the pool, as set forth in Sec. 4.24(i)(2). (j) Conflicts of Interest. (1) A full description of any actual or potential conflicts of interest regarding any aspect of the pool on the part of: (i) The commodity pool operator, the pool's trading manager, if any, any commodity trading advisor allocated or intended to be allocated at least ten percent of the pool's aggregate initial margin and premiums for futures and commodity option contracts and the commodity pool operator of any investee pool allocated or intended to be allocated at least ten percent of the assets of the pool; (ii) Any principal of the foregoing; and (iii) Any person providing services to the pool or soliciting participants for the pool. (2) Included in the description of such conflicts shall be any arrangement whereby a person may benefit, directly or indirectly, from the maintenance of the pool's account with the futures commission merchant or from the introduction of the pool's account to a futures commission merchant by an introducing broker (such as payment for order flow or soft dollar arrangements) or from an investment of pool assets in investee pools or other investments. (k) Related party transactions. A full description, including a discussion of the costs thereof to the pool, of any material transactions or arrangements between the pool and any person affiliated with a person providing services to the pool for which there is no publicly disseminated price. (l) Litigation. (1) Subject to the provisions of paragraph (l)(2) of this section, any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the document, against any of the following persons, except a concluded action that resulted in an adjudication on the merits in favor of such person: (i) The commodity pool operator, the pool's trading manager, if any, the pool's major commodity trading advisors and the operators of the pool's major investee pools; (ii) Any principal of the foregoing; (iii) The pool's futures commission merchants and introducing brokers, if any. (2) With respect to futures commission merchants and introducing brokers, an action will be considered material if: (i) The action would be required to be disclosed in the notes to the futures commission merchant's or introducing broker's financial statements prepared pursuant to generally accepted accounting principles; (ii) The action was brought by the Commission, Provided, however, That a concluded action that did not result in fines exceeding $50,000 need not be disclosed unless it involved allegations of fraud or other willful misconduct; or (iii) The action was brought by any other federal or state regulatory agency, or by a self-regulatory organization, domestic or foreign, and involved allegations of fraud or other willful misconduct. (m) Trading for Own Account. If the commodity pool operator, the pool's trading manager, any of the pool's commodity trading advisors or any principal thereof trades or intends to trade commodity interests for its own account, the pool operator must disclose whether participants will be permitted to inspect the records of such person's trades and any written policies related to such trading. (n) Performance disclosures as set forth in Sec. 4.25. (o) Limited risk pools. If the pool is a limited risk pool, as defined in Sec. 4.10(i) the commodity pool operator must: (1) Describe the nature of the limitation on risk intended to be provided, the manner by which such risk limitation will be achieved, including sources of funding, and what conditions must be satisfied for participants to receive the benefits of the risk limitation; (2) Specify when the limitation on risk becomes operative; and (3) Disclose, in the break-even analysis required by Sec. 4.24(i)(6), the costs of purchasing and carrying the assets to fund the limitation on risk, expressed as a percentage of the price of a unit of participation. (p) Transferability and redemption. (1) A complete description of any restrictions upon the transferability of a participant's interest in the pool; and (2) A complete description of the manner in which a participant may redeem its interest in the pool. That description must specify: (i) How the redemption value of a participant's interest will be calculated; (ii) The conditions under which a participant may redeem its interest, including the cost associated therewith, the terms of any notification required and the time between the request for redemption and payment; (iii) Any restrictions on the redemption of a participant's interest, including any restrictions associated with the pool's investments; and (iv) Any liquidity risks relative to the pool's redemption capabilities. (q) Liability of pool participants. The extent to which a participant may be held liable for obligations of the pool in excess of the funds contributed by the participant for the purchase of an interest in the pool. (r) Distribution of profits and taxation. (1) The pool's policies with respect to the payment of distributions from profits or capital and the frequency of such payments; and The Federal income tax effects of such payments for a participant, including a discussion of the Federal income tax laws applicable to the form of organization of the pool and to such payments therefrom. If a pool is specifically structured to accomplish certain Federal income tax objectives, the commodity pool operator must explain those objectives, the manner in which they will be achieved and any risks relative thereto. (s) Inception of trading and other information. (1) The minimum aggregate subscriptions that will be necessary for the pool to commence trading commodity interests; (2) The minimum and maximum aggregate subscriptions that may be contributed to the pool; (3) The maximum period of time for which the pool will hold funds prior to the commencement of trading commodity interests; (4) The disposition of funds received if the pool does not receive the necessary amount to commence trading, including the period of time within which the disposition will be made; and (5) Where the pool operator will deposit funds received prior to the commencement of trading by the pool, and a statement as to whom any income from such deposits will be paid. (t) Ownership in pool. The extent of any ownership or beneficial interest in the pool held by: (1) The commodity pool operator; (2) The pool's trading manager; (3) The pool's major commodity trading advisors and the operators of the pool's major investee pools; and (4) Any principal of the foregoing. (u) Reporting to pool participants. A statement that the commodity pool operator must provide all participants with monthly or quarterly (whichever applies) statements of account and with an annual report containing financial statements certified by an independent public accountant. (v) Voluntary information. If any information, other than that required by the Commission, the antifraud provisions of the Act, or any federal or state securities laws and regulations, is provided, such information: (1) May not be misleading in content or presentation or inconsistent with required disclosures; (2) Shall be subject to the antifraud provisions of the Act and the regulations thereunder and to rules regarding the use of promotional material promulgated by a registered futures association, pursuant to section 17(j) of the Act; and (3) May only appear following the related required disclosures, unless otherwise specified in this rule. (w) Material information. This section does not relieve a commodity pool operator from any obligation under the Act or the regulations thereunder, including the obligation to disclose all material information to existing or prospective pool participants even if the information is not specifically required by this section. Sec. 4.25 Performance disclosures. (a) General principles and definitions. (1)(i) Capsule Performance: Unless otherwise specified, the disclosure of the performance of a pool must be net of any fees, expenses or allocations to the commodity pool operator and include the following information. (A) The name of the pool; (B) A statement as to whether the pool is: (1) Privately offered pursuant to 15 U.S.C. 4(2) of the Securities Act of 1933; (2) A multi-advisor pool as defined in Sec. 4.10(h); and (3) A limited risk pool as defined in 4.10(i); (C) The date of inception of trading; (D) The aggregate gross capital subscriptions to the pool; (E) The pool's current net asset value; (F) The largest monthly draw-down, during the most recent five calendar years and year-to-date, expressed as a percentage of pool net asset value; the month and year of the draw-down must be specified. (G) The worst continuous peak-to-valley draw-down during the most recent five calendar years and year-to-date, expressed as a percentage of pool net asset value, indicating the months and year of the draw- down (for example, a peak-to-valley draw-down of ``4 to 8-91/25%'' means that the peak-to-valley draw-down lasted from April to August of 1991 and resulted in a twenty-five percent cumulative draw-down;) and (H) The annual and year-to-date rate of return for the pool, computed on a compounded monthly basis, except that performance of the pool offered must include monthly rates of return. (ii) Unless otherwise specified, the performance of accounts must include: (A) The name of the commodity trading advisor or other person trading the account and the name of the trading program; (B) The date on which the commodity trading advisor began trading client accounts and the date when client funds began being traded pursuant to the trading program; (C) The number of accounts directed by the commodity trading advisor pursuant to the trading program specified as of the date of the disclosure document; (D) The total assets under the management of the commodity trading advisor and in the trading program specified, as of the date of the disclosure document; (E) The largest monthly draw-down for the trading program specified during the most recent five calendar year and year-to-date expressed as a percentage of client funds. The month and year of the draw-down must be specified; (F) The worst ever continuous peak-to-valley draw-down in for the trading program specified during the most recent five calendar year and year-to-date, indicating the months and year of the draw-down, expressed as a percentage of net asset value (for example, a peak-to- valley draw-down of ``4 to 8-91/25%'' means that the peak-to-valley draw-down lasted from April to August of 1991 and resulted in a twenty- five percent cumulative draw-down;) and (G) The annual and year-to-date rate-of-return for the program specified, computed on a compounded monthly basis. (2) The performance of the pool offered must be identified as such and separately presented first and its rate of return must be stated in monthly increments. (3) With respect to pools other than the pool offered for which performance is required to be presented under this section: (i) Pools of the same class as the pool offered must be presented following the performance of the pool offered, on a pool by pool basis. (ii) Pools of a different class must be presented less prominently and, unless such presentation would be misleading, may be presented in composite form; Provided, That the disclosure document must disclose how the composite was developed and that pools of different classes may not be presented in a composite. The commodity pool operator must be prepared to justify the inclusion in a composite of the pools contained therein. (iii) For the purpose of Sec. 4.25(3)(ii), without limitation, the following shall be considered pools of different classes: Pools privately offered pursuant to Regulation D of the Securities Act and public offerings; pools of materially different leverages; limited and non-limited risk pools; pools using different trading programs; and multi-advisor pools as defined in Sec. 4.10(h) and non-multi-advisor pools. (iv) Material differences among the pools for which past performance is disclosed must be described. (4) The past performance of accounts required to be presented under this section must be presented on a program by program basis using the format set forth in Sec. 4.25(a)(1)(ii). (5) The disclosure document must indicate whether the pool offered will use any of the trading programs for which past performance is presented. (6) All past performance presented in a disclosure document, including voluntarily presented performance, must be calculated in accordance with generally accepted accounting principles as specified below or by a method otherwise approved by the Commission. All performance data presented in a disclosure document must be current as of a date not more than three months preceding the date of the document. The commodity pool operator or commodity trading advisor must maintain all supporting documents necessary to substantiate such calculations, in accordance with Sec. 1.31. (i) The beginning net asset value for the period, which shall be the same as the previous period's ending net asset value; (ii) All additions, whether voluntary or involuntary, during the period; (iii) All withdrawals and redemptions, whether voluntary or involuntary, during the period; (iv) The net performance for the period, which shall represent the change in the net asset value net of additions, withdrawals, and redemptions; (v) The ending net asset value for the period, which shall represent the beginning net asset value plus or minus additions, withdrawals, redemptions and net performance; (vi) The rate of return for the period, which shall be calculated by dividing the net performance by the beginning net asset value or by a method otherwise approved by the Commission; and (vii) The number of units outstanding at the end of the period, if applicable. (7) All required performance information must be presented for the most recent five calendar years and year-to-date or for its entire duration, if less than five years. (8) Adverse performance: Where presentation of adverse performance is required hereunder, adverse performance means any annual return of one hundred basis points less than the ninety day Treasury Bill rate on December 31 of the calendar year in which the performance occurred or any termination of a pool pursuant to a loss termination provision. To disclose adverse performance, the pool operator must indicate the year in which it occurred, the annual rate of return for that year, the commodity trading advisor or commodity pool operator responsible for the performance and the capacity of such person in respect of the pool being offered. (9) The performance of any pool or account in which the pool operator, trading manager, commodity trading advisor or any principal thereof, or any person providing services to the pool owns or controls fifty percent or more of the beneficial interest shall not be included in a disclosure document unless such performance is prominently labeled as proprietary and is set forth separately after all required disclosures. (10) Any past performance presentation, whether required or voluntarily provided, must be preceded by the following statement, prominently displayed: PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. (b) Pools which have traded commodity interests for three years or more with no fewer than fifteen participants unaffiliated with the commodity pool operator and in which no more than ten percent of the assets were contributed by the commodity pool operator. The pool operator must disclose the performance of the pool offered, as set forth in Sec. 4.25(a)(1)(i) (C) through (H). (c) Other pools. (1)(i) The pool operator must disclose the performance of the pool offered, as set forth in Sec. 4.25(a)(1)(i) (C) through (H). (ii) If applicable, the pool operator must prominently display the following statement: THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY. (2) (i) The pool operator must disclose the performance of each other pool operated and each other account traded by the pool operator or, if the pool has a trading manager, by the trading manager. (ii) If the pool operator, or if applicable, the trading manager, has less than a three-year history in trading pools with no fewer than fifteen participants unaffiliated with the pool operator and in which no more than ten percent of the assets were contributed by the commodity pool operator, the pool operator must also disclose the performance of each other pool operated and each other account traded, by each trading principal of the pool operator or the trading manager, if applicable. (iii) If neither the pool operator or trading manager, if applicable, nor any of its trading principals has operated any other pools or traded any other accounts during the prescribed period, the pool operator must prominently display the following statement: NEITHER THIS POOL OPERATOR (TRADING MANAGER, if applicable) NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY OPERATED ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS; (3)(i) The pool operator must disclose the performance of any accounts (including pools) directed by any major commodity trading advisor and of any major investee pool. (ii) If a major commodity trading advisor or major investee pool has no prior performance history, the pool operator must prominently display the following statement(s), as applicable: (name of the major commodity trading advisor), A COMMODITY TRADING ADVISOR THAT HAS DISCRETIONARY AUTHORITY OVER (percentage of the pool's aggregate initial margin and premiums for futures and commodity option contracts allocated to that trading advisor) PERCENT OF THE POOL'S DIRECT FUTURES AND COMMODITY OPTION TRADING HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS; and (name of the major investee pool), AN INVESTEE POOL THAT IS ALLOCATED (percentage of the pool assets allocated to that investee pool) PERCENT OF THE POOL'S ASSETS HAS NOT COMMENCED TRADING. (iii) Unless this performance is otherwise required to be disclosed, the pool operator must indicate, as set forth in Sec. 4.25(a)(8), any adverse performance for any account (including pools) directed or operated by the pool operator, any trading principal of the pool operator or trading manager, any commodity trading advisor allocated at least ten percent of the pool's aggregate initial margin and premiums for futures and commodity option contracts and for any investee pool allocated at least ten percent of the pool's assets. In addition, if a major commodity trading advisor or major investee pool has no prior operating history, the pool operator must indicate any adverse performance for any account (including pools) directed or operated by any trading principal of that advisor or of the commodity pool operator of the investee pool. In lieu of giving an indication of adverse performance, the commodity pool operator may provide capsule performance disclosure as set forth in Sec. 4.25(a)(1). Sec. 4.26 Use, amendment and filing of disclosure document. (a)(1) Subject to paragraph (c) of this section, all information contained in the disclosure document must be current as of the date of the document; provided, however, That performance information may be current as of a date not more than three months prior to the date of the document. (2) No commodity pool operator may use a disclosure document dated more than nine months prior to the date of its use. (b) The commodity pool operator must attach to the disclosure document the most current Account Statement and Annual Report for the pool required to be distributed in accordance with Sec. 4.22. (c)(1) If the commodity pool operator knows or should know that the disclosure document is materially inaccurate or incomplete in any respect, it must correct that defect and must distribute the correction to: (i) All existing pool participants within 21 calendar days of the date upon which the pool operator first knows or has reason to know of the defect; and (ii) Each previously solicited prospective pool participant prior to accepting or receiving funds, securities or other property from any such prospective participant. The pool operator may furnish the correction by way of an amended document, a sticker on the document, or other similar means. (2) The pool operator may not use the document until such correction has been made. (d) Except as provided by Sec. 4.8: (1) The commodity pool operator must file with the Commission two copies of the disclosure document for each pool that it operates or that it intends to operate not less than 21 calendar days prior to the date the pool operator first intends to deliver the document to a prospective participant in the pool; and (2) The commodity pool operator must file with the Commission two copies of all subsequent amendments to the disclosure document for each pool that it operates or that it intends to operate within 21 calendar days of the date upon which the pool operator first knows or has reason to know of the defect requiring the amendment. 10. Section 4.31 is proposed to be revised to read as follows: Sec. 4.31 Required delivery of disclosure document to prospective clients. (a) No commodity trading advisor registered or required to be registered under the Act may solicit a prospective client, or enter into an agreement with a prospective client to direct the client's commodity interest account or to guide the client's commodity interest trading by means of a systematic program that recommends specific transactions, unless the commodity trading advisor, at or before the time it engages in the solicitation or enters into the agreement (whichever is earlier), delivers or causes to be delivered to the prospective client a disclosure document for the trading program pursuant to which the trading advisor seeks to direct the client's account or to guide the client's trading, containing the information set forth in Secs. 4.33 and 4.34. (b) The commodity trading advisor may not enter into an agreement with a prospective client to direct the client's commodity interest account or to guide the client's commodity interest trading unless the trading advisor first receives from the prospective client an acknowledgment signed and dated by the prospective client stating that the client received a disclosure document for the trading program pursuant to which the trading advisor will direct his account or will guide his trading. 11. Section 4.32 is proposed to be amended by revising paragraph (a)(2) to read as follows: Sec. 4.32 Recordkeeping. * * * * * (a) * * * (2) The acknowledgement specified in Sec. 4.31(b). * * * * * 12. Sections 4.33, 4.34 and 4.35 are proposed to be added as follows: Sec. 4.33 General disclosures required. Except as otherwise provided herein, a disclosure document must include the following information. (a) Cautionary statement. The following Cautionary Statement, must be prominently displayed on the cover page of the disclosure document: THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. (b) Risk disclosure statement. (1) The following Risk Disclosure Statement must be prominently displayed immediately following any disclosures required to appear on the cover page of the disclosure document as provided by the Commission or any applicable federal or state securities laws and regulations: RISK DISCLOSURE STATEMENT THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE FOLLOWING: IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM AND OF ALL TRANSACTION COSTS. IF YOU PURCHASE OR SELL A COMMODITY FUTURE OR SELL A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT. UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN THE MARKET MAKES A ``LIMIT MOVE.'' THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS. A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG'' OR ``SHORT'' POSITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE (insert page number). THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. YOU SHOULD THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page number). (2) If the commodity trading advisor may trade foreign futures or options contracts, the Risk Disclosure Statement must further state the following: YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR LOCAL AND OTHER RELEVANT JURISDICTIONS. (3) If the commodity trading advisor is not also a registered futures commission merchant, the trading advisor must make the additional following statement in the Risk Disclosure Statement, prominently disclosed as the last paragraph thereof: THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM DIRECTLY WITH A FUTURES COMMISSION MERCHANT. (c) Table of contents. A table of contents showing, by subject matter, the location of the disclosures made in the disclosure document must appear immediately following the Risk Disclosure Statement. (d) Information required in the forepart of the document. (1) The name, address of the main business office, main business telephone number and form of organization of the commodity trading advisor. If the mailing address of the main business office is a post office box number or is not within the United States, the trading advisor must state where its books and records will be kept and made available for inspection; and (2) The date when the disclosure document will first be used. (e) The name of. (1) Each principal of the trading advisor; (2) The futures commission merchant with which the commodity trading advisor will require the client to maintain its account or, if the client is free to choose the futures commission merchant with which it will maintain its account, the commodity trading advisor must make a statement to that effect; and (3) The introducing broker through which the commodity trading advisor will require the client to introduce its account or, if the client is free to choose the introducing broker through which it will introduce its account, the commodity trading advisor must make a statement to that effect. (f) Business background. (1) The business background, for the five years preceding the date of the document, of: (i) The commodity trading advisor; and (ii) Each principal of the trading advisor who participates in making trading or operational decisions for the trading advisor or supervises persons so engaged. (2) The trading advisor must include in the description of the business background of each such person the name and main business of that person's employers, business associations or business ventures and the nature of the duties performed by such person for the employers or in connection with the associations or ventures. (g) Principal risk factors. As applicable, a discussion of the principal risk factors of this trading program. This discussion must include, without limitation, risks due to volatility, leverage, and counterparty risks. (h) Trading program. A description of the trading program. This description shall include the types of commodity interests and other interests the commodity trading advisor intends to trade, with a description of any restrictions or limitations on such trading established by the commodity trading advisor. (i) Fees. A complete description of each fee which the commodity trading advisor will charge the client. (1) Wherever possible, the trading advisor must specify the dollar amount of each such fee. (2) Where any fee is determined by reference to a base amount including, but not limited to, ``net assets,'' ``gross profits,'' ``net profits'' or ``net gains,'' the trading advisor must specifically explain how such base amount will be calculated. (3) Where any fee is based on an increase in the value of the client's commodity interest account, the trading advisor must specify how that increase is calculated, the period of time during which the increase is calculated, the fee to be charged at the end of that period and the value of the account at which payment of the fee commences. (j) Conflicts of interest. (1) A full description of any actual or potential conflicts of interest regarding any aspect of the trading program on the part of: (i) The commodity trading advisor; (ii) Any futures commission merchant with which the client will be required to maintain its commodity interest account; (iii) Any introducing broker through which the client will be required to introduce its account to a futures commission merchant. (2) Any principal of the foregoing. (k) Litigation. (1) Subject to the provisions of paragraph (k)(2) of this section, any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the document, against any of the following persons, except a concluded action that resulted in an adjudication on the merits in favor of such person: (i) The commodity trading advisor and any principal thereof: (ii) The futures commission merchant with which the client will be required to maintain its commodity interest account; and (iii) The introducing broker through which the client will be required to introduce its account to the futures commission merchant. (2) With respect to the futures commission merchant and the introducing broker, an action will be considered material if: (i) The action would be required to be disclosed in the notes to the futures commission merchant's or introducing broker's financial statements prepared pursuant to generally accepted accounting principles; (ii) The action was brought by the Commission, Provided, however, That a concluded action that did not result in fines exceeding $50,000 need not be disclosed unless it involved allegations of fraud or willful misconduct; or (iii) The action was brought by any other federal or state regulatory agency, or by a self-regulatory organization, domestic or foreign, and involves allegations of fraud or other willful misconduct. (l) Trading for own account. If the commodity trading advisor or any principal thereof trades or intends to trade commodity interests for its own account, the commodity trading advisor must disclose whether clients will be permitted to inspect the records of such person's trading and any written policies related to such trading. (m) Performance disclosures as set forth in Sec. 4.34 (n) Voluntary Information. If any information, other than that required by the Commission, the antifraud provisions of the Act, or any federal or state securities laws and regulations, is provided, such information: (1) May not be misleading in content or presentation or inconsistent with the required disclosures; (2) Shall be subject to the antifraud provisions of the Act and the regulations thereunder, and to rules regarding the use of promotional material promulgated by a registered futures association, pursuant to section 17(j) of the Act; and (3) May only appear following the related required disclosures, unless otherwise specified. (o) Material information. This section does not relieve a commodity trading advisor from any obligation under the Act or the regulations thereunder, including the obligation to disclose all material information to existing or prospective clients even if the information is not specifically required by this section. Sec. 4.34 Performance disclosures. (a) General principles. (1) The performance of the program offered must be displayed first, calculated in accordance with generally accepted accounting principles as specified below or by a method otherwise approved by the Commission, in a table showing at least quarterly the following information. (i) The beginning net asset value for the period, which shall represent the previous period's ending net asset value; (ii) All additions, whether voluntary or involuntary, during the period; (iii) All withdrawals and redemptions, whether voluntary or involuntary, during the period; (iv) The net performance for the period, which shall represent the change in the net asset value net of additions, withdrawals, redemptions, fees and expenses; (v) The ending net asset value for the period, which shall represent the beginning net asset value plus or minus additions, withdrawals and redemptions, and net performance; (vi) The rate of return for the period, computed on a compounded monthly basis, which shall be calculated by dividing the net performance by the beginning net asset value; (2) The performance of all other programs must be presented as set forth in Sec. 4.25(a)(1)(ii)(C) through (G) and must be based on the information set forth in Sec. 4.34(a)(1), and calculated on a current basis. The commodity trading advisor must maintain all supporting documents necessary to substantiate such calculation in accordance with Sec. 1.31. (3) All performance information presented in the disclosure document must be current as of a date not more than three months preceding the date of the document. (4) All required performance information must be presented for the most recent five calendar years and year-to-date or for its entire duration, if less than five years. (5) Unless such presentation would be misleading, the performance of accounts traded pursuant to the same trading program may be presented in a single composite table provided that the trading advisor describes how each composite was calculated. The term trading program means a trading strategy differentiated from others by commodity trading methodology, degree of risk or degree of leverage. (6) The performance of any account in which the commodity trading advisor, any of its principals or any person providing services to the pool owns or controls fifty percent or more of the beneficial interests shall not be included in a disclosure document unless such performance is prominently labeled as proprietary and set forth separately after all required disclosures. (7) Any past performance presentation, whether required or voluntarily provided, must be preceded with the following statement, prominently displayed: PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. (b) Performance to be disclosed. The commodity trading advisor must disclose the actual performance of all accounts directed by the commodity trading advisor and by each of its trading principals; Provided, however, That if the trading advisor or its trading principals previously have not directed any accounts, the trading advisor must prominently disclose this fact with one of the following statements, as applicable: (1) THIS TRADING ADVISOR PREVIOUSLY HAS NOT DIRECTED ANY ACCOUNTS; or (2) NONE OF THE TRADING PRINCIPALS OF THIS TRADING ADVISOR HAS PREVIOUSLY DIRECTED ANY ACCOUNTS; or (3) NEITHER THIS TRADING ADVISOR NOR ITS TRADING PRINCIPALS HAVE PREVIOUSLY DIRECTED ANY ACCOUNTS. Sec. 4.35 Use, amendment and filing of disclosure document. (a) Subject to paragraph (c) of this section, all information contained in the disclosure document must be current as of the date of the document; Provided, however, That performance information must be current as of a date not more than three months preceding the date of the document. (b) No commodity trading advisor may use a disclosure document dated more than nine months prior to the date of its use. (c)(1) If the commodity trading advisor knows or should know that the disclosure document is materially inaccurate or incomplete in any respect, it must correct that defect and must distribute the correction to: (i) All existing clients in the trading program within 21 calendar days of the date upon which the trading advisor first knows or has reason to know of the defect; and (ii) Each previously solicited prospective client for the trading program prior to entering into an agreement to direct or to guide such prospective client's commodity interest account pursuant to the program. The trading advisor may furnish the correction by way of an amended document, a sticker on the document, or other similar means. (2) The trading advisor may not use the document until such correction is made. (d)(1) The commodity trading advisor must file with the Commission two copies of the disclosure document for each trading program that it offers or that it intends to offer not less than 21 calendar days prior to the date the trading advisor first intends to deliver the document to a prospective client in the trading program. (2) The commodity trading advisor must file with the Commission two copies of all subsequent amendments to the disclosure document for each trading program that it offers or that it intends to offer within 21 calendar days of the date upon which the trading advisor first knows or has reason to know of the defect requiring the amendment. PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS 13. The authority citation for part 30 continues to read as follows: Authority: 7 U.S.C. 1a, 2, 4, 6, 6c, and 12a. 14. Section 30.6 is proposed to be amended by revising paragraphs (b)(1) and (b)(2) to read as follows: Sec. 30.6 Disclosure. * * * * * (b) Commodity pool operators and commodity trading advisors. (1) No commodity pool operator registered or required to be registered under this part, or exempt from registration pursuant to Sec. 30.5 of this part, may, directly or indirectly, solicit, accept or receive funds, securities or other property from a prospective participant in a foreign pool that it operates or that it intends to operate or, in the case of a commodity trading advisor, no commodity trading advisor registered or required to be registered under this part, or exempt from registration pursuant to Sec. 30.5 of this part, may solicit or enter into an agreement with a prospective client to direct or to guide the client's foreign commodity interest trading by means of a systematic program that recommends specific transactions, unless the commodity pool operator or commodity trading advisor, at or before the time it engages in such activities, first provides each prospective participant or client with the Risk Disclosure Statement set forth in Sec. 4.24(b) in the case of a commodity pool operator or Sec. 4.33(b) in the case of a commodity trading advisor. (2) The disclosure statement required to be provided in paragraph (b)(1) of this section may be given as a separate document or, if part of the disclosure document required to be furnished customers or potential customers pursuant to Sec. 4.21 or Sec. 4.31 of this chapter, must be prominently disclosed immediately following any disclosures required to appear on the cover page of the disclosure document as provided by the Commission or any applicable federal or state securities laws and regulations. * * * * * PART 150--LIMITS ON POSITIONS 15. The authority citation for part 150 continues to read as follows: Authority: 7 U.S.C. 6a, 6c and 12a(5) (1988). 16. Section 150.3 is proposed to be amended by revising paragraph (a)(4)(i)(D) to read as follows: Sec. 150.3 Exemptions. (a) * * * (4) * * * (i) * * * (D) Solicit funds for such trading by separate disclosure documents that meet the standards of Sec. 4.24 or Sec. 4.33 of this chapter, as applicable, where such disclosure documents are required under part 4 of this chapter. * * * * * Issued in Washington, DC, on May 5, 1994, by the Commission. Jean A. Webb, Secretary of the Commission. [FR Doc. 94-11380 Filed 5-13-94; 8:45 am] BILLING CODE 6351-01-P