Two-Part Documents for Commodity Pools

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

Two-Part Documents for Commodity Pools

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed Rule amendments.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has

determined pursuant to Section 17(j) of the Commodity Exchange Act

1 (``Act'') to review the National Futures Association's

(``NFA's'') Compliance Rule 2-35 (``the Rule'') and its Interpretive

Notice regarding commodity pool Disclosure Documents. The Rule requires

the commodity pool operator (``CPO'') of a commodity pool required to

register its securities under the Securities Act of 1933 (``public

pool'') to deliver a two-part document to prospective participants. The

first part of the document must be the Disclosure Document required by

Commission Rule 4.21(a),2 written using plain English

principles and limited to specific disclosure information. The second

part is a Statement of Additional Information (``SAI''), which may

include information that is not in the Disclosure Document, provided

that the information is not misleading or otherwise inconsistent with

applicable statutes, rules or regulations.3 The CPO of a

commodity pool that is not required to register its securities under

the Securities Act of 1933 (``private pool'') 4 must prepare

a Disclosure Document and may prepare and distribute an SAI, but is not

required to do so. Should the Rule be approved by the Commission, it

will be necessary to amend Commission Rules 4.24(v), 4.25(a)(2) and

4.25(c)(5) to permit the use of the two-part document format.

Accordingly, these amendments are contingent upon Commission approval

of NFA Compliance Rule 2-35. The Commission, therefore, is providing

the opportunity for comment prior to accepting NFA Compliance Rule 2-35

and implementing the related proposed amendments to Commission rules.

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\1\ 7 U.S.C. 21(j) (1994).

\2\ Commission rules referred to herein can be found at 17 CFR

Ch. I (1997).

\3\ Theoretically, the CPO of a public pool could prepare a

Disclosure Document containing all of the required information and

not need to prepare a separate SAI containing additional

information. In that case, the CPO would not be required to deliver

a two-part document, but would instead deliver only a Disclosure

Document. However, most, if not all, public pools include more than

the required information, such as trading comparison charts,

additional text describing the market system, and the limited

partnership agreement. Therefore, it is not expected that CPOs of

public pools would prepare a Disclosure Document without also

preparing an SAI.

\4\ Pursuant to Commission Rule 4.24(d)(3)(i), a ``private

pool'' is one that is privately offered pursuant to section 4(2) of

the Securities Act of 1933, as amended, or pursuant to Regulation D

thereunder.

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DATES: Comments must be received by April 29, 1998.

ADDRESSES: Interested persons should submit their views and comments to

Jean A. Webb, Secretary of the Commission, Commodity Futures Trading

Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In

addition, comments may be sent by facsimile transmission to facsimile

number (202) 418-5221, or by electronic mail to [email protected].

Reference should be made to ``Two-Part Documents for Commodity Pools.''

FOR FURTHER INFORMATION CONTACT: Leanna L. Morris, Staff Attorney,

Division of Trading and Markets, Commodity Futures Trading Commission,

1155 21st Street, N.W.,

[[Page 15113]]

Washington, D.C. 20581. Telephone: (202) 418-5434.

SUPPLEMENTARY INFORMATION :

I. Introduction

By letters dated December 24, 1997 and January 20, 1998, NFA

submitted to the Commission for its approval, pursuant to Section 17(j)

of the Act, NFA Compliance Rule 2-35 and its Interpretive Notice

regarding commodity pool Disclosure Documents. NFA's submission

indicated that it intends to implement the Rule on or after a date at

least six months following receipt of notice of Commission approval.

Should the Rule be approved by the Commission, it will be necessary to

amend Commission Rules 4.24(v), 4.25(a)(2) and 4.25(c)(5) to permit the

use of the two-part document format. Commission Rule 4.24(v) would be

amended to require that supplemental information be disclosed only in

the second part of the two-part document. Commission Rule 4.25(a)(2)

would be amended to allow monthly rate of return information of the

offered pool to be provided in the second part of the two-part

document. Commission Rule 4.25(c)(5) would be amended to allow such

required information to be provided in the second part of the two-part

document.

II. Description of NFA Compliance Rule 2-35

NFA's Interpretive Notice regarding commodity pool Disclosure

Documents states that ``[a] Disclosure Document should provide

essential information about the fundamental characteristics of a pool,

and it should provide the information in a way that will assist

investors in making informed decisions about whether to invest in the

pool.'' Accordingly, the Rule adopts a two-part document format and

plain English principles, described below, for a more

``understandable'' document.

The Rule requires that the CPO of a public pool deliver a two-part

document. The first part of the document must be the Disclosure

Document required by Commission Rule 4.21(a), written using plain

English principles 5 and limited to specific disclosure

information, as discussed in detail below. The second part is a

Statement of Additional Information (``SAI''), which may include

information that is not in the Disclosure Document, provided that the

information is not misleading or otherwise inconsistent with applicable

statutes, rules or regulations.

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\5\ NFA's Interpretive Notice to Rule 2-35 provides guidance on

what is meant by the use of ``plain English principles.'' Such

principles include: using active voice; using short sentences and

paragraphs; breaking up the document into short sections; using

titles and sub-titles that specifically describe the contents of

each section; using words that are definite, concrete, and part of

everyday language; avoiding legal jargon and highly technical terms;

using glossaries to define technical terms that cannot be avoided;

avoiding multiple negatives; and using tables and bullet lists,

where appropriate. (See NFA's Interpretive Notice to Rule 2-35). The

Rule does not affect the prescribed statements of Commission Rules

4.24(a) and 4.24(b).

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The CPO of a private pool must prepare and distribute a Disclosure

Document and may prepare and distribute an SAI, but is not required to

do so. If the CPO of a private pool chooses to prepare an SAI, it may

be bound together with the Disclosure Document, so long as the

Disclosure Document comes first. If the CPO of a private pool binds the

SAI separately, the CPO is not required to provide it to a prospective

participant unless requested by the prospective participant.

The Rule requires that the Disclosure Document required by

Commission Rule 4.21(a) be clear and concise, written using plain

English principles, and be limited to the following: information

required by Commission Rules 4.24 and 4.25, with some exceptions to the

required performance disclosures discussed below; any other information

necessary to understand the fundamental characteristics of the pool or

to keep the Disclosure Document from being misleading; and any other

information required by the Securities and Exchange Commission or state

securities administrators to be included in Part 1 of a two-part

document.

With respect to performance disclosures, the Rule states that a CPO

may provide the monthly rate of return information required under

Commission Rule 4.25(a)(1)(i)(H) and the performance information

required under Commission Rule 4.25(c)(5) in the SAI. Although the CPO

may include the monthly rate of return information in the SAI, the

Disclosure Document must still include annual rate of return

information for the pool for the most recent five calendar years and

year-to-date. It should be noted that, if the CPO does not prepare an

SAI, the monthly rate of return information required under Commission

Rule 4.25(a)(1)(i)(H) and the performance information required under

Commission Rule 4.25(c)(5) must be included in the Disclosure Document.

III. Commission Policy and Rules

In the Commission's Policy Statement of January 21, 1997, the

Commission confirmed its support in principle of the use of two-part

documents. As currently written, however, Commission Rules 4.24(v),

4.25(a)(2) and 4.25(c)(5) do not permit the use of a two-part document

format due to a specified order and placement of supplemental

information and performance disclosures. Accordingly, if the Commission

approves NFA Compliance Rule 2-35, it is necessary to amend Commission

Rules 4.24(v), 4.25(a)(2) and 4.25(c)(5) to permit certain disclosures

to be provided in the second part of a two-part document.

Commission Rule 4.24(v) provides that, if supplemental information,

as defined by the regulation, is included in the Disclosure Document,

the information must be disclosed in a specified order. Certain

supplemental performance information must be placed after all

specifically required performance information, while certain other

supplemental performance information must be included in the Disclosure

Document following all required and non-required disclosures.

Supplemental non-performance information relating to a required

disclosure may be included with the related required disclosure.

Commission Rule 4.25(a)(2) provides that, in addition to the

required performance disclosures of Commission Rule 4.25(a)(1)(i)(H),

the rate of return of the offered pool must be presented on a monthly

basis for the period specified in Commission Rule 4.25(a)(5).

Commission Rule 4.25(c)(5) provides that, with respect to commodity

trading advisors (``CTAs'') and investee pools for which performance is

not required to be disclosed pursuant to Commission Rules 4.25(c)(3)

and 4.25(c)(4) (hereinafter ``non-major CTAs and investee

pools''),6 the CPO must provide a summary description of the

performance history of each of such advisors and pools.

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\6\ Commission Rule 4.10(d)(5) defines ``major investee pool''

as any investee pool that is allocated or intended to be allocated

at least ten percent of the net asset value of the pool. Commission

Rule 4.10(i) defines ``major commodity trading advisor'' as, with

respect to a pool, any CTA that is allocated or intended to be

allocated at least ten percent of the pool's funds available for

commodity interest trading. Accordingly, ``non-major CTAs and

investee pools'' do not meet the ten percent allocation requirement.

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Should the Commission approve NFA's Compliance Rule 2-35, the

Commission believes that certain amendments to Commission Rules

4.24(v), 4.25(a)(2) and 4.25(c)(5), as discussed below, would permit

the use of two-part documents by CPOs.

[[Page 15114]]

IV. Discussion

The Commission believes that the adoption of a two-part document

format and plain English principles will assist investors in making an

informed decision prior to investing in a pool by providing clear and

concise information about the possible investment. Material information

would be provided in the first part of a two-part document and written

in a manner that is easily digested by avoiding technical or legal

terminology and excessive detail. Should the CPO desire to include more

information about the pool, its program, or other non-misleading

disclosures, it could be provided in the second part of a two-part

document. Accordingly, the two-part format will keep the emphasis on

the material, required information found in the Disclosure Document.

The amendments to the Commission rules proposed herein would

support the use of a two-part document by permitting that certain

required disclosures be provided in the second part of a two-part

document. Specifically, Commission Rule 4.24(v) would be amended to

provide that all supplemental information must be contained only in the

second part of a two-part document.

Commission Rule 4.25(a)(2) would be amended to provide that the

monthly rate of return performance of the offered pool may be provided

in the second part of a two-part document.7

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\7\ Pursuant to NFA Compliance Rule 2-35, the annual rate of

return performance information of the offered pool must be provided

in the first part of a two-part Disclosure Document.

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Commission Rule 4.25(c)(5) would be amended to provide that the

required summary description of the performance history of non-major

CTAs and investee pools, as defined above, may be provided in the

second part of a two-part document.

As noted earlier, these amendments would not take effect unless the

Commission approves NFA Compliance Rule 2-35. Accordingly, the

Commission seeks comments on NFA Compliance Rule 2-35 and its

Interpretive Notice regarding commodity pool Disclosure Documents and

the related proposed Commission rule amendments for the purpose of

permitting two-part documents for CPOs.

Copies of the Rule and its Interpretive Notice will be available

for inspection at the Office of the Secretariat, Commodity Futures

Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W.,

Washington, D.C., 20581. Copies also may be obtained through the Office

of the Secretariat at the above address or by telephoning (202) 418-

5100.

V. Related Matters

A. Regulatory Flexibility Act

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

requires that agencies, in proposing rules, consider the impact of

those rules on small businesses. The rule amendments discussed herein

will affect registered CPOs. 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.8 The Commission previously has determined that

registered CPOs are not small entities for the purpose of the

RFA.9 Therefore, the Chairperson, on behalf of the

Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the

action taken herein will not have a significant economic impact on a

substantial number of small entities.

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\8\ 47 FR 18618-18621 (April 30, 1982).

\9\ 47 FR 18619-18620.

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B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 10 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.

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\10\ Pub. L. 104-13 (May 13, 1995).

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There is no burden associated with the proposed rule amendments to

Commission Rules 4.24(v), 4.25(a)(2) or 4.25(c)(5). While these

proposed rule amendments have no burden, the group of rules 3038-0005

of which these rules are a part has the following burden:

Average burden hours per response: 124.65.

Number of respondents: 4,624.

Frequency of response: On occasion.

Persons wishing to comment on the information which would be

required by these proposed rules should contact the Desk Officer, CFTC,

Office of Management and Budget, Room 10202, NEOB, Washington, D.C.

20503, (202) 395-7340. Copies of the information collection submission

to OMB are available from the CFTC Clearance Officer, 1155 21st Street,

N.W., Washington, D.C. 20581, (202) 418-5160.

List of Subjects in 17 CFR Part 4

Brokers, commodity futures, commodity pool operators and commodity

trading advisors.

In consideration of the foregoing and pursuant to the authority

contained in the Commodity Exchange Act and in particular sections

2(a)(1), 4l, 4m, 4n, 4o, and 8a, 7 U.S.C. 2, 6l, 6m, 6n, 6o, and 12(a),

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, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,

12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.

2. Section 4.24(v) is amended by revising paragraph (v)(3)

introductory text to read as follows:

Sec. 4.24 General disclosures required.

* * * * *

(v) * * *

(3) Must be placed as follows, unless otherwise specified by

Commission rules, provided that where a two-part disclosure document is

used pursuant to rules promulgated by a registered futures association

pursuant to Section 17(j) of the Act, all supplemental information must

be provided in the second part of the two-part document:

* * * * *

3. Section 4.25 is amended by revising paragraphs (a)(2)(i) and

(c)(5) introductory text to read as follows:

Sec. 4.25 Performance disclosures.

(a) * * *

(2) * * * (i) The performance of the offered pool must be

identified as such and separately presented first, provided that where

the pool operator uses a two-part disclosure document pursuant to the

rules promulgated by a registered futures association pursuant to

section 17(j) of the Act, the rate of return of the offered pool on a

monthly basis may be provided, in the format set forth in

Sec. 4.25(a)(2)(ii) and Sec. 4.25(a)(2)(iii), in the second part of the

two-part document;

* * * * *

(c) * * *

(5) With respect to commodity trading advisors and investee pools

for which performance is not required to be disclosed pursuant to

Sec. 4.25(c)(3) and (4), the pool operator must provide a summary

description of the performance history of each of such advisors and

pools including the following information, provided that where the pool

operator uses a two-part disclosure document pursuant to the rules

promulgated by a registered futures association pursuant to section

17(j) of the Act, such summary

[[Page 15115]]

description may be provided in the second part of the two-part

document:

* * * * *

Dated: March 23, 1998.

By the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98-8147 Filed 3-27-98; 8:45 am]

BILLING CODE 6351-01-P