The Division of Swap Dealer and Intermediary Oversight issued an interpretation regarding the time period for which past performance is required to be disclosed by persons required to register as CTAs because they eng...

Summary: The Division of Swap Dealer and Intermediary Oversight issued an interpretation regarding the time period for which past performance is required to be disclosed by persons required to register as CTAs because they engage in off-exchange retail foreign currency transactions (“retail forex”). Such persons (“Forex CTAs”) are required to disclose performance information for the period beginning October 18, 2010, the date upon which the Commission’s regulations governing retail forex became effective. A Forex CTA that chooses to present past performance information for any period of time prior to October 18, 2010 must do so in accordance with the time period as specified in Regulation 4.35(a)(5), must include all accounts directed by the Forex CTA, must present the information in the format specified in Regulation 4.35, and must have and maintain adequate books and records to substantiate the information.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-6700

Facsimile: (202) 418-5528

gbarnett@cftc.gov

Division of Swap Dealer and

Intermediary Oversight

Gary Barnett

Director

CFTC Letter No. 12-01

Interpretation

February 27, 2012

Division of Swap Dealer and Intermediary Oversight

Regina Thoele

Senior Vice-President, Compliance

National Futures Association

300 South Riverside Plaza, Suite 1800

Chicago, Illinois 60606

Re:

Request for Interpretive Guidance – CFTC Regulations 4.34 and 4.35

Performance Disclosure for Forex CTAs

Dear Ms. Thoele:

This is in response to your letter dated September 13, 2011

vision of Swap Dealer and Intermediary Oversight

Regina Thoele

Senior Vice-President, Compliance

National Futures Association

300 South Riverside Plaza, Suite 1800

Chicago, Illinois 60606

Re:

Request for Interpretive Guidance – CFTC Regulations 4.34 and 4.35

Performance Disclosure for Forex CTAs

Dear Ms. Thoele:

This is in response to your letter dated September 13, 2011. By your letter you sought

guidance regarding the obligation to disclose past performance where a commodity trading

advisor (“CTA”) has discretionary trading authority over the account of a person other than an

eligible contract participant (as defined in the Commodity Exchange Act1) in connection with

off-exchange retail foreign currency transactions (“retail forex”).

Specifically, you sought the Division’s view regarding the point in time from which a

person who is required to be registered as a CTA because the person directs accounts that engage

in retail forex transactions ( a “Forex CTA”) must disclose the performance of those accounts

(whether performance disclosure must be made, e.g., for the five most recent calendar years and

year-to-date preceding the date of the Forex CTA’s Disclosure Document (or the life of the

trading program if shorter) as required under Regulation 4.35(a)(5);2 for the period from the June

18, 2008 enactment of the statutory provision requiring registration of Forex CTAs;3 or for the

period from the October 18, 2010 effective date of the Commission’s regulations (the “Forex

Regulations”) that it adopted to implement the statutory registration requirement.4

1 7 U.S.C. § 1, et seq. (2006). The Commodity Exchange Act (the “Act”) may be accessed at

the Commission’s website, http://www.cftc.gov.

2 Commission regulations are found at 17 C.F.R. Ch. I (2011) and may also be accessed at the

Commission’s website, http://www.cftc.gov

that it adopted to implement the statutory registration requirement.4

1 7 U.S.C. § 1, et seq. (2006). The Commodity Exchange Act (the “Act”) may be accessed at

the Commission’s website, http://www.cftc.gov.

2 Commission regulations are found at 17 C.F.R. Ch. I (2011) and may also be accessed at the

Commission’s website, http://www.cftc.gov.

3 See the CFTC Reauthorization Act of 2008 (“CRA”), Title XIII of the Food, Conservation,

and Energy Act of 2008, Public Law 110–246, 122 Stat. 1651, 2189–2204 (2008)..

4 See 75 Fed. Reg. 55410 (Sep. 10, 2010).

Regina Thoele

Page 2

Among other things, the Forex Regulations: (1) generally require that any person who

exercises discretionary trading authority over an account engaged in retail forex transactions

must register as a CTA (Regulations 5.1(e)(1) and 5.3(a)(3)(i)); and (2) subject each such person

to Part 4 of the Commission’s regulations, which includes Regulations 4.31, 4.34, 4.35 and 4.36,

applicable to CTA Disclosure Documents.

Part 4 of the regulations includes, among other things, performance disclosure

requirements. The Commission first proposed to require CTAs to disclose their past

performance in 1977, in connection with establishing a comprehensive program for the

regulation of CTAs and commodity pool operators (“CPOs”). In doing so, the Commission

stated:

A knowledge of the background and experience of a trading advisor

appears essential to a meaningful prospective evaluation of the value of the

advisor’s services. Commodity trading is a complex field, requiring substantial

skill and knowledge

ion with establishing a comprehensive program for the

regulation of CTAs and commodity pool operators (“CPOs”). In doing so, the Commission

stated:

A knowledge of the background and experience of a trading advisor

appears essential to a meaningful prospective evaluation of the value of the

advisor’s services. Commodity trading is a complex field, requiring substantial

skill and knowledge. A prospective client or subscriber should be aware of the

advisor’s commodity and general business experience if he is to make an

informed decision as to whether or not to avail himself of the advisor’s services.5

The Commission added in a footnote:

The Commission recognizes that this requirement [to disclose past performance

information] may impose substantial burdens on certain trading advisors.

Because no requirement now exists to maintain such performance records and

because such information may be more accessible to the futures commission

merchants carrying such accounts, the effective date of any requirement for

trading advisors to disclose past account performance might be structured to

permit them to comply with such a requirement by keeping such performance

records from the date these proposed regulations are adopted.6

When final regulations were adopted two years later, the Commission had determined not to

require disclosure of a CTA’s past performance. If a CTA chose to present such information,

though, it had to do so in the same format as the performance information CPOs were required to

use.

The Commission is not adopting the requirement in the proposed rule

(§ 5.2(b)(2)) that CTAs disclose the performance of commodity interest accounts

controlled by the CTA or any principal thereof within the previous year.

Commentators stated that this information would be expensive to compile and

would not be meaningful because clients often countermand the CTA’s trading

5 See 42 Fed. Reg. 9278, 9279 (Feb. 15, 1977).

6 Id. n. 14.

disclose the performance of commodity interest accounts

controlled by the CTA or any principal thereof within the previous year.

Commentators stated that this information would be expensive to compile and

would not be meaningful because clients often countermand the CTA’s trading

5 See 42 Fed. Reg. 9278, 9279 (Feb. 15, 1977).

6 Id. n. 14.

Regina Thoele

Page 3

decisions. The Commission agrees with these comments and instead is requiring

CTAs to disclose whether they control accounts and whether clients may obtain

information about the performance of those accounts.7

The Commission revisited the question when it revised the CPO and CTA regulations in

1981 and concluded that it made sense to harmonize the disclosure requirements for CPOs (who

were required to disclose past performance) with those for CTAs. Accordingly, CTAs were

required to disclose the actual performance for the advisor and for each principal for the three

years preceding the date of the Disclosure Document. The Commission stated:

With respect to CTAs, as proposed and as adopted, a CTA must disclose

the past performance of all accounts (including pools) directed by the CTA and its

principals. Section 4.31(a)(3)(i). The comments the Commission received were

mixed. Those persons who supported the proposal stated that, among other

things, they agreed with harmonizing the past performance disclosure required of

CTAs with that required of CPOs Those who opposed the proposal stated that,

among other things, it could lead to cumbersome and unnecessarily lengthy

performance tables. This concern has been addressed, in part, in the rules on

compositizing past performance, discussed below. Moreover, the Commission

believes that to fulfill the purposes of the Disclosure Document rules, it is

essential that this performance be disclosed

Those who opposed the proposal stated that,

among other things, it could lead to cumbersome and unnecessarily lengthy

performance tables. This concern has been addressed, in part, in the rules on

compositizing past performance, discussed below. Moreover, the Commission

believes that to fulfill the purposes of the Disclosure Document rules, it is

essential that this performance be disclosed. The Disclosure Document is

intended to provide protection for commodity customers – particularly those who

are unsophisticated in financial matters – by ensuring that they are informed about

material facts before committing their funds. See 44 FR 19178, 1920 (January 8,

1979). Because a CTA’s past performance is a material fact about which a

prospective client should be informed, the record of that past performance should

be disclosed.8

When the CPO and CTA disclosure regulations were amended in 1995, the current

requirement to disclose performance for a period of five calendar years and year-to-date was

adopted. The Commission stated its belief that:

requiring performance to be disclosed for a period longer than three years will

make the timespan covered by performance disclosures more uniform and will

better portray the evolution of performance over time, including positive and

negative fluctuations.9

Prior to the adoption of the Forex Regulations, the Commission did not require a person

who exercised discretionary trading authority over accounts engaged in retail forex transactions

7 See 44 Fed. Reg. 1918, 1923 (January 8, 1979).

8 See 46 Fed. Reg. 26004, 26009 (May 8, 1981).

9 See 60 Fed. Reg. 38146, 38160-38161 (July 25, 1995).

Prior to the adoption of the Forex Regulations, the Commission did not require a person

who exercised discretionary trading authority over accounts engaged in retail forex transactions

7 See 44 Fed. Reg. 1918, 1923 (January 8, 1979).

8 See 46 Fed. Reg. 26004, 26009 (May 8, 1981).

9 See 60 Fed. Reg. 38146, 38160-38161 (July 25, 1995).

Regina Thoele

Page 4

(and who did not accept or hold client money in the course of providing advice or managing

accounts) to register with it as a CTA. Further, the Commission did not require that such a

person provide a Disclosure Document containing past performance information, or maintain

supporting documents to substantiate the computation of past performance information.10 These

requirements first became applicable to Forex CTAs when the Forex Regulations became

effective. Also, upon effectiveness of the Forex Regulations each futures commission merchant

or retail foreign exchange dealer first became required by Regulation 5.13(c) to make the

monthly and confirmation statements that it must send to a retail forex customer available to any

person (such as a Forex CTA) who controls the retail forex customer’s account. Accordingly,

we believe that a Forex CTA should not be required to reconstruct and present in its disclosure

document past performance information for any period preceding the October 18, 2010 effective

date of the regulations that first established a requirement for such information.

It is the Division’s view, then, that a Forex CTA is required to disclose past performance

for the period beginning October 18, 2010, or, if later, the date on which the Forex CTA first

began exercising discretionary trading authority over accounts engaged in retail forex

transactions. From and after October 18, 2015, the period of time described in Regulation

4.35(a)(5) (five most recent calendar years and year-to-date or life of the trading program, if

shorter) would apply

mance

for the period beginning October 18, 2010, or, if later, the date on which the Forex CTA first

began exercising discretionary trading authority over accounts engaged in retail forex

transactions. From and after October 18, 2015, the period of time described in Regulation

4.35(a)(5) (five most recent calendar years and year-to-date or life of the trading program, if

shorter) would apply.

If a Forex CTA elects to include in its Disclosure Document past performance

information for any time prior to October 18, 2010, we believe that in order to avoid “cherry

picking” the presentation of such information should encompass the entire period set forth in

Regulation 4.35(a)(5) and should include all of the accounts over which the Forex CTA

exercised discretionary trading authority during that period. Further, any such past performance

information would have to be presented in accordance with the requirements of Part 4 and be

supported by adequate documentation as required by Regulation 4.35(a)(6)(ii).

You also sought guidance concerning a Forex CTA’s business background disclosure for

periods during which the Forex CTA’s Disclosure Document does not present performance

information. The Division’s view is that the five-year period for business background disclosure

specified in Regulation 4.34(f) should apply whether or not that period begins prior to October

18, 2010, because that information is material to prospective clients, is known to the Forex CTA,

and does not have to be obtained from others or specifically documented

ent does not present performance

information. The Division’s view is that the five-year period for business background disclosure

specified in Regulation 4.34(f) should apply whether or not that period begins prior to October

18, 2010, because that information is material to prospective clients, is known to the Forex CTA,

and does not have to be obtained from others or specifically documented. If, however, the

business background section of a Forex CTA’s Disclosure Document includes discussion of the

experience of the Forex CTA (or any of its trading principals) directing accounts during any

portion of the period set forth in Regulation 4.35(a)(5) for which the Disclosure Document does

not contain past performance (presented and documented in the manner required in Part 4) our

view is that the discussion should be restricted to identifying the person’s employment, and it

10 Regulation 4.35(a)(6)(ii) requires making and keeping of such supporting documents for past

performance calculations. Regulation 5.4 makes the requirements of Part 4 of the

Commission’s regulations applicable to persons required by Regulation 5.3(a)(3)(i) to

register as CTAs.

Regina Thoele

Page 5

should not include any qualitative description of the person’s success or ability in directing

accounts during that time (except where negative performance results constitute material

information for which disclosure is required under Regulation 4.34(o)). Moreover, in such a

case, the business background section should include a statement that although Regulation 4.35

generally requires a CTA to disclose its actual performance for the most recent five years and

year-to-date, the Forex CTA is not required to disclose past performance information for any

time prior to October 18, 2010

n for which disclosure is required under Regulation 4.34(o)). Moreover, in such a

case, the business background section should include a statement that although Regulation 4.35

generally requires a CTA to disclose its actual performance for the most recent five years and

year-to-date, the Forex CTA is not required to disclose past performance information for any

time prior to October 18, 2010.

In response to a further question raised in your letter, the Division believes that the

requirement to disclose material litigation within five years of the date of the Disclosure

Document should apply regardless of whether the Forex CTA is able to provide past

performance information. Litigation information is a matter of public record, and is material to a

prospective client’s decision to engage the Forex CTA. It is not necessarily related to trading

performance, or the ability to present and substantiate performance information. (Similarly,

information of a person’s prior business associations is material information to potential

investors, and it need not provide an indirect way to claim successful trading performance in the

absence of proper past performance information.) Accordingly, the five-year time period should

apply both for business background (as qualified in the preceding paragraph) and for material

litigation.

This letter does not excuse a Forex CTA relying on the interpretation11 set forth herein

from compliance with any other requirements applicable to it contained in the Act or in the

Commission’s regulations issued thereunder. For example, the Forex CTA remains subject to

applicable antifraud and registration provisions of the Act and the Commission’s regulations, and

to the reporting requirements for traders set forth in Parts 15, 18 and 19 of the Commission’s

regulations. Further, this letter represents the views of this Division only and does not

necessarily represent the position of the Commission or of any other office or division of the

Commission

ct to

applicable antifraud and registration provisions of the Act and the Commission’s regulations, and

to the reporting requirements for traders set forth in Parts 15, 18 and 19 of the Commission’s

regulations. Further, this letter represents the views of this Division only and does not

necessarily represent the position of the Commission or of any other office or division of the

Commission.

If you have any questions concerning this correspondence, please contact Christopher W.

Cummings, Special Counsel, at (202) 418-5445.

Sincerely,

Gary Barnett

Director

11 See Regulation 140.99(a)(3), which states that “[a]n interpretative letter may be relied upon

by persons in addition to the Beneficiary.”