95-17871. Amendments to Commodity Pool Operator and Commodity Trading Advisor Disclosure Rules

[Federal Register Volume 60, Number 142 (Tuesday, July 25, 1995)]
[Rules and Regulations]
[Pages 38146-38193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17871]

[[Page 38145]]

_______________________________________________________________________

Part III

Commodity Futures Trading Commission

_______________________________________________________________________

17 CFR Parts 1, 4, 30, and 150

Amendments to Commodity Pool Operator and Commodity Trading; Final Rule

Federal Register / Vol. 60, No. 142 / Tuesday, July 25, 1995 / Rules
and Regulations

[[Page 38146]]

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 4, 30, 150

Amendments to Commodity Pool Operator and Commodity Trading
Advisor Disclosure Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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

SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
announcing the adoption of substantial revisions to the disclosure
framework applicable to commodity pool operators (``CPOs'') and
commodity trading advisors (``CTAs''). These amendments are intended to
achieve greater simplicity, focus and clarity in performance history;
to streamline other required disclosures; to improve the presentation
and understandability of disclosures to investors; and to create a more
concise and readable format for Disclosure Documents.

EFFECTIVE DATE: August 24, 1995.

FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief
Counsel, Barbara Stern Gold, Assistant Chief Counsel, or Christopher W.
Cummings, Attorney/Advisor, Division of Trading and Markets, Commodity
Futures Trading Commission, 2033 K Street, NW., Washington, DC 20581.
Telephone: (202) 254-8955.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
A. Development of Proposed Part 4 Revisions
B. National Futures Association Proposals
C. April 25, 1995 Roundtable Discussion
D. Review of Public Comments
II. Transitional Provisions
III. Summary of Rule Changes
A. Definitions
B. Required Performance Disclosures
C. Required Non-Performance Disclosures
D. Non-Required Disclosures
E. Format Improvements to Enhance Readability
F. Other Revisions
G. Distribution Table
IV. Definitions
A. Major Commodity Trading Advisor: Rule 4.10(i)
B. Major Investee Pool: Rule 4.10(d)(5)
C. Multi-Advisor Pool: Rule 4.10(d)(2)
D. Principal-Protected Pool: Rule 4.10(d)(3)
E. Trading Manager: Rule 4.10(h)
F. Trading Principal: Rule 4.10(e)(2)
G. Break-Even Point: Rule 4.10(j)
H. Draw-Down and Worst Peak-To-Valley Draw-Down:
Rules 4.10(k) and (l)
V. Performance Disclosures: Section-by-Section Analysis
A. Introduction
B. Required Performance Disclosures
1. Required Performance Disclosures in CPO Disclosure Documents:
Rule 4.25
a. Capsule Performance Presentation: Rule 4.25(a)(1)
b. Pools With Three or More Years Operating History that Meet
Contribution Criteria: Rule 4.25(b)
c. Pools With Less Than A Three-Year Operating History: Rule
4.25(c)
2. Required Past Performance Disclosure in CTA Disclosure
Documents: Rule 4.35
3. Time Period for Which Required Past Performance Disclosure
Must Be Made: Rules 4.25(a)(5) for CPOs and 4.35(a)(5) for CTAs
4. Composite Performance Presentations: Rules 4.25 (a)(3) and
(a)(4) for CPOs and Rule 4.35(a)(3) for CTAs
a. CPO Disclosure Documents
b. CTA Disclosure Documents
c. Substantiating Composite Presentations
5. Order of Required Performance Disclosures: Rules 4.25(a)(2),
(a)(3)(i) and (a)(3)(ii) for CPOs and 4.35 (a)(1) and (a)(2) for
CTAs
6. Required Performance Legends
a. Legends Relating to Lack of Trading Experience: Rules 4.25(c)
for CPOs and 4.35(b) for CTAs
b. Legends Relating to Predictive Value of Past Performance:
Rules 4.25(a)(9) for CPOs and 4.35(a)(8) for CTAs
7. Summary Tables
a. Performance Disclosure Requirements
b. Sample Capsule Performance Presentations
c. Sample Bar Chart/Graph of Monthly Rates of Return
C. Non-Required Performance Disclosures
1. Voluntary and Supplemental Performance Disclosures: Rules
4.24(v) for CPOs and 4.34(n) for CTAs
2. Proprietary Trading Results: Rules 4.25(a)(8) for CPOs and
4.35(a)(7) for CTAs
3. Pro-Forma, Hypothetical and Extracted Performance Results
VI. Non-Performance Disclosures: Section-by-Section Analysis
A. Introduction
1. Disclosures Concerning a Pool's CTAs
2. Disclosures Concerning Investee Pools
B. Required Non-Performance Disclosures
1. Prescribed Non-Performance Statements, Table of Contents and
Forepart Information: Rules 4.24 (a) through (d) for CPOs and 4.34
(a) through (d) for CTAs
a. Cautionary Statement
b. Risk Disclosure Statement
c. Table of Contents
d. Information To Be Included in Forepart
e. Persons To Be Identified
2. Business Background: Rules 4.24(f) for CPOs and 4.34(f) for
CTAs
3. Principal Risk Factors: Rules 4.24(g) for CPOs and 4.34(g)
for CTAs
4. Investment Program and Use of Proceeds: Rule 4.24(h) for CPOs
5. Fees and Expenses; ``Break-even'' Analysis: Rules 4.24(i) for
CPOs and 4.34(i) for CTAs
6. Conflicts of Interest: Rules 4.24(j) for CPOs and 4.34(j) for
CTAs; Related Party Transactions: Rule 4.24(k) for CPOs
a. Conflicts of Interests--CPOs
b. Conflicts of Interests--CTAs
c. Related Party Transactions
7. Litigation: Rules 4.24(l) for CPOs and 4.34(k) for CTAs
8. Principal-Protected Pools: Rule 4.24(o) for CPOs
C. Supplemental and Voluntary Disclosures: Rules 4.24(v) for
CPOs and 4.34(m) for CTAs
VII. Other Changes
A. Deletion of Negative Disclosures
B. Use, Amendment and Filing of Disclosure Documents: Rules 4.26
for CPOs and 4.36 for CTAs
C. Disclosure Document Delivery Requirements
1. Notice of Intended Offering and Term Sheet
2. Acknowledgment of Disclosure Document
D. Conforming Changes
VIII. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
I. Background

A. Development of Proposed Part 4 Revisions

On May 5, 1994, the Commission proposed comprehensive revisions to
the disclosure framework for CPOs and CTAs (``Proposing Release'').\1\
This proposal followed more than fifteen years of experience in
administering the part 4 disclosure framework and reflected a
comprehensive review of the disclosure requirements for CPOs and CTAs
designed to identify aspects of the regulatory structure that could be
streamlined or simplified, while enhancing appropriate customer
protection. The first phase of this review resulted in the adoption of
Rules 4.7 and 4.8 in 1992.\2\ The adoption of the rules set forth
herein is part of the second phase of the Commission's review of part
4.\3\ As the Commission

[[Page 38147]]
stated in the Proposing Release, the purposes of these revisions are:
(1) Simplification of past performance disclosures; (2) reduction of
required disclosures concerning matters of secondary relevance; and (3)
clarification and modernization of various requirements.\4\

\1\ 59 FR 25351 (May 16, 1994). The initial sixty-day period for
public comment on the Proposing Release expired on July 15, 1994 but
was extended to August 17, 1994. The proposed amendments included
conforming changes to other rules, e.g., to Rule 30.6, which
pertains to disclosures required of CPOs and CTAs offering pools or
accounts, respectively, to trade in foreign futures contracts as
defined in Rule 30.1. 59 FR 37189 (July 21, 1994).
The Commission's rules governing the operations of CPOs and CTAs
are set forth in part 4 of the Commission's regulations, 17 CFR part
4 (1994). All other Commission rules referred to herein are found at
17 CFR Ch. I (1994).
\2\ Rule 4.7 provides relief from certain disclosure, reporting
and recordkeeping requirements applicable to CPOs for pools offered
and sold only to ``qualified eligible participants'' and CTAs
providing commodity interest trading advice to ``qualified eligible
clients,'' as defined therein, and who satisfy other specified
criteria for relief. Rule 4.8 provides relief from the twenty-one
day Disclosure Document pre-filing requirement (now contained in new
Rule 4.26(d)(1)) for CPOs of certain privately-offered pools.
\3\ This second phase will also consider, in consultation with
the Securities and Exchange Commission and the states, the
appropriateness of a two-part format for pool Disclousre documents.
See 59 FR 25351.
\4\ 59 FR 25351. These revisions do not, however, affect the
basic organizational structure of part 4. Thus, the subparts
thereunder continue to apply as follows: subpart A, to definitions
and exemptions (Rule 4.1 et seq.); subpart B, to the operations and
activities of CPOs (Rule 4.20 et seq.); subpart C, to the operations
and activities of CTAs (Rule 4.30 et seq.); and subpart D, to
advertising (Rule 4.40 et seq.).
---------------------------------------------------------------------------

In announcing the adoption of part 4 in 1979, the Commission stated
that the Disclosure Document requirement for CPOs was intended ``to
protect pool participants--particularly those who are unsophisticated
in financial matters--by ensuring that they are informed about the
material facts regarding the pool before they commit their funds.'' \5\
Similarly, the Disclosure Document requirement for CTAs was premised,
in part, upon the view that ``a prospective (CTA) client or subscriber
should be aware of the advisor's commodity and general business
experience if he is to make an informed decision as to whether or not
to avail himself of the advisor's services.'' \6\

\5\ 44 FR 1918, 1920 (January 8, 1979).
\6\ 42 FR 9278, 9279 (February 15, 1977).
---------------------------------------------------------------------------

In the Proposing Release, the Commission noted that since the
original adoption of the part 4 rules, the number of registered CPOs
had more than doubled and the number of CTAs had increased nearly
threefold; \7\ assets under the management of CPOs had grown
dramatically; \8\ and the range of available futures and option
contracts had increased substantially.\9\ In addition, during the past
decade, trading structures and investment portfolios have become
increasingly diverse and complex. A single commodity pool may engage
multiple CTAs and invest in multiple commodity pools (``investee
pools'') \10\ or securities funds in order to access the services of
particular traders or advisors, employ multiple trading strategies or
programs, or diversify its portfolio.\11\ Further, commodity pools
frequently retain ``trading managers'' to recommend or select CTAs to
manage, or funds in which to invest, the pool's assets \12\ and may
employ dynamic asset allocation strategies entailing periodic
replacement of, or reallocation of assets among, CTAs for the pool.

\7\ 59 FR 25351, 25352 and n.7.
\8\ 59 FR 25351, 25352 and n.8.
\9\ 59 FR 25351, 25352 and n.9.
\10\ Rule 4.10(d)(4) defines the term ``investee pool,''
discussed more fully below.
\11\ 59 FR 25351, 25353 and n.11.
\12\ 59 FR 25351, 25353. Rule 4.10(h) defines the term ``trading
manager,'' as discussed more fully below.
In implementing its statutory mandate to regulate the activities of
CPOs and CTAs, the Commission has endeavored to refine its rules as
appropriate to respond to changing market conditions in a manner
consistent with customer protection.\13\ The Commission's Division of
Trading and Markets (``Division'') has issued relief on a case-by-case
basis to facilitate application of the disclosure requirements to new
market conditions not contemplated by the existing regulatory
framework, such as multi-advisor and fund-of-funds structures. The
objective in such cases is to apply the rules so as to foster clear and
succinct disclosure of material information, especially concerning fees
and other aspects of fund operations affected by such structures,
taking into account the particular characteristics of the offered
investment vehicle.\14\ In many cases, strict application of existing
disclosure requirements to pools whose CPOs have voluminous performance
histories or which invest through multiple CTAs or investee funds could
result in undue emphasis upon performance record disclosure and reduced
focus upon more germane data. These effects have been mitigated in
appropriate circumstances through grants of exemptive or no-action
relief.\15\

\13\ See, e.g., Rules 4.5, 4.12(b) and 4.7, adopted in 1985,
1987 and 1992, respectively, and the discussion of those rules at 59
FR 25351, 25353.
\14\ 59 FR 25351, 25353-25354. In reviewing Disclosure Documents
for fund-of-funds structures, Division comment letters previously
have stated that although pool documents should provide all
information required by (former) Rule 4.21 for each investee pool,
``generally at the same level of detail as though the investee pool
were providing its own separate disclosure document,'' nevertheless
reduced disclosures are appropriate where less than twenty-five
percent of the assets of the offered pool would be invested in an
investee pool. The Division has also provided guidance through
interpretative statements and advisories with respect to past
performance presentations in Disclosure Documents. See, e.g., CFTC
Advisory 87-2, (1986-1987 Transfer Binder) Comm. Fut. L. Rep. (CCH)
para. 23, 624 (June 2, 1987), defining the term ``beginning net
asset value'' for rate of return calculations; CFTC Advisory
(unnumbered, dated February 27, 1991), (1990-1992 Transfer Binder)
Comm. Fut. L. Rep. (CCH) para. 25,005, permitting CPOs and CTAs to
use alternative rate of return computation methods to more
accurately reflect the return on funds available for trading during
the period; and CFTC Advisory 93-13, [Current Transfer Binder] Comm.
Fut. L. Rep. (CCH) para. 25,554 (February 12, 1993), permitting the
use of an alternative method for computing CTAs' rates of return.
As noted below (see n.15), the staff addresses specific requests
for relief on a case-by-case basis.
\15\ See, e.g., CFTC Interpretative Letter No. 94-12, (Current
Transfer Binder), Comm. Fut. L. Rep. (CCH) para. 25,993 (December
27, 1993) (capsule performance disclosure permitted for CPO's other
pools; CFTC Interpretative Letter No. 94-10, (Current Transfer
Binder) Comm. Fut. L. Rep. (CCH) para. 25,991 (December 16, 1993)
(capsule performance disclosure permitted); CFTC Interpretative
Letter No. 93-107, (Current Transfer Binder) Comm. Fut. L. Rep.
(CCH) para. 25,899 (October 26, 1993) (CPO permitted to omit
disclosures concerning its single advisor pools in Disclosure
Document for a multi-advisor pool under certain conditions); CFTC
Interpretative Letter No. 92-12, (1990-1992 Transfer Binder) Comm.
Fut. L. Rep. (CCH) para. 25,343 (July 28, 1992) (CPO permitted to
omit required disclosures concerning CTAs and investee pools
allocated less than 10% of pool's assets under certain conditions);
and CFTC Interpretative Letter No. 92-9, (1990-1992 Transfer Binder)
Comm. Fut. L. Rep. (CCH) para. 25,300 (June 1, 1992) (CPO permitted
to use two-part Disclosure Document with past performance of CTAs in
second part delivered contemporaneously with first part) and
Advisory 27-92 (June 3, 1992) (Commission has no objection to use of
two-part Disclosure Document subject to conditions set forth in
Interpretative Letter 92-9), issued in connection therewith. The
foregoing generally are discussed at 59 FR 25351, 25353-54.
---------------------------------------------------------------------------

Thus, the proposal to revise the part 4 rules reflected the
Commission's experience in addressing a wide range of CPO and CTA
disclosure issues under the prior rules, the evolution of the
marketplace, the development of new trading structures and the views of
the public and of market participants.

B. National Futures Association Proposals

As detailed in the Proposing Release,\16\ on March 15, 1994, the
National Futures Association (``NFA'') submitted to the Commission
proposed amendments to, and interpretations of, NFA's Compliance Rules
based upon the recommendations of NFA's Special Committee for the
Review of CPO/CTA Disclosure Issues (``NFA's Submission''). NFA's
Submission consisted of several parts, including: Proposals concerning
presentation of past performance data, including proposed capsule
formats for CPO and CTA performance; proposed requirements for
calculation and disclosure of break-even analyses by CPOs; proposed
rules for the use of hypothetical trading results by NFA members in
promotional material; and proposals dealing with the use of ``nominal''
or ``notionally funded'' accounts. The proposals requiring, and
providing instructions for, break-even analyses were published for
public comment and subsequently approved by the Commission on April 26,
1995, substantially as proposed.\17\ Rule 4.10(j)

[[Page 38148]]
incorporates by reference NFA's instructions for calculating the
``break-even'' point. The portion of NFA's Submission concerning
hypothetical trading results \18\ was modified by NFA in response to
Commission and public comments and remains under consideration.\19\
Rule 4.41, revised as discussed herein, permits persons to follow
either the Commission or rules adopted by NFA.

\16\ See 59 FR 25351, 25354.
\17\ NFA Compliance Rule 2-13(b) and Interpretive Notice to
Compliance Rule 2-13(b). The ``break-even'' analysis is a
computation of the trading profit that a pool must realize in the
first year of an investor's participation for the investor to recoup
his or her initial investment.
\18\ Proposed NFA Compliance Rule 2-29(c).
\19\ Separately, the Commission contemplates further review of
the subject of hypothetical performance presentations to assure
adequate safeguards against the misuse of such disclosure.
---------------------------------------------------------------------------

NFA's Submission included proposed rules with respect to past
performance presentations, which were considered by the Commission in
preparing the recommendations set forth in the Proposing Release. As
noted in the Proposing Release, the portion of NFA's Submission
addressing the use of ``nominal'' or ``notionally funded'' accounts was
remitted to the NFA for further explanation and documentation. The
Commission is not addressing the issue of ``nominal'' or ``notional''
account size in this release.

C. April 25, 1995 Roundtable Discussion

On April 25, 1995, the Commission convened a roundtable discussion
led by Chairman Mary L. Schapiro, entitled ``Rethinking Past
Performance Disclosure,'' to elicit input from industry, academic, end-
user, regulatory and other sources with respect to public policy issues
relevant to past performance disclosure, as well as technical and
pragmatic aspects of past performance presentations. A number of the
speakers expressed the view that past performance data alone are not
directly predictive of future trading results but that past performance
data provide information that is important in evaluating a contemplated
pool offering or trading program. For example, patterns of volatility
and other trading patterns in various market conditions may be evident.
Participants also noted the tendency for past performance data to
have a potent persuasive effect, which some viewed as significantly
exceeding the usefulness of such information as a basis for an
investment decision. Speakers discussed the effect of such factors as
the volume of performance data and the format in which performance
information is provided, the utility of monthly as opposed to annual
rates of return, and the extent to which meaningful benchmarks or
standards are available to measure performance.\20\

\20\ A summary of the roundtable discussion is on file with the
Commission's Office of the Secretariat.
---------------------------------------------------------------------------

D. Review of Public Comments

The Commission received thirty comment letters in response to the
Proposing Release: three from persons registered as CTAs; five from
persons registered as both a CPO and a CTA; two from persons registered
as both a CTA and an introducing broker (``IB''); two from persons
registered as futures commission merchants (``FCMs''); two from self-
regulatory organizations; two from a futures industry trade
organization; two from certified public accountants; nine from law
firms; two from bar associations; and one from an academician.
The commenters strongly supported the rulemaking in general. Many
commenters, however, advocated changes in various aspects of the
proposed rules. The Commission has carefully considered the comments
received and, based upon its review of the comments and its own
reconsideration of the proposed amendments, has determined to adopt the
revisions contained in the Proposing Release, with certain
modifications, as discussed below. Comments received on the proposed
amendments are discussed below in the context of the particular
provisions to which they relate.
The Commission believes that the revised rules, as adopted, not
only respond to the concerns of the commenters but, also, meet the
regulatory objectives of this rulemaking. Notwithstanding the adoption
of the rule amendments discussed herein, the Commission intends that
the staff will continue to respond to requests for relief from the Part
4 rules on a case-by-case basis consistent with the objectives and
principles of this rulemaking. The Commission also is exploring
possible mechanisms for addressing additional CPO and CTA disclosure
issues with the benefit of industry and other external input, including
input from other federal and state regulators, on an ongoing basis.

II. Transitional Provisions

The revisions being announced today will become effective thirty
days from the date hereof, but Disclosure Documents may be prepared,
filed and used in accordance with the revised rules prior to the
effective date. To facilitate the transition to compliance with the
revised rules adopted herein, the Commission has determined that, for a
period of six months after the effective date, it will not take
enforcement action against any person solely on the basis of such
person's use of a Disclosure Document prepared pursuant to the former
rules rather than the revised rules. For pools that are continuously
offered, amendment of the Disclosure Document is not required solely
due to the rule revisions announced herein, and operators of such pools
may make conforming changes as part of their next regular update.
Persons to whom the Division previously has granted exemptive or
no-action relief permitting them to prepare Disclosure Documents in
accordance with certain provisions of the proposed rules set forth in
the Proposing Release are reminded that such relief is superseded by
the revisions adopted herein, and any Disclosure Document used by any
such person subsequent to the effective date of these revisions must
comply with the revised rules.

III. Summary of Rule Changes

The following summary is intended to provide interested persons
with information concerning significant changes to the Commission's
disclosure framework and the manner in which those changes vary, if at
all, from the Commission's proposals. These and all other changes to
part 4 and other Commission rules are discussed below in the section-
by-section analysis. For purposes of this release, the rules as in
effect prior to the amendments discussed herein are referred to as the
``former'' rules.
A. Definitions \21\

\21\ The section-by-section analysis of revised and new
definitions is set forth in Section IV below.
---------------------------------------------------------------------------

Many of the proposed amendments set forth in the Proposing Release
introduced new concepts into the rules. As a consequence, the Proposing
Release contained several new definitions designed to modernize the
rules in light of marketplace developments and to aid in implementation
of the revised rules. Several of these new definitions have been
adopted with modifications: ``multi-advisor pool'' (Rule 4.10(d)(2));
``principal-protected pool,'' which was proposed as ``limited risk
pool'' (Rule 4.10(d)(3)); ``trading manager'' (Rule 4.10(h)); ``major
commodity trading advisor'' (Rule 4.10(i)); ``major investee pool''
(Rule 4.10(d)(5)); ``trading principal'' (Rule 4.10(e)(2)); and
``break-even point'' (Rule 4.10(j)). Two of the proposed definitions
have been

[[Page 38149]]
eliminated,\22\ and three additional definitions which were not
included in the Proposing Release have been added: ``investee pool''
(Rule 4.10(d)(4)), ``draw-down'' (Rule 4.10(k)), and ``worst peak-to-
valley draw-down'' (Rule 4.10(l)). As adopted, the new definitions are
included in Rule 4.10, and where appropriate, related definitions have
been made part of the same paragraph.\23\

\22\ The definition of ``adverse performance,'' which was
included in proposed Rule 4.25(a)(8), and the definition of
``trading program,'' which was included in proposed Rule 4.34(a)(5),
have not been adopted.
\23\ Pool-related definitions are now sub-paragraphs of Rule
4.10(d) and the definition of ``trading principal'' has been
included as a sub-paragraph of Rule 4.10(e).
---------------------------------------------------------------------------

B. Required Performance Disclosures \24\

\24\ The section-by-section analysis of required performance
disclosure revisions is set forth in Section V below.
---------------------------------------------------------------------------

1. CPO Disclosure Documents
Rule 4.25 of the amended rules creates a simplified structure for
the presentation of required past performance by CPOs. In each case,
the presentation must cover the five most recent calendar years and
year-to-date, or the entire life of the subject pool, account or
trading program, whichever is shorter. (Rule 4.25(a)(5)).
a. All required past performance presentations for pools are
reduced to a summary, capsule format containing specified core
information. (Rule 4.25(a)(1)). In a change from the proposal, CPOs may
present monthly rates of return required for the offered pool for five
calendar years and year-to-date either in tabular form or in a bar
graph. (Rules 4.25(a)(1) and (a)(2)).
b. For an offered pool which meets the following criteria, the past
performance record of only the offered pool itself is required to be
presented in the Disclosure Document: (1) The pool has at least a
three-year history of trading commodity interests; and (2) during that
minimum three-year period at least seventy-five percent of the pool's
assets were contributed by persons not affiliated with the CPO, trading
manager, CTA or FCM for the pool, or their respective principals. (Rule
4.25(b)).
c. For offered pools which do not meet the three-year operating
history criteria of Rule 4.25(b), past performance data for the offered
pool, for other pools operated by (or accounts traded by) the CPO and
trading manager, and for each ``major'' CTA or ``major'' investee pool
is required.\25\ If the CPO or trading manager has less than a three-
year history in trading pools for which at least seventy-five percent
of pool contributions were made by persons not affiliated with the CPO,
trading manager, or CTA for the pool or their respective principals,
the past performance of the CPO's (and trading manager's) trading
principals \26\ is required to be presented unless that performance
does not differ materially from the performance of the offered pool and
the CPO of the offered pool. (Rule 4.25(c)(2)).

\25\ Rules 4.10(i) and 4.10(d)(5) define the terms ``major
commodity trading advisor'' and ``major investee pool,''
respectively.
\26\ The term ``trading principal'' is defined in Rule
4.10(e)(2).
---------------------------------------------------------------------------

d. The requirement in proposed Rule 4.25(c)(3)(iii) to disclose
certain information under the designation ``adverse performance'' has
not been adopted. However, the terms ``major commodity trading
advisor'' and ``major investee pool'' have been redefined to include
CTAs and investee pools with ten percent, rather than twenty-five
percent, allocations of pool assets and a narrative discussion of the
performance history of non-major CTAs and investee pools is required.
(Rule 4.25(c)(5)).
2. CTA Disclosure Documents
Under proposed Rule 4.34(a)(1), CTAs would have been required to
continue to present the performance of the offered trading program in
the full multi-column tabular format previously required under Rule
4.31(a)(3). Performance of all other trading programs directed by the
CTA would have been presented in the new capsule format used in CPO
Disclosure Documents. As adopted, Rule 4.35(a)(1) permits CTAs to use a
capsule format (similar to the capsule format adopted for CPOs) for all
programs. The offered trading program's capsule must include monthly
rates of return and the numbers of profitable and losing accounts in
the trading program. The required monthly rates of return may be
presented either in tabular form or as a bar graph, as is the case for
the offered pool in a CPO Disclosure Document. As with CPO Documents,
all required performance is to be presented for the five most recent
calendar years and year-to-date or for the life of the trading program,
whichever is shorter. (Rule 4.35(a)(5)).

C. Required Non-Performance Disclosures \27\

Required non-performance disclosures are revised as follows.

\27\ A section-by-section analysis of required non-performance
disclosure revisions is set forth in Section VI below.
---------------------------------------------------------------------------

1. Break-Even Point. CPOs are required to disclose the pool's
break-even point, indicating the trading profit the pool must realize
in order for a participant to recover his entire initial investment if
he redeems his interest after one year. (Rules 4.10(j), 4.24(d)(5) and
4.24(i)(6) for CPOs). The break-even point is required to be calculated
in accordance with rules promulgated by a registered futures
association pursuant to section 17(j) of the Commodity Exchange Act
(the ``Act'').\28\

\28\ 7 U.S.C. 1 et seq. (1994). As noted above, NFA rules
governing calculations of the break-even point are included in an
Interpretive Notice accompanying NFA Compliance Rule 2-13(b), which
Rule and Notice the Commission approved on April 26, 1995.
---------------------------------------------------------------------------

2. Material Litigation. Actions adjudicated on the merits in favor
of persons whose litigation history is required need not be disclosed.
Required disclosures concerning actions against FCMs and IBs are
significantly reduced. (Rules 4.24(l) for CPOs and 4.34(k) for CTAs).
3. Principal Risk Factors. CPOs and CTAs must discuss the principal
risk factors of the pool or trading program, including but not limited
to volatility, leverage, liquidity and counter-party creditworthiness.
(Rules 4.24(g) for CPOs and 4.34(g) for CTAs).
4. Business Background. Disclosure of the business backgrounds of
principals is limited to principals (including officers and directors)
who participate in making trading or operational decisions for the pool
or CTA (or who supervise persons so engaged). Disclosure of CTA and
investee pool operator business backgrounds in CPO Disclosure Documents
is limited to major CTAs and major investee pools. (Rules 4.24(f) for
CPOs and 4.34(f) for CTAs).
5. Conflicts of Interest. Rule 4.24(j) calls for a full description
of actual and potential conflicts involving the CPO, the trading
manager, major CTA or major pool operator and any principal thereof, as
well as any person providing services to the pool or soliciting
participants for the pool. The rule also calls for the disclosure of
any other material conflict of interest involving the pool. Disclosure
with respect to payment for order flow, soft dollar arrangements and
similar arrangements is specifically called for. Rule 4.34(j) for CTAs
also specifically references payment for order flow and soft dollar
arrangements.
6. Fees and Expenses. Rule 4.24(i) requires the CPO to describe the
expenses incurred in the previous year and to be incurred in the
current year and to disclose fees and commissions in connection with
pool solicitations. The rule also specifies significant expense
categories not previously enumerated in Rule 4.21 and requires an
explanation of

[[Page 38150]]
the calculation of the pool's break-even point. If a fee is determined
by reference to a base amount, the manner in which the base amount is
calculated must be disclosed.\29\ (Rules 4.10(j), 4.24(d)(5) and
4.24(i) for CPOs, and 4.34(i) for CTAs).

\29\ Except for this provision, Rule 4.34(i) for CTAs is
unchanged from the former rule.
D. Non-Required Disclosures \30\

1. Proprietary Trading Results. As proposed and as adopted, the
rules provide that proprietary trading results presented in either a
CPO or CTA Disclosure Document must be labelled as such and placed at
the end of the document. (Rules 4.24(v) and 4.25(a)(8) for CPOs, and
4.34(n) and 4.35(a)(7) for CTAs).

\30\ A detailed discussion of non-required disclosures is
included in Sections V and VI below.
---------------------------------------------------------------------------

2. Supplemental Information. Proposed Rules 4.24(v) and 4.33(n)
generally would have required that information not specifically called
for by Commission rules or federal or state securities laws or
regulations could only appear following the related required
disclosure. The new rules, as adopted, require that any supplementally
provided performance information be presented after the entire required
performance presentation. Supplemental non-performance information
relating to required disclosures may be included with the respective
related required disclosures. Other supplemental information is
required to follow the last required disclosure, and any proprietary,
hypothetical, simulated or pro forma \31\ trading results must be
placed at the end of the Disclosure Document. Supplemental information
must not mislead or obscure or diminish in prominence any required
disclosure. (Rules 4.24(v) for CPOs and 4.34(n) for CTAs).

\31\ However, pro forma adjustments to performance data are
required for certain purposes and such adjustments are not affected
by the restrictions upon placement of supplemental information. See
Section V.C.3., infra.
---------------------------------------------------------------------------

E. Format Improvements to Enhance Readability \32\

A number of revisions to the rules are intended to enhance the
accessibility and prominence of relevant disclosures. Disclosure
Documents are now required to contain a table of contents. Further, the
number and content of various previously required bold-face
``boilerplate'' risk and cautionary statements has been reduced.
Certain core information, including the break-even point, is required
to be set forth in the forepart of the document. (Rules 4.24(a) through
(d) for CPOs and 4.34(a) through (d) for CTAs).

\32\ The section-by-section analysis of format improvement
revisions is set forth in paragraph B.6. of Section V and in Section
VI below.
---------------------------------------------------------------------------

A significant change from the Proposing Release is the renumbering
of the CTA disclosure rules to correspond to the numbering of the CPO
disclosure rules. To accomplish this, proposed Rules 4.32, 4.33, 4.34
and 4.35 have been adopted as Rules 4.33, 4.34, 4.35 and 4.36,
respectively, and Rule 4.32 has been reserved.

------------------------------------------------------------------------
CPO CTA
Subject rule rule
------------------------------------------------------------------------
Required delivery of Disclosure Document................ 4.21 4.31
Report to pool participants............................. 4.22 ......
Recordkeeping........................................... 4.23 4.33
General disclosures required............................ 4.24 4.34
Performance disclosures................................. 4.25 4.35
Use, amendment and filing of Disclosure Document........ 4.26 4.36
------------------------------------------------------------------------

F. Other Revisions \33\

The rule amendments also are designed to facilitate pool offerings,
particularly with respect to areas of overlap or potential
inconsistency with the rules of the Securities and Exchange Commission
(``SEC''). Thus, CPOs and CTAs may now update Disclosure Documents
every nine months, rather than every six months as formerly required.
(Rules 4.26(a) for CPOs and 4.36(a) for CTAs.) In addition, CPOs may
provide accredited investors with a notice of intended offering and
statement of the terms of the proposed offering, prior to delivery of a
Disclosure Document. (Revised Rule 4.21(a) for CPOs.)

\33\ The section-by-section analysis of other revisions
(including: Deletion of certain requirements to state that a
disclosable situation does not exist; changes to the Disclosure
Document amendment, filing and use requirements; and technical
conforming changes) is set forth in Section VII below.
---------------------------------------------------------------------------

G. Distribution Table

In light of the extensive substantive and organizational revisions
to the content of Disclosure Documents, and therefore to the part 4
rules, the Commission is setting forth below a distribution table to
assist interested persons in complying with the new disclosure
framework for CPOs and CTAs.

Distribution Table
------------------------------------------------------------------------
Old section New section
------------------------------------------------------------------------
1.55(a)(1)(iii)
4.10(d)............................ 4.10(d)(1)
4.10(d)(2)-(d)(5)
4.10(e)............................ 4.10(e)(1)
4.10(e)(2)
4.10(h)-(1)
4.21(a)............................ 4.21(a)
4.24(c)
4.24(d)
4.21(a)(1)(i)-(1)(vii)............. 4.24(d)(1)-(d)(2), 4.24(e)
4.21(a)(1)(viii)................... 4.24(h)
4.24(d)(3), 4.24(d)(5)
4.21(a)(2)......................... 4.24(f)
4.24(g)
4.21(a)(3)......................... 4.24(j)
4.21(a)(4)......................... 4.24(n), 4.25
4.21(a)(5)......................... 4.24(n), 4.25
4.21(a)(6)......................... 4.24(t)
4.21(a)(7)......................... 4.24(i)(i)-(i)(4)
4.21(a)(8)......................... 4.24(s)
4.21(a)(9)......................... 4.24(h)(4)
4.24(o)
4.21(a)(10)........................ 4.24(p)
4.21(a)(11)........................ 4.24(q)
4.21(a)(12)........................ 4.24(r)
4.24(k)
4.21(a)(13)........................ 4.24(l)
4.21(a)(14)........................ 4.24(i)(5)
4.21(a)(15)........................ 4.24(m)
4.21(a)(16)........................ 4.24(u)
4.24(v)
4.21(a)(17)........................ 4.24(b)
4.21(a)(18)........................ 4.24(a)
4.21(b)............................ 4.26(c)
4.21(c)............................ 4.24(d)(4)
4.21(d)............................ 4.21(b)
4.21(e)............................ 4.26(a)
4.21(f)............................ 4.26(b)
4.21(g)............................ 4.26(d)
4.21(h)............................ 4.24(w)
4.31(a)............................ 4.31(a)
4.34(c)
4.34(d)
4.31(a)(1)(i)...................... 4.34(d)(1)
4.31(a)(1)(ii), 4.31(a)(iv)........ 4.34(e)
4.31(a)(1)(iii).................... 4.34(h)
4.31(a)(2)......................... 4.34(f)
4.34(g)
4.31(a)(3)......................... 4.34(m), 4.35
4.31(a)(4)......................... 4.34(i)
4.31(a)(5)......................... 4.34(j)
4.31(a)(6)......................... 4.34(l)
4.31(a)(7)......................... 4.34(k)
4.34(n)
4.31(a)(8)......................... 4.34(b)
4.31(a)(9)......................... 4.34(a)
4.31(b)............................ 4.36(c)
4.31(c)............................ 4.34(d)(2)
4.31(d)............................ 4.31(b)
4.31(e)............................ 4.36(a)
4.31(f)............................ 4.36(d)
4.31(g)............................ 4.34(o)
4.32............................... 4.33
4.41(b)(1)......................... 4.41(b)(1)(A)-(b)(1)(B)
------------------------------------------------------------------------

IV. Definitions

A. Major Commodity Trading Advisor: Rule 4.10(i)

In proposed Rule 4.10(k), the term ``major commodity trading
advisor''

[[Page 38151]]
would have been defined as a CTA allocated or intended to be allocated
at least twenty-five percent of the pool's aggregate initial margin and
premiums for futures and commodity option contracts. The Commission
requested comment concerning this proposed definition, specifically as
to the use of a percentage of the pool's aggregate initial margin and
premiums for futures and commodity option contracts as compared to a
percentage of the pool's total assets, which was proposed in Rule
4.10(l) as the basis for determining whether an investee pool would be
a major investee pool. The Commission asked whether the proposed
distinction between the definition of major CTA and major investee pool
would appropriately reflect the relative risks of direct futures
trading as compared to trading through vehicles which limit the risk of
loss to the initial investment.
The majority of the commenters on the major CTA definition
recommended that the definition be based on the percentage of the
pool's net asset value allocated to the CTA, rather than on the
percentage of the pool's aggregate initial margin and option premiums.
Commenters stated that it would be difficult to determine how much of
the assets allocated to a CTA would be used for margin and premiums,
noted that pool operators do not base allocations to CTAs on margins
and premiums, and urged that the amount of assets allocated to a CTA
better indicates the CTA's potential impact on the pool's performance.
Several commenters suggested substitute benchmarks, including standards
based on the CTA's ``trading level,'' i.e., the portion of the pool's
``market exposure'' allocated to the CTA and the portion of the pool's
assets committed to trading that had been allocated to the CTA. The
Commission was also urged to provide expressly that pool assets
allocated to a CTA include notional equity, since otherwise the
standard may fail to reflect the actual portion of the pool's assets at
risk with the CTA, and to use the percentage of pool assets allocated
to an advisor specified in the written agreement between the advisor
and the pool operator to measure the allocation amount, regardless of
how such allocations are drawn upon by advisors from time to time for
margin and premiums. A number of commenters expressed agreement with
the proposed twenty-five percent threshold amount (while urging that it
be based on pool assets).
The Commission agrees with the concept advanced or implicit in
several of the comment letters that a key objective of defining major
CTAs is to gauge the ability of the various CTAs for the pool to place
the assets of the pool at risk. To further this objective, the
Commission has adopted a revised definition of major CTA in Rule
4.10(i). Under the revised definition, the determination as to whether
a CTA is a major CTA is based upon the percentage allocation to the CTA
of the pool's aggregate net assets or the aggregate value of the net
assets allocated to the pool's trading advisors, whichever is smaller,
as determined by the agreement between the CPO and the CTA. These
alternate measures are designed to assure that the major CTA definition
identifies CTAs which have the ability to expose the pool's assets to
significant risk because the amount of funds over which they have
trading authority represents a significant proportion either of the
pool's net asset value or of the aggregate value of the assets
allocated to the pool's trading advisors, whichever is less.\34\ As
discussed more fully below, the Commission has determined to use a
lower percentage threshold of ten percent in lieu of the proposed
twenty-five percent threshold as part of a restructuring of the CTA and
investee pool performance disclosure requirements of Rule 4.25 to
eliminate the proposed category of ``adverse performance,'' which would
have applied to CTAs with allocations of ten percent to twenty-five
percent of the pool's futures margins and commodity option premiums.

\34\ Adoption of this standard for determining a major CTA is
not intended to address or relate to the use of so-called
``notional'' or ``nominal'' account sizes for purposes of
calculation of rates of return.
---------------------------------------------------------------------------

Thus, under the alternate test being adopted in Rule 4.10(i), if,
for example, the total dollar value allocated to advisors for commodity
interest trading represented fifty percent of the net asset value of
the pool, a trading advisor allocated ten percent of the total dollar
value allocated to advisors, even though that amount would represent
less than ten percent of the pool's assets, would be a major CTA.\35\
This result is appropriate because the major CTA definition is designed
to include CTAs who hold authority over a substantial portion of the
pool's commodity interest trading, even if the absolute dollar value of
the funds allocated to the CTA is relatively small compared to the
total assets of the pool. Conversely, in the unlikely scenario of a CTA
having an allocation that, although insignificant compared to the
aggregate allocations to CTAs, is significant relative to the assets of
the pool, that CTA should also be considered major. This scenario could
occur if CTAs collectively are allocated more than the net asset value
of the pool; \36\ in such a case, a CTA might, in effect, be trading
more than ten percent of the pool's assets even though his allocation
represented less than ten percent of total CTA allocations. In such a
case, the CTA should be considered a major CTA, thus potentially
resulting in a pool having more than ten major CTAs, based upon the
level of exposure of pool assets.

\35\ The standards discussed herein do not affect the scope of
the existing exemption available under Rule 4.12(b), which provides
an exemption from, inter alia, past performance disclosure, for
pools that commit no more than ten percent of the fair market value
of their assets to establish commodity interest positions and trade
such commodity interests in a manner solely incidental to their
securities trading.
\36\ The Commission does not encourage such allocations and
notes that the leverage inherent in such vehicles creates
corresponding risks, which must be appropriately disclosed. The
Commission notes the recent heightened recognition in the domestic
and foreign regulatory communities of the risks inherent in
leveraged instruments and trading vehicles.
---------------------------------------------------------------------------

Because the major CTA definition is intended to identify advisors
whose trading is significant to the pool in terms of overall risk, any
percentage allocation figure based upon a single benchmark such as
funds allocated by written or other agreement is likely to provide only
a rough comparative measure. This is so because trading advisors'
programs may lead to different degrees of futures or other risk
exposure and different volatility patterns despite the same
quantitative allocation of funds. Consequently, in determining whether
a trading advisor's performance should be disclosed as material
information, even if the trading advisor would not constitute a major
CTA under the definition set forth in Rule 4.10(i), the pool operator
should assess the likelihood that the CTA's trading, given the leverage
used, may expose significantly more of the fund's net asset value in a
worst case scenario than his percentage allocation level would
indicate. Such a case may warrant inclusion of capsule performance
information for the CTA even if his allocation does not exceed the ten
percent threshold. In most cases, however, a textual discussion will
suffice, and the Commission has emphasized the requirement for this
type of supplementary disclosure as to non-major CTAs generally by
adopting Rule 4.25(c)(5), discussed infra. Further, a CTA's performance
may be marketed in such a manner as to render more comprehensive
disclosure of his performance material, e.g., the CTA may be accorded
``major'' importance by

[[Page 38152]]
virtue of prominent references to such CTA in promotional material.
The comments indicated, and the Commission would generally expect,
that allocations to CTAs would generally be evidenced by written
agreement, between the CPO (or the trading manager, if any) on behalf
of the pool and the CTA, assigning a particular dollar amount of the
pool's assets to be traded by the CTA. This dollar amount would be
converted into a percentage using the alternate standards in Rule
4.10(i). CPOs should be prepared to document their determinations as to
the status of CTAs as major or non-major for audit purposes but, in
most cases, the written agreement should be sufficient.
Proposed Rules 4.10(k) and 4.10(l) would have required that
``major'' CTA and investee pool status be determined at the time the
Disclosure Document is prepared \37\ and on an ongoing basis.\38\ As
the Commission explained in the Proposing Release, the ``major
commodity trading advisor'' and ``major investee pool'' definitions are
intended to include CTAs or investee pools to whom the CPO of a pool
that has not commenced trading intends to make allocations at or above
the specified thresholds.\39\ Similarly, any CTA or investee pool to
whom the CPO of an operating pool intends to reallocate assets such
that the allocations to such CTA or investee pool will total ten
percent or more also would be included. One commenter recommended that
the asset allocations which determine major CTA or major investee pool
status only be required to be accurate as of a date not more than
ninety days prior to the date of the Disclosure Document. In response,
the Commission notes that, pursuant to Rule 4.26(c), the CPO must
notify existing participants of changes in major CTAs and investee
pools, to the extent they represent material changes, within twenty-one
days and must so notify previously solicited prospective participants
prior to accepting or receiv- ing funds from such prospective
participants. This can be accomplished by formally amending the
Disclosure Document, ``stickering'' the document, including information
in an Account Statement, or other similar means. Whether a given major
CTA or investee pool change is material would depend upon a variety of
factors such as the overall distribution of pool assets to CTAs and
investee pools, the historical frequency of such changes and the pool's
overall trading program. Substitutions of, and reallocations to, CTAs
or investee pools are more likely to be material changes for a pool
with one or two trading advisors, than for a pool that accesses a
variety of advisors and investee pools and that redirects its assets
frequently in response to changes in market conditions.

\37\ The definitions adopted in Rules 4.10(i) and 4.10(d)(5)
include CTAs and investee pools ``allocated or intended to be
allocated * * *''
\38\ Rule 4.26(c) requires distribution of corrections of any
material inaccuracies to all participants within twenty-one days of
the date on which the CPO knows or has reason to know of the
inaccuracy.
\39\ 59 FR 25351, 25357.
---------------------------------------------------------------------------

B. Major Investee Pool: Rule 4.10(d)(5)

Proposed Rule 4.10(l) would have defined ``major investee pool'' as
an investee pool allocated or intended to be allocated at least twenty-
five percent of the assets of a pool. As noted above, in contrast to
the proposed definition of major CTA, which would have relied upon a
percentage of the pool's initial futures margin and commodity option
premiums, the major investee pool definition was based upon the
percentage of the assets of the investor pool allocated to the investee
pool. This distinction in the basis for determining allocations to
pools was based upon the fact that investments in other pools generally
expose the investor pool only to loss of the initial investment and
that the full amount of the investment is required to be paid at the
inception of the investment. The relative importance of investee pools
to prospective pool participants is thus appropriately determined by
reference to the proportion of the pool's total assets actually
invested in the investee pool, and the major investee pool definition
did not appear to present the same issues concerning quantification of
relative risk exposure as the major CTA definition.
Commenters who addressed the major investee pool definition pointed
out that ``investee pool'' was not defined in the Proposing Release or
in existing Commission rules. The Commission is adopting in Rule
4.10(d)(4) a definition of ``investee pool'' as ``any pool in which
another pool participates or invests, e.g., as a limited partner
thereof.'' The Commission is adopting as Rule 4.10(d)(5) a definition
of ``major investee pool'' that differs from the proposal in that it
specifies that the allocation threshold is ten percent of the net asset
value of the pool, instead of twenty-five percent of the assets of the
pool. This modification was made in order to make the allocation
measure consistent with the capsule performance format, which calls for
net asset value. As in the case of the major CTA definition, the
proposed twenty-five percent threshold has been reduced to ten percent
in light of the elimination of the proposed ``adverse performance''
disclosure requirement for CTAs and investee pools with allocations
ranging from ten to twenty-five percent. One commenter noted that in
determining the percentage of a pool's assets allocated to an investee
pool, as with CTA allocations, notional equity should be included in
order to capture the risk exposure created by the investee pool's
trading. This approach was advocated because the percentage of the
offered pool's assets used to purchase the participation in an investee
pool may not reflect the additional risk created where the assets of
the investee pool are traded at a leverage factor that results in
trading exposure of, for example, twice the actual assets of the
investee pool. Although the Commission does not believe that this
consideration warrants express treatment in the major investee pool
definition, it recognizes that there may be applications of the major
investee pool definition, as in the case of CTA allocations, where the
basic benchmarks used in the rule do not capture all of the investee
pools that may be of major impact on the offered pool. In such cases,
i.e., where the investee pool is traded on a highly leveraged basis,
the pool operator should be mindful of the obligation to disclose all
material information and should take into consideration the nature of
the investee pool's trading in determining whether it should be treated
as a major investee pool for disclosure purposes.
The time at which major investee pool status is determined is
discussed in paragraph A, above.

C. Multi-Advisor Pool: Rule 4.10(d)(2)

Proposed Rule 4.10(h), the multi-advisor pool definition, would
have employed a twenty-five percent or greater allocation standard
based on the pool's aggregate initial margin and premiums for futures
and commodity option contracts. Thus, as proposed, the ``multi-advisor
pool'' definition effectively would not have applied if a pool had one
major CTA or major investee pool, and the minimum number of CTAs in a
multi-advisor pool would have been five. Two commenters asserted that
any pool with two or more CTAs should be considered a multi-advisor
pool, although one commenter acknowledged that a pool that allocated
ninety percent of its assets to one CTA should not qualify as a multi-
advisor pool. As adopted, the definition of ``multi-advisor pool'' in
Rule 4.10(d)(2) is a pool in which no CTA is allocated or intended to
be allocated more than twenty-five percent of the pool's funds
available for commodity interest trading

[[Page 38153]]
and in which no investee pool is allocated or intended to be allocated
more than twenty-five percent of the pool's net assets. (Rule
4.10(d)(2)). In determining whether a CTA has been allocated more than
twenty-five percent of the pool's funds available for commodity
interest trading, the alternate standard in the major CTA definition
should be used, i.e., the percentage allocation is the amount of funds
allocated to the trading advisor by agreement with the CPO, expressed
as a percentage of the lesser of the aggregate value of the assets
allocated to the pool's trading advisors or the net assets of the pool
at the time of allocation.

D. Principal-Protected Pool: Rule 4.10(d)(3)

The term ``limited risk pool'' was defined in proposed Rule 4.10(i)
as a pool (commonly referred to as a ``guaranteed pool'') that is
designed to limit the loss of the initial investment of its
participants. Commenters pointed out that most pools are formed as
limited partnerships, thus limiting at least some of the participant's
risk. Other commenters offered alternative terms \40\ or suggested that
the definition specify that loss would be limited by guaranty, letter
of credit or other third-party undertaking. As adopted in Rule
4.10(d)(3), the term has been redesignated ``principal-protected
pool,'' but the definition is unchanged from that set forth in the
Proposing Release.

\40\ Suggested options included ``capital protected pools'' and
``principal return guaranteed pools.''
---------------------------------------------------------------------------

E. Trading Manager: Rule 4.10(h)

As proposed in Rule 4.10(j), and as adopted in Rule 4.10(h), the
``trading manager'' of a pool is defined as any person other than the
pool's CPO with authority to allocate pool assets to CTAs or investee
pools. Rule 4.10(h) further makes clear that sole or partial authority
will bring a person within the trading manager definition.
No comments addressing the trading manager definition were
received. Commission rules have not previously expressly taken account
of pool structures in which a trading manager, rather than the pool's
CPO, allocates pool assets. The Commission emphasizes that trading
managers are CTAs and are required to be registered as such. Thus,
although trading managers do not function as direct traders for the
pool, they have the ability to influence the pool's trading to a very
significant degree. Due to the importance of the role of trading
manager, in a number of contexts the proposed rules would have made
disclosure of the trading manager's performance a substitute for that
of the CPO. However, as noted below, the Commission has revised the
proposed rules to require disclosure both as to a pool's CPO and the
trading manager, if any, in a number of contexts, e.g., conflicts of
interest, on the ground that in the vast majority of cases, even if the
CPO has delegated substantial responsibility to the trading manager to
hire and monitor CTAs, the CPO retains ultimate responsibility for
operation of the pool. However, with respect to past performance
disclosure, if the CPO has completely delegated trading authority to a
trading manager and the past performance of the trading manager does
not differ materially from that of the commodity pool operator, only
the trading manager's past performance is required to be disclosed.
F. Trading Principal: Rule 4.10(e)(2)

A ``trading principal'' would have been defined in proposed Rule
4.10(m) as a principal of a CPO or CTA who participates in making
commodity interest trading decisions for a pool or client or who
supervises, or has authority to allocate pool assets to, persons so
engaged. The sole commenter who addressed this definition urged that it
be limited to principals who make trading decisions, excluding
principals who supervise or hire traders. The Commission notes,
however, that persons who select or supervise traders effectively
determine how a pool's or client's assets will be traded. Accordingly,
where disclosure of information concerning traders is appropriate, the
same information should be required of those who supervise or hire
them. As adopted in Rule 4.10(e)(2) only grammatical changes were made
to the definition of ``trading principal'' in proposed Rule 4.10(m).

G. Break-Even Point: Rule 4.10(j)

In order to make the impact of costs and fees on an investment more
understandable to the prospective investor, the Commission proposed
that the narrative discussion of fees and expenses be supplemented by
presentation of the ``break-even point'' for an offered pool and a
clear explanation of how that break-even point is calculated. Proposed
Rule 4.10(n) would have defined ``break-even point'' as the trading
profit that a pool or trading program must realize in its first year to
equal all fees and expenses such that a participant or client will
recoup its initial investment, as calculated pursuant to rules
promulgated by a registered futures association.\41\

\41\ Proposed Rule 4.10(n) would also have required that the
break-even point be expressed as a percentage of the minimum unit of
initial investment based upon assumed redemption of the initial
investment at the end of the first year of investment.
---------------------------------------------------------------------------

Many commenters supported the proposal to require disclosure of a
pool's break-even point.\42\ However, comments on the break-even point
(and the requirement to disclose the relevant calculations) indicated
some confusion regarding whether the break-even point is based on the
pool's first year of operation or an investor's first year of
participation in the pool. For ongoing pool offerings, commenters
suggested that the break-even point be optional after the first year of
a pool's operation, that it be based on a prior year's actual results,
or that a range of break-even points be permitted keyed to various
total offering sizes.

\42\ Comments addressing the manner of calculating the break-
even point are discussed below with Rule 4.24(i) (``Fees and
Expenses'') in paragraph B.5. of Section VI.
---------------------------------------------------------------------------

As adopted, Rule 4.10(j) defines the term ``break-even point'' as
the trading profit that a pool must realize in the first year of a
participant's investment to equal all fees and expenses such that the
participant will recoup its initial investment. The break-even point is
required to be calculated pursuant to rules promulgated by a registered
futures association and it must be expressed both as a dollar amount
and as a percentage of the minimum unit of initial investment. The
proposed definition referred to the trading profit that a pool or
trading program must realize in the pool or trading program's first
year, and the break-even point was not expressly required to be
presented as a dollar amount.\43\

\43\ Rule 4.10(j) omits the reference in the proposed rule to
``trading program'' and ``client.'' A break-even point is not
required for CTA Disclosure Documents, as CTA clients generally are
subject to a much simpler fee and expense structure than are pool
participants.
---------------------------------------------------------------------------

The Commission is clarifying that the break-even point must present
the trading profit that the pool must realize in the first year of an
investor's participation in order for the investor to recoup his
initial investment, and Rule 4.10(j) as adopted so states. As noted
above, Rule 4.10(j) provides that the break-even point must be
calculated pursuant to rules promulgated by a registered futures
association. NFA's Interpretive Notice accompanying its Compliance Rule
2-13(b) sets forth the manner in which the break-even point must be
calculated and includes a sample break-even presentation. The amount of
trading profit required for the

[[Page 38154]]
net asset value per unit of participation after one year to equal the
initial selling price per unit is expressed both as a dollar amount and
as a percentage of the initial selling price per unit. The Commission
based its approval of NFA's amendment to Compliance Rule 2-13 and
accompanying Interpretive Notice on, among other things, the
understanding that NFA would amend the Interpretive Notice to clarify
that the CPO of a continuously-offered pool must include an updated
break-even analysis in the pool's Disclosure Document throughout the
pool's existence, such that each new participant would be informed of a
break-even point that was accurate as of the date of the Disclosure
Document.\44\ Revision of the break-even point is thus required for
ongoing pool offerings whenever the actual break-even point becomes
materially different from that which appears in the Disclosure
Document.

\44\ The Commission also reminded NFA that in explaining and
enforcing member compliance with NFA break-even analysis
requirements the fee and expense categories in the Interpretive
Notice to Compliance Rule 2-13(b) should not be considered
exhaustive or exclusive, and that NFA should ensure that CPOs do not
use that listing to avoid including a cost in the pool's break-even
analysis. With respect to interest income, the Commission stated its
understanding that NFA would require inclusion in the break-even
analysis of a projection of a pool's expected interest income at an
assumed interest rate reflecting then current cash market
conditions, and it stated that to the extent that a person other
than a pool participant receives any portion of the pool's interest
income, such payment should be disclosed as a fee or expense in the
pool's break-even analysis.
H. Draw-Down and Worst Peak-to-Valley Draw-Down: Rules 4.10 (k) and (l)

Commenters noted that although the capsule performance presentation
format in proposed Rules 4.25 and 4.34 required registrants to disclose
the largest monthly draw-down and the worst continuous peak-to-valley
draw-down for the pool or account, the term ``draw-down'' was not
defined. To address this concern, the Commission is adopting as Rule
4.10(k) a definition of ``draw-down'' as ``losses experienced by a pool
or account over a specified period.'' Similarly, the Commission has
adopted Rule 4.10(l), which defines the ``worst peak-to-valley draw-
down,'' \45\ as the greatest cumulative percentage decline in month-end
net asset value due to losses sustained by a pool, account or trading
program during a period in which the initial month-end net asset value
is not equaled or exceeded by a subsequent month-end net asset value.
The worst peak-to-valley draw-down must be expressed as a percentage of
the initial month-end net asset value, together with an indication of
the months and year(s) of such decline from the initial month-end net
asset value to the lowest month-end net asset value of the draw-down.
For purposes of Rules 4.25 and 4.35, a peak-to-valley draw-down which
began prior to the beginning of the most recent five calendar years is
deemed to have occurred during such five-calendar-year period.

\45\ As discussed in paragraph B.1. of Section V below, the word
``continuous'' has been omitted from the capsule item ``worst
continuous peak-to-valley draw-down'' in proposed Rule
4.25(a)(1)(i)(G) and from the item ``worst ever continuous peak-to-
valley draw-down'' in proposed Rule 4.25(a)(1)(ii)(F).
---------------------------------------------------------------------------

V. Performance Disclosures: Section-by-Section Analysis \46\

A. Introduction

As noted above, the Commission is revising and reorganizing the
CPO/CTA disclosure rules with a view towards simplification of
presentation. Rules 4.21 and 4.31 continue to require CPOs and CTAs,
respectively, to deliver a Disclosure Document.\47\ Rules 4.24 with
respect to CPOs, and 4.34 with respect to CTAs, set forth requirements
concerning disclosure of all matters other than past performance, and
Rules 4.25 for CPOs and 4.35 for CTAs set forth past performance
disclosure requirements.\48\

\46\ Tables summarizing past performance disclosure requirements
under the revised rules and demonstrating the use of the new capsule
format are set forth below at paragraph B.7. of this Section V.
\47\ Requirements with respect to the use, amendment and filing
of the Disclosure Document are now contained in new Rules 4.26 for
CPOs and 4.36 for CTAs, discussed more fully below at Section VII.
\48\ Captions have been added to the subparagraphs of Rules 4.25
(a), (b) and (c) and Rules 4.35 (a) and (b) to increase ease of
reference.
---------------------------------------------------------------------------

As proposed and as adopted, past performance disclosure
requirements are being substantially condensed with the objective of
eliminating required disclosure of performance that is of secondary
relevance to the offered pool or trading program. Thus, the revised
rules provide a new ``capsule'' format for performance record
presentations that is intended to provide a simple, balanced and
succinct overview of performance. Use of the capsule format should
substantially reduce the volume of performance data presented without
sacrificing material content.
With respect to past performance in CPO Disclosure Documents, the
revised rules focus primarily upon the historical performance of the
offered pool. Where the offered pool has a three-year trading history
and meets certain contribution criteria as specified in Rule 4.25(b),
its past performance generally is the only required performance
presentation. (Rule 4.25(b)).
Where the offered pool does not have the requisite operating
history, the CPO must present performance data for the offered pool,
for the CPO (and trading manager, as applicable), and the pool's major
CTAs and investee pools. (Rules 4.25 (c)(2) through (c)(4)). A textual
discussion of relevant performance factors for non-major CTAs and
investee pools also is required. (Rule 4.25(c)(5)). Some performance
data may be presented on a composite basis. (Rule 4.25(a)(3)). All
performance data may be presented in a capsule format.
With respect to CTA Disclosure Documents, the performance of the
offered trading program is the primary focus. (Rules 4.35 (a)(1) and
(a)(2)). The performance of accounts traded pursuant to other trading
programs of the CTA may be presented in single composite, provided the
rates of return are not materially different, material differences
among the accounts included in the composite are disclosed, and the
composite presentation is not misleading. (Rule 4.35(a)(3)).
As the volume of required performance disclosures for both CPOs and
CTAs is being considerably reduced, the time period for these
disclosures is being increased from three years to five years in order
to provide investors with a better chronological perspective of the
performance records presented in the Disclo- sure Document. (Rule
4.25(a)(5) for CPOs and Rule 4.35(a)(5) for CTAs). This approach
accords with the views of the NFA Special Committee for Review of CPO/
CTA Disclosure Issues.\49\

\49\ NFA's Submission at 7.
B. Required Performance Disclosures \50\

\50\ To facilitate understanding of the new performance
requirements, paragraph B.7., infra, provides: (1) A table
summarizing the past performance requirements of Rules 4.25 and
4.35; and (2) examples of capsule performance presentation under the
rules.
---------------------------------------------------------------------------

1. Required Performance Disclosures in CPO Disclosure Documents: Rule
4.25
The new summary format for presentation of past performance history
is intended to capture the most significant information concerning a
pool's performance in a reader-friendly, largely nontabular form. This
format will generally permit multiple track records to be provided on a
single page. The new format is set forth in Rule 4.25(a)(1) for pool
documents and Rule 4.35(a)(1) for CTA documents.\51\

\51\ As discussed more fully below, the Commission has
determined to permit CTA documents to present the past performance
of the offered trading program in the new capsule format.

[[Page 38155]]

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

a. Capsule Performance Presentation: Rule 4.25(a)(1) \52\

\52\ Rule 4.10(k), which defines the term ``draw-down,'' and
Rule 4.25(a)(7), relating to substantiating past performance
calculations, are also discussed in this section.
---------------------------------------------------------------------------

CPOs

As proposed in Rule 4.25(a)(1)(i), the capsule for pool performance
in CPO Disclosure Documents would have been required to contain the
following information: The name of the pool; a statement as to whether
the pool is privately offered pursuant to the Securities Act of 1933,
as amended (the ``Securities Act''),\53\ a multi-advisor pool or a
principal-protected pool; the date when the pool commenced trading; the
aggregate gross capital subscriptions to the pool; the pool's current
net asset value; the ``largest monthly draw-down''; the ``worst
continuous peak-to-valley draw-down''; and annual and year-to-date
rates of return, computed on a monthly compounded basis,\54\ for the
preceding five calendar years and year-to-date (or for the life of the
pool if shorter). In the case of the offered pool's capsule, monthly
rates of return would have been required for the entire performance
period.

\53\ For this purpose private offerings may be pursuant to
section 4(2) of the Securities Act of 1933, as amended, 15 U.S.C.
77d(2), or Regulation D thereunder, 17 CFR 230.501-230.508 (1994).
\54\ See Rule 4.25(a)(1)(i)(H). Annual rates of return computed
on a monthly compounded basis assume reinvestment of accrued profits
and therefore the investment base on which rates of return are
calculated is effectively adjusted by these amounts.
---------------------------------------------------------------------------

Similar data would have been required in capsule presentations of
the performance of accounts in CPO Disclosure Documents. Proposed Rule
4.25(a)(1)(ii) would have called for inclusion in the capsule format
of: The name of the CTA or other person trading the account and the
name of the trading program; the date when the CTA began trading client
funds and the date of inception of trading for the trading program
being disclosed; the number of accounts in the program as of the
Disclosure Document date; the total assets under the management of the
CTA and in the trading program; the ``largest monthly draw-down'' for
the program; the ``worst ever continuous peak-to-valley draw-down'' for
the trading program; and annual and year-to-date rates of return for
the offered trading program (again, computed on a monthly compounded
basis).

CTAs

As proposed, Rule 4.34(a)(2) would have required all performance
presented in CTA Disclosure Documents, with the exception of the
performance of the offered trading program, to follow the capsule
format as specified in Rule 4.25(a)(1)(ii) (C) through (G).
Comments. Commenters expressed uniformly strong support for the
proposed new capsule format for past performance disclosure. One
commenter, however, recommended that the revised rules expressly permit
a CPO to continue to present performance in the multi-column tabular
format required by former Rule 4.21(a)(4). Many commenters requested
that the Commission define the term ``draw-down,'' as used in the
proposed capsule format. Commenters also noted that use of the word
``continuous'' in the capsule item ``worst continuous peak-to-valley
draw-down'' could be read to mean that any intermediate upward movement
terminates the draw-down, thus permitting a small ``uptick'' to
disguise the true magnitude of a long draw-down, since the uptick would
break the continuity but not the decline in asset value. Suggested
alternatives were ``worst absolute peak-to-valley draw-down'' and
``worst peak-to-valley period.'' One commenter sought confirmation that
the proposed rule would require disclosure of the number of successive
months during which net asset value failed to exceed the pool's prior
high water mark and the total percentage decline over that period.
Numerous commenters criticized the proposed requirement that
monthly rates of return be presented for the offered pool over the
entire five-year performance period (or for the life of the offered
pool if less than five years), claiming that such data would detract
from the simplicity and clarity of the capsule format. One commenter
contended that monthly rates of return are not relevant to a medium to
long-term investment such as managed futures. Various alternative
indicators of volatility were proposed in lieu of monthly rates of
return, including the pool's standard deviation over its life, the best
and worst monthly and annual returns, and the number of profitable and
losing months. One commenter recommended that the capsule also include
such information as largest monthly increase and greatest valley-to-
peak increase in order to provide a balanced presentation. A number of
commenters urged the Commission to resolve the issue of the use of
notional funds and nominal account sizes in performance
presentations.\55\

\55\ As noted above, the Commission is reviewing the subject of
``notional funds'' performance data with the benefit of industry,
end-user, regulatory and academic input provided at the Commission's
April 25, 1995, roundtable discussion and other available data.
---------------------------------------------------------------------------

The Commission requested comment as to whether past performance
presentations would provide more meaningful information if they were
required to include rates of return on a risk-adjusted basis, that is,
reduced by the relevant Treasury Bill rate or comparable interest
figure, or to break out trading results from passive interest income.
The only commenter specifically addressing this request expressed the
view that risk-adjusted rates of return would not make performance
presentations more meaningful and contended that indexing performance
based upon another form of investment implied that participation in a
commodity pool was somehow comparable to such other investment.
Technical Changes to Capsule

The Commission is adopting the capsule format for performance
presentations in pool Disclosure Documents, with certain technical
modifications as noted below. In adopting the capsule performance
format, the Commission stresses that this summary format is designed
for purposes of presentation in Disclosure Documents only. CPOs and
CTAs must continue to compute performance on the same basis as under
the former rules \56\ and to maintain records substantiating such
computations in accordance with Rule 1.31.\57\ The Commission is not
adopting at this time a requirement that registrants present past
performance on a risk-adjusted basis.

\56\ Although only the amounts specified in Rules 4.25(a) (1)
and (2), and Rules 4.35(a) (1) and (2) need be set forth in the
Disclosure Document, the same performance calculations as previsouly
required must be made, as specified in Rule 4.25(a)(7) for CPOs and
Rule 4.35(a)(6) for CTAs, as such rules may be interpreted by the
Commission. The corresponding former rules are former Rule
4.21(a)(4)(ii) and former Rule 4.31(a)(3)(ii), respectively.
\57\ Among other things, Rule 1.31 requires all books and
records to be maintained for a period of five years and to be
available for inspection by any representatives of the Commission or
the U.S. Department of Justice. CTAs also are subject to those
requirements.
---------------------------------------------------------------------------

Draw-Down Information

The required draw-down information, which is based upon activity
occurring for the most recent five calendar years and year-to-date, is
intended to inform prospective participants of the nature of the
volatility actually experienced by the pool by demonstrating the
significant one-month and sustained declines to which the commodity
pool

[[Page 38156]]
has actually been subject. To ensure that the worst long-term draw-down
is properly represented, Rules 4.25(a) and 4.35(a), as adopted, require
the capsule to include the ``worst peak-to-valley draw-down,''
eliminating the qualification ``continuous.'' \58\

\58\ The word ``continuous'' is eliminated from Rules 4.25(a)(1)
(i)(G) and (ii)(F), and the extraneous word ``ever'' is eliminated
from Rule 4.25(a)(1)(ii)(F).
---------------------------------------------------------------------------

The Commission also is adopting definitions of the terms ``draw-
down'' and ``worst peak-to-valley draw-down.'' Rule 4.10(k) provides
that ``draw-down'' means losses experienced by a pool or account over a
specified time period. Thus, a draw-down is a decline in net asset
value due to reasons other than redemptions or withdrawals. To assist
readers who may not be familiar with industry terminology, the
Commission has also added a requirement that the capsule format
include, in a footnote or otherwise, a definition of the term ``draw-
down'' that is consistent with the definition set forth in Rule
4.10(k). Rule 4.10(l) defines ``worst peak-to-valley draw-down'' as the
greatest cumulative percentage decline in month-end net asset value due
to losses sustained by a pool, account or trading program during any
period in which the initial month-end net asset value is not equaled or
exceeded by a subsequent month-end net asset value. The rule specifies
that the worst peak-to-valley draw-down must be expressed as a
percentage of the initial month-end net asset value, together with an
indication of the months and year(s) of such decline from the initial
month-end net asset value to the lowest month-end net asset value of
such decline. For purposes of the revised rules, a peak-to-valley draw-
down which began prior to the beginning of the most recent five
calendar years is deemed to have occurred during such five-calendar-
year period.
Both monthly and peak-to-valley draw-down amounts are to be
expressed as a percentage of the net asset value at the beginning of
the specified period. The largest monthly draw-down indicates the
largest net asset loss experienced by the pool in any calendar month,
and the month and year in which that loss occurred. The worst peak-to-
valley draw-down indicates the largest calendar month-to-calendar month
net asset loss experienced by the pool during any period and the months
and year in which it occurred. Dating the monthly and peak-to-valley
draw-downs permits participants to assess whether the losses were
connected to market conditions by comparing the draw-downs of several
pools. As explained in the Proposing Release,\59\ a peak-to-valley
draw-down of 4 to 8-91/25% would indicate that the peak-to-valley
lasted from April to August of 1991 and resulted in a twenty-five
percent draw-down of the pool's net asset value.

\59\ 59 FR 25351, 25356.
---------------------------------------------------------------------------

Monthly Rates of Return

The Commission has determined to modify the proposal with respect
to monthly rates of return for the offered pool to permit flexibility
as to the form of presentation. As adopted, Rule 4.25(a)(2) provides
that the capsule for the offered pool must contain monthly rates of
return for the five most recent calendar years and year-to-date (or the
pool's life, if shorter) presented either in tabular form or in a bar
graph. If a bar chart is used, the bar chart must clearly indicate
monthly rates of return and must also prominently indicate annual rates
of return. Rule 4.25(a)(2)(iv) requires that the CPO make available
upon request to prospective and existing participants the supporting
data necessary to calculate monthly rates of return for the offered
pool as specified in Rule 4.25(a)(1).
The Commission notes that registrants may present performance
information in the multi-column format specified by former Rule
4.21(a)(4) in addition to the capsule format specified by Rule
4.25(a)(1), provided that any performance presented in the superseded
format is treated as supplemental information and is placed following
all of the required performance disclosures in the Disclosure
Document.\60\

\60\ This statement also applies to CTAs. See Rule 4.24(v) for
CPOs and Rule 4.34(n) for CTAs, concerning supplemental disclosures,
discussed in paragraph C.1. of this Section V.
Registrants who offer notional programs may disclose monthly rates
of return in the capsule disclosure for CTA programs using the fully-
funded subset described in Advisory 93-13.\61\ Commission staff will
provide guidance concerning supplemental data to accompany the capsule
disclosure to reflect the range of levels of partial funding and the
generic disclosures discussed in Advisory 93-13.

\61\ CFTC Advisory 93-13, (Current Transfer Binder) Comm. Fut.
L. Rep. (CCH) para. 25,554 (February 12, 1993). Advisory 93-13
requires that CTAs who manage or offer to manage partially-funded
(``notionally'' funded) accounts present both actual and nominal
funds under management and give certain disclosures in connection
with partially-funded accounts. The Advisory also provides a method
for presenting rates of return for a trading program in a single
table on the basis of a ``fully funded subset'' of accounts within
that trading program.
---------------------------------------------------------------------------

b. Pools With Three or More Years Operating History That Meet
Contribution Criteria: Rule 4.25(b) \62\

\62\ Former Rule 4.21(a)(4) required disclosure of the
performance record of the offered pool. If the offered pool had less
than a twelve-month performance history, the performance of the CPO
and of each of its principals was also required to be disclosed.
Former Rule 4.21(a)(5) also required disclosure of the past
performance of all other accounts directed by the pool's CTA and
each of its principals, regardless of the duration of the pool's
operating history.
---------------------------------------------------------------------------

As proposed, Rule 4.25(b) would have limited required performance
disclosures in pool Disclosure Documents to the offered pool's
performance if: (1) The pool had traded commodity interests for three
years or more, (2) no fewer than fifteen pool participants were
unaffiliated with the CPO, and (3) no more than ten percent of the
pool's assets were contributed by the CPO. As stated in the Proposing
Release, the Commission believes that, generally, ``where a pool has an
extensive operational history, presentation of the pool's own past
performance record should fulfill the objectives of past performance
disclosure.'' \63\ If, however, the pool's past performance record was
accrued under conditions that differed materially from those which will
obtain prospectively, the pool's historical performance record alone
may not be sufficient. For example, if the pool's past performance
record encompasses periods when the pool was essentially a proprietary
trading vehicle investing a relatively small amount of funds
contributed by third party sources, the performance record generated
may have little or no relevance to a publicly offered pool.\64\
Accordingly, to assure that the three-year performance history would
not represent the performance of a significantly dissimilar trading
vehicle, the Commission proposed to limit past performance disclosure
to the past performance of only the offered pool where, and only where,
the pool

[[Page 38157]]
had a three-year trading history with at least fifteen unaffiliated
participants and no more than ten percent participation by the CPO.

\63\ 59 FR 25351, 25356.
\64\ See Elton, Gruber and Rentzler, New Public Offerings.
Information and Investor Rationality: The Case of Publicly Offered
Funds, 62 J. Bus. 1 (1988); and Edwards and Ma, Commodity Pool
Performance: Is the Information Contained in Pool Prospectuses
Useful?, Working Paper Series No. 16, Center for the Study of
Futures Markets, Col. Bus. Sch. (January 1988). See also, Statement
of the Commodity Futures Trading Commission Regarding Disclosure by
Commodity Pool Operators of Past Performance Records and Pool
Expenses and Request for Comments, 54 FR 5597, (February 6, 1989);
and companion release of the Securities and Exchange Commission,
Statement of the Commission Regarding Disclosure by Issuers of
Interest in Publicly Offered Commodity Pools, 54 FR 5600 (February
6, 1989).
---------------------------------------------------------------------------

The Commission requested comment as to whether, where the offered
pool has a three-year operating history, that performance record is
generally sufficient without supplementary performance data concerning
the pool's CTAs or other pools operated by the CPO. Three of the nine
commenters who responded to the Commission's request agreed with the
proposal, stating that if a pool has a three-year history, only its own
past performance should be required. Six of the nine recommended that
the twelve-month standard of former Rule 4.21(a)(4), which related to
the presentation of other pools operated by the CPO, should be used to
identify pools for which only the performance of the offered pool is
required.
The Commission also sought comment as to whether the offered pool's
operating history should be considered for purposes of the three-year
minimum if such history was acquired when the pool differed in some
material respect from the pool as offered, for example, in cases in
which the pool's CTA, types of interests traded or the trading program
had been significantly modified or the pool was initially privately
offered but subsequently was offered to the public. All but one of the
persons who responded to this request stated that material differences
should be disclosed but should not disqualify a pool from meeting the
three-year criteria of the rule.
Several commenters suggested elimination or modification of the
requirement that the requisite three-year operating history be obtained
when the pool had at least fifteen unaffiliated participants.
Commenters warned that pools with high minimum investments (and few
participants) would be unjustly penalized by this restriction. Several
commenters recommended that the requirement that the CPO have
contributed no more than ten percent of the pool's assets be modified
to increase the permissible level of CPO participation, e.g., to fifty
percent, and two commenters noted that this would harmonize with the
fifty percent standard in proposed Rule 4.25(a)(9) for determining
whether past performance results must be treated as proprietary trading
results for the purpose of separating such results from other past
performance information.\65\ Several commenters contended that Rule
4.25 as proposed would have the undesirable effect of discouraging CPOs
from investing in the pools they operate. Three commenters proposed
adopting either the CPO investment test or the unaffiliated participant
test.

\65\ Proposed Rule 4.25(a)(9), adopted as Rule 4.25(a)(8), is
discussed at paragraph C.2. of this Section V.
---------------------------------------------------------------------------

The Commission has adopted Rule 4.25(b) with several modifications
to afford greater flexibility in its application. The requirement that
the pool have had no fewer than fifteen participants unaffiliated with
the pool operator has been eliminated and the maximum level of
contribution of assets by the CPO has been increased. As adopted, Rule
4.25(b) provides for past performance disclosure to be limited to that
of the offered pool if both of the following criteria are met: (1) The
pool has traded commodity interests for at least three years; and (2)
during the three-year (or greater) period, at least seventy-five
percent of the pool's assets were contributed by persons unaffiliated
with the CPO, the trading manager (if applicable), the pool's CTAs, or
any of their principals.
The performance of an offered pool which has the requisite three-
year operating history is required to be disclosed for five full
calendar years and year-to-date or, if the pool has less than a five-
year history, for the pool's entire operating history,\66\ in the
specified capsule format.\67\ The CPO is free to include additional
performance information, subject to the provisions relating to
supplemental disclosures.\68\

\66\ Rule 4.25(a)(5).
\67\ Rule 4.25(b). As adopted, the text of Rules 4.25(b) and
4.25(c) is being amended to clarify that where the offered pool
meets the criteria of Rule 4.25(b), the CPO is required to present
only the offered pool's performance. Where the offered pool does not
meet the Rule 4.25(b) criteria, the CPO must provide additional
performance disclosure as detailed in Rule 4.25(c).
\68\ See Rule 4.24(v).
---------------------------------------------------------------------------

The Commission notes that the twelve-month standard in former Rule
4.21(a)(4) related only to disclosure of the performance of other pools
operated by the CPO and did not affect former Rule 4.21(a)(5)'s
requirement to disclose the performance of the CTAs for the pool. Under
Rule 4.25(b), if the offered pool has the requisite three-year
operating history, neither the performance of the CPO's other pools nor
the performance of the pool's CTA(s) must be presented. In view of the
elimination of all other performance data, including CTA performance
under the new disclosure framework, the Commission believes that a
three-year rather than a one-year history is the appropriate minimum.
The Commission agrees that material differences in the operation or
structure of the pool during the three years, given appropriate
disclosure, generally should not disqualify the pool from satisfying
the three-year criteria. However, registrants should exercise caution
in cases in which such differences exist, taking into account that the
requirement to disclose all material information includes past
performance disclosure and thus that where significant changes in the
offered pool might cause presentation of the offered pool's past
performance by itself to be misleading, additional performance
disclosure may be required.
The Commission believes that the different purposes of Rule
4.25(a)(8), which defines proprietary trading results and requires
appropriate placement and labelling of such results, and of Rule
4.25(b), which identifies pools for which no performance history other
than that of the offered pool is required, warrant different standards
as to the relevant amount of proprietary participation. A more
stringent limitation upon qualifying pools is appropriate for use in
Rule 4.25(b), which eliminates the necessity for certain otherwise
required disclosures, as compared to that of proposed Rule 4.25(a)(8).
Unlike Rule 4.25(b), which identifies pools for which no additional
performance data other than that of the offered pool is required, Rule
4.25(a)(8) determines the percentage at which proprietary participation
essentially renders a trading vehicle a proprietary vehicle, the
trading results for which were obtained under conditions that render
the performance data presumptively inappropriate for inclusion with
and, indeed, potentially misleading if included with, the performance
of the offered pool.
c. Pools With Less Than A Three-Year Operating History: Rule 4.25(c)
\69\
Disclosure Documents for offered pools that do not satisfy the
criteria of proposed Rule 4.25(b) would have been required under
proposed Rule 4.25(c) to include the performance records of the offered
pool, each other pool operated or account traded by the CPO (or trading
manager), the CPO's (or trading manager's) trading principals if the
CPO (or trading manager) had less than a three-year history, and the
performance of each ``major'' CTA and ``major''

[[Page 38158]]
investee pool.\70\ Disclosure of ``adverse performance'' results would
have been required to be indicated (or in the alternative, capsule
performance could have been presented) for non-major CTAs allocated at
least ten percent of the pool's initial margins and commodity option
premiums and for investee pools allocated at least ten percent of the
pool's assets.\71\

\69\ Rule 4.25(c) employs certain key terms, ``trading
manager,'' ``major commodity trading advisor,'' ``major investee
pool,'' and ``trading principal,'' which are defined in Rules
4.10(h), 4.10(i), 4.10(d)(5) and 4.10(e)(2), respectively. These
definitions are discussions in detail in Section IV, supra.
\70\ If the pool or such persons did not have a prior trading
history, indication of the lack thereof would have been required,
using legends set forth in Rule 4.25(c).
\71\ Proposed Rule 4.25(c)(3)(iii) would also have required that
adverse performance be indicated for any account directed, or pool
operated, by the CPO, and any trading principal of the CPO or
trading manager (if any), unless such person's performance was
otherwise required to be disclosed.
---------------------------------------------------------------------------

Adverse performance was defined in proposed Rule 4.25(a)(8) as
``any annual return of one hundred basis points less than the ninety
day Treasury Bill rate on December 31 of the calendar year in which the
performance occurred or any termination of a pool pursuant to a loss
termination provision.''
The Commission received comments on various components of Rule
4.25(c). A number of commenters urged the Commission to eliminate the
proposed intermediate category for CTAs and investee pools \72\ for
whom adverse performance disclosure would have been required and to
adopt a two-tier system in which full performance disclosure would be
made for CTAs (and investee pools) above the threshold, and none for
CTAs (and investee pools) below the threshold. Several commenters
suggested that where a CPO makes (and is authorized to make) frequent
changes in the pool's CTAs and the size of the allocations to those
CTAs, required disclosures with respect to CTAs should be eliminated or
substantially reduced. The emphasis in such cases, according to these
commenters, should be on the CPO/trading manager's performance
operating multi-advisor pools. The Commission notes, however, that the
distinction between ``active allocation'' CPOs (or trading managers)
and other CPOs (or trading managers) does not appear to be susceptible
to a bright line test, as most if not all CPOs and trading managers
assume some responsibility for ongoing management and evaluation of
CTAs. Consequently, the relative significance of the CPO's or trading
manager's asset allocation expertise, as compared to the CTAs' trading
program and skills, varies significantly and may not provide an
objective basis for distinguishing among pools for past performance
disclosure purposes. Accordingly, given the lack of precise standards
on which to base a regulatory distinction between dynamically managed
multi-advisor pools and other types of pools, the Commission has
elected not to employ such a distinction in constructing the past
performance disclosure requirements.

\72\ The middle tier of the proposed three-tier disclosure
scheme consisted of CTAs allocated at least ten, but less than
twenty-five, percent of initial futures margin and option premiums,
and investee pools allocated at least ten, but less than twenty-
five, percent of pool assets.
As adopted, Rule 4.25(c) reflects several modifications from the
proposed rules, principally the elimination of the category of CTAs and
investee funds for which disclosure of adverse performance would have
been required. Upon consideration of the comments received, the
Commission has determined to simplify the disclosure requirements such
that all CTAs and investee funds will be either major and capsule
format presentations of their past performance required (Rule 4.25
(c)(3) and (c)(4)), or non-major and a narrative discussion of matters
relevant to their past performance required. (Rule 4.25(c)(5)). As
noted above, the definitions of ``major commodity trading advisor''
(Rule 4.10(i)) and ``major investee pool'' (Rule 4.10(d)(5)) have been
revised accordingly, such that a ten percent, rather than a twenty-five
percent allocation is the operative threshold.
With respect to pools that do not have the requisite three-year
operating history with at least seventy-five percent of the pool's
assets contributed by persons unaffiliated with the CPO, trading
manager, CTAs, or their respective principals, Rule 4.25(c) requires
presentation of the past performance records of the offered pool, each
other pool operated or account traded by the CPO (and trading manager,
if applicable), the CPO's (and trading manager's) trading principals if
the CPO (or trading manager) has less than a three-year history, and
the performance of each major CTA and major investee pool.\73\ If a CTA
or investee pool is not ``major,'' a summary description of the
performance history of such advisor or pool is required in lieu of
capsule performance data. To the extent that performance of principals
is required, the revised rules require disclosure of the past
performance of ``trading principals'' only.\74\

\73\ If the pool or such specified persons do not have a prior
trading history, the lack thereof must be indicated by legends set
forth in Rule 4.25(c), and discussed below in paragraph B.6. of this
Section V.
\74\ See Rule 4.25(c)(2), and Rule 4.10(e)(2) which defines the
term ``trading principal,'' discussed above in Section IV. Former
disclosure requirements mandated disclosures concerning all
principals.
---------------------------------------------------------------------------

(i) Performance of Major Commodity Trading Advisors: Rule 4.25(c)(3)
For pools that do not have the three-year operating history
specified in Rule 4.25(b), the revised rules require capsule format
disclosure of CTA past performance only for ``major'' CTAs.
As discussed above,\75\ the term ``major commodity trading
advisor'' is defined in Rule 4.10(i) as a CTA allocated or intended to
be allocated ten percent or more of the smaller of (i) the pool's
aggregate net assets, or (ii) the aggregate value of the assets
allocated to the pool's trading advisors, as determined based upon the
agreement between the CPO and the CTA.

\75\ See paragraph A. of Section IV.
---------------------------------------------------------------------------

(ii) Performance of Major Investee Pools: Rule 4.25(c)(4)
The revised rules also require disclosure of past performance of
investee pools constituting ``major investee pools,'' if the offered
pool does not meet the standard of Rule 4.25(b). As discussed
above,\76\ Rule 4.10(d)(5) defines ``major investee pool'' as an
investee pool allocated or intended to be allocated at least ten
percent of the net asset value of a pool.\77\ A commenter noted that
the term ``investee pool'' was not defined in the former rules or in
the proposed revisions. As noted above,\78\ the Commission has adopted
a definition of ``investee pool,'' set forth in Rule 4.10(d)(4), as
``any pool in which another pool or account participates or invests,
e.g., as a limited partner thereof.''

\76\ See paragraph B. of Section IV.
\77\ The term ``pool'' continues to be defined in Rule
4.10(d)(1) as ``any investment trust, syndicate or similar form of
enterprise operated for the purpose of trading commodity
interests.''
\78\ See paragraph B. of Section IV.
---------------------------------------------------------------------------

(iii) CTAs and Investee Pools That Are Not ``Major'': Proposed Rules
4.25(a)(8) and 4.25(c)(3)(iii)
The Commission had proposed in Rule 4.25(c)(3)(iii) to require that
the CPO of an offered pool that does not satisfy the criteria of Rule
4.25(b) indicate any ``adverse performance'' (or, alternatively,
provide a complete past performance capsule) with respect to those CTAs
and investee pools allocated at least ten but less than twenty-five
percent of the pool's assets (initial margins and premiums in the case
of CTAs). Under proposed Rule 4.25(a)(8), ``adverse performance'' would
have included: (i) Any annual rate of return that was at least one
hundred basis points less than the ninety-day Treasury Bill rate on
December 31 of the same

[[Page 38159]]
year; or (ii) the termination of a pool pursuant to a loss termination
provision. Adverse performance would have been indicated by giving the
year of occurrence, the rate of return, the identity of the CPO or CTA
responsible, and that person's relationship to the offered pool.\79\
The Commission sought comment with respect to the proposed definition
of adverse performance, and in particular, as to whether any additional
benchmarks would be appropriate for identifying what past performance
was sufficiently ``adverse'' to warrant disclosure.

\79\ Unless their past performance was otherwise disclosed, Rule
4.25(c)(3)(iii) would also have required an indication of adverse
performance with respect to accounts (including pools) traded by the
CPO, the trading principals of the CPO (or trading manager), trading
principals of major CTAs that had no prior trading history, and the
trading principals of major investee pools that had no prior trading
history.
---------------------------------------------------------------------------

Numerous commenters strongly criticized both the adverse
performance characterization and the concept of requiring specific
disclosure of performance below a selected risk-free rate. In
particular, several commenters objected to the adjective ``adverse'' as
unnecessarily pejorative. Several commenters criticized the Treasury
Bill benchmark as an inappropriate standard for a managed futures
investment, and some commenters proposed alternative triggering events,
such as a losing year, or a specified monthly or quarterly draw-down.
Commenters asserted that CPOs would generally opt for including the
full performance capsule rather than highlight negative results and,
thus, that performance presentations would not in fact be streamlined
by use of the adverse performance concept. Several commenters suggested
a simplified, two-tier allocation standard for CTA and investee pool
performance disclosure, with full disclosure for those above a
specified percentage (between ten and twenty-five percent) and no
performance disclosure for those with lesser allocations.
The Commission agrees with the proposition that material CTA or
investee pool performance should be fully disclosed, and it believes
that multiple standards can be confusing. Accordingly, the Commission
is adopting a two-tier disclosure standard for an offered pool's CTAs
and investee pools, rather than the three-level approach set forth in
the Proposing Release. Under the adopted standard, full performance
disclosure, i.e., capsule performance data, is required with respect to
CTAs and investee pools with allocations in excess of the designated
benchmark, i.e., ``major'' CTAs and investee pools. As adopted, the
revised rules omit the proposed requirement to indicate adverse
performance for CTAs and investee pools with allocations of at least
ten percent, but less than twenty five percent.\80\ Because this type
of individual performance disclosure is being eliminated for non-major
CTAs and investee pools, the Commission has determined to reduce the
percentage allocation standard for major CTAs and investee pools from
twenty-five to ten percent. As discussed more fully below, a narrative
summary description is required for CTAs and investee pools with lesser
allocations.

\80\ The requirement in proposed Rule 4.25(c)(3)(iii) to
indicate adverse performance on the part of accounts (including
pools) directed or operated by the offered pool's CPO, any trading
principal of the CPO or any trading principal of the trading manager
is also being eliminated.
---------------------------------------------------------------------------

(iv) Past Performance of CTAs and Investee Pools That Are Not Major:
Rule 4.25(c)(5)
As noted above, the Commission has adopted a simplified approach to
the disclosure of past performance under which capsule performance data
would be required for CTAs and investee pools with ten percent or
greater allocations and no intermediate category of CTAs and investee
funds would exist for which ``adverse performance'' would be
disclosable. The Commission recognizes, however, that any simple
quantitative standard such as the ten percent allocation standard can
provide only a convenient point of reference to assure a minimum level
of performance disclosure, but that pools may be structured, or their
assets traded in such a manner, that use of the ten percent allocation
standard will not be sufficient to identify all potentially relevant
past performance data. Consequently, to supplement the required
performance data for major CTAs and investee pools, the Commission is
requiring in Rule 4.25(c)(5) a summary description of the performance
history of non-major CTAs and investee pools, including monthly return
parameters, i.e., highest and lowest monthly rates of return,
historical volatility information, an explanation of the degree of
leverage used in the trading of such CTA or investee pool, and an
identification of any material differences between the performance of
such advisors and pools and that of the offered pool's major trading
advisors and investee pools.
This requirement for summary performance disclosure of non-major
CTAs and investee pools reflects the fact that the trading of pool
assets may be distributed among multiple CTAs and investee funds, such
that a substantial portion of the pool's assets, all of the pool's
assets, or even a multiple of the pool's assets, may effectively be
allocated to CTAs or investee pools which are not ``major'' and about
whom performance data and other information may not generally be
presented. Nonetheless, such advisors and investee pools collectively
may determine the success or failure of the pool. It also reflects the
fact that quantitative allocation figures alone may not be adequate to
identify the extent of a particular advisor's or investee pool's impact
upon the offered pool. For example, a CTA with a five percent
allocation may have such an aggressive trading strategy that the impact
of its trading results on the overall return of the pool may be greater
than the impact of a trading advisor with an equivalent or larger
allocation who follows a less aggressive trading strategy. Under Rule
4.25(c)(5), CPOs will be able to devise individualized approaches to
conveying the historical volatility and other pertinent characteristics
of the past performance of non-major CTAs and investee pools.
(v) Updating Past Performance Information for Certain Persons: Proposed
Rules 4.22(a)(4) and 4.26(c) for CPOs \81\

\81\ Because of the differences between CPOs and CTAs, CTAs have
no corresponding requirements.
---------------------------------------------------------------------------

The Commission proposed to add a new paragraph (a)(4) to Rule 4.22,
which would have required the periodic Account Statement that a CPO
must deliver to pool participants to include the names of all of the
pool's CTAs and investee funds (including investee pools), together
with the percentage of pool assets each is allocated, regardless of the
amount of pool assets so allocated.\82\ Rule 4.22(a)(4) would also have
required that the Account Statement include past performance disclosure
with respect to each new major CTA or major investee pool for whom past
performance data was not previously provided in the Disclosure
Document, i.e., CTAs and investee funds previously allocated less than
ten percent of the pool's futures margins or assets, respectively.

\82\ Rule 4.22(b) states that the Account Statement must be
distributed at least monthly in the case of pools with net assets of
more than $500,000 at the beginning of the pool's fiscal year, and
otherwise at least quarterly.
---------------------------------------------------------------------------

Commenters criticized the proposed inclusion of performance
information in Account Statements as unreasonably expensive and
burdensome. Some commenters contended that Account Statements are
essentially financial statements subject to audit and should

[[Page 38160]]
not include performance information. Still others argued that Account
Statements should not be used to update or amend Disclosure Documents.
Other commenters criticized the requirement to identify all CTAs and
investee pools, while under proposed Rules 4.24 (e)(3) and (e)(4) only
those allocated ten percent or more of pool assets would be required to
be identified in the Disclosure Document.
The Commission notes that the proposed expansion of the data to be
included in Account Statements was designed largely in response to
concerns expressed by CPOs as to how to efficiently update Disclosure
Documents to include new CTAs and in response to claims that disclosure
of the names of investee funds was less onerous and more appropriate in
communications with existing pool participants than in Disclosure
Documents. Further, such CTA and investee pool information would not be
required to be certified by the pool's accountants. Thus, as proposed,
the rule would have provided a convenient mechanism for providing a
complete, current picture of the pool's CTAs and investee pools.
Nonetheless, since the commenters appeared to find the proposed
modifications of Rule 4.22 burdensome rather than helpful, the
Commission has determined not to amend Rule 4.22. Instead, the existing
updating requirements for Disclosure Documents will continue to apply,
except as noted below with respect to the periodic update requirement.
When a pool acquires a new major CTA or major investee pool, if such
event is of material significance, the CPO will be required to notify
pool participants and to provide the relevant information including
performance records, as required by Rule 4.26(c),\83\ within twenty-one
calendar days after the CPO knows or should know of this occurrence. As
was the case under the former rules, correction of Disclosure Documents
may be accomplished by way of an amended Disclosure Document, Account
Statement, a sticker on the Disclosure Document, or other similar
means.

\83\ Rule 4.26(c), discussed below at paragraph B of Section
VII, sets forth the requirements for amending pool Disclosure
Documents to reflect a material change in the document. This
requirement previously was found in former Rule 4.21(b).
---------------------------------------------------------------------------

(vi) Trading Managers: Rule 4.25(c)(2)
The revised rules take into account arrangements in which a CPO
delegates authority to a trading manager to select CTAs or investee
pools to which the pool's assets will be allocated.\84\ The term
``trading manager'' is defined in new Rule 4.10(h) as any person, other
than the pool's CPO, with authority to allocate pool assets to CTAs or
investee pools.\85\ Rule 4.25(c)(2) requires trading manager
performance in addition to CPO performance if the pool has a trading
manager. In such cases, the trading manager is, in effect, a
supervisory CTA and the performance of such manager is clearly
material. As discussed supra, the requirement has been changed from an
alternate one, i.e., CPO or trading manager's performance, to include
performance of both on the basis that even where a trading manager has
been appointed, generally the CPO will continue to exercise ultimate
control over the pool's operations. However, in cases where the trading
manager has been given complete authority over the pool's trading and
the performance of the trading manager does not differ materially from
that of the pool operator, Rule 4.25(c)(2) provides that performance
data for the pool operator may be omitted.

\84\ See, e.g., Rule 4.25 (c)(2).
\85\ As the Commission noted in the Proposing Release, the
practice of retaining trading managers to select and monitor the
performance of CTAs and investee pools to which pool assets will be
committed has become commonplace. CPOs commonly seek to maximize
pool returns by allocating pool assets based on analysis of the
returns achieved by CTAs retained for the pool and investee pools in
which the pool has invested in light of their aggregate results,
market conditions, and the performance of other CTAs and investee
pools. CPOs frequently rely on trading managers to continously
review the performance of CTAs and investee pools and allocate and
reallocate pool funds. Because of the importance of the trading
manager and the fact that the trading manager is a CTA for the pool,
when a pool has a trading manager, the trading manger's performance
is generally required in addition to that of the CPO. 59 FR 25351,
25357.
---------------------------------------------------------------------------

2. Required Past Performance Disclosure in CTA Disclosure Documents:
Rule 4.35
Proposed Rule 4.34(a)(1) would have required CTAs to continue to
present past performance of the offered trading program in the full
multi-columnar format required by former Rule 4.31(a)(3). Most
commenters strongly urged that CTAs be permitted to use the new capsule
format. Some argued that if the offered trading program's performance
must be presented in the multi-column format, the CTA will be forced to
produce a separate Disclosure Document for each program he offers or to
include all past performance in the multi-columnar format. One
commenter suggested permitting use of the capsule format for the CTA's
offered trading program but requiring monthly rates of return.
The Commission has determined to modify proposed Rule 4.34(a) to
provide that the past performance of the CTA's offered trading program
be presented in capsule format.\86\ The capsule will include the names
of the CTA and the trading program, the dates on which the CTA began
trading client accounts and on which accounts were first traded
pursuant to the trading program, the number of accounts traded pursuant
to the trading program, and the total assets under management by the
CTA and total assets traded pursuant to the trading program. The worst
monthly and peak-to valley draw-downs experienced by the trading
program are also required. Like the offered pool's performance in a CPO
Disclosure Document, the capsule for a CTA's offered program is
required to include monthly rates of return. The offered trading
program's monthly rates of return may be presented either in a table or
in a bar graph or chart. (Rule 4.35(a)(2) (ii) and (iii)). The offered
program's capsule must also include the number of accounts closed with
positive net performance during the most recent five calendar years and
year-to-date, as well as the number of accounts closed with negative
net performance during the same period. (Rule 4.35(a)(1)(viii)). CTAs
will be required to provide prospective and existing clients, upon
request, with the offered trading program's performance in the multi-
column format previously required. (Rule 4.35(a)(2)(iv)).

\86\ With respect to CTAs calculating rates of return on the
basis permitted by Advisory 93-13, as discussed supra, the capsule
must include rates of return for the fully-funded subset and
Commission staff will provide guidance concerning supplemental data
to accompany the capsule disclosure to reflect the range of levels
of partial funding and the generic disclosures discussed in Advisory
93-13.
---------------------------------------------------------------------------

The Commission believes that with the specified additional
requirements for the offered trading program, this modification of the
proposal will result in simplified CTA Disclosure Documents, while
providing prospective clients with material information regarding
trading program volatility.
3. Time Period for Which Required Past Performance Disclosures Must Be
Made: Rules 4.25(a)(5) for CPOs and 4.35(a)(5) for CTAs \87\

\87\ Former Rules 4.21 (a)(4) and (a)(5) for CPOs and 4.31(a)(3)
for CTAs generally required past performance to be presented for a
three-year period.
---------------------------------------------------------------------------

Proposed Rules 4.25(a)(7) and 4.34(a)(4) would have extended the
time period for which performance must be disclosed from three years to
five years (or the life of the pool or account, if less than five
years). As stated in the Proposing Release, the Commission believes
that requiring performance to

[[Page 38161]]
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 in returns.\88\ Two commenters
supported the proposed five-year timeframe, noting that if all
registrants may use the capsule format, investors will be provided with
material information without increasing the volume of performance
disclosure. One commenter, however, claimed that extending performance
from three to five years would work against streamlining and reducing
the volume of disclosure and would not enhance investor understanding.

\88\ 59 FR 25351, 25358.
---------------------------------------------------------------------------

The Commission is adopting Rules 4.25(a)(7) and 4.34(a)(4) as
proposed (proposed Rule 4.34(a)(4) has been re-numbered Rule
4.35(a)(5), however). As noted in the Proposing Release, under the new
summary format for performance disclosure, performance presentations
are substantially condensed and multiple tables in the new summary
format can be included on a single page. Consequently, adoption of a
five-year disclosure period should not entail any significant increase
in the volume of performance disclosures. The Commission believes that
the benefits of this additional disclosure outweigh any minor resulting
increase in the quantity of data disclosed.\89\

\89\ As noted above, the NFA Special Committee for the Review of
CPO/CTA Disclosure Issues suggested that the capsule include at
least five years of performance history.
---------------------------------------------------------------------------

4. Composite Performance Presentations: Rules 4.25(a)(3) and (a)(4) for
CPOs and Rule 4.35(a)(3) for CTAs \90\

\90\ Former Rule 4.21(a)(4)(iv) permitted the performance of
pools operated by each person for whom performance was required to
be disclosed to be presented on a composite basis, provided that the
performance of the offered pool was separately disclosed, the CPO
described how each composite was developed, and the composite was
not misleading. Former Rule 4.31(a)(3)(iii) also permitted composite
presentation of the performance of accounts directed by the CTA and
each of its principals, provided that material differences among the
accounts and the manner in which the composite was developed were
described.
---------------------------------------------------------------------------

As noted in the Proposing Release, the Commission has carefully
considered the benefits and disadvantages that may accrue from the use
of composites.\91\ Thus, as proposed and as adopted, the new rules
employ an approach designed to realize the benefits of reducing the
volume of performance data created by the use of composites while
minimizing the potential for misleading past performance presentations.

\91\ 59 FR 25351, 25359. Specifically, the Commission noted
that:
Composite presentations have the obvious advantage of reducing
the volume of past performance data presented. However, composite
presentations raise a number of regulatory concerns precisely
because they supplant individualized presentations of potentially
quite different types of pools and trading programs and may smooth
or camouflage actual rates of return. Composite results not only
fail to reflect differences among the pools and accounts whose
results are presented but also merge potentially disparate trading
results into average trading results and thus fail to reflect the
actual dispersion of returns as well as the volatility of individual
pools and accounts. Id.
---------------------------------------------------------------------------

a. CPO Disclosure Documents

Proposed Rule 4.25(a)(3) would have required that past performance
data for the offered pool and for pools similar to the offered pool be
separately disclosed, on a pool-by-pool basis. (Rule 4.25(a)(3)(i)).
Pools of a different type from the offered pool could be presented in
composites with other pools of the same class, provided that such
presentations were not misleading, that the manner in which the
composite was developed was disclosed, and that the CPO was able to
justify the inclusion of pools in a composite. (Rule 4.25(a)(3)(ii)).
As proposed, Rule 4.25(a)(3)(iii) listed a non-exclusive set of five
specific class distinctions requiring separate rather than composite
presentation but recognized that additional factors might warrant
creation of additional composite categories.\92\ In addition, Rule
4.25(a)(3)(iv) would have required that material differences among the
pools for which past performance is presented must be disclosed.

\92\ The distinctions set forth in proposed Rule 4.25(a)(3)(iii)
are: Pools privately offered pursuant to Regulation D under the
Securities Act of 1933 and publicly offered pools; pools using
materially different leverages; pools using different trading
programs; pools with a guarantee feature and pools without such a
feature; and multi-advisor pools and non-multi-advisor pools. The
CPO would have discretion to use additional criteria and would be
required to do so where use of a composite would be misleading. See
Rule 4.24(w), which requires disclosure of all material information.
Numerous comments were received on proposed Rule 4.25(a)(3),
several of which urged the adoption of three categories for composite
performance presentation: guaranteed pools, non- guaranteed multi-
advisor pools and non-guaranteed single-advisor pools.\93\ Several
commenters asserted that the distinction between public and privately
offered pools can be eliminated by pro forma adjustments for cost
differences. One commenter remarked that since virtually all pools use
different trading programs, composite presentations might be precluded
altogether under the proposed rule. Other commenters contended that
some of the listed pool categories were too broadly worded. Still other
commenters criticized use of the concept of specified pool classes for
purposes of determining what pools may be combined in a single
composite or the particular categories proposed by the Commission,
suggesting either a general materiality standard for determining
whether differences among pools require separate composites or
inclusion in a single composite of all pools operated by the CPO and
structured similarly to the offered pool. Some commenters contended
that even pools similar to the offered pool should be included in one
composite, instead of separately presented.\94\ One commenter urged
that CPOs not be under an obligation to be prepared to justify the
inclusion of pools in a composite but, rather, that the CPO be
permitted to exercise reasonable discretion in this matter.

\93\ NFA's Submission had proposed the same three categories.
\94\ One commenter suggested that performance of all pools other
than the pool being offered should be presented in the second part
of a two-part Disclosure Document. The Commission will take this
comment into consideration in the course of its review of other
issues raised by the bifrucated disclosure format.
---------------------------------------------------------------------------

The Commission specifically requested comment as to the costs and
benefits of a general requirement of separate rather than composite
presentations of pool performance in lieu of a qualified approach of
the nature proposed. Commenters stated that greater use of composite
presentations should be permitted, e.g., composite presentation of
performance for pools of the same class as the offered pool or
inclusion of all of a CPO's prior pools in one composite.
Rule 4.25(a)(3) has been adopted as proposed with certain
modifications. Pools with materially different rates of return may not
be included in the same composite, regardless of class. (Rule
4.25(a)(3)(ii)(B)). The Commission believes that separate presentation
of the performance of other pools of the same class as the offered pool
provides useful information to the reader since such pools should
provide the most comparable performance content and has thus retained
this requirement. However, the Commission has simplified the criteria
for determining what types of pools may be included in a composite
capsule. The Commission has determined to delete two of the
distinctions specified in proposed Rule 4.25(a)(3)(iii) (``pools using
different leverages'' and ``pools using different trading programs''),
on the ground that

[[Page 38162]]
they may be difficult to apply and thus may preclude the use of
composites in most or all cases, and otherwise to adopt Rule 4.25(a)(3)
essentially as proposed.\95\ Two pools that use different trading
programs or different degrees of leverage could therefore be included
in the same composite, provided that material differences among the
pools are disclosed and provided that such pools' rates of return are
not materially different.

\95\ The text of Rule 4.25(a)(3)(iii) is affected by the change
of the term ``limited risk pool'' to ``principal protected pool'' in
Rule 4.10(d)93) and the changed definition of ``multi-advisor pool''
in Rule 4.10(d)(2).
---------------------------------------------------------------------------

The Commission is retaining two of the remaining pool categories
specified in proposed Rule 4.25(a)(3), i.e., pools privately offered
pursuant to the Securities Act \96\ and public offerings; and
principal-protected and non-principal-protected pools. With respect to
the proposed differentiation between multi-advisor pools as defined in
Rule 4.10(d)(2) and non-multi-advisor pools, the Commission is adopting
a more flexible approach pursuant to which multi-advisor pools will be
presumed to have rates of return that are materially different from
those of non-multi-advisor pools and thus may not be included in the
same composite, absent clear evidence to the contrary. The Commission
believes that this qualified approach is warranted because multi-
advisor pools will tend to have different fee structures and risk/
reward profiles than non-multi-advisor pools, yet, in part due to the
definitional complexity of the multi-advisor pool concept, this may not
be true in all cases.

\96\ See Section 4(2) of the Securities Act and Regulation D
thereunder, 17 CFR 230.501-230.508 (1994).
As adopted, Rule 4.25(a)(3) retains the proposed requirements
regarding separate and composite performance presentations for the
CPO's other pools. First, pools of the same class as the offered pool
must be presented separately, following the offered pool's performance.
Second, performance of any remaining pools must be presented less
prominently, and may be presented in composites. Third, only pools
belonging to the same class, and that do not differ materially from
each other in their rates of return, may be included in the same
composite. Finally, material differences among pools for which
performance is presented must be disclosed. The Commission reiterates
that the categories specified in Rule 4.25(a)(3)(iii) are illustrative
and not exclusive.
In deciding not to permit general compositizing of the CPO's other
pools that differ from the offered pool, the Commission notes that
while composites condense voluminous material into digestible units,
overly inclusive composites tend to flatten performance fluctuations
and thus may obscure variations in rates of return and volatility among
pools. Registrants therefore must use care in constructing composites,
and material differences between and among pools (including the
distinctions set forth in Rule 4.25(a)(3)(iii)) are ordinarily
indications against composite presentation.\97\

\97\ Material differences among the pools for which past
performance is disclosed must be described. (Rule 4.25(a)(3)(iv)).
---------------------------------------------------------------------------

As the Commission noted in the Proposing Release, there may be
instances in which even composites of pools of the same class may be
misleading, such as where differences between or among the trading
results of the pools are so great that a composite would materially
distort their results.\98\ The express restriction against inclusion
of pools with materially different rates of return in the same
composite addresses this concern to some extent, but other types of
differences, e.g., different volatility levels, could be material. The
proviso in Rule 4.25(a)(3)(ii) that results may be presented in
composite form ``unless such presentation would be misleading'' is
intended to ensure that composites are carefully reviewed to protect
against any material distortion that may result from use of this
format.

\98\ 59 FR 25351, 25359. For example, two multi-advisor pools
with no guarantee feature using the same CTAs could show widely
disparate results unless each CTA were allocated substantially the
same portion of each pool's assets. Also, two single-advisor pools
with different CTAs may achieve very different results.
---------------------------------------------------------------------------

To present capsule performance of pools in a composite, the CPO
must name all pools included in the composite, set forth the classes of
these pools (which, as discussed above, would be the same for each pool
in the composite), including at a minimum and, as applicable, the
classes specified in Rule 4.25(a)(3)(iii) and specify the date on which
each pool commenced trading. For composite capsule performance
purposes, the aggregate gross capital subscriptions are the total
subscriptions for all pools in the composite, the draw-down figures are
the worst experienced by any one of the pools included in the composite
and the rate of return is the weighted average rate of return for all
pools included.
Proposed Rule 4.25(a)(4) would have required that the past
performance of accounts be presented in capsule format on a program-by-
program basis. As adopted, Rule 4.25(a)(4) permits program-by-program
presentation unless such a presentation would be misleading. In
addition, accounts with materially different rates of return may not be
included in the same composite, and the CPO must discuss all material
differences among accounts included in a composite.

b. CTA Disclosure Documents

Proposed Rule 4.34(a)(5) would have provided that the performance
of accounts traded pursuant to the same trading program could be
presented in the same composite, unless to do so would be misleading,
provided that the CTA describes how the composite performance
information was calculated. Under proposed Rule 4.34(a)(5), ``trading
program'' would have been defined as a trading strategy differentiated
from other trading strategies by commodity trading methodology, degree
of risk or degree of leverage. Commenters stated that ``trading
program'' was already defined in existing Rule 4.10(g) \99\ and argued
that the Commission's proposal would have conflicted with the existing
rule.

\99\ The term ``trading program'' continues to be defined in
existing Rule 4.10(g) as ``the program pursuant to which a (CTA) (1)
directs a client's commodity interest account, or (2) guides the
client's commodity interest trading by means of a sytematic program
that recommends specific transactions.''
---------------------------------------------------------------------------

In adopting Rule 4.34(a)(5), renumbered as Rule 4.35(a)(3), the
Commission has revised the text to eliminate the proposed definition of
trading program as a trading strategy differentiated from other such
strategies by trading methodology, degree of risk or degree of
leverage. Instead, Rule 4.35(a)(3), like the parallel provision for CPO
Disclosure Documents, provides that unless such a presentation would be
misleading, past performance of accounts may be presented in a
composite form on a program-by-program basis and that accounts that
differ materially with respect to rates of return may not be presented
in the same composite. In determining which accounts may be included in
a single composite, the factors set forth in the proposed rule, trading
methodology, degree of risk and degree of leverage, are ones that
should be taken into consideration. Like Rule 4.25(a)(4) for CPOs, Rule
4.35(a)(3) for CTAs contains a proviso that results may be presented in
composite form ``unless such presentation would be misleading.''
Further, CTAs are cautioned that other material differences among
accounts may make presentation in the same composite misleading. As
with

[[Page 38163]]
composite presentations of pool performance, the draw-down figures in a
composite in a CTA Disclosure Documents are the worst experienced by
any one of the accounts included in the composite.

c. Substantiating Composite Presentations

Rules 4.25(a)(7) and 4.35(a)(6) require that records be maintained
substantiating the performance data set forth in CPO and CTA Disclosure
Documents, respectively, and documenting the underlying calculations,
in accordance with Rule 1.31. Naturally, this requirement also applies
with respect to composite presentations. Although not specified in Rule
4.25(a)(3)(ii), as adopted, a CPO must be prepared to justify the
inclusion of a given pool's past performance results in a composite.
5. Order of Required Performance Disclosures: Rules 4.25(a)(2),
(a)(3)(i) and (a)(3)(ii) for CPOs and 4.35(a)(1) and (a)(2) for CTAs
\100\

\100\ The Commission's disclosure rules previously did not
specifically address the order of required performance disclosures.
---------------------------------------------------------------------------

Proposed Rule 4.25(a)(2) for CPO Disclosure Documents would have
required that the performance of the offered pool be identified as
such, presented separately, and included before any other performance
information.\101\ Thus, if presentation of past performance in addition
to that of the offered pool was required because the offered pool did
not have the requisite three-year operating history under Rule 4.25(b),
the offered pool's performance must be presented separately from, and
prior to, any such other required performance data.\102\ Under proposed
Rule 4.25(a)(3), performance data for pools of the same class as the
offered pool would be presented on a pool-by-pool, non-composite basis,
after the performance history of the offered pool. The performance
histories of pools of a different class from the offered pool would be
presented after, and less prominently than, the performance records of
pools of the same class as the offered pool. Proposed Rule
4.25(a)(1)(i)(H) specified that required performance disclosure for
pools other than the offered pool must provide annual and year-to-date
rates of return.\103\ Similarly, for CTAs, proposed Rules 4.34(a)(1)
and (a)(2) would have required that the performance of the offered
trading program be displayed first and the performance of all other
programs after that presentation.

\101\ Proposed Rule 4.25(a)(2) also required that the offered
pool's rate of return be stated in monthly increments.
\102\ As discussed above, Rule 4.25(b) provides that if the
offered pool has traded commodity interests for at least three
years, during which time at least 75% of its assets were contributed
by persons unaffiliated with its CPO, trading manager, CTAs or any
of their principals, only the offered pool's past performance must
be disclosed.
\103\ As discussed above, Rules 4.25(a)(3) and (a)(4) provide
guidance for determining whether pools or accounts may be included
in the same composite.
---------------------------------------------------------------------------

The Commission is adopting the required order of performance
presentation specified in proposed Rules 4.25(a)(2), (a)(3)(i) and
(a)(3)(ii) for CPOs and in proposed Rules 4.34(a)(1) and (a)(2) for
CTAs. Registrants are reminded that disclosure of performance
information not required by Commission rules, federal or state laws or
regulations, self-regulatory agency rules or laws of non-United States
jurisdictions is subject to the rules on supplemental information,
i.e., it may not be misleading and it must follow the entire
presentation of required performance information (except that
proprietary, hypothetical, extracted, pro forma \104\ or simulated
trading results must be placed at the end of the Disclosure
Document).\105\

\104\ As discussed in Section V.C.3. infra, pro forma
adjustments to performance data are required for certain purposes
and such adjustments are not affected by the restrictions upon
placement of supplemental information.
\105\ Rules 4.24(v) for CPOs and 4.34(n) for CTAs (both
captioned ``Supplemental information''), are discussed more fully
below in Section VI.
---------------------------------------------------------------------------

6. Required Performance Legends

a. Legends Relating to Lack of Trading Experience: Rules 4.25(c) for
CPOs and 4.35(b) for CTAs \106\

The proposed rules would have continued to require the inclusion
of prescribed legends in specific circumstances, alerting prospective
pool participants and discretionary account clients to the lack of
performance history on the part of specified persons. In the case of
pool Disclosure Documents, the proposed rules would have required
legends with respect to the absence of performance history, where
applicable, on the part of the pool, the CPO (or trading manager) and
its trading principals, major CTAs and major investee pools. In CTA
Documents, such legends would be required, if applicable, on the part
of the CTA and its trading principals. In the interest of
simplification and readability, the Commission proposed substantial
revisions of the legends required by the former rules, generally to
shorten them and to sharpen their focus upon the matters most pertinent
to investors.\107\

\106\ Former Rules 4.21(a)(4) and (a)(5) for CPOs and 4.31(a)(3)
for CTAs required lengthier legends. For example, former Rule
4.21(4)(i)(B) specified a statement that the Commission requires
disclosure of the performance of the offered pool and of other pools
operated by the CPO and its principals and that neither the CPO nor
its principals have any prior performance history. See 59 FR 25351,
25361 for a more complete discussion of the former requirements.
\107\ 59 FR 25351, 25361.
---------------------------------------------------------------------------

The Commission received several comments favoring the proposed
shortening of the required legends. The revised legends in proposed
Rules 4.25(c) and 4.34(b) are being adopted as proposed (with Rule
4.34(b) being renumbered as Rule 4.35(b)) to provide and highlight
important information in a more concise and comprehensible manner.\108\
Prescribed legends in pool Disclosure Documents apply only where the
offered pool does not meet the trading history criteria of Rule
4.25(b).\109\ The prescribed legends have been shortened by eliminating
introductory language stating that disclosure of the referenced
information is required by the Commission. This focuses attention upon
the primary point to be conveyed, e.g., the fact that the CPO and its
principals have not previously operated any commodity pools. Thus, the
legend relating to the lack of trading history of a pool now reads:
``THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.'' (Rule 4.25(c)(1)(ii)).\110\ Similarly, the legend relating
to the lack of experience of the CPO or trading manager and its trading
principals now reads: ``NEITHER THIS POOL OPERATOR (TRADING MANAGER, if
applicable) NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY OPERATED
ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS.'' (Rule 4.25(c)(2)(ii)).
Similar legends are required, where applicable, with respect to major
CTAs and investee pools.

[[Page 38164]]
(Rules 4.25(c)(3)(ii) and (c)(4)(ii), respectively). The revised rules
similarly require a CTA Disclosure Document to disclose, if applicable,
the lack of experience of the CTA and its principals. If the CTA has no
prior experience, the following legend is to be included: ``THIS
TRADING ADVISOR PREVIOUSLY HAS NOT DIRECTED ANY ACCOUNTS.'' (Rule
4.35(b)(1)). The following legend is to be used for trading principals:
``NONE OF THE TRADING PRINCIPALS OF THIS TRADING ADVISOR HAS PREVIOUSLY
DIRECTED ANY ACCOUNTS.'' (Rule 4.35(b)(2)). If neither the CTA nor any
of its principals has prior trading experience, rather than displaying
two separate cautionary legends concerning the CTA and the CTA's
principals, the following single sentence is to be included: ``NEITHER
THIS TRADING ADVISOR NOR ITS TRADING PRINCIPALS HAVE PREVIOUSLY
DIRECTED ANY ACCOUNTS.'' (Rule 4.35(b)(3)).

\108\ The Commission is retaining in Rules 4.25(c) and 4.35(b)
the explanation that if any of the persons for whom a prescribed
legend must be displayed is a sole proprietorship, reference to its
trading principals need not be included.
\109\ Those criteria, as adopted, are: (1) The pool has traded
commodity interests for at least three years; and (2) during the
three-year (or greater) period, at least seventy-five percent of the
pool's assets were contributed by persons unaffiliated with the CPO,
the trading manager (if applicable), the CTA or any of their
principals.
\110\ The legend required by former Rule 4.21(a)(4)(c) read as
follows:
THE COMMODITY FUTURES TRADING COMMISSION REQUIRES A COMMODITY
POOL OPERATOR TO DISCLOSE TO PROSPECTIVE POOL PARTICIPANTS THE
ACTUAL PERFORMANCE RECORD OF THE POOL FOR WHICH THE OPERATOR IS
SOLICITING PARTICIPANTS. YOU SHOULD NOTE THAT THIS POOL HAS NOT
BEGUN TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.
b. Legends Relating to Predictive Value of Past Performance: Rules
4.25(a)(9) for CPOs and 4.35(a)(8) for CTAs \111\

To indicate the general lack of predictive value of past
performance information, proposed Rules 4.25(a)(10) for CPOs and
4.34(a)(7) for CTAs would have required that any past performance
information, whether required or voluntarily provided, be preceded by
the statement that ``PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE
PERFORMANCE,'' prominently displayed.\112\ Thus, if a registrant
presents both required and voluntarily provided performance information
in its Disclosure Document, the specified disclaimer must precede each
such performance presentation.

\111\ The Commission's former disclosure rules did not contain
any such legends with respect to past performance generally. Rule
4.41(b) specifies a disclaimer required to precede the presentation
of simulated or hypothetical performance results, and NFA Compliance
Rule 2-29(b)(5) requires language similar to that in proposed Rules
4.25(a)(10) and 4.34(a)(7).
\112\ As the Commission noted in its proposal, numerous studies
have shown the general lack of predictive value of past performance.
59 FR 25351, 25361 at n.42.
---------------------------------------------------------------------------

One commenter strongly opposed the proposal as a ``potentially
misleading'' departure from the language of NFA Compliance Rule 2-29,
which prohibits reference to past trading profits without mentioning
that past results ``are not necessarily indicative of future results.''
\113\ Other commenters stated, similarly, that ``not necessarily
indicative'' is more accurate and balanced than ``not predictive.''

\113\ NFA Compliance Rule 2-29, which concerns communications
with the public and use of promotional materials by NFA members,
prohibits a member or associate from using promotional material
which ``includes any reference to actual past trading profits
without mentioning that past results are not necessarily indicative
of future results.'' (NFA Compliance Rule 2-29(b)(5)).
---------------------------------------------------------------------------

Although the Commission does not agree that the proposed legend was
either potentially misleading or less accurate than NFA's existing
performance disclaimer, it has determined to revise the proposed text
of this legend in the interest of establishing a single, uniform
standard. Consequently, the Commission has revised the text of the
proposed legend to conform it to the language of NFA Compliance Rule 2-
29, that is, ``Past performance is not necessarily indicative of future
results.'' \114\ However, the Commission may revisit this issue in the
context of its further consideration of past performance and risk
disclosure issues. The Commission believes that pools are likely to be
sold based on past performance claims and therefore, a formatted
disclosure requirement assures consistency and auditability. The
Commission remains convinced that past performance is not generally
predictive of future rates of return.

\114\ The Commission is adopting proposed Rules 4.25(a)(10) and
4.34(a)(7) as Rules 4.25(a)(9) and 4.35(a)(8), respectively.
---------------------------------------------------------------------------

7. Summary Tables

a. Performance Disclosure Requirements

The following table summarizes the past performance requirements
set forth in Rules 4.25 and 4.35.

Summary of Required Performance Disclosures--CPO Disclosure Documents
------------------------------------------------------------------------
Category Requirement
------------------------------------------------------------------------
Offered pools with 3 years --Performance of offered pool for
history & 75% or more of assets five most recent calendar years and
from non-affiliates of CPO, year-to-date (``YTD'') (or if
trading mgr., CTAs or principals. shorter, for life of pool), with
monthly rates of return (``RORs'')
presented in bar graph or table.
Rules 4.25(b); 4.25(a)(5);
4.25(a)(2).
Offered pools that do not meet --Performance of offered pool for
three-year history and asset life of pool first, with monthly
contribution standards. RORs in table or bar chart.
Prescribed statement if pool has no
operating history. Rules 4.25(c)(1);
4.25(a)(2).
--Performance of CPO's and trading
manager's other pools and accounts
for five most recent calendar years
and YTD, with annual RORs.
Performance for pools of the same
class as the offered pool must be
presented more prominently than that
of other pools. Rule 4.25(c)(2)(i).
--If CPO or trading manager has less
than three-year history in trading
pools with 75% outside
contributions, performance of CPO's
trading principals, with annual
RORs. Prescribed statement if no
prior trading history of CPO/trading
manager or trading principals. Rules
4.25(c)(2)(i); 4.25(c)(2)(ii).
--Performance of major CTAs and
investee pools. Prescribed statement
if no prior history. Rules
4.25(c)(3), 4.25(c)(4).
--Narrative description of non-major
CTAs' and/or investee pools' past
performance, trading, investment
activities, strategies, and
experience. Rule 4.25(c)(5).
All.............................. --Required performance is to be given
for most recent five calendar years
and YTD (or, if shorter, for life of
account). Rule 4.35(a)(5).
--Performance of offered trading
program presented first, with
monthly rates of return presented in
bar graph or table. CTA must make
performance available in multi-
column format of former Rule
4.21(a)(5) upon request. Rule
4.35(a)(2).
--Performance of each other account
directed by CTA and by each of CTA's
trading principals, with annual
RORs. Rule 4.35(b).
--Performance of accounts traded
pursuant to same trading program may
be presented in composite unless
misleading. Rule 4.35(a)(3).
--Prescribed statement if no prior
trading history of CTA or trading
principals. Rule 4.35(b).
------------------------------------------------------------------------

[[Page 38165]]

b. Sample Capsule Performance Presentations

The following are examples of ``capsule'' performance presentation
under Rules 4.25 and 4.35.

Capsule Performance Examples Under Rule 4.25 Capsule Performance of the
Offered Pool
[XYZ Partners, L.P. is a privately offered, single-advisor pool that
does not have a guarantee feature. Past performance is shown for the
most recent five calendar years and year-to-date (monthly rates of
return for the most recent calendar year and year-to-date). For purposes
of this example, it is assumed that thirty percent of the assets were
provided by X, the CPO, and that the performance of other pools operated
by X is therefore required to be presented. Of the other pools operated
by X, Pool A, which is of the same class as the offered pool is
presented first (and separately). Pools B, C and D are of different
classes than that of the offered pool, and since Pools B and C belong to
the same class, the performance of B and C is presented in a composite.]
------------------------------------------------------------------------
Month
Percentage rate of -----------------------------------------------
return (computed on a Year-
compounded monthly to- 1994 1993 1992 1991 1990
basis) date
------------------------------------------------------------------------
January................. 1.12 2.43 3.50 2.56 1.54 0.69
February................ 1.34 3.11 (2.30) 1.96 (0.89) (0.82)
March................... 0.96 (0.23) 1.60 3.72 1.15 0.55
April................... 1.45 1.16 1.22 4.66 0.97 1.06
May..................... ...... 1.54 (3.62) 2.75 1.21 0.90
June.................... ...... 0.32 1.32 (16.87
) 0.51 1.12
July.................... ...... 1.28 1.15 (9.87) 0.11 1.01
August.................. ...... 1.12 1.85 (7.03) (0.14) 0.93
September............... ...... 2.09 0.87 5.61 0.56 0.99
October................. ...... 1.34 2.10 4.23 0.23 1.01
November................ ...... 1.57 0.90 3.97 1.11 1.19
December................ ...... 1.04 0.825 3.81 0.32 1.14
Year.................... 6.32 18.66 8.48 (3.60) 7.80 12.11
------------------------------------------------------------------------
Offered pool
Name of Pool: XYZ Partners, L.P.
Type of Pool: Privately offered
Inception of Trading: January 1, 1989
Aggregate Subscriptions: $1,673,000
Current Net Asset Value: $1,925,000
Worst Monthly Percentage Draw-down:* 7-92/16.54%
Worst Peak-to-Valley Draw-down: 6 to 9-92/30.52%
*``Draw-down'' means losses experienced by the pool over a specified
period.

Capsule Performance of Other Pools Operated by the Offered Pool'S CPO
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Percentage rate of return (computed on a compounded monthly
Inception Aggregate total Worst Worst peak- basis)
Name of pool Type of of subscription NAV ($ monthly to valley ------------------------------------------------------------
pool trading ($ x x percent draw-down Year-to-
1,000) 1,000) draw-down 1990 1991 1992 1993 1994 date
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other pools operated by
X, different class from
offered pool:
A................... 2 8/86 617 730 (11.73)
7/93 (19.61%)
4-8/91 11.17 6.2 3.4 10.6 6.8 6.82
Other pools operated by
X, same class as
offered pool:
B; C................ 2, 3 8/93; 10/
89 9,101 20,701 (1.09)
12/93* (1.09%)
10-12/93* 6.8 8.9 9.6 11.2 12.6 0.51
D................... 1, 2 1/90 931 379 (16.01)
6/92 (40.81%)
5-8/92 (2.3) 4.3 6.2 (8.2) 13.9 (17.26%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Key to type of pool
1--Principal-protected pool
1--Privately offered pool
3--Multi-advisor pool
*Worst draw-down for any of the pools included in the composite.
**In the case of composite presentation, combined rate of return figures are weighted on the basis of the net asset values of the pools included in the
composite.

c. Sample Bar Chart/Graph of Monthly Rates of Return

The following is an example of monthly rates of return for a five-
year period presented in the form of a bar chart.

BILLING CODE 6351-01-P

[[Page 38166]]
[GRAPHIC][TIFF OMITTED]TR25JY95.000

BILLING CODE 6351-01-C
C. Non-Required Performance Disclosures

1. Voluntary and Supplemental Performance Disclosures: Rules 4.24(v)
for CPOs and 4.34(n) for CTAs \115\
Proposed Rules 4.24(v) and 4.33(n) would have required that
information (including performance information) other than that
required by Commission rules, the antifraud provisions of the Act,\116\
or federal or state securities laws and regulations ``appear following
the related required disclosures.'' In addition, the proposed rules
provided that such information could not be misleading in content or
presentation nor inconsistent with required disclosures. The purpose of
these rules was to ensure that the principal focus of the Disclosure
Document would remain upon the required information because of its
generally high degree of materiality.

\115\ Rules 4.24(v) and 4.34(n) regulate placement of all
supplementally supplied information. Application of these rules to
non-performance disclosures is discussed below at paragraph C of
Section VI. The Commission's former disclosure rules did not
specifically address the placement of voluntary performance
disclosures.
\116\ See Sections 4b and 4o of the Act, 7 U.S.C. 6b and 6o
(1994). Section 4b of the Act prohibits fraud in connection with the
making of any contract of sale of any commodity for future delivery.
Section 4o of the Act prohibits CPOs, CTAs and their associated
persons from employing any device, scheme, or artifice to defraud a
pool participant, prospective pool participant or client and from
engaging in any transaction, practice or course of business which
operates as a fraud or deceit upon such participant or client. In
addition, under section 4o(2) of the Act CPOs, CTAs and their
associated persons are precluded from representing or implying that
they have been sponsored, recommended or approved by the United
States or by any agency or officer thereof.
---------------------------------------------------------------------------

As emphasized in the Proposing Release, voluntary performance
disclosures can readily be constructed to create misleading effects by,
for example, focusing attention upon positive performance while
omitting negative results. If the performance of two pools (other than
the offered pool) operated by a CPO were voluntarily provided, it could
be misleading to show the favorable performance of Pool 1 but not the
negative performance of Pool 2 or to show the performance of Pool 1 in
capsule format and that of Pool 2 in full format. It could also be
misleading to show the performance of a pool in capsule format for year
one and in full format for year two or to show the pool's performance
for 1991 and not 1992. Clearly, care must be taken to assure that
supplementally provided performance disclosures are not presented in a
manner that creates the potential to mislead.\117\

\117\ 59 FR 25351, 25361.
---------------------------------------------------------------------------

Commenters claimed that in view of the requirement to disclose all
material information,\118\ the determination that information is not
required by Commission rules, the Act or other laws necessarily
involves a determination that the information is not material and that
designating it as ``voluntary'' reinforces that determination. A number
of commenters stressed the difficulty of determining in many cases what
information is required to be disclosed and what is merely advisable,
and believed that, in consequence, mandating that non-required
information follow required disclosures could create confusion.
Further, some commenters incorrectly read proposed Rules 4.24(v) and
4.33(n) to require placing all non-required information at the end of
the document (instead of following the related required disclosures).
One commenter suggested that placement of non-required information
adjacent to the required information to which it relates may be clearer
to the reader.

\118\ Former Rules 4.21(h) and 4.31(g), renumbered as Rules
4.24(w) and 4.34(o).
---------------------------------------------------------------------------

One commenter urged that CPOs and CTAs be permitted to present
performance disclosure beyond the required five-year period, provided
material changes are disclosed, while another commenter urged that CPOs
and CTAs be required to present either five years' performance or the
full trading history of the pool or trading program, in order to
prevent ``cherry picking.''
As adopted, Rules 4.24(v) and 4.34(n) provide significantly more
guidance regarding the placement of supplementally provided
information. Rules 4.24(v) and 4.34(n), as adopted, also expand the
category of required information to include information required by
``any applicable laws of non-United States jurisdictions.'' In
addition, applicable federal and state requirements are no longer
restricted to securities laws and regulations. The comments received
and the Commission's action with respect to the application of proposed
Rules 4.24(v) and 4.33(n) to supplementally provided non-performance
information are discussed below in Section VI. With respect to
supplemental past performance, however, the Commission believes that
requiring such data to follow required past performance disclosure is
appropriate.
The Commission will permit presentation of additional past
performance information beyond the required five calendar years and
year-to-date, provided that any such supplemental information is
calculated in compliance with the requirements of

[[Page 38167]]
Rules 4.25 or 4.35, as applicable, and is presented following all
required performance disclosures. Such additional performance
information must not be misleading. For example, if additional
performance information beyond the required five years is presented but
the entire history of the pool or program is not covered, the
additional performance results shown must be representative of the
results that would have been shown if the entire history were
presented. Thus, ``cherry picking'' of performance data to highlight
positive performance is a misleading practice precluded under existing
antifraud standards. Generally, inclusion of voluntarily provided
performance data should be made on a result-neutral basis that results
in inclusion of all similar data.\119\ The Commission also notes that
the practice of advertising a pool by touting the excellent past
performance record of a particular CTA to attract prospective
participants and shortly thereafter reallocating pool assets to another
CTA, a practice commonly referred to as ``bait-and-switch,'' is
misleading and that use of performance data in this manner would
violate relevant antifraud provisions.

\119\ Thus, for example, and as the Commission explained in the
Proposing Release, in the case of a pool meeting the criteria of
Rule 4.25(b), where only the past performance of the offered pool is
required, the past performance of two CTAs each allocated an equal
portion of the pool's assets generally should either be included for
both CTAs or omitted entirely. Similarly, where only the past
performance of the offered pool is required, generally the past
performance of the CPO's other pools should be shown in total or
omitted. Id.
Any proprietary performance must be presented in accordance with
Rule 4.25(a)(8) for CPOs and Rule 4.35(a)(7) for CTAs, as discussed
below. Hypothetical, extracted, simulated and pro forma \120\
performance information is also now required by Rules 4.4(v) and
4.34(n) to be presented separately after all other information.\121\

\120\ As discussed in section 3, infra, pro forma adjustments to
performance data are required for certain purposes and such
adjustments are not affected by the restrictions upon placement of
supplemental information.
\121\ If a Disclosure Document contains two or more of these
types of performance information, the registrant may choose the
order of presentation between or among them at the end of the
document.
---------------------------------------------------------------------------

2. Proprietary Trading Results: Rules 4.25(a)(8) for CPOs and
4.35(a)(7) for CTAs \122\
Proposed Rules 4.25(a)(9) and 4.34(a)(6) would have permitted CPOs
and CTAs, respectively, to disclose proprietary trading results under
appropriate restrictions. Proposed Rule 4.25(a)(9) would have provided
that the performance of pools and accounts in which the CPO, trading
manager, CTA or other person providing services to the pool owns or
controls fifty percent or more of the beneficial interest may not be
included in pool Disclosure Documents unless prominently labeled as
proprietary and set forth separately following all required performance
and non-performance disclosures. Proposed Rule 4.34(a)(6) set forth
similar restrictions for CTA Disclosure Documents with respect to
accounts in which the CTA or any of its principals or any person
providing services to the account owns or controls fifty percent or
more of the beneficial interests.

\122\ The Commission's former disclosure rules did not
specifically address the placement of proprietary trading results.
---------------------------------------------------------------------------

While a number of commenters agreed with the intent of the
Commission's proposal, i.e., to prevent disguising of proprietary
trading by including an insignificant amount of money from ``outside''
participants, other commenters claimed that the proposal would have the
undesirable effect of discouraging CPOs from investing in their own
pools. One commenter stressed that proprietary trading is often the
only way a pool can begin trading before raising outside capital.
Commenters suggested raising the threshold for ownership or control by
the pool operator, advisor, principals or other service providers from
fifty to between sixty and eighty percent. Commenters also asked the
Commission to clarify that the interests in the pool of the CPO, the
CTA, their principals and other service providers are not required to
be added together when applying the fifty percent test in proposed Rule
4.25(a)(9) unless such persons are affiliated. One commenter urged that
the definition of proprietary performance should be broadened to
include both accounts for which the CPO, trading manager, CTA or
respective principals receive no direct fees, as well as pools in which
an affiliate or family member of the CPO, trading manager or CTA owns
or controls fifty percent or more of the beneficial interest. Several
commenters suggested that if proprietary accounts are traded in a
manner similar to pool and customer accounts, the rules should permit
CPOs and CTAs to include the performance in a composite with customer
accounts, provided pro forma adjustments are made for fees and other
differences.
The Commission is adopting Rule 4.25(a)(9) (renumbered as Rule
4.25(a)(8)) and Rule 4.34(a)(6) (renumbered as Rule 4.35(a)(7))
substantially as proposed, permitting presentation of proprietary
performance information, subject to restrictions intended to assure
that the disclosure of such information is not misleading. Further, the
Commission has determined to adopt the comment that accounts in which
an affiliate or family member of the CPO, trading manager or CTA owns
or controls fifty percent of more of the beneficial interest should be
characterized as proprietary and has revised the rules accordingly. As
adopted, the text of these rules has been reorganized for clarity and
cross-references to the respective rule provisions governing placement
of supplemental information have been included. The word ``required''
has been omitted to clarify the requirement that proprietary trading
results (together with any hypothetical, extracted, pro forma \123\ or
simulated results) follow all of the other disclosures in a Disclosure
Document.

\123\ See discussion in Section 3, infra, concerning required
pro forma adjustments.
---------------------------------------------------------------------------

Although proprietary performance results in CPO and CTA Disclosure
Documents have a significant potential to mislead, given the often
material differences in the conditions under which proprietary trading
results as opposed to non-proprietary results are obtained, the
Commission recognizes that proprietary trading results may be the only
performance results available to some new traders to present to
customers as evidence of trading experience.\124\ The requirement that
proprietary trading results be presented after all required and non-
required disclosures, rather than just the required performance
disclosures, reflects the relatively low utility of such data to
prospective customers and the relatively high potential for confusion
of proprietary and customer trading results. Given the significant
potential

[[Page 38168]]
to mislead inherent in proprietary trading results, the Commission
believes that if such data are permitted to be included in the
Disclosure Document, they should be placed after all required
information in order to minimize the likelihood that such results will
be accorded undue weight.

\124\ As the Commission explained in its proposal,
Use of proprietary trading results in soliciting customer
accounts is a practice which has long been of concern to the
Commission. CPOs and CTAs may trade proprietary funds for a variety
of purposes, including to test a new trading strategy before
implementing it for customer funds or to establish a track record
prior to trading customer funds. However, proprietary accounts may
be traded in a different manner, for example, more aggressively,
using higher leverage and assuming greater risk, than customer
accounts. Also, proprietary accounts are usually not subject to the
same fee schedule as customer accounts. Naturally, no management or
incentive fee would apply where a CTA traded its own account, and
clearing fees may be waived or reduced if the account is cleared by
an affiliate. In addition, where proprietary and customer assets are
combined for purposes of performance presentations, the total amount
of assets under management is inflated and conceals the actual
amount of customer funds being traded. For these reasons,
proprietary trading results may, in many cases, be of little
relevance to a prospective pool participant or CTA client and
actually misleading in others. 59 FR 25351, 25360.
The Commission noted in the Proposing Release that staff have
previously advised registrants that any proprietary trading results
presented in a Disclosure Document must be clearly labeled as such and
presented in a separate table.\125\ Staff have also required that if
fees, expenses, commissions, margin-to-equity ratios, or any other item
pertaining to the proprietary trading is materially different from that
relevant to the pool or trading program offered to participants or
clients the registrant must ``pro forma'' such items to correspond to
those in the pool or program being offered.\126\ The Commission will
continue to require registrants to make such pro-forma adjustments to
proprietary trading results.

\125\ 59 FR 25351, 25360.
\126\ Id. See discussion in Section 3, infra, concerning
required pro forma adjustments.
---------------------------------------------------------------------------

With respect to whether the interests of the CPO, the CTA, their
principals and other service providers would be required to be
aggregated for purposes of applying the fifty-percent test, the
Commission generally agrees that the interests of unaffiliated parties
need not be aggregated. However, a CPO would be considered to be
affiliated with the CPO's principal, affiliates or family members, for
example, and a CTA with its principals, affiliates or family members
for this purpose.
3. Pro Forma, Hypothetical and Extracted Performance Results \127\
In the Proposing Release, the Commission discussed the potential
for inappropriate use of certain types of performance data,
specifically, hypothetical, pro forma and extracted results.\128\
Hypothetical results are based on hindsight and can be readily
manipulated. Pro forma results can reflect the same type of hindsight
selection as hypothetical results and are thus also subject to abuse.
Similarly, although extracted results are taken from actual results,
they are subject to manipulation through, for example, emphasis upon
results of an isolated portion of an overall trading strategy. Under
the proposed rules, hypothetical, pro forma and extracted results would
be treated like other disclosures voluntarily provided (proposed Rules
4.24(v) and 4.33(n)) and would be subject to the Commission's general
antifraud provisions and such restrictions as may be imposed under the
rules of a registered futures association. Further, of course, Rule
4.41 requires that any presentation of simulated or hypothetical
trading results must be accompanied by a prescribed cautionary
statement describing the limited value of such results.\129\ As
discussed infra, the Commission is amending Rule 4.41 to provide that
such presentations must be accompanied either by the statement set
forth therein or a statement provided for this purpose by a registered
futures association.

\127\ Hypothetical results are results calculated based upon the
application of a given program to historical market prices and
purport to present results that could have been obtained in trading
a particular program during the specified historical period. Pro
forma results present trading results with adjustments to reflect
certain factors, such as a particular fee schedule or degree of
leverage, to permit easier comparison with other types of results.
Extracted performance results isolate a single component of a
trading strategy for presentation to customers. The Commission's
former disclosure rules did not specifically address the placement
of such performance results.
\128\ 59 FR 25351, 25360.
\129\ The statement required by Rule 4.41(b)(1) reads as
follows:
``Hypothetical or simulated performance results have certain
inherent limitations. Unlike an actual performance record, simulated
results do not represent actual trading. Also, since the trades have
not actually been executed, the results may have under-or-over
compensated for the impact, if any, of certain market factors, such
as lack of liquidity. Simulated trading programs in general are also
subject to the fact that they are designed with the benefit of
hindsight. No representation is being made that any account will or
is likely to achieve profits or losses similar to those shown.''
---------------------------------------------------------------------------

In some circumstances, the Commission requires registrants to make
pro forma adjustments to disclosed information, e.g., to adjust
performance presentations to the same fee structure as that of the pool
or program being offered. Such pro forma adjustments are not within the
scope of the restrictions of Rules 4.24(v) and 4.34(n). As noted in the
Proposing Release, NFA has recently adopted Compliance Rule 2-29(c)
which, together with an accompanying interpretive notice, requires that
promotional materials containing hypothetical results include a
prominently displayed prescribed disclaimer, comparable actual
performance results displayed at least as prominently as hypothetical
results, and a description of the material assumptions used, and that
no statement be made placing undue emphasis on the hypothetical
results.\130\ The restrictions in NFA Compliance Rule 2-29(c) do not
apply to promotional materials directed exclusively to ``qualified
eligible participants'' as defined in Commission Rule 4.7(a)(1)(ii).
However, Rule 4.41 requires that such a statement be provided without
regard to the status of the offeree and will thus require that either
the statement specified in Rule 4.41 or the statement specified in NFA
Compliance Rule 2-29(c), if approved by the Commission, be provided
whenever simulated or hypothetical trading results are presented.

\130\ 59 FR 25351, 25360. The draft Interpretive Notice
accompanying NFA's proposed amendments to Compliance Rule 2-29 would
permit pro forma performance histories solely for the purpose of
adjusting performance presentations to the same fee structure as
that of the pool or program offered. No pro forma results which
reflect a hindsight analysis, such as to show results a multi-
advisor pool could have achieved using a different allocation of
assets among CTAs, would be permitted. Extracted results would only
be permitted to be presented based on the percentage of net asset
value actually committed to the particular component extracted.
---------------------------------------------------------------------------

Commenters generally agreed that hypothetical, pro forma, extracted
(and simulated) results should not be prohibited, but should be subject
to strict regulatory oversight and controls. The Commission was also
urged to delegate to NFA and industry groups any rulemaking regarding
use of pro forma, hypothetical and simulated results.
Based upon its review of the comments received and of NFA
Compliance Rule 2-29(c) and the accompanying interpretive release, the
Commission has determined to retain the same general approach to pro
forma, hypothetical and extracted results as indicated in the Proposing
Release, pending further review of this area. Although such results
would not be precluded from inclusion in the Disclosure Document, Rule
4.24(v)(2)(iii) requires that such results, if included, must appear as
the last disclosure in the document following all required and non-
required disclosures. Further, such disclosures would be required to be
accompanied by the cautionary language of Rule 4.41 or of NFA
Compliance Rule 2-29(c), if approved by the Commission, with respect to
the limited usefulness of hypothetical results, where applicable. To
avoid duplication of cautionary statements as to the limitations of pro
forma, hypothetical and extracted results, the Commission is adopting
an amendment to Rule 4.41 to permit use of an NFA disclaimer in lieu of
the disclaimer in Rule 4.41.
Like other supplemental disclosures, disclosure of pro forma,
hypothetical and extracted results must comply with Rule 4.24(v) for
CPOs and Rule 4.34(n) for CTAs. Moreover, such disclosures

[[Page 38169]]
must comply with applicable NFA restrictions and they are subject to
the antifraud provisions of the Act and Commission rules.

VI. Non-Performance Disclosures: Section-by-Section Analysis

A. Introduction

As proposed and as adopted, non-performance disclosure requirements
are now set forth in Rules 4.24 for CPOs and 4.34 for CTAs.\131\

\131\ As proposed, Rule 4.34 was numbered 4.33.
---------------------------------------------------------------------------

Preliminarily, the Commission notes that it did not receive any
comments on certain of its proposed non-performance disclosure
requirements and is adopting those requirements as proposed.
Specifically, these are the CPO requirements found in the following
paragraphs of Rule 4.24: (n) (specified performance); (p)
(transferability and redemption); (q) (liability of pool participants);
(r) (distribution of profits and taxation); (t) (ownership in
pool);\132\ (u) (reporting to participants); and (w) (material
information). For CTAs, corresponding requirements are found in the
following paragraphs of Rule 4.34: (h) (description of trading
program); (i) (fees); (m) (specified performance disclosures); and (o)
(material information).

\132\ Because proposed Rule 4.24(t) required disclosure with
respect to major CTAs, it was indirectly addressed by the commenters
who suggested changes to the major CTA definition.
---------------------------------------------------------------------------

1. Disclosures Concerning a Pool's CTAs
As proposed, several provisions of Rule 4.24 would have based the
level of required non-performance disclosures with respect to a pool's
CTAs (and their principals) on such CTAs' respective percentage
allocations of the pool's aggregate initial futures margin and premiums
for commodity option contracts.\133\ Several commenters recommended
that these disclosure requirements (as well as the major CTA and multi-
advisor pool definitions) be based upon the percentage of the pool's
assets allocated to each CTA. As discussed above, the definition of
major commodity trading advisor, as adopted in Rule 4.10(i), no longer
is based upon the percentage of initial margin and premiums but,
instead, considers the CTA's allocated portion of the pool's funds
available for futures and option transactions pursuant to agreement
between the pool's CPO or trading manager, on behalf of the pool, and
the CTA. Wherever Rule 4.24, as proposed, keyed disclosure requirements
regarding a pool's CTAs to allocation size, the rule as adopted uses
the major CTA definition adopted in Rule 4.10(i).

\133\ These were proposed Rules 4.24 (e)(3) (names), (f)
(business backgrounds), (j) (conflicts of interest), (l)
(litigation) and (t) (ownership in pool).
---------------------------------------------------------------------------

2. Disclosures Concerning Investee Pools \134\
Unlike the former rules, the new disclosure framework (as proposed
and as adopted) specifically addresses disclosures concerning investee
pools. As with performance disclosure requirements, non-performance
disclosure requirements relating to investee pools are also being
tailored to take into account the relative importance of the investee
pool to the offered pool, as measured by the amount of assets allocated
or intended to be allocated to the investee pool. Thus, no disclosures
would have been required for investee pools allocated or intended to be
allocated less than ten percent of the assets of the offered pool. With
respect to each investee pool allocated at least ten percent of the
assets of the offered pool, the CPO would have been required to
disclose the name of the operator and the operator's principals \135\
and any conflicts of interest on the part of the investee pool's
operator in respect of the offered pool.\136\

\134\ As discussed above in Section IV, ``investee pool'' is now
defined in Rule 4.10(d)(4). Former Rule 4.21 did not specifically
address disclosures relative to these trading vehicles.
\135\ See proposed Rule 4.24(e).
\136\ See proposed Rule 4.24(j).
---------------------------------------------------------------------------

With respect to investee pools allocated twenty-five percent or
more of the assets of the offered pool,\137\ the CPO would have been
required to disclose the business background of, material litigation
against, and any ownership in the offered pool on the part of the
investee pool's operator and the operator's principals. (Rules 4.24
(f), (l) and (t)). In addition, the proposed rules requiring disclosure
of the use of proceeds (Rule 4.24(h)), risk factors (Rule 4.24(g)),
fees and expenses (Rule 4.24(i)), and redemption restrictions (Rule
4.24(p)) would have required information relative to the offered pool's
investments, including participation in investee pools. As the
Commission explained in the Proposing Release, these provisions are
appropriate because investments in investee pools may entail both the
risks inherent in the investee pool's own investments and liquidity
risks due to restrictions upon redemption of the investment in the
investee pool; fees and expenses may accrue at each level of a multi-
tier structure; and investments in investee pools with redemption
periods different from those of the pool offered or with minimum
``lock-in'' provisions \138\ may affect the ability of the top tier
pool promptly to honor redemption requests from its participants.\139\

\137\ As proposed in Rule 4.10(l), such investee pools would be
``major'' investee pools. Rule 4.10(d)(5) contains the definition,
as adopted, of the term major investee pool, discussed above at
paragraph B. of Section IV.
\138\ Certain pools lock in initial investments for a specified
period before allowing any redemptions. Because there are no
Commission rules requiring that an opportunity for redemption of
pool interests be afforded in very short timeframes as for
investment companies, disclosure of volatility risks as required by
new Rule 4.24(g) has added importance.
\139\ 59 FR 25351, 25363.
The Commission sought comment concerning the proposed treatment of
investee pools. In particular, commenters were invited to address any
special public policy or disclosure considerations presented by tiered
investment structures by means of which a commodity pool can, in
effect, appropriate the value of a second fund's management by
investing all or a portion of its funds in the second fund. No
commenter specifically addressed this issue. The Commission also
requested comment concerning whether any additional protections, other
than disclosure of applicable fees, are appropriate in light of the
``layering'' of fees that typically occurs at each level of a fund of
funds structure. No comments specifically responded to this
request.\140\

\140\ A number of commenters, however, claimed that the proposed
revisions failed to adequately address the compliance problems faced
by funds-of-funds. Some stated that obtaining required information
from investee funds on a timely basis is often difficult or
impossible for a variety of reasons, e.g., because securities
investee fund managers may consider the names of investee funds and
managers to be proprietary; Rule 4.12(b) investee funds and
securities trading partnerships report on a quarterly basis;
partnerships that predominantly trade securities do not provide the
same level of expense reporting as do pools; and if an investee pool
is not soliciting participants when the investor pool prepares its
Disclosure Document, the information from the investee pool may be
unavailable or stale. Other commenters suggested that specific
information regarding investee pools is unhelpful and may be
misleading where the CPO frequently drops and adds investee pools.
As a general matter, the Commission does not believe that fund-of-
funds structures should be permitted to impair or diminish the duty
of pool operators to provide timely material information to
prospective and current pool participants. Consequently, the pool
operator should ascertain the availability of such information prior
to using pool funds for such investments. However, the Commission
intends that the staff will continue to grant relief from reporting
timeframes in fund-of-funds contexts as warranted by the
circumstances presented.
---------------------------------------------------------------------------

The Commission has determined to key non-performance disclosures
with respect to a pool's investee pools to the new definition of major
investee pool adopted as Rule 4.10(d)(5). Thus, for purposes of Rules
4.24 (f), (l) and (t) as adopted, disclosure is required with respect
to investee pools allocated ten

[[Page 38170]]
percent or more of the offered pool's net assets, rather than the
proposed twenty-five percent standard of the proposed major investee
pool definition. Rule 4.24(j) (conflicts of interest involving the
pool) effectively retains the ten percent threshold of the proposal.

B. Required Non-Performance Disclosures

1. Prescribed Non-Performance Statements, Table of Contents and
Forepart Information: Rules 4.24 (a) through (d) for CPOs and 4.34 (a)
through (d) for CTAs
Proposed Rules 4.24 (a) through (d) for CPOs and 4.33 (a) through
(d) for CTAs would have specified the content and order of certain core
information required to be placed at the front of Disclosure Documents.
In particular, proposed Rules 4.24 (a) and (b) would have required a
cautionary statement to be placed on the cover page of a pool
Disclosure Document, followed by a risk disclosure statement. Rule
4.24(c) would have required a table of contents to follow the risk
disclosure statement, and Rule 4.24(d) would have required specified
descriptive information regarding the offered pool and the CPO to
follow the table of contents in the forepart of the Disclosure
Document. Proposed Rules 4.33 (a), (b) and (c) would have required the
cautionary statement, risk disclosure statement and table of contents
to be sequenced in the same manner in CTA Disclosure Documents as in
pool documents. Proposed Rule 4.33(d) would have required inclusion of
descriptive information regarding the CTA in the forepart.\141\

\141\ In connection with developing its proposed revisions to
the disclosure rules, the Commission also considered whether a
particular order for all required information should be mandated in
order to ``standardize'' the entire format of Disclosure Documents.
However, the Commission determined to propose, and now to adopt,
only the limited sequence requirements contained in Rules 4.24 (a)
through (d) and 4.34 (a) through (d).
---------------------------------------------------------------------------

Two commenters favored standardizing the order of disclosures,
asserting that it would promote consistency, clarity and comparability
within the industry, both for potential investors and for regulators.
Of the five commenters who opposed regulation of the placement of
information, two suggested that the Commission's review process is
capable of effectuating more prominent disclosure of underemphasized or
``buried'' information and one claimed that a summary cross-reference
to the body of the document should provide sufficient clarity.
The Commission believes that investors are well served by requiring
that certain items of particular significance be placed at the front of
the Disclosure Document. With minor exceptions as noted below, it is
adopting Rules 4.24(a) through (d) for CPO documents and Rules 4.33(a)
through (d) for CTA documents (Rule 4.33 is renumbered 4.34) as
proposed. The Commission notes that federal and state securities laws
may also address the order and format of certain disclosures. These
rules are not intended to supersede such requirements.
Placement of all required disclosures other than those specified in
Rules 4.24(a) through (d) and 4.34(a) through (d) is left to the
discretion of the registrant. Placement of information other than
required disclosures is addressed by Rules 4.24(v) and 4.34(n), which
are intended to maintain the prominence of required disclosures while
giving discretion to the registrant with respect to placement of other
matters, e.g., supplementally provided performance information.\142\
Thus, registrants will retain substantial discretion in arranging
information in the Document. However, the required table of contents
should facilitate review notwithstanding differences in placement of
some items.

\142\ Rules 4.24(v) and 4.34(n) are discussed in detail in
Section C of this Section VI.
---------------------------------------------------------------------------

a. Cautionary Statement

Rules 4.24(a) and 4.34(a), which contain the requirements of former
Rules 4.21(a)(18) and 4.31(a)(9), respectively, specify that a
Cautionary Statement, i.e., a statement that the Commission has not
passed upon the merits of the investment or the adequacy of the
Disclosure Document, appear on the cover page of the Document. Apart
from comments generally urging that specific required statements and
legends be minimized, no comments were received on the text of the
proposed Cautionary Statement. The Commission is adopting Rules 4.24(a)
and 4.33(a) as proposed (except that Rule 4.33(a) is renumbered
4.34(a)).\143\

\143\ The requirement in Rules 4.24(a) and 4.34(a) that the
Cautionary Statement be ``prominently'' displayed means that, as
with the former rules, capital letters and boldface type are
required. See Rule 4.1(b).
---------------------------------------------------------------------------

b. Risk Disclosure Statement

The Risk Disclosure Statement specified in Rules 4.24(b) and
4.34(b) is required to be ``prominently displayed'' immediately
following any disclosures required to appear on the cover page of the
Disclosure Document as provided by the Commission or any applicable
federal or state securities laws and regulations or by any applicable
laws of non-United States jurisdictions.\144\ As proposed, the revised
Risk Disclosure Statement included page references to textual
descriptions of fees and expenses, principal risk factors and the
break-even point. Inadvertently omitted from the Proposing Release was
the requirement for a legend (if applicable) to warn of potential
liability in excess of the amount of a pool participant's investment.
As explained in the Proposing Release, the proposed revisions to the
prescribed Risk Disclosure Statements were also intended to address the
potential for duplicative disclosure created by prior revisions of
Rules 1.55 \145\ and 30.6(a) \146\ by eliminating the need to provide
two prescribed Risk Disclosure Statements, one for domestic futures
trading and one for foreign futures trading.\147\ Thus, the proposed
revised statements addressed the risks of foreign as well as domestic
transactions and revision of Rule 30.6(b) was proposed to cross-
reference the Part 4 Risk Disclosure Statements. In addition, the
proposal would have replaced the terms ``domestic'' and ``foreign,''
previously used to refer to contract markets or exchanges in foreign
jurisdictions, with the terms ``United States'' and ``non-United
States,'' in order to avoid confusion in the context of offerings in
non-United States jurisdictions to non-United States participants for
whom the term ``foreign'' does not mean ``non-United States.''

\144\ The Risk Disclosure Statement must be printed in capital
letters and in boldface type. Rule 4.1(b).
\145\ 59 FR 25351, 25363. Rule 1.55 sets forth the basic risk
disclosure requirement applicable to FCMs and IBs opening accounts
for domestic futures and option contracts.
\146\ Part 30 generally governs transactions in foreign futures
and option contracts. Rule 30.6(a) requires an FCM or IB to deliver
a risk disclosure statement (pursuant to Rule 1.55(b)) prior to the
opening of a foreign futures or options account.
\147\ 59 FR 25351, 25363.
---------------------------------------------------------------------------

Some commenters encouraged minimizing required verbatim cautionary
statements and legends. Two commenters suggested that the Commission
prescribe one risk statement for inclusion in both CPO and CTA
documents, incorporating all of the issues the Commission believes are
necessary for investor protection, in order to increase the
effectiveness of such disclosure. Another commenter asked whether the
Risk Disclosure Statement would be more effective if set forth in the
text of the Disclosure Document.

[[Page 38171]]

The Commission is adopting Rules 4.24(b) and 4.34(b) \148\ as
proposed with the following exceptions. As adopted, Rules 4.24(b)(1)
and 4.34(b)(1) recognize that foreign jurisdictions may require
specific information on the cover page by adding the language ``or by
any applicable laws of non-United States jurisdictions.'' As adopted,
Rule 4.24(b) incorporates the requirement of former Rule
4.21(a)(17)(ii) to include in the Risk Disclosure Statement additional
language if the pool participant's liability can exceed the purchase
price of his interest in the pool. Further, Rule 4.34(b) as adopted
omits reference to a break-even point. In addition, Rule 1.55 is being
amended, as proposed, to provide that pools need not be treated as
customers for purposes of delivery of the Risk Disclosure Statement
required thereunder.

\148\ Rule 4.34(b) was proposed as Rule 4.33(b).
---------------------------------------------------------------------------

The Commission believes that the different risks and
characteristics of pools as compared to direct trading through a
managed account, perhaps most notably the difference between
participating in a limited liability trading vehicle as opposed to an
individually-managed account, warrant different risk disclosure
statements. Accordingly, the Commission is not prescribing a single,
common statement for both CPO and CTA Disclosure Documents. Further,
the Commission believes that the information contained in the Risk
Disclosure Statement is critical in order to inform potential investors
as to many of the generic risks inherent in commodity interest trading,
and that the importance of this information is appropriately
highlighted by placing the Risk Disclosure Statement at the beginning
of the document.
c. Table of Contents \149\

Rules 4.24(c) and 4.34(c) specify that the Disclosure Document must
include a table of contents immediately following the Risk Disclosure
Statement. The table of contents must show, by subject matter, the
location of disclosures in the Disclosure Document. One commenter
stated that a table of contents should be optional for smaller
documents. Several commenters favored requiring a table of contents but
requested latitude in its placement, e.g., to permit it to appear on
the back cover page. The Commission believes that placement of the
table of contents at the beginning, rather than the end of (or
elsewhere in) the Disclosure Document will be most helpful to
investors, given the format of most pool documents, and that the
benefits of a table of contents outweigh any burdens attendant to its
preparation. The Commission thus is adopting as proposed the
requirement that a table of contents be included in all Disclosure
Documents immediately following the Risk Disclosure Statement.

\149\ Neither former Rule 4.21 for CPOs nor former Rule 4.31 for
CTAs required a table of contents. However, most Disclosure
Documents reviewed by the Division contain such a table. Further,
Form S-1, the form most frequently used to register pool offerings
with the SEC, requires ``a reasonably detailed table of contents
showing the subject matter of the various sections or subdivisions
of the prospectus and the page number on which each section or
subdivision begins.'' See Item 502(g) of Regulation S-K, 17 CFR
229.502(g) (1994), incorporated by reference into Item 2 of Form S-
1, 17 CFR 239.11 (1994). The Commission believes that a table of
contents should contribute to making the disclosure document
``reader-friendly'' and readily reviewable.
---------------------------------------------------------------------------

d. Information To Be Included in Forepart \150\

Proposed Rules 4.24(d) and 4.33(d) would have required that
specified basic information appear immediately following the table of
contents, in the forepart of the Disclosure Document. With respect to
CPO documents, this information would have included the following: The
name, business address, business phone number and form of organization
of the offered pool and of the CPO (and if the pool's address is a post
office box or is outside the United States, the location of the books
and records); a statement whether the offered pool is privately offered
under the Securities Act, a multi-advisor pool or a limited risk
pool;\151\ the closing date of the pool offering (or a statement that
the offering is continuous); the date the Disclosure Document will
first be used; and the break-even point of the pool.\152\ The forepart
of a CTA document would have been required to contain the business
address, business phone number and form of organization of the CTA (and
if the address is a post office box or is outside the United States,
the location of the books and records) as well as the date the
Disclosure Document will first be used.

\150\ Neither former Rule 4.21 nor 4.31 required specified
information to be placed in the forepart of the Disclosure Document.
\151\ As discussed at Section IV above, new Rule 4.10(d)(3)
replaces the proposed term ``limited risk pool'' with the term
``principal-protected pool'' (while continuing to define it, as
proposed, as pool designed to limit the loss of the initial
investment of its participants).
\152\ The term ``break-even point'' is discussed in Section IV
above.
---------------------------------------------------------------------------

The Commission is adopting Rules 4.24(d) and 4.33(d) as proposed,
with the following exceptions. Instead of requiring a ``statement
whether the pool is'' privately offered, a multi-advisor pool or a
limited risk (principal-protected) pool, Rule 4.24(d)(3) requires
disclosure only in the event that one or more of such descriptions
applies to the offered pool. In addition, instead of the date the
Disclosure Document will actually be used, the forepart must indicate
the date the CPO or CTA first intends to use it.\153\ Cross-references
have been conformed and corrected. Finally, proposed Rule 4.33(d) is
adopted as 4.34(d).

\153\ Proposed Rules 4.24(d)(4) and 4.33(d)(2) had required
``[t]he date when the Disclosure Document will first be used.''
---------------------------------------------------------------------------

e. Persons To Be Identified

Proposed Rule 4.24(e) would have required disclosure of names of
the CPO's principals, the trading manager (if any) and its principals,
each investee pool allocated at least ten percent of the assets of the
offered pool, each CTA allocated at least ten percent of the pools
initial margin and option premiums, the person who will make trading
decisions for the offered pool, and, if known, the FCM to be used by
the offered pool. Proposed Rule 4.33(e) would have required a CTA to
name each of its principals, as well as any FCM or IB the CTA's client
will be required to use.
Rule 4.24(e), as adopted, eliminates the initial margin and
premiums standard for CTA disclosure and requires instead that only
CTAs (and investee pools) that are ``major'' must be named. Rule
4.24(e) also requires identification of any IB the offered pool will
use, and otherwise is adopted as proposed. Rule 4.33(e) is adopted as
proposed except that it is renumbered 4.34(e).
2. Business Background: Rules 4.24(f) for CPOs and 4.34(f) for CTAs
As proposed, Rule 4.24(f) would have required disclosure in a pool
document of the business backgrounds of the CPO, any trading manager of
the pool, major CTAs, and the operators of major investee pools. The
only principals of the foregoing for whom disclosure of business
backgrounds would have been required are those ``who participate in
making trading or operational decisions * * * or who supervise those
so engaged.'' Proposed Rule 4.33(f) would have required a CTA document
to provide the business background of the CTA and the principals
thereof participating in making trading or operational decisions.
Former Rule 4.21(a)(2) required business backgrounds for the CPO,
the CTA and all of their respective principals, and, similarly, former
Rule 4.31(a)(2) called for the backgrounds of the CTA and all of its
principals. The

[[Page 38172]]
proposed revisions were designed to reduce the number of principals
subject to business background disclosure and, in the context of
trading advisors and operators of investee pools, restricted business
background disclosure to major CTAs and the operators of major investee
pools.
Commenters generally supported the proposed reduction of business
background disclosure. Six suggested further limiting disclosure with
respect to principals by deleting the words ``or operational'' and
effectively employing the definition of ``trading principal'' in Rule
4.10(e)(2).\154\

\154\ Under the rule amendments as proposed and as adopted, the
``trading principal'' concept is not used in connection with non-
performance disclosure requirements. See Rule 4.25(c) for CPOs and
Rule 4.35(b) for CTAs.
---------------------------------------------------------------------------

The Commission is adopting Rules 4.24(f) and 4.33(f) as proposed,
except that the provision with respect to principals who participate in
making trading or operational decisions for the pool or supervise
persons so engaged is revised to make clear that officers and directors
are included among the principals whose business background is
required, as only shareholders and other passive investors who would
constitute principals were intended to be excluded. Proposed Rule
4.33(f) is adopted as Rule 4.34(f). The requirement to disclose
business backgrounds for principals who participate in making
operational decisions for a pool operator or advisor is retained
because such persons can have as significant an effect on the
performance of the pool operator or advisor as those who make its
trading decisions. For example, the persons who supervise sales
solicitations, manage the pool's back office and perform compliance
functions may be wholly uninvolved in the pool's trading yet integral
to the pool's success or failure. Accordingly, the Commission believes
that the business backgrounds of such persons should be disclosed to
prospective participants or clients.\155\ As noted above, the
Commission intends that the principals who participate in making
trading or operational decisions for the pool or who supervise persons
so engaged would include all principals other than purely passive
investors or owners.

\155\ The Commission emphasizes that while disclosure of
business backgrounds of principals is being limited to officers,
directors and other operational or trading principals, the names of
all principals of the CPO, trading manager, major CTAs, and
operators of major investee pools continue to be required to be
disclosed in the Disclosure Document. See Rules 4.24(e) for CPOs and
4.34(e) for CTAs.
---------------------------------------------------------------------------

3. Principal Risk Factors: Rules 4.24(g) for CPOs and 4.34(g) for
CTAs\156\

\156\ Former Rules 4.21 and 4.31 did not contain any specific
requirements applicable to the particular risks of the pool or
trading program.
---------------------------------------------------------------------------

As noted above, Rules 4.24(b) and 4.34(b) require the inclusion, at
the beginning of the Disclosure Document, of a standardized Risk
Disclosure Statement that generically describes the risks of the
investment. Proposed Rules 4.24(g) and 4.33(g) would have required that
the prescribed generic risk disclosures be supplemented by a
particularized discussion of the ``principal risk factors'' specific to
the pool or trading program being offered, including, without
limitation, risks due to volatility, leverage and counterparty
creditworthiness. As the Commission explained in the Proposing Release,
this requirement was designed to elicit a ``plain English'' discussion
of the risks of the offered investment, with particular attention to
the risks created by over-the-counter transactions.\157\ For example,
as noted in the Proposing Release, the discussion of principal risk
factors should address the volatility of an offered pool investment as
compared to investments in other types of trading vehicles and other
risks relevant to the trading program to be followed, such as risks
resulting from concentration of investments in particular commodities
or from trading foreign contracts that are subject to currency rate
fluctuations. Other risks cited included risks inherent in transactions
in off-exchange instruments and risks arising from the lack of relevant
experience of the CPO or CTA.\158\ The Commission noted that in
establishing an express requirement for disclosure of principal risk
factors, it was essentially codifying disclosure requirements
previously required under the obligation to disclose all material
information or under other provisions of the former rules. This
provision also accords with existing SEC requirements for publicly
offered funds.\159\

\157\ 59 FR 25351, 25364. These risks may differ materially from
those entailed in exchange-traded futures and option transactions,
which generally are backed by clearing organization guarantees,
daily marking-to-market and settlement, and segregation and minimum
capital requirements applicable to intermediaries. Transactions
entered directly between two counterparties generally do not benefit
from such protections and expose the parties to the risk of
counterparty default.
\158\59 FR 25351, 25364.
\159\ Public securities offerings are required by Item 503(c) of
Regulation S-K (17 CFR 229.503(c) (1994)) to include immediately
following the cover page of the prospectus (or following the
summary, if one is included) ``a discussion of the principal factors
that make the offering speculative or one of high risk.'' Possible
risk factors included in Item 503(c) include absence of an operating
history, absence of profitable operations in recent periods,
financial position, nature of the registrant's business and absence
of a previous market for the offered securities. SEC Release Number
33-6900, which provides guidance with respect to disclosure
requirements for limited partnership offerings and roll-up
transactions, requires that the cover page of a limited partnership
prospectus indicate the most significant risk factors ``highlighted
through the use of a concise list of bullet-type statements.'' (17
CFR 231.6900 (1994)).
---------------------------------------------------------------------------

The Commission requested comment as to whether additional guidance
should be given in the rules as to the types of risk factors that
should be discussed and as to any specific factors that should be
identified in this context. The commenters did not suggest any
additional specific risk factors. One commenter supported the proposed
requirement for a particularized discussion of the risks beyond the
standardized required risk disclosure. Another urged that the rules not
list specific required risk factors, since risks vary by pool or
program, and such a requirement would mean that risks that are
important in certain contexts but not in others would be required to be
disclosed in the same manner in all contexts. Another commenter stated
that discussion of counterparty creditworthiness is not warranted for a
pool that restricts its trading to exchange-traded instruments. One
commenter proposed that the level of risk factor disclosure with
respect to an investee pool be determined by the percentage of assets
allocated to such investee pool.
The Commission is adopting Rules 4.24(g) and 4.33(g) as proposed
(renumbering proposed Rule 4.33(g) as 4.34(g)) with certain
modifications designed to provide more specific guidance as to the
types of disclosures called for in the discussion of principal risks.
The principal risk factor discussion must now include, without
limitation, risks relating to volatility, leverage, liquidity and
counterparty creditworthiness, as applicable to the types of trading
programs to be followed, trading structures to be employed and
investment activity expected to be engaged in by the offered pool.
Similarly, under Rule 4.34(g), the focus is on the trading program and
the types of transactions and investment activity expected to be
engaged in pursuant to the trading program. As noted, the specific
types of risks cited in the rules (volatility, leverage, liquidity and
counterparty creditworthiness) are illustrative, not exclusive, are
likely to be significant across a wide range of trading programs and
investments and thus are logical starting points for a discussion of
principal risk factors. The final rule includes specific reference to

[[Page 38173]]
``liquidity'' as a risk factor, in recognition that the risk of
illiquidity is one that arises in a wide range of instruments and that
liquidity issues may often be linked to the other identified risk
factors.
Rule 4.24(g) as adopted provides three contexts in which such risks
should be considered, the trading programs to be followed, the trading
structures to be employed and the investment activity expected to be
engaged in by the offered pool. Risk factors specific to each context
should be discussed. For example, this discussion should indicate any
material historical or expected volatility of the trading program and
any other special characteristics of the trading program, such as
concentration in a particular commodity, lack of trading history, or
negative performance history associated with the trading program. The
trading structures or vehicles to be employed may also present
significant risks. For example, multi-CTA and multi-investee-fund
structures generally involve more complex fee structures than other
pools and their profit potential may be adversely affected as a result
of the potential for the pool to maintain offsetting positions due to
the separate trading of various CTAs and investee funds. The specific
types of investment activity in which the pool is expected to engage
must also be examined to identify principal risk factors. For example,
highly leveraged off-exchange transactions such as some types of swaps,
may present risks of rapid price movements, illiquidity, lack of
transparency and the potential for counterparty default which may not
be material in the context of domestic exchange-traded futures
contracts. Given the wide range of potential pool investments, the CPO
must determine on a case-by-case basis what risk factors must be
addressed in light of the contemplated trading and investment activity
of the pool.
A CPO must make a determination whether the risks affecting each
investee pool (or investee fund), when considered in the context of the
investor pool's participation in such investee pool (or fund),
constitute principal risk factors of the investor pool. In determining
whether counterparty creditworthiness is a principal risk factor in the
context of a given pool offering or trading program, factors such as
the use of instruments other than those that are traded on United
States contract markets must be considered.\160\

\160\ As shown by the recent events involving the collapse of
Barings, PLC, under certain circumstances exchange-traded
instruments may be subject to some of the same risks as over-the-
counter transactions.
---------------------------------------------------------------------------

4. Investment Program and Use of Proceeds: Rule 4.24(h) for CPOs \161\

\161\ Because of the differences between CPOs and CTAs, the
Commission did not propose nor is it now adopting any general ``use
of proceeds'' disclosure requirement for CTAs. However, both new
Rules 4.24(h)(2) for CPOs and Rule 4.34(h) for CTAs require a
description of the trading progrm that will be used for the pool or
managed account client.
---------------------------------------------------------------------------

Proposed Rule 4.24(h) would have consolidated under the caption
``Use of Proceeds'' the provisions of former Rule 4.21(a)(1)(viii),
which required a description of the types of commodity interests the
pool is expected to trade and any restrictions on such trading, with
those of former Rule 4.21(a)(9), which required disclosure of the
manner in which the pool would fulfill its margin requirements and the
form in which non-margin funds would be held. As a result, taken
together, former Rules 4.21(a)(1)(viii) and (a)(9) called for
disclosure of both the commodity interest trading expected to be
engaged in by the pool and all other types of trading, investments,
custodial arrangements and other uses of the funds of the pool.
Proposed Rule 4.24(h) thus would have unified previously separate
related disclosures to create a single, cogent discussion of all of the
contemplated uses of pool funds. In addition to integrating disclosures
previously required under separate rule provisions, Proposed Rule
4.24(h) was designed to reflect the increasingly diverse nature of non-
futures investments made by pools, for example, interests in other
commodity pools, commercial paper and foreign securities.
Several commenters recommended that use of proceeds disclosure
requirements minimize (or eliminate) information regarding ``normal''
investment uses and concentrate on (or be limited to) ``unusual'' uses
of assets or uses that present special risks to the investor. Several
commenters argued that expanded use of proceeds disclosures have
unnecessarily lengthened Disclosure Documents, resulting in
disproportionate emphasis on standard or mundane investments and
obscuring the pool's primary business objectives. Some commenters urged
that the use of pool assets in securities trading that is independent
of rather than incidental to a pool's commodity interest trading should
not require disclosure. With respect to participation in investee pools
or funds, one commenter suggested that only a general statement that
the pool would invest in investee pools or funds should be sufficient.
Another commenter suggested that the requirement for use of proceeds
disclosure should be based upon the percent of assets allocated to the
investee pool and that if the investment involved less than ten percent
of the offered pool's assets, disclosure should not be required. Two
commenters criticized the requirement to disclose whether (and in what
form) assets are held in segregation.
Based upon its review of the comments received and of the overall
content of the proposed and final rules, the Commission has determined
to modify proposed Rule 4.24(h) in order to provide greater clarity and
specificity as to the disclosures called for. In essence, proposed Rule
4.24(h) was designed to elicit a description of the types of interests
in which the proceeds of the offering would be invested and of the
trading programs to be followed. To better reflect the overall intent
and scope of this provision, it has been retitled ``Investment Program
and Use of Proceeds'' and the text has been restructured and refined to
provide more specific guidance as to the minimum disclosures called
for. As revised, Rule 4.24(h) calls for four main types of information:
Information about the types of commodity interests and other interests
which the pool will trade; a description of the trading and investment
programs and policies that will be followed by the offered pool; a
summary description of the pool's commodity trading advisors and
investee pools or funds; and information concerning the manner in which
the pool will fulfill its margin requirements, the approximate
percentage of the pool's assets that will be held in segregation and
related matters. With respect to each topic, explanatory text has been
added to clarify the types of information to be provided. For example,
information concerning the ``types of commodity interests or other
interests the commodity pool operator intends that the pool will hold
or trade'' is to include the approximate percentage of the pool's
assets that will be used to trade commodity interests, securities and
other types of interests. The provision also calls for the different
types of interests in which the pool will trade to be categorized so as
to provide a meaningful explanation of the contemplated trading and
investment portfolio. Thus, the rule provides for categorization by the
type of commodity or market sector, type of security, whether traded or
listed on a regulated exchange market, maturity ranges, and investment
rating, as applicable. Further, the regulatory status of such

[[Page 38174]]
interests, i.e., the extent to which they are subject to state or
federal regulation, foreign regulation or supervision by a self-
regulatory organization, is called for.
Second, Rule 4.24(h)(2) requires a description of the trading and
investment program and policies to be followed by the offered pool.
This description must include an explanation of the methodologies and
data used to select CTAs, investee pools and types of investment
activity to which pool assets will be committed. The objective is to
provide an explanation of the basic trading and investment approach to
be followed by the pool, including, if applicable, an explanation of
the systems used to select the pool's advisors and the types of
investment activity in which the pool will engage.\162\

\162\ The requirement in proposed Rule 4.24(h)(1) to disclose
``any restrictions or limitations on such interests or trading
required by the pool's organizational documents or otherwise''
(originally part of former Rule 4.21(a)(1)(viii)) was revised to
refer to ``any material restrictions or limitations * * *''
---------------------------------------------------------------------------

A new subparagraph, designated as Rule 4.24(h)(3), calls for a
narrative description of the major commodity trading advisors and
investee funds to which the pool will commit funds. This discussion is
required to include percentage allocations of pool assets to major CTAs
and investee pools and funds, a description of the trading programs to
be followed by such advisors, and for each such advisor and investee
fund, the types of interests traded and material information as to the
advisor's historical experience trading such program, including
material information as to volatility, leverage and rates of return and
the length of time during which the advisor has traded such program.
Similarly, for the pool's investee pools or funds, the description
should extend to the nature and operation of such investee pools and
funds, including for each investee pool or fund the types of interests
traded, material information as to volatility, leverage and rates of
return for such investee pool or fund and the period of its operation.
Finally, Rule 4.24(h)(4), like the proposed ``Use of proceeds''
section, calls for information as to the manner in which the pool will
fulfill its margin requirements and the approximate percentage of the
pool's assets that will be held in segregation pursuant to the Act and
the Commission's regulations, the nature of anticipated non-cash margin
deposits and to whom income generated by margin assets will be paid.

\163\ The Commission's former disclosure rules did not require a
break-even analysis.
---------------------------------------------------------------------------

5. Fees and Expenses; ``Break-Even'' Analysis for CPOs: Rules 4.24(i)
for CPOs and 4.34(i) for CTAs \163\
Proposed Rule 4.24(i) was intended to provide in a single location
a complete discussion of costs incurred by a commodity pool for all
purposes. The proposed rule combined the requirements of former Rule
4.21(a)(7), which called for a description of the expenses that the CPO
knew or should have known had been incurred in the preceding year or
would be incurred in the current year (e.g., fees for management,
trading advice, brokerage commissions, legal advice, accounting and
organizational services), with those of former Rule 4.21(a)(14), which
required disclosure of fees and commissions paid in connection with
solicitations for the pool.\164\ In addition, it called for a
description of certain fees and expenses that were not specifically
enumerated in the former rules but that nonetheless constitute material
information about which a prospective investor should be informed.
These include clearance fees and fees paid to national exchanges and
self-regulatory organizations, incentive fees (including any
disproportionate share of profits allocated to the CPO, i.e., a right
of the CPO to receive a greater than pro-rata share of the pool's
profits), and fees and expenses incurred as a result of investments in
investee pools and other investment vehicles or in connection with
funding the guarantee of a principal-protected pool. The proposed rule
also required an explanation of the calculation of the pool's ``break-
even point.''

\164\ By way of clarification, as proposed and as adopted, Rule
4.24(i) also requires that disclosure of fees paid in connection
with solicitations for the pool must include trailing commissions as
well as any type of benefit that may accrue to persons engaged in
such solicitations.
---------------------------------------------------------------------------

With respect to CTAs, proposed Rule 4.33(i) differed from former
Rule 4.31(a)(4) only in requiring that if a fee is determined by
reference to a base amount such as net assets or net profits, the
manner in which such base amount will be calculated must be explained,
where former Rule 4.31(a)(4) simply required that such base amount be
defined.\165\

\165\ The same change was also incorporated in proposed CPO Rule
4.24(i).
---------------------------------------------------------------------------

The Commission received numerous comments in response to its
request for comment as to whether a description of fees and expenses
should continue to be required or whether the break-even analysis is
sufficient to accurately describe the costs of participation in a pool.
These comments included the following: That a break-even analysis is
sufficient unless in the CPO's judgment more information is required to
make the break-even analysis more understandable; that investors
benefit from receiving a separate, more comprehensive description of
applicable fees than is contained in a break-even discussion; that for
a pool in operation for more than one year the prior year's actual
expenses should suffice with no requirement for estimated expenses;
that estimated expenses be required to be disclosed in a manner similar
to that required under SEC rules applicable to mutual funds; and that a
description of fees and expenses that are paid by the CPO or the CTA
out of their own assets on behalf of the pool should not be required.
Some commenters asserted that calculation of a break-even point would
be difficult or impossible for pools with no maximum amount of capital
that can be raised, for pools invested in other collective investment
vehicles, and for multi-advisor pools with high CTA turnover and
reallocation. One commenter suggested a convention (such as 2% of
average net asset value) for approximating the profit shares to be paid
in a multi-advisor fund with non-netted incentive fees.
Several commenters argued that estimating incentive and other fees
would be difficult or impossible for CPOs of existing pools as well as
operators of new pools. One commenter, however, stated that since the
CPO establishes and understands the fee structure (and is allowed to
make and to state any necessary assumptions) it is incorrect to argue
that a break-even analysis cannot be provided because fees cannot be
estimated.
The Commission is adopting Rules 4.24(i) and 4.33(i) as proposed
(renumbering proposed Rule 4.33(i) as 4.34(i)). For pool Disclosure
Documents both the break-even analysis and the narrative fee and
expense description are required because the Commission believes that
each serves a valuable purpose. A description of each separate fee and
expense may not convey a clear understanding of the actual portion of
each pool participation absorbed by the aggregate fees and expenses of
the pool. To foster a better understanding of the nature of those costs
and their impact upon an investment in the pool, the revised rules
require that the narrative description of fees and expenses, which is
designed to explain the basis for each such expenditure, be accompanied
by a

[[Page 38175]]
tabular presentation of fees and expenses from all sources, setting
forth how the break-even point for the pool is calculated (``break-even
analysis''). Where specific components of the break-even analysis are
not available or are not subject to precise determination, good faith
estimates should be made, based on reasonable assumptions properly
disclosed. As noted above, the ``break-even point'' for the pool is
required by Rule 4.24(d)(5) and 4.10(j) to be set forth as a separate
item in the forepart of the Disclosure Document, immediately following
the table of contents, and must be expressed both as a dollar amount
and as a percentage of the minimum unit of initial investment. The
break-even analysis provides an explanation, in tabular form, of how
the break-even point is calculated, taking into account all fees,
expenses and commissions applicable to the pool. Rule 4.10(j) requires
that the break-even point be prepared in accordance with rules
promulgated by a registered futures association pursuant to section
17(j) of the Act. As noted above, NFA has adopted (and the Commission
has approved) an Interpretive Notice to accompany NFA Compliance Rule
2-13, setting forth how a break-even point must be calculated and the
format in which such calculation must be disclosed.
The Commission is clarifying that the break-even point must
represent the trading profit the pool must realize in the first year of
an investor's participation in order for the investor to recoup his
initial investment, and Rule 4.10(j) as adopted so states. Revision of
the break-even point is required for ongoing pool offerings whenever
the Disclosure Document is amended or updated. Of course, if the actual
break-even point becomes materially different from that which appears
in the Disclosure Document, amendment is required.
As proposed and as adopted, Rules 4.24(i) and 4.34(i) require
disclosure of fees and expenses expected to be incurred in the current
fiscal year, including estimated figures if actual amounts cannot be
determined. The Commission believes that reliance solely upon the prior
year's actual fees and expenses may be misleading, especially if the
CPO has reason to anticipate changes in investment strategies or
advisors or market conditions. With respect to fees and expenses borne
entirely by the CPO or the CTA, disclosure should not be necessary
unless the compensation paid by the pool or account to the CPO or CTA
is increased as a result. Of course, disclosure is required if such
fees and expenses are subsequently charged to the pool or account.
Where a fee or expense item is variable or otherwise difficult to
determine (e.g., in the case of a multi-advisor pool rapidly
substituting and re-allocating among numerous advisors), the narrative
discussion required by Rule 4.24(i) must indicate a range based upon
the CPO's advisor selection criteria, investment objectives and other
business practices. For purposes of the break-even analysis, however, a
good faith estimate should be used, as discussed above, and the
assumptions for such estimate disclosed. This situation illustrates the
benefit of requiring both the break-even analysis and the narrative
discussion.
The Commission believes that the revised fee and expense disclosure
requirements better codify disclosures required under the former rules,
that the break-even analysis makes such disclosures more
understandable, and that the revised requirements will better assist
readers of Disclosure Documents in understanding the nature and effect
upon investment returns of costs incidental to the offering and
operation of the pool or trading program.
6. Conflicts of Interest: Rules 4.24(j) for CPOs and 4.34(j) for CTAs;
Related Party Transactions: Rule 4.24(k) for CPOs \166\

a. Conflicts of Interest--CPOs

Proposed Rule 4.24(j) called for a full description of any actual
or potential conflicts on the part of: (a) The pool's CPO, trading
manager (if any), CTAs allocated at least ten percent of the pool's
initial margin and premiums, the operators of investee pools allocated
at least ten percent of pool assets; (b) any principal of the
foregoing; and (c) any person providing services to the pool or
soliciting participants for the pool. Proposed Rule 4.24(j)
specifically referred to arrangements whereby a person benefits from
the pool's use of a particular FCM or IB (specifically including
payment for order flow and soft dollar arrangements) \167\ or from the
investment of pool assets in investee pools or other investments.
Former Rule 4.21(a)(3) required disclosure of conflicts involving the
following persons or their principals: The CPO, the CTA, any FCM that
will execute the pool's trades, and any IB through which the pool's
trades will be introduced. The former rule specified that such
description should include any arrangement whereby the CPO or the CTA
might benefit directly or indirectly from maintenance of the pool's
account with the FCM or introduction of the account by the IB. The
proposed rule would have retained the requirement to disclose conflicts
of interest on the part of the CPO and its principals but, subject to
the requirement that all material information be disclosed, generally
would have eliminated such disclosure with respect to CTAs allocated
less than ten percent of the pool's futures margins and option
premiums. Further, rather than limiting the disclosure of conflicts of
interest to specified categories of registrants, such as FCMs and IBs,
specifically identified in the former rule, the proposed rule would
have encompassed conflicts of interest on the part of any person
providing services to, or soliciting participants for, the pool. As
noted in the Proposing Release, the purposes of conflict of interest
disclosure are not confined to conflicts involving a Commission
registrant.\168\ Unregulated parties such as a CPO affiliate acting as
counterparty to over-the-counter transactions with the pool may be
equally relevant for such purposes. Finally, unlike former Rule
4.21(a)(3), proposed Rule 4.24(j) would have specifically referenced
payment for order flow and soft-dollar arrangements as types of
disclosable arrangements by which a person may benefit from maintenance
of the pool's account with an FCM or the introduction of the pool's
account by an IB. As with the former rule, disclosure of all material
conflicts would continue to be required, whether

[[Page 38176]]
or not specifically called for under proposed Rule 4.24(j).\169\

\166\ Former Rules 4.21(a)(3) for CPOs and 4.31(a)(5) for CTAs
addressed conflicts of interest. The Commission's former disclosure
rules did not contain any specific requirements with respect to
related party transactions.
\167\ Payment for order flow is a practice whereby FCMs and IBs
compensate CPOs (and CTAs) for directing customers to them. Soft
dollar arrangements consist of arrangements whereby customer or pool
funds are used to pay for research or other services that benefit
the CPO (or CTA). Both practices have concerned regulators because,
among other things, they are often inadequately disclosed. See
Market 2000, An Examination of Current Equity Market Developments:
Study V, Best Execution (Division of Market Regulation, SEC, January
1994). The SEC recently adopted Rule 11Ac1-3 and amendments to Rule
10b-10 (17 CFR 240.10b-10 (1994)) under the Securities Exchange Act
of 1934 15 U.S.C. 78a et seq. to require enhanced disclosure on
customer confirmations and account statements (and upon opening of
new accounts) with respect to payment for order flow practices.
Release No. 34-34902, 59 FR 55006 (November 2, 1994). At the same
time, revisions to Rule 11Ac1-3 and further amendments to Rule 10b-
10 were proposed. Release No. 34-34903, 59 FR 55014 (November 2,
1994). The effective date of Rule 11Ac1-3 and the amendments to Rule
10b-10 has been postponed to October 2, 1995 (Release No. 34-35473,
60 FR 14366, March 17, 1995).
\168\ 59 FR 25351, 25365.
\169\ Former Rule 4.21(h) and new Rule 4.24(w).
Several commenters supported the expansion of the range of required
conflicts disclosure to include persons not registered with the
Commission. However, several commenters noted that conflict of interest
disclosures have expanded beyond reasonable measure and recommended
restricting disclosure to ``actual'' as opposed to ``potential''
conflicts. Others urged that only those conflicts that the CPO
reasonably believes might be considered material should be required.
One commenter suggested that only conflicts likely to have a direct
material adverse effect on the pool, its performance or its
relationships with its FCMs should be required.
The Commission is adopting Rule 4.24(j) generally as proposed.
However, the Commission has added to the final rule new Sec. 4.24(j)(2)
which requires description of ``(a)ny other material conflict of
interest involving the pool,'' to make clear that material conflicts
involving non-major CTAs and the operators of non-major investee pools
must be disclosed. Under the general materiality standard, disclosure
of conflicts of interest on the part of CTAs and CPOs of investee pools
below the ten percent thresholds is required if, in light of all
relevant circumstances, including, for example, the nature and severity
of the conflict, such disclosure would be material to prospective pool
participants. Thus, the additional subparagraph will reinforce the
dictates of the general materiality standard stated in Rule 4.24(w) in
this area.
With respect to the comments concerning the desirability of
limiting conflict of interest disclosures, for example, by requiring
the disclosure only of ``actual'' as opposed to ``potential'' conflicts
of interest or material conflicts, the Commission does not believe that
a clear bright line distinction of this nature can meaningfully be
drawn on a prospective basis. A situation that may ripen into a
conflict of interest, although it has not done so as of the date of the
Disclosure Document, nonetheless may be as material as an actual
conflict that currently exists. However, the Commission does believe
that conflict of interest disclosure should be guided by a rule of
reason and that only those conflicts that are reasonably likely to be
material must be disclosed. The Commission stresses, however, that
materiality in this context should not necessarily be determined on a
strictly quantitative basis, e.g., in terms of the expected
quantitative impact on a pool's rate of return, but rather, on the
basis of what a prospective investor would consider to be material.

b. Conflicts of Interest--CTAs

Proposed Rule 4.33(j) differed from former Rule 4.31(a)(5) in that
the proposed rule would have added the words ``(a) full description
of'' any actual or potential conflict. Also, the following paragraph,
which was proposed as part of the conflicts of interest provision for
CPO Disclosure Documents in proposed Rule 4.24(j), was inadvertently
omitted from Rule 4.33(j) in the Proposing Release, and it has been
included in the rule as adopted:\170\

\170\ Except for the language in parentheses, the paragraph is
identical to the last paragraph of former Rule 4.31(a)(5)(i). The
parenthetical language conforms to proposed Rule 4.24(j) for CPOs.

(2) Included in the description of such conflict shall be any
arrangement whereby the trading advisor or any principal thereof may
benefit, directly or indirectly, from the maintenance of the
client's commodity interest account with a futures commission
merchant or the introduction of that account through an introducing
---------------------------------------------------------------------------
broker (such as payment for order flow or soft dollar arrangements).

No comments were received specifically addressing proposed Rule
4.33(j). The Commission is adopting Rule 4.33(j) as proposed
(renumbering it as 4.34(j)), with the addition of the foregoing
paragraph, including the reference to payment for order flow and soft
dollar arrangements.

c. Related Party Transactions

Proposed Rule 4.24(k) would have required that the CPO describe and
discuss the costs to the pool of any material transactions or
arrangements between the pool and any person affiliated with a person
providing services to the pool for which there is no publicly
disseminated price. Although the rules previously contained no
corresponding provision, the Commission believes that this type of
disclosure is already mandated in many cases under the general
requirement that material information be disclosed. However, given the
increasing use of over-the-counter transactions in which pools contract
with their CPO or an affiliate of the CPO as counterparty to the
transaction, the Commission believes that an express requirement for
such disclosure is warranted.
Two commenters claimed that computing costs of related party
transactions is difficult. One asked the Commission to consider
requiring disclosure of the benefit to the related entity and the
potential detriment to the pool. Another commenter stated that it will
be very difficult, if not impossible, for a sponsor to quantify the
spreads charged on forward trades between its pools and counterparties
affiliated with the sponsor and urged that no greater cost detail be
required than ``cannot be quantified but will constitute a significant
cost to the pool.'' One commenter urged that if Rule 4.24(k) applies to
investee pools, no disclosure should be required with respect to pools
allocated less than ten percent of pool assets; an intermediate level
of disclosure should be required for pools allocated at least ten but
less than twenty-five percent; and full disclosure should be required
for pools allocated more than twenty-five percent.
The Commission is adopting Rule 4.24(k) as proposed (with a word
order change for clarity).\171\ In situations in which a transaction is
undertaken with an affiliate for which there is no publicly
disseminated price, the Commission recognizes that quantification of
the ``cost'' thereof to the pool may be difficult. In such contexts,
the Commission believes that, as suggested by a commenter, an
explanation of the benefit to the related party and the potential
detriment to the pool may be sufficient. In other cases, a good faith
estimate or a qualitative description of the potential negative impact
on the pool may be sufficient. The fact that such transactions are
entered into on a noncompetitive basis should also be highlighted. With
respect to investee pools, the Commission does not believe that the
three-level disclosure suggested by one of the commenters is warranted
because Rule 4.24(k) applies to transactions or arrangements that
directly involve, and that are material to, the offered pool.\172\
Thus, in applying Rule 4.24(k) to investee pool transactions, pool
operators may consider the extent of the pool's allocation of funds to
an investee pool in assessing the materiality of a related party
transaction.

\171\ See 59 F.R. 25351, 25365 n.67 for a discussion of the
litigation involving Stotler Funds, Inc., as an illustration of the
purpose of this requirement.
\172\ Moreover, as adopted, the revised rules do not retain the
proposed three-level disclosure framework for past performance
disclosures.
---------------------------------------------------------------------------

7. Litigation: Rules 4.24(l) for CPOs and 4.34(k) for CTAs
As proposed, Rule 4.24(l) would have required disclosure of any
material administrative, civil or criminal action within the preceding
five years against the pool's CPO, trading manager (if any), major CTAs
and operators of major

[[Page 38177]]
investee pools, any principal of the foregoing, and the pool's FCMs and
IBs (if any). Disclosure of actions that were concluded by adjudication
on the merits in favor of the listed persons would not have been
required. Proposed Rule 4.33(k) would have required similar disclosure
with respect to the CTA and with respect to the FCM and IB required to
be used by the CTA's client.
Former Rule 4.21(a)(13) required disclosure of any action against a
pool's CPO, CTA, FCM, IB or any of their principals within five years
preceding the Document date without regard to the outcome. Former Rule
4.31(a)(7) required similar disclosure with respect to the CTA, any FCM
or IB the client is required to use, and any principal of those
persons. If there had been no actions against any of the listed
persons, the former rules required a statement to that effect.
In addition to eliminating the requirement to disclose actions
resolved on the merits in favor of one of the identified persons, the
proposed rules would have substantially reduced required litigation
disclosures concerning FCMs and IBs. First, the basic determinant of
whether FCM or IB litigation would be material would be the extent of
potential impact of the proceeding upon the FCM or IB, unless the
proceeding were brought by the Commission or another regulatory or
self-regulatory organization. The proceeding would be disclosable only
if it would be required to be disclosed in the notes to the FCM's or
IB's financial statements prepared pursuant to generally accepted
accounting principles.\173\ Disclosure of actions brought by the
Commission and other regulatory agencies was also proposed to be
streamlined. Commission actions would have been deemed material except
for concluded actions which did not result in civil monetary penalties
exceeding $50,000 and did not involve allegations of fraud or willful
misconduct or which was adjudicated on the merits in favor of the
specified person. Actions brought by other federal or state regulatory
agencies or domestic or foreign self-regulatory organizations would
have been required to be disclosed either if they were required to be
disclosed in the notes to financial statements as discussed above or if
they involved allegations of fraud or willful misconduct. Proposed Rule
4.24(l) also would expressly have required disclosure of litigation
against a pool's trading manager, if any, and its principals, a
requirement previously encompassed within the former requirement for
disclosure of litigation against CTAs.

\173\ Proposed Rules 4.24(l)(2)(i) and 4.33(k)(2)(i). Under
generally accepted accounting principles, certain information
regarding litigation must be disclosed if the potential of a
financial loss from the litigation is either probable (i.e., likely
to occur) or reasonably possible (more than remote but less than
likely). See ACCOUNTING FOR CONTINGENCIES, Statement of Financial
Accounting Standard No. 5, (Financial Accounting Standards Board,
1975) relating to disclosure of contingencies, including litigation.
---------------------------------------------------------------------------

Proposed Rules 4.24(l) and 4.33(k) thus represented a reduction of
required litigation disclosure, particularly with respect to FCMs and
IBs. The scope of previously required litigation disclosures as to CTAs
would have been limited under proposed Rule 4.24(l) to major, as
opposed to all, CTAs for the pool, and only litigation against
operators of major investee pools would be included.\174\ Litigation
involving FCM and IB principals was not included in the proposed rule.

\174\ See Rules 4.10(i) and (d)(5), which define the terms
``major commodity trading advisor'' and ``major investee pool.'' Of
course, as noted above with respect to conflicts of interest on the
part of FCM and IB pricnipals, the requirement to disclose all
material information may require disclosure of litigation involving
persons not expressly designated in the rules.
---------------------------------------------------------------------------

Commenters generally supported the proposed changes but suggested
certain further revisions. One commenter urged that all Commission and
other regulatory matters concluded favorably with respect to the
respondent (whether or not involving allegations of fraud or willful
conduct) should be considered not material. Several commenters
contended that litigation against FCMs is immaterial because such
litigation generally does not jeopardize customer funds and virtually
all FCMs have been subject to litigated customer claims. One commenter
stated that only litigation required to be disclosed in the FCM's
financial statements (and not the regulatory matters required by Rule
4.24(l)(2) (ii) and (iii)) is material and should be required in CPO
and CTA Documents. Other commenters contended that CPOs and CTAs must
rely upon the FCM to furnish its litigation history and are unable to
verify independently the information that is provided. Consequently,
commenters recommended, variously, that litigation disclosures be
limited to those actions against an FCM that the FCM reasonably
believes are likely to have a material adverse effect on the FCM's
ability to provide brokerage services to the pool or managed account
program or upon the investor's decision to place his funds with that
FCM, or actions actually disclosed in an FCM's or IB's financial
statements. Another commenter asserted that the impact of the
litigation disclosure requirement upon funds-of-funds is unclear.
The Commission is adopting Rules 4.24(l) and 4.33(k) as proposed
(renumbering proposed Rule 4.33(k) as 4.34(k)) with the exception that
the rule is clarified to make explicit that actions involving an FCM or
IB brought by a non-United States regulatory agency and involving
allegations of fraud or willful misconduct will be considered material.
The requirement to disclose actions that would be required to be
disclosed in an FCM's or IB's financial statements is being retained.
Since FCMs carry funds of the pool or managed account, their financial
status and reliability are matters of material importance to
prospective investors.
Except for events occurring subsequent to the issuance of the
latest certified financial statements, litigation required to be
disclosed would already have been disclosed in the FCM's or IB's latest
certified financial statements. Generally, the CPO or CTA will be able
to rely, under a reasonable diligence standard, upon these pre-existing
disclosures as to matters covered by such statements. A CPO should
exercise reasonable diligence in determining which subsequent actions
are required to be so disclosed. Generally, absent facts placing the
CPO or CTA on notice of special circumstances, the CPO or CTA should be
able to rely upon representations by the FCM or IB as to what
litigation is required to be disclosed in the firm's financial
statements.
Actions brought by the Commission are treated differently from
those brought by other regulatory agencies due to the presumptively
greater relevance of such actions to the investment decision being
made. All actions brought by the Commission are considered material
other than concluded actions that did not result in civil monetary
penalties exceeding $50,000 and did not involve allegations of fraud or
other willful misconduct or which were adjudicated on the merits in
favor of the specified person. Actions brought by any other federal or
state agency, by a non-United States regulatory agency or by a self-
regulatory organization, whether domestic or foreign, are material if
they involve allegations of fraud or other willful misconduct. In all
cases, subject to the general materiality standard, concluded actions
resulting in an adjudication on the merits in favor of such persons
would not be required to be disclosed.
As in the case of other provisions of the final rules, Rule 4.24(l)
provides parallel treatment of litigation against CTAs for the pool and
the operators of

[[Page 38178]]
investee pools. Subject to the general materiality standard of Rule
4.24(w),\175\ disclosure of litigation against non-major CTAs and
investee pool operators would not be required by Rule 4.24(l).
Litigation against the FCM and IB for investee funds, absent special
circumstances, would not be required to be disclosed.

\175\ Former Rule 4.21(h).
8. Principal-Protected Pools: Rule 4.24(o) for CPOs\176\
Proposed Rule 4.24(o) would have set forth minimum disclosures
relevant to so-called ``guaranteed pools,'' which the Proposing Release
termed ``limited risk pools.'' Generally, Proposed Rule 4.24(o) would
have codified Commission Advisory 86-1\177\ by requiring the CPO of a
``limited risk pool'' to describe the nature of the limitation on risk
intended to be provided, the manner in which the limitation would be
achieved, including the cost of providing it, the conditions to be
satisfied in order for participants to receive the benefits of the risk
limitation and the circumstances in which the risk limitation would
become operative.\178\ Proposed Rule 4.24(o) would also have required
the CPO to include in the break-even analysis required by Rule
4.24(i)(6) disclosure of the cost of establishing and maintaining the
risk limitation, expressed as a percentage of the price of a unit of
participation in the pool.

\176\ Former Rule 4.21 did not specifically address disclosures
relative to principal-protected pools.
This section also discusses Rule 4.10(d)(3), which defines the
term ``principal-protected pool.'' See, also Rule 4.24(i)(xi), which
requires disclosures of costs arising from the guarantee of a
principal-protected pool.
\177\ (1986-1987 Transfer Binder) Comm. Fut. L. Rep. (CCH)
para.23,035 (April 25, 1986).
\178\ Rule 4.24(p), which deals with transferability and
redemption, requires a description of restrictions on redemption
associated with the pool's investments. The Commission intends that
this discussion include a description of any restrictions on
transferability and redemption due to use of pool funds to support a
guarantee or principal protection feature and of any restrictions
upon vesting of such guarantee or principal protection feature.
---------------------------------------------------------------------------

The Commission noted in the Proposing Release the proliferation of
so-called ``guaranteed pools,'' which are designed to assure
participants the return of their initial investment, generally by
committing a substantial portion of the assets of the pool to interest-
bearing instruments or comparable investments in order to fund the
guarantee feature. As noted, such ``guarantee'' structures generally
impose costs which limit the potential for return on futures
transactions and other types of investment returns, are often subject
to significant restrictions, for example, that the participant maintain
his investment in the fund for a specified period of years in order to
realize on the guarantee, and are subject to the risk of nonfulfillment
due to various causes. Consequently, in the past, representations in
pool Disclosure Documents concerning various types of guarantee
structures have been carefully scrutinized and guidance has been
provided by advisory concerning material disclosures that should be
made to prospective investors in pools with ``guarantee''
structures.\179\ Proposed Rule 4.24(o) was designed to codify these
specific minimum disclosures concerning ``guarantee'' structures.

\179\ See, e.g., Advisory 86-1 (1986-1987 Transfer Binder) Comm.
Fut. L. Rep. (CCH) para.23,035 (April 25, 1986), cited previously.
---------------------------------------------------------------------------

The principal comment offered on this provision of the proposed
rules was that the term ``limited risk pool'' proposed to be used in
Rule 4.24(o) was potentially confusing in that most commodity pools are
limited partnerships in which the risk to investors is to some degree
limited no matter what other measures are taken. A variety of
substitute terms were proposed, including ``capital protected pools''
and ``principal return guaranteed pools.'' Other than the comments on
the proposed ``limited risk pool'' term, the Commission did not receive
any specific comments on proposed Rule 4.24(o).
The Commission has determined to substitute the term ``principal-
protected pool'' for ``limited risk pool,'' and otherwise to adopt Rule
4.24(o) as proposed. As discussed above, ``principal-protected pool''
is defined in Rule 4.10(d)(3) to mean ``a pool (commonly referred to as
a ``guaranteed pool'') that is designed to limit the loss of the
initial investment of its participants.'' The Commission agrees that
use of the ``limited risk'' terminology of the proposal could be
confusing to investors and that ``principal-protected'' better
distinguishes pools supported by a guarantee feature from those that
are not.
As adopted, Rule 4.24(o) requires that the CPO describe the nature
of the contemplated principal protection feature, disclosing the manner
by which protection of principal will be achieved, sources of funding
for the protection feature, conditions that must be satisfied for
participants to receive the benefits of the protection feature, and
when the protection feature becomes operative. The rule also specifies
that the costs of purchasing and carrying assets necessary to fund the
principal protection feature be included in the break-even analysis
required by Rule 4.24(i)(6), expressed as a percentage of the price of
a unit of participation. Rule 4.24(o) is intended to supersede the
specific disclosures set forth in Advisory 86-1. However, Advisory 86-1
may continue to be helpful in constructing disclosures under 4.24(o),
as well as providing insight into the purposes of this provision.
Further, CPOs are reminded of the admonition in Advisory 86-1 that
``(a)ny statements that suggest that the risks of futures trading are
decreased by reason of this structure have a high potential to mislead
or deceive and could result in serious violations of the Commission's
regulations and anti-fraud provisions.''

C. Supplemental and Voluntary Disclosures: Rules 4.24(v) for CPOs and
4.34(n) for CTAs \180\

A frequent complaint concerning commodity pool Disclosure Documents
is that in many cases the disclosure process fails to achieve its
intended purpose due to the high volume of information, much of which
is beyond the scope of Commission requirements, included in the
Disclosure Document. To address this concern, the Commission proposed a
format for Disclosure Documents under which disclosures that are
``volunteered'' would be required to be placed after all relevant
required disclosures. Specifically, proposed Rules 4.24(v) and 4.33(n)
would have required all information, other than that required by the
Commission,\181\ the antifraud provisions of the Act, and any federal
or state securities laws and regulations, to be placed ``following the
related required disclosures, unless otherwise specified in this
rule.'' Additionally, such information could not have been misleading
in content or presentation or inconsistent with required disclosures,
and it would be subject to the anti-fraud provisions of the Act\182\
and the regulations thereunder, and to rules regarding the use of
promotional material promulgated by a registered futures association
pursuant to section 17(j) of the Act. Essentially, Proposed

[[Page 38179]]
Rules 4.24(v) and 4.33(n) were designed to assure that core disclosures
required under Commission and other rules and statutes are given due
prominence and that focus upon these matters is not displaced by the
often voluminous material gratuitously included in the Disclosure
Document.

\180\ The Commission's former disclosure rules did not
specifically address supplemental and voluntary disclosures.
\181\ Commission-required disclosures include information
required by former Rules 4.21(h) (renumbered as Rule 4.24(w) for
CPOs)) and 4.31(g) (renumbered as Rule 4.34(o) for CTAs)). As noted
above, these rules require CPOs and CTAs to disclose all material
information to existing and prospective pool participants and
clients even if the information is not specifically required by
Commission rules.
\182\ See sections 4b and 4o of the Act.
---------------------------------------------------------------------------

The comments received by the Commission indicated significant
confusion regarding the meaning and operation of proposed Rules 4.24(v)
and 4.33(n). Commenters asserted that it was unclear where various
types of voluntary information would be required (or permitted) to be
placed. They noted the potential for scattering of related items in
different portions of a Disclosure Document, when clarity would be
fostered by placing non-required information adjacent to the required
information to which it relates. Also, commenters claimed that, in
essence, by designating information as ``voluntary,'' registrants would
be declaring that such information was not material or important, when
in fact such information may be necessary to explain or clarify
required disclosures. Commenters also noted that it is often difficult
to determine what information is mandated by law or regulation and what
is merely advisable to include.
The Commission has adopted Rules 4.24(v) and 4.33(n) (renumbered as
4.34(n)) with the following modifications. The word ``voluntary'' has
been replaced in the rule heading with ``supplemental,'' and the rules
as adopted distinguish among supplemental performance disclosures
(which must be placed after the last required performance disclosure),
supplemental information with respect to required non-performance
disclosures (which may be placed after or within the text of the
corresponding required disclosures), and supplemental information which
relates neither to the performance nor the non-performance disclosures
required by Commission rules, federal or state laws and regulations,
self-regulatory agency regulations or laws of non-United States
jurisdictions (which must be placed after the last required
disclosure).
As proposed, Rules 4.24(v) and 4.33(n) referred to disclosures
required, inter alia, by federal or state securities laws or
regulations. The modifier ``securities'' has been deleted from the
final rules to take account of the potential applicability of other
bodies of law. Further, as adopted, the required disclosures from which
supplemental information is distinguished by Rules 4.24(v) and 4.34(n)
include information required by applicable laws of a non-United States
jurisdiction. Rules 4.24(v) and 4.34(n) as adopted, treat supplemental
performance and non-performance information differently due to the
extensive specific requirements of Commission rules with respect to
performance data and the high susceptibility of performance data to use
in a misleading manner. Thus, the entire required performance
presentation must precede any supplemental performance data.\183\
However, required volatility disclosure, for example, supplemental
disclosure to indicate high monthly volatility for a CTA whose
performance is otherwise required to be provided only on an annual
basis, is expressly permitted to be included with the related
performance disclosure. Supplemental non-performance information that
relates to a disclosure required by Commission rules may be included in
the text of or immediately following the related required disclosure,
provided that the required disclosure is not thereby obscured or made
less prominent. Other supplemental information must follow the last
required disclosure, except that proprietary, hypothetical, extracted,
pro forma (except as previously discussed)\184\ or simulated trading
results, because of their inherent lack of reliability and high
potential to mislead, must be placed at the end of the Disclosure
Document following all other information.\185\

\183\ The Commission does not consider footnotes and explanatory
text,if any, directly related to a required performance presentation
to be supplemental performance disclosures and thus they should be
included with the required performance.
\184\ See discussion in Section V.C.3., supra, concerning
required pro forma adjustments.
\185\ See Rules 4.25(a)(8) for CPOs and 4.35(a)(7) for CTAs. The
Commission is not specifying the order of presentation as among
proprietary, hypothetical, extracted, pro forma or simulated trading
results.
---------------------------------------------------------------------------

VII. Other Changes

A. Deletion of Negative Disclosures

The Commission proposed to eliminate certain statements which the
former rules had required registrants to include if there was no
affirmative response to a particular disclosure requirement (e.g., a
statement that no material actions had been brought against the CPO in
the preceding five years). Although many commenters generally approved
of the Commission's efforts to eliminate excessive and burdensome
required statements, none of the comments received specifically
addressed these proposed changes.
As adopted, the revised disclosure rules thus no longer require
CPOs or CTAs to make the following types of statements, as applicable:
That there are no actual or potential conflicts of interest regarding
any aspect of the pool or trading program on the part of certain
persons;\186\ that certain persons do not own any beneficial interest
in the pool;\187\ that there is no minimum or maximum amount of
contributions or maximum amount of time pool funds will be held prior
to trading;\188\ that there are no restrictions on transfer or
redemptions of participations;\189\ that no material actions have been
brought within the past five years against certain persons;\190\ and
that certain persons will not trade for their own accounts.\191\ There
remain requirements for affirmative, positive related disclosures on
these subjects, as applicable.

\186\ See former Rules 4.21(a)(3)(iii) and 4.31(a)(5)(iii).
\187\ See former Rule 4.21(a)(6)(ii).
\188\ See former Rules 4.21(a)(8)(i)(B), 4.21(a)(8)(ii)(B) and
4.21(a)(8)(iii)(B).
\189\ See former Rule 4.21(a)(10)(ii)(C)(2).
\190\ See former Rules 4.21(a)(13)(ii) and 4.31(a)(7)(ii).
\191\ See former Rules 4.21(a)(15)(iii) and 4.31(a)(6)(iii).
B. Use, Amendment and Filing of Disclosure Documents: Rules 4.26 for
CPOs and 4.36 for CTAs

As proposed, Rules 4.26 and 4.35, which govern the use, amendment
and filing of Disclosure Documents, would have retained, substantially
unchanged, the requirements of the former rules, with one
exception.\192\ The Commission proposed to extend the length of time
that a Disclosure Document could have been used following the date
thereof from six to nine months. As the Commission noted in the
Proposing Release, this would conform the updating requirements of pool
Disclosure Documents to those of section 10(a)(3) of the Securities Act
for public securities offerings.\193\ Thus,

[[Page 38180]]
these rules would have continued to address the currentness of a
Disclosure Document and the information therein, corrections, filing
and, in the case of CPOs, attachment of the most recent Account
Statement and Annual Report to pool Disclosure Documents.

\192\ Proposed Rule 4.26 would have combined the requirements of
former Rules 4.21 (b), (e), (f) and (g), which, respectively,
required correction of material inaccuracies or omissions in a
Disclosure Document, specified how current the performance and non-
performance information must be and how long a Disclosure Document
could be used, required attachment of the current Account Statement
and Annual Report, and specified the filing requirements for CPO
Disclosure Documents. Proposed Rule 4.35 would have combined the
requirements of former Rules 4.31 (b), (e) and (f), which,
respectively, required correction of material inaccuracies or
omissions in a Disclosure Document, specified how current the
performance and non-performance information must be and how long a
Disclosure Document could be used, and specified the filing
requirements for CTA Disclosure Documents.
\193\ 59 FR 25351, 25367. Section 10(a)(3) of the Securities Act
(15 U.S.C. 77j(a)(3)) requires that when a securities prospectus is
used more than nine months after the effective date of the
registration statement, information contained therein may not be as
of a date more than sixteen months prior to such use if the
information is known and can be furnished without unreasonable
effort or expense.
---------------------------------------------------------------------------

Two commenters questioned whether it was appropriate to adopt a
nine-month standard from Securities Act Section 10(a)(3), and
recommended instead an annual updating schedule. One commenter objected
to maintaining the former rules' requirement to deliver a current
Account Statement with the Disclosure Document, contending that in a
medium- to long-term investment, monthly account statements are not
material and that the requirements to attach the most recent Account
Statement to thousands of prospectuses distributed to various branch
offices presents substantial compliance problems.\194\

\194\ Another commenter sought guidance (or a safe harbor) with
respect to the level of investee pool changes or reallocations which
trigger the need to update performance information and/or the
Disclosure Document for a fund-of-funds (suggesting a quarterly
performance update). But see Rule 4.8, which provides specified
relief from the pre-filing requirement for CPOs who operate pools of
the nature specified therein. Further, as discussed above, whether a
given investee pool allocation or reallocation is material depends
upon the particular factual circumstances of the pool, including the
overall frequency and significance of such changes. Thus, for
example, in a dynamically allocated multi-advisor pool with multiple
monthly CTA changes, the likelihood of a given CTA change being
material is less than in a pool with fewer advisors and less
frequent reallocations.
---------------------------------------------------------------------------

Rules 4.26 and 4.35 are being adopted generally as proposed, with
Rule 4.35 renumbered as 4.36. With respect to the comments favoring a
one-year updating cycle for Disclosure Documents, the Commission notes
that since performance information need only be current as of a date
three months prior to the Disclosure Document date, extending the
updating requirement to nine months means that the performance
information in the Disclosure Document may be as much as a year old.
The Commission believes that further extending the updating cycle to
twelve months is unwarranted, and that the purpose of the proposed
revisions to permit updating on a nine-month cycle, i.e., harmonization
with the SEC update cycle, is achieved by adoption of the update
provisions as proposed.
The Commission notes that Disclosure Document amendments are not
subject to the twenty-one day prefiling requirement, but may be used
simultaneously with their filing with the Commission, i.e., not more
than twenty-one days after the date on which the CPO or CTA first knows
or has reason to know that the Disclosure Document is materially
inaccurate or incomplete. In response to a commenter's request for
clarification, the Commission also is confirming that an offering
memorandum distributed pursuant to Rule 4.12(b) must be updated in the
same manner as a Disclosure Document.
In response to the comment concerning the difficulty of, and lack
of benefit from, including the current Account Statement with the
Disclosure Document, the Commission notes that the information
contained in the Account Statement provides a prospective participant
with relevant current information, particularly with respect to the
pool's performance, that is not available in the Disclosure Document.
The requirement to provide the most recent monthly Account Statement is
a means of assuring that prospective investors receive recent data
concerning the pool's performance. This requirement, coupled with the
duty to provide material information to prospective investors, should
assure that prospective investors receive timely information concerning
the pool's performance as necessary to balance the potentially stale
performance data in the Disclosure Document. If it would be misleading
not to disclose performance information for the period subsequent to
that reflected in the Disclosure Document but prior to the Account
Statement, the CPO may be required to provide additional information.
In light of the new nine-month update cycle, pool operators should
exercise special caution in assuring that sufficient additional
information is provided to investors concerning performance volatility
occurring subsequent to the period covered in the Disclosure Document.
The Commission does not agree with the view expressed by the commenter
that monthly data are not material to prospective pool participants.
The importance of such current data will in fact be heightened under
these rules, given the extension of the update cycle to nine months
rather than six months.
The Commission believes that the purpose of the requirement to
attach the most recent Account Statement may, however, be accomplished
by other methods and has provided in the final rules an alternative
procedure to attachment of the Account Statement to the Disclosure
Document. Under the alternative procedure, in lieu of attaching the
most recent monthly Account Statement to the Disclosure Document, the
pool operator would provide performance information for the pool (which
may be, but is not required to be, set forth in the form of a monthly
Account Statement) current as of a date not more than sixty days prior
to the date on which the Disclosure Document is provided to the
prospective participant and covering the period since the most recent
performance data contained in the Disclosure Document. Of course, any
material changes in the pool's performance would require
supplementation of the Disclosure Document.
In response to another commenter's request for clarification, the
Commission is confirming that a CPO need not (1) file the most current
Account Statement for a pool unless it is being used as an amendment to
the pool's Disclosure Document; (2) include the most current Account
Statement and Annual Report with a Disclosure Document amendment prior
to filing such amendment with the Commission; or (3) physically attach
the most current Account Statement and Annual Report to a Disclosure
Document amendment prior to distributing the amendment to investors--
inclusion in the same package is sufficient. When an amendment is
distributed to existing pool participants, the CPO need not include the
latest Annual Report and Account Statement (provided the existing
participants have been receiving such reports on a timely basis). If a
Disclosure Document amendment is distributed to previously solicited
prospective investors, however, the most recent Annual Report and
Account Statement must be included.

C. Disclosure Document Delivery Requirements

As proposed, Rules 4.21 and 4.31 would have retained, respectively,
only paragraphs (a) and (d) of former Rules 4.21 and 4.31. In each
case, paragraph (a) was the requirement for delivery of a Disclosure
Document at or before the time of solicitation, and paragraph (d) was
the requirement that a signed acknowledgment of receipt of the
Disclosure Document be obtained. The requirements specified in former
Rules 4.21(a) and (d) and former Rules 4.31(a) and (d) were left intact
in the proposed revisions, except that CPOs would have been permitted
to use summary offering materials in certain circumstances.
1. Notice of Intended Offering and Term Sheet
Proposed Rule 4.21(a) would have permitted CPOs to provide
prospective participants who are accredited

[[Page 38181]]
investors as defined in Rule 501 of Regulation D under the Securities
Act \195\ with a notice of intended offering and term sheet prior to
delivery of the Disclosure Document, subject to rules promulgated by a
registered futures association pursuant to Section 17(j) of the Act.
This provision was intended to facilitate the offering of pools that
qualify for relief from registration under the Securities Act as
private offerings.

\195\ 17 CFR 230.501 (1994).
---------------------------------------------------------------------------

One commenter called the proposed change a worthwhile advance. Most
commenters on the proposed provision urged that its coverage be
expanded. Two commenters suggested that a CPO should be able to deliver
a term sheet to a person who is not an accredited investor, so long as
a Disclosure Document was delivered, ultimately or within a
``reasonable time.'' Several commenters urged that CTAs be permitted to
use term sheets and notices of intended offerings to solicit accredited
investors. Another commenter stated that the proposed amendment to Rule
4.21 would provide no additional relief beyond that already provided by
Rule 4.8 and sought both clarification whether a Disclosure Document
must still be provided to the recipient of a term sheet and inclusion
in the rule itself of the requirement (if any) that the term sheet be
filed.
The Commission has determined to adopt Rule 4.21 as proposed. The
Commission believes that extending the use of term sheets to non-
accredited investors is not appropriate at this time and that such
investors should receive the full protection of the disclosure rules to
make an informed decision about participating in a pool. The Commission
is also declining to permit CTAs to employ a procedure comparable to
the use of a notice of intended offering and term sheet. The purpose of
allowing the use of this type of short-form solicitation in the case of
a pool offering is to permit a simple statement of basic terms to be
provided in lieu of an often lengthy pool Disclosure Document. The
relative brevity and simplicity of CTA Disclosure Documents do not at
this time appear to warrant establishment of a comparable procedure.
The Commission confirms that a Disclosure Document must be provided to
the recipient of a term sheet and that the term sheet is not required
to be filed.
2. Acknowledgment of Disclosure Document
The Commission also sought comment on whether the requirement that
CPOs and CTAs must receive from a prospective investor a signed and
dated acknowledgment continues to be necessary. Three commenters
proposed that, in the case of pools, the requirement be permitted to be
satisfied if an acknowledgment is included in the subscription
documents, with one such commenter suggesting that such an
acknowledgment need not include the date of the Disclosure Document in
order to permit use of the subscription documents throughout the
offering, asserting that a blank left for the Disclosure Document date
would likely be overlooked. The Commission confirms that an
acknowledgment may be included in the subscription documents for a
pool, provided that the text of the acknowledgment is prominently
captioned and distinguished from the subscription agreement and that
there is a separate line for the acknowledgment signature and date
thereof. The Commission notes that the required provision of a date
imposes a minimal burden, if any at all, protects the interests of both
the CPO and the participant and is a critical component of the pool's
audit trail.

D. Conforming Changes

The Proposing Release contained a number of changes to conform
cross-references in the text of various Commission rules to the new
section numbering within part 4, which changes are being adopted. The
rules so affected are Rules 4.12, 4.21, 4.23, 4.32 (renumbered as
4.33), 30.6 and 150.3. One commenter pointed out that cross references
in Rule 4.7 to former Rules 4.21 and 4.31 required amendment to conform
with the reorganization and separate designation of certain provisions
of former Rules 4.21 and 4.31. The Commission has revised Rule 4.7
accordingly, and has also revised Rule 4.8 to conform cross-references
to the revised rule numbers.

VIII. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1988),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments discussed herein
will 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.\196\ The Commission previously has determined
that registered CPOs are not small entities for the purpose of the
RFA.\197\ 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.\198\

\196\ 47 FR 18618-18621 (April 30, 1982).
\197\ 47 FR 18619-18620.
\198\ 47 FR 18618-18620.
---------------------------------------------------------------------------

The revised rules reduce rather than increase the requirements of
former Rule 4.21 for CPOs and the requirements of former Rule 4.31 for
CTAs. The revised rules significantly decrease the amount of past
performance and other information required to be disclosed by CPOs and
CTAs, and Disclosure Documents may be used for nine months rather than
six months. The Commission has adopted in the final revised rules
further reductions in disclosure requirements from the proposed
revisions (e.g., permitting CTAs to use the new capsule format for
presenting the past performance of the offered pool).
In certifying pursuant to section 3(a) of the RFA that the proposed
revisions to the part 4 CPO and CTA disclosure rules would not have a
significant economic impact on a substantial number of small entities,
the Commission invited comments from any CPO or CTA who believed that
the proposed revisions, if adopted, would have a significant economic
impact on their activities. No such comments were received on the
proposed revisions.
Accordingly, pursuant to Rule 3(a) of the RFA (5 U.S.C. 605(b)),
the Chairman, on behalf of the Commission, certifies that the action
taken herein will not have a significant economic impact on a
substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1980, (``PRA'') 44 U.S.C. 3501 et
seq., imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. In compliance with the
PRA, the Commission has submitted these proposed rule amendments and
the associated information collection requirements to the Office of
Management and Budget. The burden associated with this entire
collection, including these rules, is as follows:

Average burden hours per response..................... 124.65

[[Page 38182]]

Number of respondents................................. 3,924
Frequency of response................................. On occasion

The burden associated with these specific rules, is as follows:

Average burden hours per response..................... 8.05
Number of respondents................................. 1,162
Frequency of response................................. On occasion

Copies of the information collection submission to OMB are
available from Joe F. Mink, CFTC Clearance officer, 2033 K Street, NW,
Washington, DC 20581, (202) 254-9735.

List of Subjects

17 CFR Part 1

Consumer protection, Risk disclosure statements.

17 CFR Part 4

Brokers, Commodity futures, Commodity pool operators and commodity
trading advisors.

17 CFR Part 30

Commodity futures, Consumer protection, Foreign futures and foreign
options transactions.

17 CFR Part 150

Commodity futures, Limits on positions.

In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and in particular, sections
2(a)(1), 4b, 4c, 4l, 4m, 4n, 4o, and 8a, 7 U.S.C. 2, 6b, 6c, 6l, 6m,
6n, 6o, and 12a, the Commission hereby amends 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 and 24.

2. Section 1.55 is amended by adding paragraph (a)(1)(iii) to read
as follows:

Sec. 1.55 Distribution of ``Risk Disclosure Statement'' by futures
commission merchants and introducing brokers.

(a)(1) * * *
(iii) Solely for purposes of this section, a pool operated by a
commodity pool operator registered under the Commodity Exchange Act or
exempt from such registration need not be treated as a customer.
* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

Subpart A--General Provisions, Definitions and Exemptions

3. 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.

Sec. 4.7 [Amended]

4. In Sec. 4.7, paragraph (a)(2)(i)(A) is amended by removing the
reference ``Sec. 4.21'' and by adding the reference ``Secs. 4.21, 4.24,
4.25 and 4.26'' in its place.

Sec. 4.7 [Amended]

5. In Sec. 4.7, paragraph (a)(4) is amended by removing the
reference ``Secs. 4.21, 4.22 or 4.23'' and by adding the reference
``Secs. 4.21, 4.22, 4.23, 4.24, 4.25 or 4.26'' in its place.

Sec. 4.7 [Amended]

6. In Sec. 4.7, paragraph (b)(2)(i)(A) is amended by removing the
reference ``Sec. 4.31'' and by adding the reference ``Secs. 4.31, 4.34,
4.35 and 4.36'' in its place.

Sec. 4.7 [Amended]

7. In Sec. 4.7, paragraph (b)(4) is amended by removing the
reference ``Secs. 4.31 or 4.32'' and by adding the reference
``Secs. 4.31, 4.33, 4.34, 4.35 or 4.36'' in its place.

Sec. 4.8 [Amended]

8. In Sec. 4.8, the section heading is amended by removing the
reference to ``rules 4.21'' and by adding the reference ``rule 4.26''
in its place.

Sec. 4.8 [Amended]

9. In Sec. 4.8, paragraphs (a) and (b) are amended by removing the
reference ``paragraph (g) of Sec. 4.21'' and by adding the reference
``paragraph (d) of Sec. 4.26'' in its place.
10. Section 4.10 is amended by designating paragraph (d) as
paragraph (d)(1), by adding new paragraphs (d)(2), (d)(3), (d)(4),
(d)(5), (h), (i), (j), (k) and (l), and by revising paragraph (e) to
read as follows:

Sec. 4.10 Definitions.

* * * * *
(d)(1) Pool means any investment trust, syndicate or similar form
of enterprise operated for the purpose of trading commodity interests.
(2) Multi-advisor pool means a pool in which:
(i) No commodity trading advisor is allocated or intended to be
allocated more than twenty-five percent of the pool's funds available
for commodity interest trading; and
(ii) No investee pool is allocated or intended to be allocated more
than twenty-five percent of the pool's net asset value.
(3) Principal-protected pool means a pool (commonly referred to as
a ``guaranteed pool'') that is designed to limit the loss of the
initial investment of its participants.
(4) Investee pool means any pool in which another pool or account
participates or invests, e.g., as a limited partner thereof.
(5) Major investee pool means, with respect to a pool, any investee
pool that is allocated or intended to be allocated at least ten percent
of the net asset value of the pool.
(e)(1) Principal, when referring to a person that is a principal of
a particular entity, means:
(i) Any person including, but not limited to, a sole proprietor,
general partner, officer or director, or person occupying a similar
status or performing similar functions, having the power, directly or
indirectly, through agreement or otherwise, to exercise a controlling
influence over the activities of the entity;
(ii) Any holder or any beneficial owner of ten percent or more of
the outstanding shares of any class of stock of the entity; and
(iii) Any person who has contributed ten percent or more of the
capital of the entity.
(2) ``Trading principal'' means:
(i) With respect to a commodity pool operator, a principal who
participates in making trading decisions for a pool, or who supervises,
or has authority to allocate pool assets to, persons so engaged; and
(ii) With respect to a commodity trading advisor, a principal who
participates in making trading decisions for the account of a client or
who supervises or selects persons so engaged.
* * * * *
(h) Trading manager means, with respect to a pool, any person,
other than the commodity pool operator of the pool, having sole or
partial authority to allocate pool assets to commodity trading advisors
or investee pools.
(i) Major commodity trading advisor means, with respect to a pool,
any commodity trading advisor that is allocated or is intended to be
allocated at least ten percent of the pool's funds available for
commodity interest trading. For this purpose, the percentage allocation
shall be the amount of funds allocated to the trading advisor by

[[Page 38183]]
agreement with the commodity pool operator (or trading manager) on
behalf of the pool, expressed as a percentage of the lesser of the
aggregate value of the assets allocated to the pool's trading advisors
or the net assets of the pool at the time of allocation.
(j) Break-even point:
(1) Means the trading profit that a pool must realize in the first
year of a participant's investment to equal all fees and expenses such
that such participant will recoup its initial investment, as calculated
pursuant to rules promulgated by a registered futures association
pursuant to section 17(j) of the Act; and
(2) Must be expressed both as a dollar amount and as a percentage
of the minimum unit of initial investment and assume redemption of the
initial investment at the end of the first year of investment.
(k) Draw-down means losses experienced by a pool or account over a
specified period.
(l) Worst peak-to-valley draw-down means the greatest cumulative
percentage decline in month-end net asset value due to losses sustained
by a pool, account or trading program during any period in which the
initial month-end net asset value is not equaled or exceeded by a
subsequent month-end net asset value. Such decline must be expressed as
a percentage of the initial month-end net asset value, together with an
indication of the months and year(s) of such decline from the initial
month-end net asset value to the lowest month-end net asset value of
such decline.\1\ For purposes of Secs. 4.25 and 4.35, a peak-to-valley
draw-down which began prior to the beginning of the most recent five
calendar years is deemed to have occurred during such five- calendar-
year period.

\1\ For example, a worst peak-to-valley draw-down of ``4 to 8-
92/25%'' means that the peak-to-valley draw-down lasted from April
to August of 1992 and resulted in a twenty-five percent cumulative
draw-down.
---------------------------------------------------------------------------

11. Section 4.12 is amended by revising paragraphs (b)(2)(i) and
(b)(5)(i) to read as follows:

Sec. 4.12 Exemption from provisions of part 4.

* * * * *
(b) * * *
(2) * * *
(i) In the case of Sec. 4.21, that the Commission accept in lieu
and in satisfaction of the Disclosure Document specified by that
section an offering memorandum for the pool which does not contain the
information required by Secs. 4.24(a), 4.24(b), and 4.24(n); Provided,
however, that the offering memorandum:
(A) Is prepared pursuant to the requirements of the Securities Act
of 1933, as amended, or the exemption from said Act pursuant to which
the pool is being offered and sold;
(B) Contains the information required by Secs. 4.24(c) through (m)
and (o) through (u); and
(C) Complies with the requirements of Secs. 4.24(v) and (w).
* * * * *
(5)(i) If a claim of exemption has been made under
Sec. 4.12(b)(2)(i), the commodity pool operator must make a statement
to that effect on the cover page of each offering memorandum, or
amendment thereto, that it is required to file with the Commission
pursuant to Sec. 4.26.
* * * * *

Subpart B--Commodity Pool Operators

12. Section 4.21 is revised to read as follows:

Sec. 4.21 Required delivery of pool Disclosure Document.

(a) No commodity pool operator registered or required to be
registered under the Act may, directly or indirectly, solicit, accept
or receive funds, securities or other property from a prospective
participant in a pool that it operates or that it intends to operate
unless, on or before the date it engages in that activity, the
commodity pool operator delivers or causes to be delivered to the
prospective participant a Disclosure Document for the pool containing
the information set forth in Sec. 4.24; Provided, however, that where
the prospective participant is an accredited investor, as defined in 17
CFR 230.501(a), a notice of intended offering and statement of the
terms of the intended offering may be provided prior to delivery of a
Disclosure Document, subject to compliance with rules promulgated by a
registered futures association pursuant to section 17(j) of the Act.
(b) The commodity pool operator may not accept or receive funds,
securities or other property from a prospective participant unless the
pool operator first receives from the prospective participant an
acknowledgment signed and dated by the prospective participant stating
that the prospective participant received a Disclosure Document for the
pool.

13. Section 4.23 is amended by revising paragraph (a)(3) to read as
follows:

Sec. 4.23 Recordkeeping.

* * * * *
(a) * * *
(3) The acknowledgement specified by Sec. 4.21(b) for each
participant in the pool.
* * * * *
14. Sections 4.24, 4.25 and 4.26 are added to read as follows:

Sec. 4.24 General disclosures required.
Except as otherwise provided herein, a Disclosure Document must
include the following information.
(a) Cautionary Statement. The following Cautionary Statement must
be prominently displayed on the cover page of the Disclosure Document.

THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE
MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED
ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

(b) Risk Disclosure Statement. (1) The following Risk Disclosure
Statement must be prominently displayed immediately following any
disclosures required to appear on the cover page of the Disclosure
Document as provided by the Commission, by any applicable federal or
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions.

RISK DISCLOSURE STATEMENT

YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU
SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO
LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY
REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF
YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS
MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES
FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY
FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF
THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE
DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE (insert
page number) AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO
BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL
INVESTMENT, AT PAGE (insert page number).
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER
FACTORS NECESSARY TO EVALUATE

[[Page 38184]]
YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE
TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY
THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL
RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page number).

(2) If the pool may trade foreign futures or options contracts, the
Risk Disclosure Statement must further state:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE
FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS
LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED
TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER
DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS.
FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO
COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR
MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR
THE POOL MAY BE EFFECTED.

(3) If the potential liability of a participant in the pool is
greater than the amount of the participant's contribution for the
purchase of an interest in the pool and the profits earned thereon,
whether distributed or not, the commodity pool operator must make the
following additional statement in the Risk Disclosure Statement, to be
prominently disclosed as the last paragraph thereof:

ALSO, BEFORE YOU DECIDE TO PARTICIPATE IN THIS POOL, YOU SHOULD
NOTE THAT YOUR POTENTIAL LIABILITY AS A PARTICIPANT IN THIS POOL FOR
TRADING LOSSES AND OTHER EXPENSES OF THE POOL IS NOT LIMITED TO THE
AMOUNT OF YOUR CONTRIBUTION FOR THE PURCHASE OF AN INTEREST IN THE
POOL AND ANY PROFITS EARNED THEREON. A COMPLETE DESCRIPTION OF THE
LIABILITY OF A PARTICIPANT IN THIS POOL IS EXPLAINED MORE FULLY IN
THIS DISCLOSURE DOCUMENT.

(c) Table of contents. A table of contents showing, by subject
matter, the location of the disclosures made in the Disclosure Document
must appear immediately following the Risk Disclosure Statement.
(d) Information required in the forepart of the Disclosure
Document. (1) The name, address of the main business office, main
business telephone number and form of organization of the pool. If the
mailing address of the main business office is a post office box number
or is not within the United States, its territories or possessions, the
pool operator must state where the pool's books and records will be
kept and made available for inspection;
(2) The name, address of the main business office, main business
telephone number and form of organization of the commodity pool
operator. If the mailing address of the main business office is a post
office box number or is not within the United States, its territories
or possessions, the pool operator must state where its books and
records will be kept and made available for inspection;
(3) As applicable, a statement that the pool is:
(i) Privately offered pursuant to section 4(2) of the Securities
Act of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D
thereunder (17 CFR 230.501 et seq.);
(ii) A multi-advisor pool as defined in Sec. 4.10(d)(2);
(iii) A principal-protected pool as defined in Sec. 4.10(d)(3); or
(iv) Continuously offered. If the pool is not continuously offered,
the closing date of the offering must be disclosed.
(4) The date when the commodity pool operator first intends to use
the Disclosure Document; and
(5) The break-even point per unit of initial investment, as
specified in Sec. 4.10(j).
(e) Persons to be identified. The names of the following persons:
(1) Each principal of the pool operator;
(2) The pool's trading manager, if any, and each principal thereof;
(3) Each major investee pool, the operator of such investee pool,
and each principal of the operator thereof;
(4) Each major commodity trading advisor and each principal
thereof;
(5) Which of the foregoing persons will make trading decisions for
the pool; and
(6) If known, the futures commission merchant through which the
pool will execute its trades, and, if applicable, the introducing
broker through which the pool will introduce its trades to the futures
commission merchant.
(f) Business background. (1) The business background, for the five
years preceding the date of the Disclosure Document, of:
(i) The commodity pool operator;
(ii) The pool's trading manager, if any;
(iii) Each major commodity trading advisor;
(iv) The operator of each major investee pool; and
(v) Each principal of the foregoing persons who participates in
making trading or operational decisions for the pool or who supervises
persons so engaged, including, without limitation, the officers and
directors of such persons.
(2) The pool operator must include in the description of the
business background of each person identified in Sec. 4.24(f)(1) the
name and main business of that person's employers, business
associations or business ventures and the nature of the duties
performed by such person for such employers or in connection with such
business associations or business ventures. The location in the
Disclosure Document of any required past performance disclosure for
such person must be indicated.
(g) Principal risk factors. A discussion of the principal risk
factors of participation in the offered pool. This discussion must
include, without limitation, risks relating to volatility, leverage,
liquidity, and counterparty creditworthiness, as applicable to the
types of trading programs to be followed, trading structures to be
employed and investment activity expected to be engaged in by the
offered pool.
(h) Investment program and use of proceeds. The pool operator must
disclose the following:
(1) The types of commodity interests and other interests which the
pool will trade, including:
(i) The approximate percentage of the pool's assets that will be
used to trade commodity interests, securities and other types of
interests, categorized by type of commodity or market sector, type of
security (debt, equity, preferred equity), whether traded or listed on
a regulated exchange market, maturity ranges and investment rating, as
applicable;
(ii) The extent to which such interests are subject to state or
federal regulation, regulation by a non-United States jurisdiction or
rules of a self-regulatory organization; (iii)(A) The custodian or
other entity (e.g., bank or broker-dealer) which will hold such
interests; and
(B) If such interests will be held or if pool assets will be
invested in a non-United States jurisdiction, the jurisdiction in which
such interests or assets will be held or invested.
(2) A description of the trading and investment programs and
policies that will be followed by the offered pool, and any material
restrictions or limitations on trading required by the pool's
organizational documents or otherwise. This description must include,
if applicable, an explanation of the systems used to select commodity
trading advisors, investee pools and types of investment activity to
which pool assets will be committed;
(3)(i) A summary description of the pool's major commodity trading
advisors, including their respective

[[Page 38185]]
percentage allocations of pool assets, a description of the nature and
operation of the trading programs such advisors will follow, including
the types of interests traded pursuant to such programs, and each
advisor's historical experience trading such program including material
information as to volatility, leverage and rates of return and the
length of time during which the advisor has traded such program;
(ii) A summary description of the pool's major investee pools or
funds, including their respective percentage allocations of pool assets
and a description of the nature and operation of such investee pools
and funds, including for each investee pool or fund the types of
interests traded, material information as to volatility, leverage and
rates of return for such investee pool or fund and the period of its
operation; and
(4)(i) The manner in which the pool will fulfill its margin
requirements and the approximate percentage of the pool's assets that
will be held in segregation pursuant to the Act and the Commission's
regulations thereunder;
(ii) If the pool will fulfill its margin requirements with other
than cash deposits, the nature of such deposits; and
(iii) If assets deposited by the pool as margin generate income, to
whom that income will be paid.
(i) Fees and expenses. (1) The Disclosure Document must include a
complete description of each fee, commission and other expense which
the commodity pool operator knows or should know has been incurred by
the pool for its preceding fiscal year and is expected to be incurred
by the pool in its current fiscal year, including fees or other
expenses incurred in connection with the pool's participation in
investee pools and funds.
(2) This description must include, without limitation:
(i) Management fees;
(ii) Brokerage fees and commissions, including interest income paid
to futures commission merchants;
(iii) Fees and commissions paid in connection with trading advice
provided to the pool;
(iv) Fees and expenses incurred within investments in investee
pools, investee funds and other collective investment vehicles, which
fees and expenses must be disclosed separately for each investment
tier;
(v) Incentive fees;
(vi) Any allocation to the commodity pool operator, or any
agreement or understanding which provides the commodity pool operator
with the right to receive a distribution, where such allocation or
distribution is greater than a pro rata share of the pool's profits
based on the percentage of capital contributions made by the commodity
pool operator;
(vii) Commissions or other benefits, including trailing commissions
paid or that may be paid or accrue, directly or indirectly, to any
person in connection with the solicitation of participations in the
pool;
(viii) Professional and general administrative fees and expenses,
including legal and accounting fees and office supplies expenses;
(ix) Organizational and offering expenses;
(x) Clearance fees and fees paid to national exchanges and self-
regulatory organizations;
(xi) For principal-protected pools, any direct or indirect costs to
the pool associated with providing the protection feature, as referred
to in paragraph (o)(3) of this section; and
(xii) Any other direct or indirect cost.
(3) Where any fee, commission or other expense is determined by
reference to a base amount including, but not limited to, ``net
assets,'' ``allocation of assets,'' ``gross profits,'' ``net profits,''
or ``net gains,'' the pool operator must explain how such base amount
will be calculated, in a manner consistent with calculation of the
break-even point.
(4) Where any fee, commission or other expense is based on an
increase in the value of the pool, the pool operator must specify how
the increase is calculated, the period of time during which the
increase is calculated, the fee, commission or other expense to be
charged at the end of that period and the value of the pool at which
payment of the fee, commission or other expense commences.
(5) Where any fee, commission or other expense of the pool has been
paid or is to be paid by a person other than the pool, the pool
operator must disclose the nature and amount thereof and the person who
paid or who is expected to pay it.
(6) The pool operator must provide, in a tabular format, an
analysis setting forth how the break-even point for the pool was
calculated. The analysis must include all fees, commissions and other
expenses of the pool, as set forth in Sec. 4.24(i)(2).
(j) Conflicts of interest. (1) A full description of any actual or
potential conflicts of interest regarding any aspect of the pool on the
part of:
(i) The commodity pool operator;
(ii) The pool's trading manager, if any;
(iii) Any major commodity trading advisor;
(iv) The commodity pool operator of any major investee pool;
(v) Any principal of the persons described in paragraphs (k)(1)
(i), (ii), (iii) and (iv) of this section; and
(vi) Any other person providing services to the pool or soliciting
participants for the pool.
(2) Any other material conflict involving the pool.
(3) Included in the description of such conflicts must be any
arrangement whereby a person may benefit, directly or indirectly, from
the maintenance of the pool's account with the futures commission
merchant or from the introduction of the pool's account to a futures
commission merchant by an introducing broker (such as payment for order
flow or soft dollar arrangements) or from an investment of pool assets
in investee pools or funds or other investments.
(k) Related party transactions. A full description, including a
discussion of the costs thereof to the pool, of any material
transactions or arrangements for which there is no publicly
disseminated price between the pool and any person affiliated with a
person providing services to the pool.
(l) Litigation. (1) Subject to the provisions of Sec. 4.24(l)(2),
any material administrative, civil or criminal action, whether pending
or concluded, within five years preceding the date of the Document,
against any of the following persons; Provided, however, that a
concluded action that resulted in an adjudication on the merits in
favor of such person need not be disclosed:
(i) The commodity pool operator, the pool's trading manager, if
any, the pool's major commodity trading advisors, and the operators of
the pool's major investee pools;
(ii) Any principal of the foregoing; and
(iii) The pool's futures commission merchants and introducing
brokers, if any.
(2) With respect to a futures commission merchant or an introducing
broker, an action will be considered material if:
(i) The action would be required to be disclosed in the notes to
the futures commission merchant's or introducing broker's financial
statements prepared pursuant to generally accepted accounting
principles;
(ii) The action was brought by the Commission; Provided, however,
that a concluded action that did not result in civil monetary penalties
exceeding $50,000 need not be disclosed unless it involved allegations
of fraud or other willful misconduct; or

[[Page 38186]]

(iii) The action was brought by any other federal or state
regulatory agency, a non-United States regulatory agency or a self-
regulatory organization and involved allegations of fraud or other
willful misconduct.
(m) Trading for own account. If the commodity pool operator, the
pool's trading manager, any of the pool's commodity trading advisors or
any principal thereof trades or intends to trade commodity interests
for its own account, the pool operator must disclose whether
participants will be permitted to inspect the records of such person's
trades and any written policies related to such trading.
(n) Performance disclosures. Past performance must be disclosed as
set forth in Sec. 4.25.
(o) Principal-protected pools. If the pool is a principal-protected
pool as defined in Sec. 4.10(d)(3), the commodity pool operator must:
(1) Describe the nature of the principal protection feature
intended to be provided, the manner by which such protection will be
achieved, including sources of funding, and what conditions must be
satisfied for participants to receive the benefits of such protection;
(2) Specify when the protection feature becomes operative; and
(3) Disclose, in the break-even analysis required by
Sec. 4.24(i)(6), the costs of purchasing and carrying the assets to
fund the principal protection feature or other limitation on risk,
expressed as a percentage of the price of a unit of participation.
(p) Transferability and redemption. (1) A complete description of
any restrictions upon the transferability of a participant's interest
in the pool; and
(2) A complete description of the frequency, timing and manner in
which a participant may redeem interests in the pool. Such description
must specify:
(i) How the redemption value of a participant's interest will be
calculated;
(ii) The conditions under which a participant may redeem its
interest, including the cost associated therewith, the terms of any
notification required and the time between the request for redemption
and payment;
(iii) Any restrictions on the redemption of a participant's
interest, including any restrictions associated with the pool's
investments; and
(iv) Any liquidity risks relative to the pool's redemption
capabilities.
(q) Liability of pool participants. The extent to which a
participant may be held liable for obligations of the pool in excess of
the funds contributed by the participant for the purchase of an
interest in the pool.
(r) Distribution of profits and taxation. (1) The pool's policies
with respect to the payment of distributions from profits or capital
and the frequency of such payments;
(2) The federal income tax effects of such payments for a
participant, including a discussion of the federal income tax laws
applicable to the form of organization of the pool and to such payments
therefrom; and
(3) If a pool is specifically structured to accomplish certain
federal income tax objectives, the commodity pool operator must explain
those objectives, the manner in which they will be achieved and any
risks relative thereto.
(s) Inception of trading and other information. (1) The minimum
aggregate subscriptions that will be necessary for the pool to commence
trading commodity interests;
(2) The minimum and maximum aggregate subscriptions that may be
contributed to the pool;
(3) The maximum period of time the pool will hold funds prior to
the commencement of trading commodity interests;
(4) The disposition of funds received if the pool does not receive
the necessary amount to commence trading, including the period of time
within which the disposition will be made; and
(5) Where the pool operator will deposit funds received prior to
the commencement of trading by the pool, and a statement specifying to
whom any income from such deposits will be paid.
(t) Ownership in pool. The extent of any ownership or beneficial
interest in the pool held by the following:
(1) The commodity pool operator;
(2) The pool's trading manager, if any;
(3) The pool's major commodity trading advisors;
(4) The operators of the pool's major investee pools; and
(5) Any principal of the foregoing.
(u) Reporting to pool participants. A statement that the commodity
pool operator is required to provide all participants with monthly or
quarterly (whichever applies) statements of account and with an annual
report containing financial statements certified by an independent
public accountant.
(v) Supplemental information. If any information, other than that
required by Commission rules, the antifraud provisions of the Act,
other federal or state laws or regulations, rules of a self-regulatory
agency or laws of a non-United States jurisdiction, is provided, such
information:
(1) May not be misleading in content or presentation or
inconsistent with required disclosures;
(2) Is subject to the antifraud provisions of the Act and
Commission rules and to rules regarding the use of promotional material
promulgated by a registered futures association pursuant to section
17(j) of the Act; and
(3) Must be placed as follows, unless otherwise specified by
Commission rules:
(i) Supplemental performance information (not including proprietary
trading results as defined in Sec. 4.25(a)(8), or hypothetical,
extracted, pro forma or simulated trading results) must be placed after
all specifically required performance information; Provided, however,
that required volatility disclosure may be included with the related
required performance disclosure;
(ii) Supplemental non-performance information relating to a
required disclosure may be included with the related required
disclosure; and
(iii) Other supplemental information may be included after all
required disclosures; Provided, however, that any proprietary trading
results as defined in Sec. 4.25(a)(8), and any hypothetical, extracted,
pro forma or simulated trading results included in the Disclosure
Document must appear as the last disclosure therein following all
required and non-required disclosures.
(w) Material information. Nothing set forth in Secs. 4.21, 4.24,
4.25 or Sec. 4.26 shall relieve a commodity pool operator from any
obligation under the Act or the regulations thereunder, including the
obligation to disclose all material information to existing or
prospective pool participants even if the information is not
specifically required by such sections.

Sec. 4.25 Performance disclosures.

(a) General principles--(1) Capsule performance information--(i)
For pools. Unless otherwise specified, disclosure of the past
performance of a pool must include the following information. Amounts
shown must be net of any fees, expenses or allocations to the commodity
pool operator.
(A) The name of the pool;
(B) A statement as to whether the pool is:
(1) Privately offered pursuant to section 4(2) of the Securities
Act of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D
thereunder (17 CFR 230.501 et seq.);
(2) A multi-advisor pool as defined in Sec. 4.10(d)(2); and
(3) A principal-protected pool as defined in Sec. 4.10(d)(3);
(C) The date of inception of trading;
(D) The aggregate gross capital subscriptions to the pool;
(E) The pool's current net asset value;
(F) The largest monthly draw-down during the most recent five
calendar

[[Page 38187]]
years and year-to-date, expressed as a percentage of the pool's net
asset value and indicating the month and year of the draw-down (the
capsule must include a definition of ``draw-down'' that is consistent
with Sec. 4.10(k));
(G) The worst peak-to-valley draw-down during the most recent five
calendar years and year-to-date, expressed as a percentage of the
pool's net asset value and indicating the months and year of the draw-
down; and
(H) Subject to Sec. 4.25(a)(2) for the offered pool, the annual and
year-to-date rate of return for the pool for the most recent five
calendar years and year-to-date, computed on a compounded monthly
basis;
(ii) For accounts. Disclosure of the past performance of an account
required under this Sec. 4.25 must include the following capsule
performance information:
(A) The name of the commodity trading advisor or other person
trading the account and the name of the trading program;
(B) The date on which the commodity trading advisor or other person
trading the account began trading client accounts and the date when
client funds began being traded pursuant to the trading program;
(C) The number of accounts directed by the commodity trading
advisor or other person trading the account pursuant to the trading
program specified, as of the date of the Disclosure Document;
(D)(1) The total assets under the management of the commodity
trading advisor or other person trading the account, as of the date of
the Disclosure Document; and
(2) The total assets traded pursuant to the trading program
specified, as of the date of the Disclosure Document;
(E) The largest monthly draw-down for the trading program specified
during the most recent five calendar years and year-to-date expressed
as a percentage of client funds, and indicating the month and year of
the draw-down;
(F) The worst peak-to-valley draw-down for the trading program
specified during the most recent five calendar years and year-to-date,
expressed as a percentage of net asset value and indicating the months
and year of the draw-down; and
(G) The annual and year-to-date rate-of-return for the program
specified, computed on a compounded monthly basis.
(2) Additional requirements with respect to the offered pool. (i)
The performance of the offered pool must be identified as such and
separately presented first;
(ii) The rate of return of the offered pool must be presented on a
monthly basis for the period specified in Sec. 4.25(a)(5), either in a
numerical table or in a bar graph;
(iii) A bar graph used to present monthly rates of return for the
offered pool:
(A) Must show percentage rate of return on the vertical axis and
one-month increments on the horizontal axis;
(B) Must be scaled in such a way as to clearly show month-to-month
differences in rates of return; and
(C) Must separately display numerical percentage annual rates of
return for the period covered by the bar graph; and
(iv) The pool operator must make available upon request to
prospective and existing participants all supporting data necessary to
calculate monthly rates of return for the offered pool as specified in
Sec. 4.25(a)(7), for the period specified in Sec. 4.25(a)(5).
(3) Additional requirements with respect to pools other than the
offered pool. With respect to pools other than the offered pool for
which past performance is required to be presented under this section:
(i) Performance data for pools of the same class as the offered
pool must be presented following the performance of the offered pool,
on a pool-by-pool basis.
(ii) Pools of a different class than the offered pool must be
presented less prominently and, unless such presentation would be
misleading, may be presented in composite form; Provided, however,
that:
(A) The Disclosure Document must disclose how the composite was
developed;
(B) Pools of different classes or pools with materially different
rates of return may not be presented in the same composite.
(iii) For the purpose of Sec. 4.25(a)(3)(ii), the following,
without limitation, shall be considered pools of different classes:
Pools privately offered pursuant to section 4(2) of the Securities Act
of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D
thereunder (17 CFR 230.501 et seq.), and public offerings; and
principal-protected and non-principal-protected pools. Multi-advisor
pools as defined in Sec. 4.10(d)(2) will be presumed to have materially
different rates of return from those of non-multi-advisor pools absent
evidence sufficient to demonstrate otherwise.
(iv) Material differences among the pools for which past
performance is disclosed, including, without limitation, differences in
leverage and use of different trading programs, must be described.
(4) Additional requirements with respect to accounts. (i) Unless
such presentation would be misleading, past performance of accounts
required to be presented under this section may be presented in
composite form on a program-by-program basis using the format set forth
in Sec. 4.25(a)(1)(ii).
(ii) Accounts that differ materially with respect to rates of
return may not be presented in the same composite.
(iii) The commodity pool operator must disclose all material
differences among accounts included in a composite.
(5) Time period for required performance. All required performance
information must be presented for the most recent five calendar years
and year-to-date or for the life of the pool, account or trading
program, if less than five years.
(6) Trading programs. If the offered pool will use any of the
trading programs for which past performance is required to be
presented, the Disclosure Document must so indicate.
(7) Calculation of, and recordkeeping concerning, performance
information. (i) All performance information presented in a Disclosure
Document, including performance information contained in any capsule
and performance information not specifically required by Commission
rules, must be current as of a date not more than three months
preceding the date of the Document, and must be supported by the
following amounts, calculated on an accrual basis of accounting in
accordance with generally accepted accounting principles, as specified
below or by a method otherwise approved by the Commission.
(A) The beginning net asset value for the period, which shall be
the same as the previous period's ending net asset value;
(B) All additions, whether voluntary or involuntary, during the
period;
(C) All withdrawals and redemptions, whether voluntary or
involuntary, during the period;
(D) The net performance for the period, which shall represent the
change in the net asset value net of additions, withdrawals, and
redemptions;
(E) The ending net asset value for the period, which shall
represent the beginning net asset value plus or minus additions,
withdrawals, redemptions and net performance;
(F) The rate of return for the period, which shall be calculated by
dividing the net performance by the beginning

[[Page 38188]]
net asset value or by a method otherwise approved by the Commission;
and
(G) The number of units outstanding at the end of the period, if
applicable.
(ii) All supporting documents necessary to substantiate the
computation of such amounts must be maintained in accordance with
Sec. 1.31.
(8) Proprietary trading results. (i) Proprietary trading results
may not be included in a Disclosure Document unless such performance is
prominently labeled as proprietary and is set forth separately after
all disclosures in accordance with Sec. 4.24(v), together with a
discussion of any differences between such performance and the
performance of the offered pool, including, but not limited to,
differences in costs, leverage and trading methodology.
(ii) For the purposes of Sec. 4.24(v) and this Sec. 4.25(a),
proprietary trading results means the performance of any pool or
account in which fifty percent or more of the beneficial interest is
owned or controlled by:
(A) The commodity pool operator, trading manager (if any),
commodity trading advisor or any principal thereof
(B) An affiliate or family member of the commodity pool operator,
trading manager (if any) or commodity trading advisor; or
(C) Any person providing services to the pool.
(9) Required legend. Any past performance presentation, whether or
not required by Commission rules, must be preceded by the following
statement, prominently displayed:

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS.

(b) Performance disclosure when the offered pool has at least a
three-year operating history. The commodity pool operator must disclose
the performance of the offered pool, in accordance with paragraphs
(a)(1)(i) (A) through (H) and (a)(2) of this Sec. 4.25, where:
(1) The offered pool has traded commodity interests for three years
or more; and
(2) For at least such three-year period, seventy-five percent or
more of the contributions to the pool were made by persons unaffiliated
with the commodity pool operator, the trading manager (if any), the
pool's commodity trading advisors, or the principals of any of the
foregoing.
(c) Performance disclosure when the offered pool has less than a
three-year operating history.--(1) Offered pool performance. (i) The
commodity pool operator must disclose the performance of the offered
pool, in accordance with paragraphs (a)(1)(i)(A) through (H) and (a)(2)
of this Sec. 4.25; or
(ii) If the offered pool has no operating history, the pool
operator must prominently display the following statement:

THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY
PERFORMANCE HISTORY.

(2) Other performance of commodity pool operator. (i)(A) Except as
provided in Sec. 4.25(a)(8), the commodity pool operator must disclose,
for the period specified by Sec. 4.25(a)(5), the performance of each
other pool operated by the pool operator (and by the trading manager if
the offered pool has a trading manager) in accordance with paragraphs
(a)(1)(i) (C) through (H) and (a)(3) of this Sec. 4.25, and the
performance of each other account traded by the pool operator (and by
the trading manager if the offered pool has a trading manager) in
accordance with paragraphs (a)(1)(ii) (C) through (G) of this
Sec. 4.25. If the trading manager has been delegated complete authority
for the offered pool's trading, and the trading manager's performance
is not materially different from that of the pool operator, the
performance of the other pools operated by and accounts traded by the
pool operator is not required to be disclosed.
(B) In addition, if the pool operator, or if applicable, the
trading manager, has not operated for at least three years any
commodity pool in which seventy-five percent or more of the
contributions to the pool were made by persons unaffiliated with the
commodity pool operator, the trading manager, the pool's commodity
trading advisors or their respective principals, the pool operator must
also disclose the performance of each other pool operated by and
account traded by the trading principals of the pool operator (and of
the trading manager, as applicable) unless such performance does not
differ in any material respect from the performance of the offered pool
and the pool operator (and trading manager, if any) disclosed in the
Disclosure Document.
(ii) If neither the pool operator or trading manager (if any), nor
any of its trading principals has operated any other pools or traded
any other accounts, the pool operator must prominently display the
following statement: NEITHER THIS POOL OPERATOR (TRADING MANAGER, IF
APPLICABLE) NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY OPERATED
ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS. If the commodity pool
operator or trading manager, if applicable, is a sole proprietorship,
reference to its trading principals may be deleted from the prescribed
statement.
(3) Major commodity trading advisor performance. (i) The commodity
pool operator must disclose the perfor- mance of any accounts
(including pools) directed by a major commodity trading advisor in
accordance with paragraphs (a)(1)(ii) (C) through (G) of this
Sec. 4.25.
(ii) If a major commodity trading advisor has not previously traded
accounts, the pool operator must prominently display the following
statement:

(name of the major commodity trading advisor), A COMMODITY
TRADING ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER
(percentage of the pool's funds available for commodity interest
trading allocated to that trading advisor) PERCENT OF THE POOL'S
FUTURES AND COMMODITY OPTION TRADING HAS NOT PREVIOUSLY DIRECTED ANY
ACCOUNTS.

(4) Major investee pool performance. (i) The commodity pool
operator must disclose the performance of any major investee pool.
(ii) If a major investee pool has not commenced trading, the pool
operator must prominently display the following statement:

(name of the major investee pool), AN INVESTEE POOL THAT IS
ALLOCATED (percentage of the pool assets allocated to that investee
pool) PERCENT OF THE POOL'S ASSETS HAS NOT COMMENCED TRADING.

(5) Other commodity trading advisor and investee pool performance.
With respect to commodity trading advisors and investee pools for which
performance is not required to be disclosed pursuant to this
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:
(i) Monthly return parameters (highs and lows);
(ii) Historical volatility and degree of leverage; and
(iii) Any material differences between the performance of such
advisors and pools as compared to that of the offered pool's major
trading advisors and major investee pools.

Sec. 4.26 Use, amendment and filing of Disclosure Document.

(a)(1) Subject to paragraph (c) of this section, all information
contained in the Disclosure Document must be current as of the date of
the Document; Provided, however, that performance information may be
current as of a date not more than three months prior to the date of
the Document.
(2) No commodity pool operator may use a Disclosure Document dated
more

[[Page 38189]]
than nine months prior to the date of its use.
(b) The commodity pool operator must attach to the Disclosure
Document the most current Account Statement and Annual Report for the
pool required to be distributed in accordance with Sec. 4.22; Provided,
however, that in lieu of the most current Account Statement the
commodity pool operator may provide performance information for the
pool current as of a date not more than sixty days prior to the date on
which the Disclosure Document is distributed and covering the period
since the most recent performance information contained in the
Disclosure Document.
(c) (1) If the commodity pool operator knows or should know that
the Disclosure Document is materially inaccurate or incomplete in any
respect, it must correct that defect and must distribute the correction
to:
(i) All existing pool participants within 21 calendar days of the
date upon which the pool operator first knows or has reason to know of
the defect; and
(ii) Each previously solicited prospective pool participant prior
to accepting or receiving funds, securities or other property from any
such prospective participant. The pool operator may furnish the
correction by way of an amended Disclosure Document, a sticker on the
Document, or other similar means.
(2) The pool operator may not use the Disclosure Document until
such correction has been made.
(d) Except as provided by Sec. 4.8:
(1) The commodity pool operator must file with the Commission two
copies of the Disclosure Document for each pool that it operates or
that it intends to operate not less than 21 calendar days prior to the
date the pool operator first intends to deliver the Document to a
prospective participant in the pool; and
(2) The commodity pool operator must file with the Commission two
copies of all subsequent amendments to the Disclosure Document for each
pool that it operates or that it intends to operate within 21 calendar
days of the date upon which the pool operator first knows or has reason
to know of the defect requiring the amendment.

Subpart C--Commodity Trading Advisors

15. Section 4.31 is revised to read as follows:

Sec. 4.31 Required delivery of Disclosure Document to prospective
clients.

(a) No commodity trading advisor registered or required to be
registered under the Act may solicit a prospective client, or enter
into an agreement with a prospective client to direct the client's
commodity interest account or to guide the client's commodity interest
trading by means of a systematic program that recommends specific
transactions, unless the commodity trading advisor, at or before the
time it engages in the solicitation or enters into the agreement
(whichever is earlier), delivers or causes to be delivered to the
prospective client a Disclosure Document for the trading program
pursuant to which the trading advisor seeks to direct the client's
account or to guide the client's trading, containing the information
set forth in Secs. 4.34 and 4.35.
(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.
16. Section 4.32 is redesignated Section 4.33, and amended by
revising paragraph (a)(2) to read as follows:

Sec. 4.33 Recordkeeping.
* * * * *
(a) * * *
(2) The acknowledgement specified in Sec. 4.31(b).
* * * * *

Sec. 4.32 [Reserved]

17. Section 4.32 is added and reserved.
18. Sections 4.34, 4.35 and 4.36 are added to read as follows:

Sec. 4.34 General disclosures required.

Except as otherwise provided herein, a Disclosure Document must
include the following information.
(a) Cautionary Statement. The following Cautionary Statement must
be prominently displayed on the cover page of the Disclosure Document:

THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE
MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR HAS THE
COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE
DOCUMENT.

RISK DISCLOSURE STATEMENT

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU
SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE
FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER
TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD
BE AWARE OF THE FOLLOWING:
IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS
OF THE PREMIUM AND OF ALL TRANSACTION COSTS.
IF YOU PURCHASE OR SELL A COMMODITY FUTURE OR SELL A COMMODITY
OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS AND
ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH
OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR
POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A
SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN
ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED
FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT
A LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR
ACCOUNT.
UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR
IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE,
WHEN THE MARKET MAKES A ``LIMIT MOVE.''
THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING
ADVISOR, SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT
NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET
CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE
``LONG'' OR ``SHORT'' POSITION.
THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN
COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE
OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO
SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE
NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO
MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF
THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert
page number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO
YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER

[[Page 38190]]
SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. YOU SHOULD THEREFORE
CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY TRADING
BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGE (insert page number).

(2) If the commodity trading advisor may trade foreign futures or
options contracts pursuant to the offered trading program, the Risk
Disclosure Statement must further state the following:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY
ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS
ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS
FORMALLY LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO
REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER,
UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE
ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN
NON-UNITED STATES JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE
EFFECTED. BEFORE YOU TRADE YOU SHOULD INQUIRE ABOUT ANY RULES
RELEVANT TO YOUR PARTICULAR CONTEMPLATED TRANSACTIONS AND ASK THE
FIRM WITH WHICH YOU INTEND TO TRADE FOR DETAILS ABOUT THE TYPES OF
REDRESS AVAILABLE IN BOTH YOUR LOCAL AND OTHER RELEVANT
JURISDICTIONS.

(3) If the commodity trading advisor is not also a registered
futures commission merchant, the trading advisor must make the
additional following statement in the Risk Disclosure Statement, to be
included as the last paragraph thereof:

THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM
ACCEPTING FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR
TRADING COMMODITY INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN
THIS TRADING PROGRAM DIRECTLY WITH A FUTURES COMMISSION MERCHANT.

(c) Table of contents. A table of contents showing, by subject
matter, the location of the disclosures made in the Disclosure
Document, must appear immediately following the Risk Disclosure
Statement.
(d) Information required in the forepart of the Disclosure
Document. (1) The name, address of the main business office, main
business telephone number and form of organization of the commodity
trading advisor. If the mailing address of the main business office is
a post office box number or is not within the United States, its
territories or possessions, the trading advisor must state where its
books and records will be kept and made available for inspection; and
(2) The date when the commodity trading advisor first intends to
use the Disclosure Document.
(e) Persons to be identified. The names of the following persons:
(1) Each principal of the trading advisor;
(2) The futures commission merchant with which the commodity
trading advisor will require the client to maintain its account or, if
the client is free to choose the futures commission merchant with which
it will maintain its account, the trading advisor must make a statement
to that effect; and
(3) The introducing broker through which the commodity trading
advisor will require the client to introduce its account or, if the
client is free to choose the introducing broker through which it will
introduce its account, the trading advisor must make a statement to
that effect.
(f) Business background. (1) The business background, for the five
years preceding the date of the Disclosure Document, of:
(i) The commodity trading advisor; and
(ii) Each principal of the trading advisor who participates in
making trading or operational decisions for the trading advisor or
supervises persons so engaged, including, without limitation, the
trading advisor's officers and directors.
(2) The trading advisor must include in the description of the
business background of each person identified in Sec. 4.34(f)(1) the
name and main business of that person's employers, business
associations or business ventures and the nature of the duties
performed by such person for such employers or in connection with such
business associations or business ventures. The location in the
Disclosure Document of any required past performance disclosure for
such person must be indicated.
(g) Principal risk factors. A discussion of the principal risk
factors of this trading program. This discussion must include, without
limitation, risks due to volatility, leverage, liquidity, and
counterparty creditworthiness, as applicable to the trading program and
the types of transactions and investment activity expected to be
engaged in pursuant to such program.
(h) Trading program. A description of the trading program, which
must include the types of commodity interests and other interests the
commodity trading advisor intends to trade, with a description of any
restrictions or limitations on such trading established by the trading
advisor or otherwise.
(i) Fees. A complete description of each fee which the commodity
trading advisor will charge the client.
(1) Wherever possible, the trading advisor must specify the dollar
amount of each such fee.
(2) Where any fee is determined by reference to a base amount
including, but not limited to, ``net assets,'' ``gross profits,'' ``net
profits'' or ``net gains,'' the trading advisor must explain how such
base amount will be calculated.
(3) Where any fee is based on an increase in the value of the
client's commodity interest account, the trading advisor must specify
how that increase is calculated, the period of time during which the
increase is calculated, the fee to be charged at the end of that period
and the value of the account at which payment of the fee commences.
(j) Conflicts of interest. (1) A full description of any actual or
potential conflicts of interest regarding any aspect of the trading
program on the part of:
(i) The commodity trading advisor;
(ii) Any futures commission merchant with which the client will be
required to maintain its commodity interest account;
(iii) Any introducing broker through which the client will be
required to introduce its account to a futures commission merchant; and
(iv) Any principal of the foregoing.
(2) Any other material conflict involving any aspect of the offered
trading program.
(3) Included in the description of any such conflict must be any
arrangement whereby the trading advisor or any principal thereof may
benefit, directly or indirectly, from the maintenance of the client's
commodity interest account with a futures commission merchant or the
introduction of such account through an introducing broker (such as
payment for order flow or soft dollar arrangements).
(k) Litigation. (1) Subject to the provisions of Sec. 4.34(k)(2),
any material administrative, civil or criminal action, whether pending
or concluded, within five years preceding the date of the Document,
against any of the following persons; Provided, however, that a
concluded action that resulted in an adjudication on the merits in
favor of such person need not be disclosed:
(i) The commodity trading advisor and any principal thereof:
(ii) Any futures commission merchant with which the client will be
required

[[Page 38191]]
to maintain its commodity interest account; and
(iii) Any introducing broker through which the client will be
required to introduce its account to the futures commission merchant.
(2) With respect to a futures commission merchant or an introducing
broker, an action will be considered material if:
(i) The action would be required to be disclosed in the notes to
the futures commission merchant's or introducing broker's financial
statements prepared pursuant to generally accepted accounting
principles;
(ii) The action was brought by the Commission; Provided, however,
that a concluded action that did not result in civil monetary penalties
exceeding $50,000 need not be disclosed unless it involved allegations
of fraud or other willful misconduct; or
(iii) The action was brought by any other federal or state
regulatory agency, a non-United States regulatory agency or a self-
regulatory organization and involved allegations of fraud or other
willful misconduct.
(l) Trading for own account. If the commodity trading advisor or
any principal thereof trades or intends to trade commodity interests
for its own account, the trading advisor must disclose whether clients
will be permitted to inspect the records of such person's trading and
any written policies related to such trading.
(m) Performance disclosures. Past performance must be disclosed as
set forth in Sec. 4.35.
(n) Supplemental information. If any information, other than that
required by Commission rules, the antifraud provisions of the Act,
other federal or state laws and regulations, any rules of a self-
regulatory agency or laws of a non-United States jurisdiction, is
provided, such information:
(1) May not be misleading in content or presentation or
inconsistent with the required disclosures;
(2) Is subject to the antifraud provisions of the Act and
Commission rules, and to rules regarding the use of promotional
material promulgated by a registered futures association pursuant to
section 17(j) of the Act; and
(3) Must be placed as follows, unless otherwise specified by
Commission rules:
(i) Supplemental performance information (not including proprietary
trading results as defined in Sec. 4.35(a)(7), or hypothetical,
extracted, pro forma or simulated trading results) must be placed after
all required performance information;
(ii) Supplemental non-performance information relating to a
required disclosure may be included with the related required
disclosure; and
(iii) Other supplemental information may be included after all
required disclosures; Provided, however, That any proprietary trading
results as defined in Sec. 4.35(a)(7), and any hypothetical, extracted,
pro forma or simulated trading results included in the Disclosure
Document must appear as the last disclosure therein following all
required and non-required disclosures.
(o) Material information. Nothing set forth in Secs. 4.31, 4.34,
4.35 or Sec. 4.36 shall relieve a commodity trading advisor from any
obligation under the Act or the regulations thereunder, including the
obligation to disclose all material information to existing or
prospective clients even if the information is not specifically
required by such sections.

Sec. 4.35 Performance disclosures.

(a) General principles.--(1) Capsule performance information.
Unless otherwise specified, disclosure of the past performance of an
account or trading program required under this Sec. 4.35 must include
the following information:
(i) The name of the commodity trading advisor or other person
trading the account and the name of the trading program;
(ii) The date on which the commodity trading advisor or other
person trading the account began trading client accounts and the date
when client funds began being traded pursuant to the trading program;
(iii) The number of accounts directed by the trading advisor or
other person trading the account pursuant to the trading program
specified, as of the date of the Disclosure Document;
(iv)(A) The total assets under the management of the trading
advisor or other person trading the account, as of the date of the
Disclosure Document; and
(B) The total assets traded pursuant to the trading program
specified, as of the date of the Disclosure Document;
(v) The largest monthly draw-down for the account or trading
program specified during the most recent five calendar year and year-
to-date expressed as a percentage of client funds and indicating the
month and year of the draw-down (the capsule must include a definition
of ``draw-down'' that is consistent with Sec. 4.10(k));
(vi) The worst peak-to-valley draw-down for the trading program
specified during the most recent five calendar year and year-to-date,
expressed as a percentage of net asset value and indicating the months
and year of the draw-down;
(vii) Subject to Sec. 4.35(a)(2) for the offered trading program,
the annual and year-to-date rate-of-return for the program specified
for the five most recent calendar years and year-to-date, computed on a
compounded monthly basis; Provided, however, That performance of the
offered trading program must include monthly rates of return for such
period; and
(viii) In the case of the offered trading program:
(A) The number of accounts traded pursuant to the offered trading
program that were closed during the period specified in Sec. 4.35(a)(5)
with positive net performance (profits) as of the date the account was
closed; and
(B) The number of accounts traded pursuant to the offered trading
program that were closed during the period specified in Sec. 4.35(a)(5)
with negative net performance (losses) as of the date the account was
closed.
(2) Additional requirements with respect to the offered trading
program. (i) The performance of the offered trading program must be
identified as such and separately presented first;
(ii) The rate of return of the offered trading program must be
presented on a monthly basis for the period specified in
Sec. 4.35(a)(5), either in a numerical table or in a bar graph;
(iii) A bar graph used to present monthly rates of return for the
offered trading program:
(A) Must show percentage rate of return on the vertical axis and
one-month increments on the horizontal axis;
(B) Must be scaled in such a way as to clearly show month-to-month
differences in rates of return; and
(C) Must separately display numerical percentage annual rates of
return for the period covered by the bar graph; and
(iv) The commodity trading advisor must make available to
prospective and existing clients upon request a table showing at least
quarterly the information required to be calculated pursuant to
Sec. 4.35(a)(6).
(3) Composite presentation. (i) Unless such presentation would be
misleading, the performance of accounts traded pursuant to the same
trading program may be presented in composite form on a program-by-
program basis, using the format set forth in Sec. 4.35(a)(1).
(ii) Accounts that differ materially with respect to rates of
return may not be presented in the same composite.
(iii) The commodity trading advisor must discuss all material
differences

[[Page 38192]]
among the accounts included in a composite.
(4) Current information. All performance information presented in
the Disclosure Document must be current as of a date not more than
three months preceding the date of the Document.
(5) Time period for required performance. All required performance
information must be presented for the most recent five calendar years
and year-to-date or for the life of the trading program or account, if
less than five years.
(6) Calculation of, and recordkeeping concerning, performance
information. (i) All performance information presented in a Disclosure
Document, including performance information contained in any capsule
and performance information not specifically required by Commission
rules, must be current as of a date not more than three months
preceding the date of the Document, and must be supported by the
following amounts, calculated on an accrual basis of accounting in
accordance with generally accepted accounting principles, as specified
below or by a method otherwise approved by the Commission.
(A) The beginning net asset value for the period, which shall
represent the previous period's ending net asset value;
(B) All additions, whether voluntary or involuntary, during the
period;
(C) All withdrawals and redemptions, whether voluntary or
involuntary, during the period;
(D) The net performance for the period, which shall represent the
change in the net asset value net of additions, withdrawals,
redemptions, fees and expenses;
(E) The ending net asset value for the period, which shall
represent the beginning net asset value plus or minus additions,
withdrawals and redemptions, and net performance; and
(F) The rate of return for the period, computed on a compounded
monthly basis, which shall be calculated by dividing the net
performance by the beginning net asset value.
(ii) All supporting documents necessary to substantiate the
computation of such amounts must be maintained in accordance with
Sec. 1.31.
(7) Proprietary trading results. (i) Proprietary trading results
shall not be included in a Disclosure Document unless such performance
is prominently labeled as proprietary and is set forth separately after
all disclosures in accordance with Sec. 4.34(n), together with a
discussion of any differences between such performance and the
performance of the offered trading program, including, but not limited
to, differences in costs, leverage and trading.
(ii) For the purposes of Sec. 4.34(n) and this Sec. 4.35(a),
proprietary trading results means the performance of any account in
which fifty percent or more of the beneficial interest is owned or
controlled by:
(A) The commodity trading advisor or any of its principals;
(B) An affiliate or family member of the commodity trading advisor;
or
(C) Any person providing services to the account.
(8) Required legend. Any past performance presentation, whether or
not required by Commission rules, must be preceded with the following
statement, prominently displayed:

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS.

(b) Performance to be disclosed. Except as provided in
Sec. 4.35(a)(7), the commodity trading advisor must disclose the actual
performance of all accounts directed by the commodity trading advisor
and by each of its trading principals; Provided, however, that if the
trading advisor or its trading principals previously have not directed
any accounts, the trading advisor must prominently disclose this fact
with one of the following statements, as applicable:
(1) THIS TRADING ADVISOR PREVIOUSLY HAS NOT DIRECTED ANY ACCOUNTS;
or
(2) NONE OF THE TRADING PRINCIPALS OF THIS TRADING ADVISOR HAS
PREVIOUSLY DIRECTED ANY ACCOUNTS; or
(3) NEITHER THIS TRADING ADVISOR NOR ANY OF ITS TRADING PRINCIPALS
HAVE PREVIOUSLY DIRECTED ANY ACCOUNTS. If the commodity trading advisor
is a sole proprietorship, reference to its trading principals need not
be included in the prescribed statement.

Sec. 4.36 Use, amendment and filing of Disclosure Document.

(a) Subject to paragraph (c) of this section, all information
contained in the Disclosure Document must be current as of the date of
the Document; Provided, however, that performance information must be
current as of a date not more than three months preceding the date of
the Document.
(b) No commodity trading advisor may use a Disclosure Document
dated more than nine months prior to the date of its use.
(c)(1) If the commodity trading advisor knows or should know that
the Disclosure Document is materially inaccurate or incomplete in any
respect, it must correct that defect and must distribute the correction
to:
(i) All existing clients in the trading program within 21 calendar
days of the date upon which the trading advisor first knows or has
reason to know of the defect; and
(ii) Each previously solicited prospective client for the trading
program prior to entering into an agreement to direct or to guide such
prospective client's commodity interest account pursuant to the
program. The trading advisor may furnish the correction by way of an
amended Disclosure Document, a sticker on the Document, or other
similar means.
(2) The trading advisor may not use the Disclosure Document until
such correction is made.
(d) (1) The trading advisor must file with the Commission two
copies of the Disclosure Document for each trading program that it
offers or that it intends to offer not less than 21 calendar days prior
to the date the trading advisor first intends to deliver the Document
to a prospective client in the trading program.
(2) The commodity trading advisor must file with the Commission two
copies of all subsequent amendments to the Disclosure Document for each
trading program that it offers or that it intends to offer within 21
calendar days of the date upon which the trading advisor first knows or
has reason to know of the defect requiring the amendment.

Subpart D--Advertising

19. Section 4.41 is amended by revising paragraph (b)(1) to read as
follows:

Sec. 4.41 Advertising by commodity pool operators, commodity trading
advisors, and the principals thereof.

* * * * *
(b) (1) No person may present the performance of any simulated or
hypothetical commodity interest account, transaction in a commodity
interest or series of transactions in a commodity interest of a
commodity pool operator, commodity trading advisor, or any principal
thereof, unless such performance is accompanied by one of the
following:
(i) The following statement: ``Hypothetical or simulated
performance results have certain inherent limitations. Unlike an actual
performance record, simulated results do not represent actual trading.
Also, since the trades have not actually been executed, the results may
have under- or over-

[[Page 38193]]
compensated for the impact, if any, of certain market factors, such as
lack of liquidity. Simulated trading programs in general are also
subject to the fact that they are designed with the benefit of
hindsight. No representation is being made that any account will or is
likely to achieve profits or losses similar to those shown;'' or
(ii) A statement prescribed pursuant to rules promulgated by a
registered futures association pursuant to section 17(j) of the Act.
* * * * *

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

20. The authority citation for part 30 continues to read as
follows:

Authority: 7 U.S.C. 1a, 2, 4, 6, 6c, and 12a.

21. Section 30.6 is amended by revising paragraphs (b)(1) and
(b)(2) to read as follows:

Sec. 30.6 Disclosure.

* * * * *
(b) Commodity pool operators and commodity trading advisors. (1) No
commodity pool operator registered or required to be registered under
this part, or exempt from registration pursuant to Sec. 30.5 of this
part, may, directly or indirectly, solicit, accept or receive funds,
securities or other property from a prospective participant in a
foreign pool that it operates or that it intends to operate or, in the
case of a commodity trading advisor, no commodity trading advisor
registered or required to be registered under this part, or exempt from
registration pursuant to Sec. 30.5 of this part, may solicit or enter
into an agreement with a prospective client to direct or to guide the
client's foreign commodity interest trading by means of a systematic
program that recommends specific transactions, unless the commodity
pool operator or commodity trading advisor, at or before the time it
engages in such activities, first provides each prospective participant
or client with the Risk Disclosure Statement set forth in Sec. 4.24(b)
in the case of a commodity pool operator or Sec. 4.34(b) in the case of
a commodity trading advisor.
(2) The disclosure statement required to be provided in paragraph
(b)(1) of this section may be given as a separate document or, if part
of the Disclosure Document required to be furnished customers or
potential customers pursuant to Sec. 4.21 or Sec. 4.31 of this chapter,
must be prominently disclosed immediately following any disclosures
required to appear on the cover page of the Disclosure Document as
provided by the Commission or any applicable federal or state
securities laws and regulations.
* * * * *

PART 150--LIMITS ON POSITIONS

22. The authority citation for part 150 continues to read as
follows:

Authority: 7 U.S.C. 6a, 6c and 12a(5)(1988).

23. Section 150.3 is amended by revising paragraph (a)(4)(i)(D) to
read as follows:

Sec. 150.3 Exemptions.

(a) * * *
(4) * * *
(i) * * *
(D) Solicit funds for such trading by separate Disclosure Documents
that meet the standards of Sec. 4.24 or Sec. 4.34 of this chapter, as
applicable, where such Disclosure Documents are required under part 4
of this chapter.
* * * * *
Issued in Washington, DC, on July 14, 1995, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 95-17871 Filed 7-24-95; 8:45 am]
BILLING CODE 6351-01-P

Visit the Official Version

Document Information

Effective Date:: 8/24/1995
Published:: 07/25/1995
Department:: Commodity Futures Trading Commission
Entry Type:: Rule
Action:: Final rules.
Document Number:: 95-17871
Dates:: August 24, 1995.
Pages:: 38146-38193 (48 pages)
PDF File:: 95-17871.pdf
CFR: (27): 17 CFR 4.25(a)(7); 17 CFR 4.35(a)(5); 17 CFR 4.35(a)(6); 17 CFR 4.35(a)(7); 17 CFR 4.12(b)(2)(i); More ...