Proposed Amendments to Commodity Pool Operator and Commodity Trading Advisor Disclosure 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

This text is long and has been trimmed here. Open the source document for the complete record.