Interpretation Regarding Use of Electronic Media by Commodity Pool Operators and Commodity Trading Advisors for Delivery of Disclosure Documents and Other Materials

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

Interpretation Regarding Use of Electronic Media by Commodity

Pool Operators and Commodity Trading Advisors for Delivery of

Disclosure Documents and Other Materials

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Interpretation; Final Rules.

-----------------------------------------------------------------------

[[Page 39105]]

SUMMARY: The Commodity Futures Trading Commission (the ``Commission''

or ``CFTC'') is modifying in part the interpretation set forth in its

August 14, 1996 release (61 FR 42146) to clarify the Commission's views

concerning electronic delivery of required Disclosure Documents and

other materials by commodity pool operators (``CPOs'') and commodity

trading advisors (``CTAs''). The Commission also is adopting technical

amendments to its rules governing the form of documents distributed by

CPOs and CTAs and the requirement that a CPO or CTA obtain a signed

acknowledgment when a Disclosure Document is delivered. The rule

amendments were proposed in the Commission's August 27, 1996 release

(61 FR 44009) and are intended to facilitate the use of electronic

media by CPOs and CTAs.

EFFECTIVE DATE: August 21, 1997.

FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief

Counsel, or Christopher W. Cummings, Special Counsel, Division of

Trading and Markets, Commodity Futures Trading Commission, 1155 21st

Street, N.W., Washington, D.C. 20581. Telephone Number: (202) 418-5450.

Facsimile Number: (202) 418-5536. Electronic Mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

On August 8, 1996, the Commission issued a proposed interpretation

regarding the use of electronic media \1\ by commodity pool operators

(``CPOs''), commodity trading advisors (``CTAs'') and their associated

persons (``Initial Release''). The Initial Release provided guidance to

CPOs and CTAs concerning the application of the Commodity Exchange Act

(``CEA'') and the Commission's regulations thereunder to activities

involving electronic media. The original effective date of the Initial

Release, which was published in the Federal Register on August 14,

1996, was October 15, 1996, with a sixty day period for the submission

of public comments. On October 15, 1996, the Commission postponed the

effective date for sixty days and extended the comment period on the

Initial Release for thirty days to provide additional time for the

public to submit comments. On December 11, 1996, the Commission

indefinitely postponed the effective date of the Initial Release to

enable a full review and consideration of the comments received and

issues presented.\2\

---------------------------------------------------------------------------

\1\ The term ``electronic media'' refers to such media as

audiotapes, videotapes, facsimiles, CD-ROM, electronic mail,

bulletin boards, Internet World Wide Web sites and computer networks

(e.g., local area networks and commercial on-line services) used to

provide documents and information required by or otherwise affected

by the Commodity Exchange Act and the regulations promulgated

thereunder.

\2\ The pilot program for electronic filing of Disclosure

Documents announced in the Initial Release was implemented October

15, 1996 and was not affected by postponement of the Initial

Release's effective date.

---------------------------------------------------------------------------

On August 19, 1996, the Commission proposed a series of technical

changes to Part 4 of its rules (the ``Proposed Rules'') to clarify

application of paper-based formatting, filing and acknowledgment

requirements in light of the interpretations set forth in the Initial

Release. The Proposed Rules were published for public comment in the

Federal Register on August 27, 1996.\3\ The Commission did not receive

any comments specifically addressed to the Proposed Rules. However,

because the proposed changes to Rules 4.1, 4.21 and 4.31 codified

portions of the Initial Release, the Commission is considering the

comments received in response to the Initial Release as applicable also

to those proposed rule amendments.

---------------------------------------------------------------------------

\3\ 61 FR 44009 (August 27, 1996).

---------------------------------------------------------------------------

The Initial Release discussed the application of the existing

statutory and regulatory regime to the use of electronic media,

including in Section II a discussion of the registration implications

of using electronic media and in Section III specific guidance for the

use of electronic media for delivery of Disclosure Documents. In

Section IV the Commission announced an optional, six month pilot

program for the electronic filing of Disclosure Documents (the ``Pilot

Program'').

Based upon its review of the comments received and its experience

with the Pilot Program, on April 9, 1997, the Commission determined to

convert the electronic filing program to a permanent, voluntary filing

program.\4\ On April 9, 1997, the Commission adopted the proposed

changes to Rules 4.2(a), 4.26(d) and 4.36(d) substantially as proposed

to implement the electronic filing program.\5\ This Release addresses

the issues relating to the electronic delivery of Disclosure Documents

and other documents by CPOs and CTAs discussed in Section III of the

Initial Release. This Release does not affect the status of Section II

of the Initial Release, which principally addressed registration

issues, the effectiveness of which was indefinitely postponed by the

Commission's Federal Register release of December 16, 1996.\6\

---------------------------------------------------------------------------

\4\ 62 FR 18265 (April 15, 1997).

\5\ 62 FR 18265 (April 15, 1997). Rule 4.2(a) was changed to

provide for electronic filing at an e-mail address to be designated

by the Commission. Rules 4.26(d) and 4.36(d) were changed to provide

that, when a Disclosure Document is filed electronically, only one

copy need be submitted.

\6\ 61 FR 65940 (December 16, 1996).

---------------------------------------------------------------------------

The Commission received comment letters from seventy-seven sources:

twenty-six from persons registered as CTAs, nineteen from CPOs/CTAs,

two from CTAs/introducing brokers (``IBs''), one from a CTA/futures

commission merchant, one from a CTA/CPO/IB, one from a contract market,

one from a futures industry trade association, one from a self-

regulatory organization, one from a public interest legal center, one

from a publishers' trade association and the remainder from various

unregistered persons or entities. The comments received expressed broad

support for the Commission's initiative to provide guidance regarding

the use of electronic media but raised issues concerning a number of

specific applications of the requirements for delivery of Disclosure

Documents.\7\ Based upon the Commission's consideration of the comments

received and its own reconsideration of the Initial Release, the

Commission has determined to modify the interpretation as discussed

below. The Commission also has determined to adopt the remaining

technical amendments to Part 4 in substantially the form in which they

were proposed.

---------------------------------------------------------------------------

\7\ Because final action on Section II of the Initial Release is

not being taken at this time, the Commission is not addressing in

this release the comments received concerning registration-related

issues.

---------------------------------------------------------------------------

As the Commission stated in the Initial Release, ``electronic media

can provide an effective alternative to traditional paper-based

media.'' \8\ Thus, as a general proposition, the Commission supports

consistency in the application of regulatory requirements to electronic

and non-electronic media to ensure that information is conveyed in a

manner that achieves the relevant regulatory objectives, regardless of

the medium selected. The following guidance is designed to aid in the

application of the rules to delivery of Disclosure Documents and other

documents by means of electronic media in a manner that achieves the

same objectives as delivery of hardcopy documents.

---------------------------------------------------------------------------

\8\ 61 FR at 42150.

---------------------------------------------------------------------------

II. Delivery of Disclosure Documents to Prospective Investors--

Compliance With Rules 4.21(a) and 4.31(a)

Commission rules require that CPOs and CTAs deliver a Disclosure

Document at or prior to the time of solicitation of customers.

Commission Rule 4.21(a) provides that ``no CPO

[[Page 39106]]

* * * may, directly or indirectly, solicit, accept or receive funds,

securities or other property from a prospective pool 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 CPO delivers or causes

to be delivered to the prospective participant a Disclosure Document

for the pool * * *.'' \9\ Similarly, Rule 4.31(a) provides that ``no

CTA * * * may solicit a prospective client, or enter into an agreement

with a prospective client to direct the client's commodity interest

account or to guide the client's commodity interest trading by means of

a systematic program that recommends specific transactions, unless the

commodity trading advisor, at or before the time it engages in the

solicitation or enters into the agreement (whichever is earlier),

delivers or causes to be delivered to the prospective client a

Disclosure Document for the trading program * * *.'' \10\

---------------------------------------------------------------------------

\9\ 17 CFR 4.21(a). CPOs and CTAs are reminded of their

obligations, regardless of the medium used, to disclose all material

information to existing or prospective clients (see Rules 4.24(w)

and 4.34(o)) and not to mislead (see Sections 4b and 4o of the Act,

7 U.S.C. 6b and 6o).

\10\ 17 CFR 4.31(a).

---------------------------------------------------------------------------

The Initial Release provided guidance to CPOs and CTAs concerning

the use of electronic media to comply with the requirements of Part 4

of the Commission's regulations for the delivery of Disclosure

Documents by CPOs and CTAs and distribution of monthly or quarterly

statements and annual reports by CPOs. The requirement to deliver

Disclosure Documents to prospective customers is an essential component

of the Commission's regulatory regime for CPOs and CTAs. The Commission

reaffirms the view expressed in the Initial Release that ``the

requirements that CTAs and CPOs deliver Disclosure Documents to

prospective clients and pool participants, respectively, may be

satisfied by the use of electronic media, provided appropriate measures

are taken to assure that the purposes of the delivery requirements are

achieved.'' \11\ In the Initial Release, the Commission identified

criteria to guide CPOs and CTAs in making use of electronic media to

effect delivery of Disclosure Documents and other required

communications in a manner that assures that the purposes of the

delivery requirements are achieved. The Commission invited comment

concerning the criteria highlighted in the Initial Release and any

additional criteria that commenters believed to be relevant. The

Commission has reviewed the Initial Release in light of the comments

received and has determined to make several modifications of the

guidance provided, as discussed more fully below.

---------------------------------------------------------------------------

\11\ 61 FR at 42158.

---------------------------------------------------------------------------

Consent. In the past, compliance with Part 4 of the Commission's

rules has required delivery of Disclosure Documents in paper form.

While the Commission supports the use of electronic media as an

alternative medium for delivery of Disclosure Documents, it recognizes

that some persons may prefer to receive disclosure in paper form. Paper

disclosures generally have a greater degree of permanence and

portability than electronic disclosures and in some contexts may be

easier to review, e.g., if one wishes to review several pages ``side by

side.'' Accordingly, CPOs and CTAs may use electronic delivery in lieu

of delivery of a hardcopy Disclosure Document only where the intended

recipient has provided informed consent to receipt of the document by

means of electronic delivery.

In the Initial Release, the Commission set forth six generic

factors that must be disclosed by a CPO or CTA to obtain informed

consent to delivery of required documents electronically: (1) the

regulatory requirement to deliver the relevant document, such as a

Disclosure Document, to prospective commodity pool participants or

managed account customers, as applicable; (2) the right to elect to

receive such document in hardcopy form or by means of electronic

delivery; (3) the specific media and method by which electronic

delivery will be made; \12\ (4) the potential costs associated with

receiving or accessing electronically delivered documents; (5) the

types of documents that will be delivered through electronic media, if

documents in addition to the Disclosure Document are to be delivered

electronically; and (6) the prospective customer's right to revoke his

consent to receive documents by electronic means at any time.

---------------------------------------------------------------------------

\12\ This information should include, for example,

identification of software (other than that which the customer/user

is using to view the disclosures given to obtain informed consent)

needed to download the Disclosure Document and, as appropriate, an

indication that download times may be lengthy.

---------------------------------------------------------------------------

Two commenters, the National Futures Association (``NFA'') and the

Managed Futures Association (``MFA''), contended that the Commission's

procedures for obtaining informed consent were complicated and required

unnecessary information. For example, NFA questioned whether in an

electronic environment a CPO should be required to obtain informed

consent concerning delivery of pool account statements at the time of

initial solicitation. NFA was also concerned as to how registrants

could provide estimates concerning the cost of receiving electronic

disclosures when such costs are likely to vary substantially from user

to user. Similarly, MFA's comment letter asked that the Commission

clarify what is required for obtaining informed consent and contended

that the requirement of informed consent could amount to a ``penalty''

for using electronic media. MFA urged that both informed consent and

acknowledgment of delivery be required only at the point of sale,

rather than at initial solicitation.

The Commission does not believe that obtaining informed consent

need require complex or burdensome procedures and is providing further

clarification to address concerns expressed by various commenters. With

respect to NFA's concern that a CPO might be required to obtain

informed consent concerning delivery of other required pool reports

such as pool account statements at the time of initial solicitation,

the Commission notes that the Initial Release was only intended to set

forth the consent criteria that would apply to all potentially required

communications without addressing when each relevant consent need be

obtained. It did not require that such consents be obtained at the time

of initial solicitation, except consent to delivery of the Disclosure

Document electronically, since such delivery is required to occur at or

prior to solicitation.\13\ With respect to explaining the potential

costs of electronic delivery, the Commission did not intend that CPOs

or CTAs provide the actual amount of attendant costs other than costs

added by the deliverer for the electronic delivery of required

documents. This means that if charges specific to access and receipt of

the Disclosure Document, in addition to basic Internet or electronic

media access fees, will be incurred, CPOs and CTAs must so specify.

Consequently, for materials posted on the World Wide Web and accessible

without charge, as is the case with materials presented on the vast

majority of Internet sites, there would be no duty to disclose

potential costs. In many, if not most, cases the consent requirements

should be satisfiable with a single sentence identifying the document

to be delivered electronically, the prospective customer's right to

receive a hardcopy, and the prospective customer's right to

[[Page 39107]]

revoke consent to electronic delivery. As discussed more fully below,

the disclosures requisite to obtaining informed consent may be included

in the disclosure statement presented in lieu of the full Disclosure

Document at the beginning of the solicitation material to permit access

to a CPO or CTA Internet site.

---------------------------------------------------------------------------

\13\ See discussion below as to how such delivery (i.e.,

presubscription delivery) may be accomplished in an electronic

environment.

---------------------------------------------------------------------------

Delivery. Commission Rules 4.21(a) and 4.31(a) require that, at or

before the time at which a CPO or CTA solicits a prospective pool

participant or client, respectively, he must deliver the applicable

Disclosure Document. In the Initial Release, the Commission construed

the requirements of Rules 4.21(a) and 4.31(a) (which, by reference to

Rules 4.24 and 4.34, impose both specific presentation and order of

disclosure requirements) in the context of electronic media to require

that the full Disclosure Document be delivered electronically to a

prospective investor prior to providing access to any solicitation

materials concerning the offered pool or managed account services other

than de minimis introductory material. In order not to constrain unduly

the ability to provide a menu of available information, the Commission

indicated that a general description of the contents of a website,

through presentation of an outline or table of contents for the website

in which the Disclosure Document is listed as the first item, would

satisfy Rules 4.21(a) and 4.31(a) provided that the prospective pool

participant or client would be unable to review other sections of the

site before accessing and scrolling through the Disclosure Document and

affirming that he or she had received it.

This ``click and scroll'' requirement addressed both the

Commission's concern that prospective investors actually have the

Disclosure Document brought to their attention with a comparable degree

of directness and immediacy as would normally be attained by postal

mail or personal delivery, and the ``order'' of disclosure requirements

of Commission rules. Postal mail or personal delivery assures actual

notice to the recipient of receipt of a document as well as actual

receipt of the document. By contrast, electronic media have the

capability of making vast inventories of documents passively available

through indices or hyperlinks, which provide a computer connection to

documents often too numerous for any viewer to access or, in many

cases, even to identify as being of particular relevance to that

viewer. Consequently, announcing the availability of a document by

means of electronic media may have far less significance to, and impact

upon, a prospective customer than actual delivery of a hardcopy

Disclosure Document. Thus, in the Initial Release, the Commission

endeavored to give guidance designed to balance the regulatory interest

in the prospective pool participant's or managed account customer's

actually having notice and immediate receipt of the Disclosure Document

with the CPO's and CTA's interest in the efficiencies obtainable

through the use of electronic media.

However, a number of commenters argued that application of the

delivery requirement in the manner suggested in the Initial Release was

unduly burdensome. They objected to the requirement that investors

access and scroll to the end of a Disclosure Document prior to

receiving promotional material on the ground that hardcopy documents,

while provided before other material, may not be read completely. These

commenters believed that such a requirement might discourage persons

from obtaining information concerning managed futures on the Internet.

Although the ``click and scroll'' procedure permits a viewer to scroll

through a document in a matter of seconds, some commenters viewed the

requirement that the viewer scroll through the Disclosure Document as

excessive and analogous to ``requir[ing] registrants to ensure that

prospective customers review each page of the hardcopy document before

proceeding with a solicitation.'' \14\ NFA's comment letter proposed

that, in lieu of requiring that viewers actually proceed through the

full text of the Disclosure Document before receiving any additional

solicitation material, CPOs and CTAs instead provide a concise risk

disclosure statement, which viewers would be required to scroll

through, together with immediate electronic (or hardcopy) access to the

full electronic (or hardcopy) Disclosure Document. NFA's comment letter

also proposed that the Disclosure Document be deemed to have been

delivered if: (1) the Disclosure Document is prominently available and

in close proximity to the solicitation information requiring delivery

of a Disclosure Document; (2) the Disclosure Document and all

supplements are made accessible electronically for the time period for

which the Disclosure Document is effective; and (3) the Disclosure

Document is available upon request in paper form or able to be

downloaded by the recipient.\15\ Further, some commenters contended

that the Commission's interpretation of delivery differed from that of

the Securities and Exchange Commission (``SEC''), which permits the use

of hyperlinks to effectuate delivery in certain circumstances.\16\

---------------------------------------------------------------------------

\14\ NFA comment letter at 2.

\15\ NFA also referenced the interpretations of the SEC

concerning electronic delivery of required disclosures. NFA's

tripartite test is consistent with that of the SEC.

\16\ For example, the SEC stated that during the ``post-

effective'' period of a public securities offering, a company could

place its sales literature on the World Wide Web provided that the

sales literature contains a hyperlink to the Company's final

prospectus where an individual may click on a box marked ``final

prospectus'' and almost instantly the final prospectus appears on

the individual's computer screen. The SEC noted that ``[s]ales

literature, whether in paper or electronic form, is required to be

preceded or accompanied by a final prospectus. The hyperlink

function enables the final prospectus to be viewed directly as if it

were packaged in the same envelope as the sales literature.

Therefore, the final prospectus would be considered to have

accompanied the sales literature.'' 60FR 53458, 53463 (October 13,

1995).

---------------------------------------------------------------------------

Based upon further consideration of the issues and the comments

received, the Commission believes that the delivery requirements of

Rules 4.21 and 4.31 may be satisfied in the context of electronic media

by methods that do not require the prospective customer to scroll

through the entire Disclosure Document prior to receiving other

solicitation material, provided that the requirements on prominence of

presentation and comparable availability discussed herein are followed.

One such method acceptable to the Commission would be providing a

simple, concise statement highlighting the nature of the risks relevant

to the pool or managed account program being offered and directing the

viewer to the Disclosure Document for a fuller explanation of the

nature of the proposed investment and its attendant risks and costs.

The same explanatory statement could be used to satisfy the requirement

to obtain the informed consent of prospective customers who elect to

receive the Disclosure Document electronically rather than through

delivery of a hardcopy document. This risk disclosure statement would

be filed with the Commission together with the registrant's Disclosure

Document. In this scenario, the prospective investor is using

electronic media to consent to electronic receipt of the Disclosure

Document and is also receiving on that medium a summary risk statement

highlighting the availability of the Disclosure Document and a

hyperlink or other similarly immediate connection to the Disclosure

Document. In this context, the CPO or CTA has delivered the relevant

Disclosure Document at the

[[Page 39108]]

time of or prior to solicitation of the prospective customer.\17\

---------------------------------------------------------------------------

\17\ However, if a prospective investor were solicited other

than by electronic media, providing a summary risk disclosure

statement and notice of the electronic availability of a Disclosure

Document would not constitute delivery of the Disclosure Document at

the time of or prior to solicitation.

---------------------------------------------------------------------------

For purposes of providing this concise risk disclosure and

highlighting the contents and availability of the Disclosure Document,

the Commission believes that the ``risk disclosure statement'' set

forth in Rules 4.24 and 4.34 and required to be presented at the

beginning of the Disclosure Document for commodity pools and commodity

trading advisors, respectively, may provide a useful template, with

minor adjustments. A sample ``short form'' risk disclosure statement

for a commodity pool might read as follows:

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 OPTION 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. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE

DESCRIPTION OF THE PRINCIPAL RISK FACTORS, EACH EXPENSE TO BE

CHARGED THIS POOL AND A STATEMENT OF THE AMOUNT, AS A PERCENTAGE

RETURN AND DOLLAR AMOUNT, NECESSARY TO BREAK EVEN, THAT IS, TO

RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT.\18\

---------------------------------------------------------------------------

\18\ Ideally, individual disclosure documents provided

electronically would include electronic tables of contents,

providing hyperlinks (or comparable features) to highlight and

facilitate access to the principal risk factors, costs, and break-

even amounts, matters which are required to be highlighted in

hardcopy disclosure. In any event, a table of contents is required

by Rules 4.24(c) and 4.34(c) to be included in all Disclosure

Documents.

---------------------------------------------------------------------------

THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION

(``CFTC'') REQUIRE THAT PROSPECTIVE INVESTORS RECEIVE A DISCLOSURE

DOCUMENT WHEN THEY ARE SOLICITED TO INVEST FUNDS IN A COMMODITY POOL

AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS

READILY ACCESSIBLE AT THIS SITE. THIS BRIEF STATEMENT CANNOT

DISCLOSE ALL OF THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE

YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, YOU SHOULD

PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY

TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF

YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE

DISCLOSURE DOCUMENT BY CLICKING BELOW. YOU WILL NOT INCUR ANY

ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY

ALSO REQUEST DELIVERY OF A HARDCOPY OF THE DISCLOSURE DOCUMENT,

WHICH ALSO WILL BE PROVIDED TO YOU AT NO COST. THE CFTC HAS NOT

PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR ON THE

ADEQUACY OR ACCURACY OF THE DISCLOSURE DOCUMENT.

PLEASE ACKNOWLEDGE YOUR UNDERSTANDING OF THIS IMPORTANT

STATEMENT.

Similarly, a CTA's ``short form'' risk disclosure statement might read

as follows:

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU

SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE

FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.

THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN

COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE

OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO

SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE

NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO

MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF

THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE

DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED

TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (``CTA'').

THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION

(``CFTC'') REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A

DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN

AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S

COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE

HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS

BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER

SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD

PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY

TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF

YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE

DISCLOSURE DOCUMENT BY CLICKING BELOW. YOU WILL NOT INCUR ANY

ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY

ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT,

WHICH ALSO WILL BE PROVIDED TO YOU AT NO COST. THE CFTC HAS NOT

PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR

ON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE DOCUMENT.

OTHER DISCLOSURE STATEMENTS ARE REQUIRED TO BE PROVIDED YOU

BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU.

PLEASE ACKNOWLEDGE YOUR UNDERSTANDING OF THIS IMPORTANT

STATEMENT.

At a minimum, such a risk disclosure statement should state: (1)

that the risk of loss in trading futures contracts or commodity options

can be substantial; (2) that Commission rules require delivery at or

prior to the time of solicitation of a Disclosure Document, which

explains, among other things, the principal risk factors and costs of

the proposed participation in the commodity pool or managed account

program including the potential impact of fees and expenses, the

``break even'' point in dollars and the percentage return necessary to

recover one's initial investment, and restrictions on redeeming or

withdrawing one's initial investment; (3) that a hardcopy Disclosure

Document may be obtained from the CPO or CTA at no cost at any

time;\19\ and (4) that the Commission has not passed upon the merits of

participating in a particular investment or on the adequacy or accuracy

of the Disclosure Document. At the end of the risk disclosure

statement, the prospective investor would be required to acknowledge

that he or she understands the statement. CPOs and CTAs may tailor the

risk disclosure statement to the particular facts of their

situation.\20\

---------------------------------------------------------------------------

\19\ Inclusion of an indication of the time required to download

the Disclosure Document may assist the prospective client in

determining whether to request a paper copy and is therefore

strongly encouraged by the Commission.

\20\After experience with this arrangement, the Commission may

develop more explicit rules, as determined to be necessary.

---------------------------------------------------------------------------

This summary risk disclosure statement should be accompanied by the

Disclosure Document, made accessible by means of a hyperlink or

similarly immediate connection and presented in a form that is readily

accessible to the recipient. In stating that the Disclosure Document be

[[Page 39109]]

``readily accessible,'' the Commission requires that the Disclosure

Document be accessible on a comparable basis to other promotional

material on the CPO's or CTA's website. Thus, to the extent that a

Disclosure Document is in a form that requires use of a specially

designated viewer or software, the other promotional material should

require use of such viewer or software. This requirement is necessary

to prevent the situation where a user may access promotional materials,

such as performance data or a narrative description of the trading

methodology, but is unable to access the Disclosure Document.\21\ Use

of a concise risk disclosure statement which highlights the immediate

availability of the Disclosure Document and electronic hyperlinking or

other similarly accessible arrangement that requires no greater

facility or steps than access to other materials on the site should

balance the need for electronic delivery of Disclosure Documents to be

no more cumbersome than hardcopy delivery with the need for a customer

to be properly informed of the relevant costs and risks of the proposed

investment. Prospective pool participants or advisory clients would be

required to access only the abbreviated risk disclosure statement and

not to ``click and scroll'' through the entire Disclosure Document.

Permitting delivery of the Disclosure Document in the manner discussed

above also promotes consistency with the approach of other financial

regulators such as the SEC.\22\ Specific examples illustrating how CPOs

and CTAs may use electronic media to deliver Disclosure Documents are

provided in Section V.

---------------------------------------------------------------------------

\21\ The SEC has reflected similar concerns. For example, in

example (38), the SEC stated, ``A server available through the

Internet contains a fund's prospectus and application form in

separate files. Users can download or print the application form

without first accessing, downloading or printing the prospectus; the

form includes a statement that by signing the form, the investor

certifies that he or she has received the prospectus. Logistically,

it is significantly more burdensome to access the prospectus than

the application form (e.g., the investor needs to download special

software before accessing the prospectus). The statement in the form

about receipt of the prospectus would not by itself constitute

electronic delivery of the prospectus, and the application form is

not evidence of delivery of the prospectus, given the need to

download special software before the prospectus can be viewed.'' 60

FR 53458, 53465 (October 13, 1995).

\22\ See footnote 16 supra.

---------------------------------------------------------------------------

Delivery of a risk disclosure statement in the form provided above

or with minor adjustments should satisfy the requirements for informed

consent with respect to delivery of a Disclosure Document. Where the

sample risk disclosure statement provided does not address all required

disclosures, such as where the Disclosure Document is delivered in a

different manner from the risk disclosure statement, e.g., where a

Disclosure Document will be delivered by means of electronic mail, or

where accessing the electronic Disclosure Document entails additional

costs, CPOs or CTAs should modify the risk disclosure statement to

address these additional factors. In every case, the Disclosure

Document should be as accessible as promotional material.

Format. Commission rules include a number of format requirements

which are designed to assure that certain information is accorded

special prominence or emphasis in the Disclosure Document. These

requirements create an order of presentation under which certain basic

information must be placed at the beginning of the document,

information of lesser relevance is presented after matters of greater

importance, and voluntarily presented information follows required

disclosures. The prescribed order also facilitates comparison of

documents by maintaining the same sequence of topics across documents

of different registrants. In the Initial Release and the Proposed

Rules, the Commission recognized that a Disclosure Document could be

presented in electronic form in place of paper form, provided that

documents electronically delivered comply with the formatting standards

specified in Commission rules. Specifically, the Commission noted that,

where Commission rules specify the prominence, location, or other

attributes of the information required to be delivered, an electronic

version of such information must present the information in the same

order and must reflect (if not replicate) the differences in emphasis

and prominence that would exist in a hardcopy document.

The Commission received only one comment addressed to format

issues.\23\ The commenter noted that certain electronic document

formats do not have standard ``pages'' and thus may not present

legends, disclaimers and notes in the same manner as documents in

hardcopy form. To address this disparity, the commenter proposed that

the Commission require the use of certain technologies that make the

appearance of electronic documents nearly identical to their paper

versions, such as the currently popular Adobe Acrobat. The Commission

recognizes that electronic and paper versions of the same document may

differ in some respects as to format, but as noted above, does not

intend to limit the technologies that CPOs or CTAs may use to deliver

their Disclosure Documents as long as such documents present

information in the same format and order as specified in Commission

rules, and reflect ``the differences in emphasis and prominence that

would exist in the paper document.'' \24\ The Initial Release suggested

methods by which the electronic versions of documents might present

information for which special presentation requirements exist. For

example, the Commission noted that where text is required to be

presented in boldface type, an electronic presentation might achieve

the same objective by changing the color or shading of the text or the

background in a manner that causes that portion of the text to be

emphasized.

---------------------------------------------------------------------------

\23\ That commenter also asked whether an electronic Disclosure

Document must be contained as a single file or may be several files

linked together. This comment appears to address language in

proposed Rule 4.1, which equated readily communicated information

with material in a ``single file.'' 61 FR at 44012. This commenter

favored linking several files together so that the Disclosure

Document may be downloaded in portions, each of which could be

downloaded more rapidly than the entire document. This comment and

the Commission's modifications to proposed Rule 4.1 are discussed

below in Section VI.

\24\ 61 FR at 42161.

---------------------------------------------------------------------------

Receipt of Acknowledgments by Electronic Media--Compliance with

Rules 4.21(b) and 4.31(b). Commission Rule 4.21(b) provides that a

``commodity pool operator may not accept or receive funds, securities

or other property from a prospective pool participant unless the pool

operator first receives from the prospective pool participant an

acknowledgment signed and dated by the prospective participant stating

that the prospective participant received a Disclosure Document for the

pool.'' \25\ Similarly, Commission Rule 4.31(b) provides that a

``commodity trading advisor may not enter into an agreement with a

prospective client to direct the client's commodity interest account or

to guide the client's commodity interest trading unless the trading

advisor first receives from the prospective client an acknowledgment

signed and dated by the prospective client stating that the client

received a Disclosure Document for the trading program pursuant to

which the trading advisor will direct his account or will guide his

trading.'' \26\ This acknowledgment of delivery is required of a

subscribing participant as opposed to one who is merely solicited, a

distinction preserved in the electronic context. A signed and dated

acknowledgment certifies that the

[[Page 39110]]

prospective investor has received the Disclosure Document, and the

acknowledgment is one of the records that CPOs and CTAs are required to

maintain under Part 4.

---------------------------------------------------------------------------

\25\ 17 CFR 4.21(b).

\26\ 17 CFR 4.31(b).

---------------------------------------------------------------------------

In the Initial Release, the Commission stated that it ``supports

the use of electronic media to obtain customer acknowledgments but

believes that measures must be taken to assure an adequate level of

verification of the authenticity of such acknowledgments.'' \27\

Similarly, in the Rule Proposal, the Commission stated that ``adequate

evidence of receipt of a Disclosure Document may be obtained in ways

other than a manually signed paper receipt.'' \28\ In the Initial

Release, the Commission stated that use of personal identification

numbers (``PINs'') to verify the identity of a recipient represented a

non-exclusive method of obtaining electronic acknowledgments of receipt

of a Disclosure Document, and the Commission invited comment concerning

the validity of electronic acknowledgments. The Commission noted that

PINs serve two important objectives: (1) they enable the CPO or CTA, to

the extent practicable, to verify the identity of the person sending

the electronic communication; and (2) they help to protect innocent

persons from false claims that they have sent a particular electronic

communication.\29\ Failure to include a valid PIN assigned to the

intended party would render invalid any message purportedly sent by

that person. The Commission has approved the use of PINs in lieu of

manual signatures in other contexts, e.g., by FCMs filing financial

reports with self-regulatory organizations. Consequently, in the

Initial Release, the Commission confirmed that the use of PINs ``would

provide an acceptable method of obtaining acknowledgments of receipt of

Disclosure Documents.'' \30\ Further, the Commission noted that under

Rules 4.21(b) and 4.31(b), CPOs and CTAs bear the burden of obtaining a

valid acknowledgment of receipt of Disclosure Documents and are thus

responsible for establishing procedures adequate to establish the

authenticity of electronic acknowledgments. The Commission originally

stated that if a CPO or CTA plans to accept electronic acknowledgments,

it is responsible for establishing a system for issuing individualized

PINs, but requested comment concerning alternative methods of

authentication. In a subsequent release, the Commission stated that the

methodology specified was not intended to be exclusive, provided that

the CPO or CTA could satisfy the relevant criteria for

verifiability.\31\

---------------------------------------------------------------------------

\27\ 61 FR at 42160.

\28\ 61 FR at 44011.

\29\ 61 FR at 42161.

\30\ Id.

\31\ 61 FR at 44011.

---------------------------------------------------------------------------

A number of commenters, including the NFA, MFA and the Chicago

Mercantile Exchange, objected to the requirement of use of a PIN to

verify the authenticity of electronic acknowledgments. These commenters

expressed concern that the Commission's discussion of a PIN system

mandated the use of that technology and prevented use of any other

means of verification. The MFA, for example, contended that existing

regulations do not require that a registrant verify the authenticity of

a customer's signature and recommended that, in light of multiple

technologies and procedures which may satisfy the regulatory

requirements, the Commission ``require that a registrant develop

procedures to ensure a means of identifying uniquely the recipient from

whom an acknowledgment is required,'' without mandating a particular

procedure. Although NFA objected to a requirement of authentication, it

agreed that the rules currently require ``receipt of an executed

acknowledgment which uniquely identifies an individual and purports to

be his signature.''

The Commission believes that it is reasonable to require that

electronic acknowledgments incorporate use of a PIN or other comparably

efficacious form of verifying the identity of the recipient. The

Commission recognizes, however, that different levels of verification

control may be required depending upon the sensitivity of the signature

obtained (e.g., chief financial officers currently are permitted to

sign electronically by PIN) and believes that greater flexibility may

be appropriate where a signature merely evidences receipt of a document

rather than validation of its contents. Further, the Commission does

not wish to freeze its approaches to new technologies. The Commission

therefore agrees that the acknowledgment requirement may be satisfied

by any electronic methodology that uniquely identifies a specified

person who has confirmed receipt of a document. As use of electronic

media raises particular concerns of unique identification and

attribution, a verification requirement of this nature is necessary and

prudent.\32\ Moreover, verification procedures should benefit CPOs and

CTAs insofar as they may reduce the risk of customer complaints of

failure to provide required disclosures. Thus, to the extent that

methods other than PINs for verifying the identity of a person are

available and provide a comparable level of identification of the

recipient, the Commission does not intend PIN systems to be the

exclusive method of obtaining electronic acknowledgments of receipt.

---------------------------------------------------------------------------

\32\ Indeed, many parties on the Internet presently use PIN

systems to verify the identity of an individual.

---------------------------------------------------------------------------

In the Initial Release, the Commission requested comment concerning

alternatives to the use of PINs to verify receipt of electronically

delivered documents. The commenters alluded to a number of

alternatives, including electronic gating, security coded electronic

mail, digital and electronic signatures, cryptography, public key-

private key configurations and certificates of identity. However, the

commenters' discussion of these alternatives did not provide

information sufficient to assess the efficacy of these methods.

Accordingly, the Commission has determined to continue to treat

acknowledgment by PIN as adequate but also to set out a performance

standard for the use of alternative mechanisms for receipt of

electronic acknowledgments.

The performance standard requires use of a unique identifier to

confirm the identity of the person sending the electronic

acknowledgment to convey the acknowledgment in order to protect persons

from claims that they have received a particular electronic

communication when in fact they have not. Hard copy or electronic

evidence of each use of such a system must be retained in order that

the Commission and other authorities can verify that the acknowledgment

was in fact given.\33\ Registrants who develop alternative systems that

meet this performance criterion are permitted, but not required, to

submit such systems to the Commission's Division of Trading and Markets

for review.

---------------------------------------------------------------------------

\33\ See Section IV, infra, concerning electronic recordkeeping.

---------------------------------------------------------------------------

III. Use of Electronic Media To Deliver Documents Other Than Disclosure

Documents

A. Account Statements for Pools

In the Initial Release, the Commission also provided guidance

concerning the delivery of documents other than Disclosure Documents

(specifically, monthly and quarterly account statements required to be

delivered to pool participants by Rule 4.22, and modifications of

Disclosure

[[Page 39111]]

Documents).\34\ As discussed in the Initial Release, CPOs may deliver

electronically monthly and quarterly account statements required by

Rule 4.22 provided that the CPO obtains the pool participant's informed

consent. The procedures outlined for obtaining informed consent

discussed above provide a single mechanism for establishing informed

consent to delivery of Disclosure Documents as well as other required

documents. A CPO seeking informed consent to deliver monthly or

quarterly account statements would disclose: (1) that the CPO is

required to deliver the monthly or quarterly account statement; (2) the

right of the pool participant to elect to receive such statement in

hardcopy form or by means of electronic delivery; (3) the specific

media and method by which electronic delivery will be made; (4) the

potential costs associated with receiving or accessing the electronic

account statement; and (5) the prospective customer's right to revoke

his consent to electronic delivery of account statements at any time.

---------------------------------------------------------------------------

\34\ In the Initial Release, the Commission invited comment from

CPOs, accounting professionals, and other interested persons

concerning the advisability of amending Rule 1.16 to allow for

certification of Annual Reports by independent public accountants by

means of electronic media. The Commission received no comments on

this issue.

---------------------------------------------------------------------------

The Commission received no comments with respect to electronic

delivery of monthly or quarterly account statements other than NFA's

comment, discussed above, concerning whether a CPO is required to

obtain informed consent to deliver pool account statements at the time

it obtains informed consent to deliver a Disclosure Document. As noted

above, CPOs may obtain informed consent concerning pool account

statements at any time, either in conjunction with informed consent to

deliver a Disclosure Document or separately, as long as the informed

consent is obtained prior to electronic delivery of the document in

question.

B. Modifications

Commission Rules 4.26 and 4.36 require that Disclosure Documents be

used for no longer than nine months and contain performance information

that is current as of a date not more than three months prior to the

date of the Disclosure Document. Rules 4.26 and 4.36 also require that,

in the event that a CPO or CTA knows or should know that a Disclosure

Document is materially inaccurate or incomplete, the registrant must

correct the defect and distribute the correction to, in the case of a

CPO, all existing pool participants and previously solicited pool

participants prior to accepting or receiving funds from such

prospective participants and, in the case of a CTA, all existing

clients in the trading program and each previously solicited client for

the trading program prior to entering into an agreement to manage such

prospective client's account. The Initial Release made clear that CPOs

and CTAs may use electronic media to comply with the amendment

requirements of Rules 4.26 and 4.36 provided that the intended

recipient has consented to electronic delivery of such information. Due

to the relatively lower costs of electronic publishing, a CPO or CTA

may wish to update its electronically presented Disclosure Documents

more frequently than it would a hardcopy version of such document

distributed in the customary manner. As stated in the Initial Release,

however, the electronic version of a Disclosure Document must be at

least as current as any paper-based version.\35\

---------------------------------------------------------------------------

\35\ Ideally, the paper version would explain that more frequent

updates could be obtained electronically.

---------------------------------------------------------------------------

In the Initial Release, the Commission stated that CPOs and CTAs

relying upon electronic delivery of a Disclosure Document must continue

to provide access to the Disclosure Document for a period of nine

months to allow repeated access to the Disclosure Document used at the

time of solicitation. The requirement that Disclosure Documents be

maintained at a CPO's or CTA's website for a period of nine months was

designed to coincide with the maximum effective period of a Disclosure

Document. However, NFA commented that the Commission's proposal would

require CPOs and CTAs to maintain multiple versions of their Disclosure

Documents on their websites and that this would have the potential to

confuse prospective investors. The Commission agrees with this comment

and, to avoid the potential confusion described by NFA, adopts NFA's

recommendation that CPOs and CTAs be required to maintain only the most

current version of their Disclosure Documents on their websites.\36\

The informed consent required for electronic delivery of a Disclosure

Document provides that a CPO or CTA furnish a hardcopy Disclosure

Document to a prospective investor at any time. Consequently,

individuals who may have visited a website earlier and who wish to

receive a prior version of a Disclosure Document may contact the CPO or

CTA, who must provide the previous version of the Disclosure Document,

either in hardcopy (or electronic form if the individual consents).

---------------------------------------------------------------------------

\36\ Additionally, this prevents any potential confusion that

could result in prospective investors being solicited through use of

an out-of-date Disclosure Document. See Rules 4.26(a)(2) and

4.36(b). Rules 4.24(d)(4) and 4.34(d)(2) state that a Disclosure

Document must contain the date on which the CPO or CTA first intends

to use the document, and Rules 4.26(a)(1) and 4.36(a)(1) require

that all information must be current as of that date (although

performance information may be current as of a date up to three

months prior thereto).

---------------------------------------------------------------------------

C. Term Sheets

Rule 4.21(a) provides that a CPO soliciting a prospective pool

participant who is an accredited investor, as defined in 17 CFR

230.501(a), may provide the prospective participant with a notice of

intended offering and statement of the terms of the intended offering,

i.e., a ``term sheet,'' prior to delivery of a Disclosure Document.

This is an exception to the general prohibition against solicitation of

prospective pool participants unless a Disclosure Document has been

given previously or is given contemporaneously. In the Initial Release,

the Commission stated that a CPO may not satisfy the requirements of

Rule 4.21(a) by electronically posting a ``term sheet'' because ``[i]n

posting a term sheet on a public electronic forum, a CPO is soliciting

all persons who are able to access such term sheet, many of whom may

not be `accredited investors.' Consequently, unless a CPO restricts

access to its term sheet to `accredited investors' only, a CPO must

also provide a copy of its Disclosure Document in accordance with the

criteria set forth herein in order to comply with the requirements of

Rule 4.21(a).'' \37\ In its comment letter, MFA agreed that, ``where

the registrant is able to restrict access to the term sheet when it is

distributed electronically in the same manner as he restricts access to

paper-based versions of the term sheet, he should be permitted to use

term sheets distributed electronically.'' Thus, term sheets may be used

electronically in accordance with Rule 4.21(a) provided that access to

such term sheets is restricted to persons who the CPO reasonably

believes to be accredited investors.\38\ For example, a CPO might

present on its website a series of questions to determine whether an

individual is an accredited investor and restrict access to its term

sheet to those persons who, based upon the responses to such questions,

it reasonably believes are accredited investors. Similarly, if a CPO

requires the use of a password to

[[Page 39112]]

access its term sheet and restricts such passwords to persons it

reasonably believes to be accredited investors based upon information

available to it, such CPO also would be in compliance with Rule

4.21.\39\

---------------------------------------------------------------------------

\37\ 61 FR at 42159 n.92.

\38\ See also IPONET, 1996 SEC No-Act. LEXIS 642 (July 26,

1996).

\39\ In the Initial Release, the Commission noted that the SEC

has taken the position that placing offering materials on the

Internet would not be consistent with the prohibition against

general solicitation or advertising in Rule 502(c) of Regulation D

unless the prospective accredited investor purchasers who are

permitted to access the offering materials have been otherwise

located without a general solicitation. 60 FR at 53463-64. For

example, the SEC has approved the use of a password protected page

of a website that is accessible only to persons previously

identified as qualified accredited investors as not involving any

form of ``general solicitation'' or ``general advertising'' within

the meaning of Rule 502(c) of Regulation D provided that the process

whereby accredited investors are identified is generic in nature and

does not reference any specific transactions. See IPONET, supra note

38.

---------------------------------------------------------------------------

D. Review of Websites

The Commission also received a comment that NFA should offer to

review the content of websites much in the way as it reviews

promotional materials. Pursuant to NFA Compliance Rule 2-29 and the

related Interpretive Notice dated May 1, 1989,\40\ as a service to its

members, NFA will review promotional material prior to its first

use.\41\ To the extent that CPOs and CTAs favor a voluntary prior

review process for electronic media, they may propose this to NFA

directly.

---------------------------------------------------------------------------

\40\ National Futures Association Manual, Vol. 3, No. 2, (Jan.

1, 1997) at para. 9009.

\41\ Registrants have the options to file promotional material

unless otherwise required to do so by rule or directive.

---------------------------------------------------------------------------

IV. Maintenance of Records

A substantial number of the comments received in response to the

Initial Release concerned the application of the Commission's

recordkeeping requirements in the context of electronic media. Rule

4.23, with respect to CPOs, and Rule 4.33, with respect to CTAs,

specify books and records that must be maintained by CPOs and CTAs in

accordance with Rule 1.31. These records include the acknowledgments

required by Rules 4.21(b) and 4.31(b), as well as the original or a

copy of each report, letter, circular, memorandum, publication,

writing, advertisement or other literature or advice distributed by

CPOs and CTAs. Rule 1.31, requires among other things, that records be

retained for a period of five years and be readily accessible during

the first two years of the five-year period. Rule 1.31(b) provides that

copies may be retained on microfilm, microfiche, or optical disk but

must be maintained in accordance with the standards set forth in Rule

1.31(c) and (d).\42\

---------------------------------------------------------------------------

\42\ Rule 1.31(d) states, among other things, that all records

preserved on optical media pursuant to Rule 1.31(b) must be

preserved on non-rewritable, write once read many (``WORM'') media.

In addition, the technology must have write-verify capabilities that

continuously and automatically verify the quality and accuracy of

the information stored and automically correct quality and accuracy

defects. Rule 1.31(d)(1) states that an optical storage system must:

(i) use removable disks; (ii) serialize the disks; (iii) time-date

all files of information placed on the disks, reflecting the

computer run time of the file of information and using a permanent

and non-erasable time-date; and (iv) write files in ASCII or EBCDIC

format. As the Commission has noted, the ASCII and EBCDIC formats

``generally do not allow storage of paper records or electronic

images, such as webpages, since such records or images are normally

not written in ASCII or EBCDIC format. Therefore, these records

would be required to be retained in hard[]copy form.'' 61 FR at

42162.

---------------------------------------------------------------------------

To facilitate CPOs' and CTAs' use of electronic media when possible

and to avoid imposing duplicative or inconsistent requirements on

registrants who may also be registered with the SEC, the Commission

hereby permits a CPO or CTA, whether or not registered with the SEC, to

use guidelines set forth by the SEC in its recent rulemaking in

connection with recordkeeping requirements for broker-dealers.\43\

Accordingly, a CPO or CTA may maintain required records pursuant to

Commission Rule 1.31 or as allowed by SEC regulations.\44\ For that

purpose, in the case of CPOs and CTAs, the designated examining

authority would be considered to be the NFA.

---------------------------------------------------------------------------

\43\ SEC Release No. 34-38245, 62 FR 6469 (February 12, 1997).

The SEC amended its Rule 17a-4(f) to provide for the production or

reproduction of records by means of electronic storage media, with

the limited exception of those records required for penny stocks.

Rather than specify particular electronic storage media, the SEC

provided that the particular medium chosen must meet certain

criteria:

(A) Preserve the records exclusively in a non-rewrit[]able, non-

erasable format;

(B) Verify automatically the quality and accuracy of the storage

media recording process;

(C) Serialize the original and, if applicable, duplicate units

of storage media, and time-date for the required period of retention

the information placed on such electronic storage media; and

(D) Have the capacity to readily download indexes and records

preserved on the electronic storage media to any medium acceptable

under [Rule 17a-4(f)] as required by the [SEC] or the [SROs] or

which the member, broker, or dealer is a member.

17 CFR Sec. 240.17a-4(f)(ii) (1997). If a broker-dealer chooses

to use electronic storage media, it must notify its designated

examining authority prior to using such media and, if the broker-

dealer uses media other than optical disk technology or CD-ROM, it

must provide notice of at least 90 days. The SEC also set forth,

among other things, the following requirements: maintenance of

duplicates of records, which can be stored on any medium satisfying

the above criteria; organizing and indexing of both original and

duplicate records; an audit system that can record both the entry

and modification of records; a third-party download provider, whose

name is provided to the SRO and who agrees to promptly furnish to

the SEC and SRO(s) information necessary to access and download

records; and, where a broker-dealer uses an outside service bureau

to preserve records, an escrow agent who keeps a current copy of the

information necessary to access and download records.

\44\ A substantial number of Commission registrants are also

registered with the SEC. As of March 31, 1997, 113 of 236 futures

commission merchants (``FCM'') were registered with the SEC as

broker-dealers. Therefore, the Commission has attempted, where

possible, to coordinate its regulatory efforts with SEC

requirements. For instance, Rule 1.10(h) permits an FCM to file

reports concerning its financial condition by submitting a copy of

its Financial and Operational Combined Uniform Single report filed

with the SEC in lieu of the Commission's Form 1-FR-FCM, and Rules

1.14 and 1.15, the Commission's risk assessment rules, attempt to

avoid duplication of similar SEC rules with regard to recordkeeping

and reporting.

In the Commission's recent advisory (62 Fed. Reg. 31507 (June

10, 1997) permitting FCMs to deliver confirmations, purchase and

sale statements and monthly statements electronically, it also

stated that they may comply with recordkeeping requirements by

following either Commission Rule 1.31 or the SEC's guidance as set

forth in Release No. 34-38245.

---------------------------------------------------------------------------

Concerning the storage and maintenance of records of electronic

communications, the Commission understands that it may be difficult or

impossible as a technical matter to store certain data in exactly the

format in which it is transmitted to customers. However, the CPO or CTA

must be able to store and maintain required records in order that, upon

request of any representative of the Commission or the United States

Department of Justice, the CPO or CTA can reproduce the recorded

materials in substantially the same form \45\ and containing the same

information as was transmitted to customers.

---------------------------------------------------------------------------

\45\ For example, registrant logos may be deleted.

---------------------------------------------------------------------------

V. Illustrative Examples

(1) Disclosure Document Must be Readily Accessible and Delivery of

Risk Disclosure Statement May be Sufficient to Obtain Informed Consent.

ABC is a registered CTA who operates a site on the World Wide Web. The

first page of ABC's website sets forth the risk disclosure statement

followed by ``yes'' or ``no'' lines which can be clicked upon for

viewers to confirm that they have read the statement and wish to

continue or do not wish to continue. After ``clicking'' to continue,

the user is hyperlinked to a document containing recent performance

data as well as a prominent hyperlink to the Disclosure Document.

Access to the Disclosure Document is comparably accessible as was

access to the page displaying the performance data. In this case, ABC

has complied with the requirements of Rule 4.31(a).

[[Page 39113]]

(2) Disclosure Document Must be Comparably Accessible as Other

Promotional Material. ABC is a registered CTA who operates a site on

the World Wide Web. The first page of ABC's website sets forth the risk

disclosure statement with a section for individuals to indicate by

clicking on the appropriate statement that they have read the statement

and wish to continue. After ``clicking'' to continue, the user is

hyperlinked to a document containing recent performance data as well as

a prominent hyperlink to the Disclosure Document. For some users,

clicking on the Disclosure Document hyperlink brings up instructions

and hyperlinks concerning how to download the required software viewer

to access the Disclosure Document. By contrast, accessing the

performance data on the website does not require the use of the same

viewer. In this case, ABC has not complied with Rule 4.21(a). The

Disclosure Document is not as accessible as promotional material.

Although some users may have the viewer already installed on their web

browser, others may not. Requiring users to use specialized software to

view the Disclosure Document but not the promotional material does not

satisfy the requirement that the Disclosure Document be comparably

accessible as the promotional material. The Disclosure Document must be

as readily accessible as performance data and other promotional

material.

(3) Informed Consent Necessary to Deliver Monthly Account

Statements at World Wide Web Site. XYZ is a registered CPO who operates

a site on the World Wide Web. XYZ plans to offer its pool participants

the choice of receiving monthly account statements by electronic media

or by postal mail. In a letter to pool participants, XYZ informs its

investors that it plans to post its monthly account statements on its

World Wide Web site and that persons who wish to receive monthly

account statements electronically may elect to do so. In its letter,

XYZ explains that the monthly account statements will be hyperlinked to

its website. The letter also explains that pool participants electing

to receive disclosures solely by electronic media may revoke their

election at any time and request that any monthly account statement be

sent to them in hardcopy. At the bottom of the letter is a form for

pool participants to complete and mail or fax back to XYZ indicating

that they consent to delivery of monthly account statements by

electronic media. Pool participants who do not complete the form will

continue to receive monthly account statements in hardcopy. XYZ has

complied with the requirements for informed consent to deliver monthly

account statements.

(4) Informed Consent Necessary to Deliver Monthly Account

Statements Through Electronic Mail. RST is a registered CPO who

operates a site on the World Wide Web. RST's website complies with all

Commission requirements with respect to delivery of a concise risk

disclosure statement and Disclosure Document. In order to provide RST's

pool participants with access to monthly account statements faster and

at less expense, RST has decided to use electronic mail to deliver

monthly account statements to those pool participants interested in

receiving such statements in this manner. On its website is a section

devoted to providing information on how pool participants may receive

monthly account statements by electronic mail. In addition to

requesting the pool participant's electronic mail address, the section

explains: (1) that RST is required to deliver monthly account

statements; (2) the pool participant's right to elect to receive such

statements either in hardcopy or electronic form; (3) that electronic

account statements will be delivered as a part of an electronic mail

message; (4) that there is no charge for electronic delivery of account

statements; and (5) that pool participants' election to receive monthly

account statements by electronic mail may be revoked at any time and

that RST would then resume delivery of hardcopy statements. At the

conclusion of these disclosures is an electronic form for pool

participants to complete if they are interested in receiving monthly

account statements in this manner. RST has complied with the

requirement to obtain informed consent to delivery monthly account

statements.

(5) Modifications to Disclosure Document. ABC is a registered CTA

who operates a site on the World Wide Web. ABC posts its Disclosure

Document on its website in a manner consistent with the requirements

for obtaining informed consent. Because of the additional flexibility

that electronic media provide, ABC updates the performance data on a

monthly basis. For example, by the 5th day of every month, ABC's

Disclosure Document performance data is current as of the month that

just expired. ABC is not required to keep prior months' Disclosure

Documents on its website even though prospective managed account

customers may have viewed them without obtaining a copy. If a

prospective client wishes to see a Disclosure Document as of a date

several months ago, ABC must furnish that Disclosure Document to the

prospective client, either in hardcopy or by electronic media if the

prospective client consents. Based upon the modifications made in this

Release, CTAs (or CPOs) are no longer required to maintain each

Disclosure Document posted on the website for a period of nine months.

VI. Final Rules

Rule 4.1--Requirements as to form. Commission Rule 4.1(a) sets

forth the form requirements for documents distributed pursuant to Part

4 and requires generally that documents be clear and legible, paginated

and fastened in secure manner and that information required to be

``prominently'' disclosed must be in capital letters and in boldface

type. Rule 4.1, which was adopted by the Commission in 1981, was

designed to address hardcopy documents. The proposed amendments to Rule

4.1 issued by the Commission on August 19, 1996, were designed to

reflect the reality that many documents today are presented in

electronic media. Proposed Rule 4.1 was designed to make clear that

documents may be distributed by electronic media. To this end, proposed

Rule 4.1(c)(1) would have required that for documents distributed

through an electronic medium, ``all required information must be

presented in a format readily communicated to the recipient'' and that

for this purpose ``information is readily communicated to the recipient

if it is accessible as a single file by means of commonly available

hardware and software, and if the electronically delivered document is

organized in substantially the same manner as would be required for a

paper document with respect to the order of presentation and the

relative prominence of information.'' \46\ Proposed Rule 4.1(c)(2) also

would have applied to electronic media the requirement of existing Rule

4.1(b) that information required to be ``prominently'' disclosed be

displayed in capital letters and boldface type by requiring that such

information be presented in a manner that is reasonably calculated to

draw it to the recipient's attention. Proposed Rule 4.1(c)(3) would

have required that a complete paper version of a document be provided

to a recipient upon request. Finally,

[[Page 39114]]

proposed Rule 4.1(d) required that if any graphic, image or audio

material that is included with or that accompanies the Disclosure

Document delivered to a recipient cannot be filed with the Commission

in the form in which delivered to the recipient, the CPO or CTA must

provide a fair and accurate narrative description, tabular

representation or transcript of the omitted material in the version

filed with the Commission.

---------------------------------------------------------------------------

\46\ Additionally, the Commission stated in the preamble to the

August 27, 1996 Federal Register release that ``[e]lectronically

delivered information is readily communicated for purposes of Part 4

if it is accessible in a single `package' or by a single data

retrieval process, without the need to download and assemble

multiple files, and preferably without the need to use special

`viewer' software.'' 61 FR at 44010.

---------------------------------------------------------------------------

The only comment received concerning these proposed amendments to

Rule 4.1 was from a CTA who noted that requiring the use of a single

file containing the Disclosure Document was unnecessarily restrictive

and may not be advantageous since CTAs could link several sections of

the Disclosure Document to a table of contents and thus accelerate the

download time as compared to the time required for a single file. The

Commission agrees that Rule 4.1(c)(1) need not specify whether a

document is contained in a single or multiple files. Although the

Commission believes that delivery procedures typically will result in

delivery of the Disclosure Document in a single file, the Commission

does not believe that it is necessary to specify such procedures by

rule nor does the Commission wish to restrict the flexibility of CPOs

or CTAs to devise alternative methods of delivery so long as such

delivery ``readily communicates'' the information to the required

recipient.\47\

---------------------------------------------------------------------------

\47\ Of course, where multiple files must be downloaded by the

recipient in order to view the entire Disclosure Document, the CPO

or CTA must make this fact clear.

---------------------------------------------------------------------------

As adopted, Rule 4.1(c)(2) clarifies that, where use of capital

letters and bold-face type is required by Commission rules, this type

of presentation would also be required in the context of electronic

presentations. However, where the use of capital letters and bold-face

type would not in the context of electronic media achieve the purpose

of highlighting and emphasizing specified information, another method

reasonably calculated to draw attention to the specified information

should be used. Rule 4.1(c)(3), as adopted, clarifies that the paper

version that must be made available to recipients of electronically-

transmitted documents upon request must comply with applicable paper-

based Part 4 rules. Based upon the Commission's further consideration

of proposed Rule 4.1, section (d) is being adopted as proposed.

Rules 4.21 and 4.31--Required delivery of pool Disclosure Document

and Required delivery of Disclosure Document to prospective clients.

Rules 4.21(b) and 4.31(b) establish the requirement that CPOs and CTAs

obtain a signed and dated acknowledgment of receipt of the Disclosure

Document before accepting any funds from a prospective pool participant

or client. As proposed, Rules 4.21(b) and 4.31(b) would have been

modified to permit CPOs and CTAs to obtain acknowledgments

electronically in a form approved by the Commission. Proposed Rules

4.21 and 4.31 provided that, ``[w]here a Disclosure Document is

delivered to a prospective pool participant by electronic means, in

lieu of a manually signed and dated acknowledgment the pool operator

may establish receipt by electronic means approved by the Commission.''

The proposed rules also would have required that the CPO and CTA retain

the acknowledgment in accordance with Rules 4.23 and 4.33,

respectively, either in hardcopy or in another form approved by the

Commission.

The Commission did not receive any comments addressing the proposed

amendments to Rules 4.23 and 4.33. While the Commission did receive

comments concerning the requirements for and use of electronic

acknowledgments, these comments were addressed in section II, supra,

and Rules 4.21(b) and 4.31(b) have been modified in conformity with the

analysis set forth above. Specifically, final Rules 4.21(b) and 4.31(b)

have been modified to permit alternative methods of electronic

verification so long as the performance criteria enunciated in section

II are satisfied. As discussed above, use of a PIN or other unique

identifier to confirm the identity of the person acknowledging receipt

provides an acceptable method of obtaining electronic acknowledgments

of receipt. This modification responds to the concerns of commenters

that PINs might be considered the exclusive means of complying with

Rules 4.21(b) and 4.31(b) with respect to electronic media. As

discussed above, to facilitate use of electronic media, CPOs and CTAs

may maintain required records either pursuant to Commission Rule 1.31

or as permitted by SEC regulations.

VII. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994),

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.\48\ The Commission previously determined that

registered CPOs are not small entities for the purpose of the RFA.\49\

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.\50\

---------------------------------------------------------------------------

\48\ 47 FR 18618-21 (April 30, 1982).

\49\ 47 FR 18619-20.

\50\ 47 FR 18618, 18620.

---------------------------------------------------------------------------

The amendments adopted herein do not impose any new burdens upon

CPOs or CTAs. Rather, these amendments facilitate the use of electronic

media to meet existing requirements, and they clarify the application

of existing regulations to the use of such media. Consequently, the

Commission believes that the adoption of these rule amendments will in

many cases reduce the burden of compliance by CPOs and CTAs. Moreover,

CPOs and CTAs are free to continue using paper documents.

In certifying pursuant to section 3(a) of the of the RFA that the

proposed revisions would not have a significant economic impact on a

substantial number of small entities, the Commission invited comments

from any CPOs and CTAs who believed that the proposed revisions, if

adopted, would have a significant impact on their activities. No such

comments were received on the revisions adopted herein.

Accordingly, pursuant to Rule 3(a) of the RFA, the Chairperson, on

behalf of the Commission, certifies that the action taken herein will

not have a significant impact on a substantial number of small

entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995, Pub. L. 104-13 (May 13, 1995),

imposes certain requirements on federal agencies (including the

Commission) in connection with their conducting or sponsoring any

collection of information as defined by the Paperwork Reduction Act.

While this rule has no burden, the group of rules (3038-0005) of which

this is a part has the following burden:

Average Burden Hours per Response: 124.75.

Number of Respondents: 4,654.

Frequency of Response: On occasion.

[[Page 39115]]

Copies of the OMB approved information collection package

associated with this rule may be obtained from: Desk Officer, CFTC,

Office of Management and Budget, Room 10202, NEOB Washington DC 20503,

(202) 395-7340.

List of Subjects in 17 CFR Part 4

Advertising, Commodity futures, Consumer protection, Reporting and

recordkeeping requirements.

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, 4l, 4m, 4n, 4o, and 8a, 7 U.S.C. 2, 6b, 6c, 6l, 6m,

6n, 6o, and 12a, the Commission amends chapter I of title 17 of the

Code of Federal Regulations as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

Subpart A--General Provisions, Definitions and Exemptions

1. The authority citation for part 4 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and

23.

2. Section 4.1 is amended by adding paragraphs (c) and (d) to read

as follows:

Sec. 4.1 Requirements as to form.

(a) * * *

(b) * * *

(c) Where a document is distributed through an electronic medium:

(1) The requirements of paragraphs (a) of this section shall mean

that required information must be presented in a format that is readily

communicated to the recipient. For purposes of this paragraph (c),

information is readily communicated to the recipient if it is

accessible to the ordinary user by means of commonly available hardware

and software and if the electronically delivered document is organized

in substantially the same manner as would be required for a paper

document with respect to the order of presentation and the relative

prominence of information. Where a table of contents is required, the

electronic document must either include page numbers in the text or

employ a substantially equivalent cross-reference or indexing method or

tool;

(2) The requirements of paragraph (b) of this section shall mean

that such information must be presented in capital letters and boldface

type or, as warranted in the context, another manner reasonably

calculated to draw the recipient's attention to the information and

accord it greater prominence than the surrounding text; and

(3) A complete paper version of the document that complies with the

applicable provisions of this part 4 must be provided to the recipient

upon request.

(d) If graphic, image or audio material is included in a document

delivered to a prospective or existing client or pool participant, and

such material cannot be reproduced in an electronic filing, a fair and

accurate narrative description, tabular representation or transcript of

the omitted material must be included in the filed version of the

document. Inclusion of such material in a Disclosure Document shall be

subject to the requirements of Sec. 4.24(v) in the case of pool

Disclosure Documents, and Sec. 4.34(n) in the case of commodity trading

advisor Disclosure Documents.

3. Section 4.21 paragraph (b) is to be revised to read as follows:

Subpart B--Commodity Pool Operators

Sec. 4.21 Required delivery of pool Disclosure Document.

(a) * * *

(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 prospective participant received a Disclosure Document for the

pool. Where a Disclosure Document is delivered to a prospective pool

participant by electronic means, in lieu of a manually signed and dated

acknowledgment, the pool operator may establish receipt by electronic

means that use a unique identifier to confirm the identity of the

recipient of such Disclosure Document, Provided, however, That the

requirement of Sec. 4.23(a)(3) to retain the acknowledgment specified

in this paragraph (b) applies equally to such substitute evidence of

receipt, which must be retained either in hard copy form or in another

form approved by the Commission.

Subpart C--Commodity Trading Advisors

4. Section 4.31 paragraph (b) is to be revised to read as follows:

Sec. 4.31 Required delivery of Disclosure Document to prospective

clients.

(a) * * *

(b) The commodity trading advisor may not enter into an agreement

with a prospective client to direct the client's commodity interest

account or to guide the client's commodity interest trading unless the

trading advisor first receives from the prospective client an

acknowledgment signed and dated by the prospective client stating that

the client received a Disclosure Document for the trading program

pursuant to which the trading advisor will direct his account or will

guide his trading. Where a Disclosure Document is delivered to a

prospective client by electronic means, in lieu of a manually signed

and dated acknowledgment the trading advisor may establish receipt by

electronic means that use a unique identifier to confirm the identity

of the recipient of such Disclosure Document, Provided, however, That

the requirement of Sec. 4.33(a)(2) to retain the acknowledgment

specified in this paragraph (b) applies equally to such substitute

evidence of receipt, which must be retained either in hard copy form or

in another form approved by the Commission.

Issued in Washington, DC on July 15, 1997, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97-19147 Filed 7-21-97; 8:45 am]

BILLING CODE 6351-01-P