[Federal Register Volume 63, Number 60 (Monday, March 30, 1998)]
[Proposed Rules]
[Pages 15112-15115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8147]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
Two-Part Documents for Commodity Pools
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed Rule amendments.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has
determined pursuant to Section 17(j) of the Commodity Exchange Act
1 (``Act'') to review the National Futures Association's
(``NFA's'') Compliance Rule 2-35 (``the Rule'') and its Interpretive
Notice regarding commodity pool Disclosure Documents. The Rule requires
the commodity pool operator (``CPO'') of a commodity pool required to
register its securities under the Securities Act of 1933 (``public
pool'') to deliver a two-part document to prospective participants. The
first part of the document must be the Disclosure Document required by
Commission Rule 4.21(a),2 written using plain English
principles and limited to specific disclosure information. The second
part is a Statement of Additional Information (``SAI''), which may
include information that is not in the Disclosure Document, provided
that the information is not misleading or otherwise inconsistent with
applicable statutes, rules or regulations.3 The CPO of a
commodity pool that is not required to register its securities under
the Securities Act of 1933 (``private pool'') 4 must prepare
a Disclosure Document and may prepare and distribute an SAI, but is not
required to do so. Should the Rule be approved by the Commission, it
will be necessary to amend Commission Rules 4.24(v), 4.25(a)(2) and
4.25(c)(5) to permit the use of the two-part document format.
Accordingly, these amendments are contingent upon Commission approval
of NFA Compliance Rule 2-35. The Commission, therefore, is providing
the opportunity for comment prior to accepting NFA Compliance Rule 2-35
and implementing the related proposed amendments to Commission rules.
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\1\ 7 U.S.C. 21(j) (1994).
\2\ Commission rules referred to herein can be found at 17 CFR
Ch. I (1997).
\3\ Theoretically, the CPO of a public pool could prepare a
Disclosure Document containing all of the required information and
not need to prepare a separate SAI containing additional
information. In that case, the CPO would not be required to deliver
a two-part document, but would instead deliver only a Disclosure
Document. However, most, if not all, public pools include more than
the required information, such as trading comparison charts,
additional text describing the market system, and the limited
partnership agreement. Therefore, it is not expected that CPOs of
public pools would prepare a Disclosure Document without also
preparing an SAI.
\4\ Pursuant to Commission Rule 4.24(d)(3)(i), a ``private
pool'' is one that is privately offered pursuant to section 4(2) of
the Securities Act of 1933, as amended, or pursuant to Regulation D
thereunder.
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DATES: Comments must be received by April 29, 1998.
ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary of the Commission, Commodity Futures Trading
Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In
addition, comments may be sent by facsimile transmission to facsimile
number (202) 418-5221, or by electronic mail to secretary@cftc.gov.
Reference should be made to ``Two-Part Documents for Commodity Pools.''
FOR FURTHER INFORMATION CONTACT: Leanna L. Morris, Staff Attorney,
Division of Trading and Markets, Commodity Futures Trading Commission,
1155 21st Street, N.W.,
[[Page 15113]]
Washington, D.C. 20581. Telephone: (202) 418-5434.
SUPPLEMENTARY INFORMATION :
I. Introduction
By letters dated December 24, 1997 and January 20, 1998, NFA
submitted to the Commission for its approval, pursuant to Section 17(j)
of the Act, NFA Compliance Rule 2-35 and its Interpretive Notice
regarding commodity pool Disclosure Documents. NFA's submission
indicated that it intends to implement the Rule on or after a date at
least six months following receipt of notice of Commission approval.
Should the Rule be approved by the Commission, it will be necessary to
amend Commission Rules 4.24(v), 4.25(a)(2) and 4.25(c)(5) to permit the
use of the two-part document format. Commission Rule 4.24(v) would be
amended to require that supplemental information be disclosed only in
the second part of the two-part document. Commission Rule 4.25(a)(2)
would be amended to allow monthly rate of return information of the
offered pool to be provided in the second part of the two-part
document. Commission Rule 4.25(c)(5) would be amended to allow such
required information to be provided in the second part of the two-part
document.
II. Description of NFA Compliance Rule 2-35
NFA's Interpretive Notice regarding commodity pool Disclosure
Documents states that ``[a] Disclosure Document should provide
essential information about the fundamental characteristics of a pool,
and it should provide the information in a way that will assist
investors in making informed decisions about whether to invest in the
pool.'' Accordingly, the Rule adopts a two-part document format and
plain English principles, described below, for a more
``understandable'' document.
The Rule requires that the CPO of a public pool deliver a two-part
document. The first part of the document must be the Disclosure
Document required by Commission Rule 4.21(a), written using plain
English principles 5 and limited to specific disclosure
information, as discussed in detail below. The second part is a
Statement of Additional Information (``SAI''), which may include
information that is not in the Disclosure Document, provided that the
information is not misleading or otherwise inconsistent with applicable
statutes, rules or regulations.
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\5\ NFA's Interpretive Notice to Rule 2-35 provides guidance on
what is meant by the use of ``plain English principles.'' Such
principles include: using active voice; using short sentences and
paragraphs; breaking up the document into short sections; using
titles and sub-titles that specifically describe the contents of
each section; using words that are definite, concrete, and part of
everyday language; avoiding legal jargon and highly technical terms;
using glossaries to define technical terms that cannot be avoided;
avoiding multiple negatives; and using tables and bullet lists,
where appropriate. (See NFA's Interpretive Notice to Rule 2-35). The
Rule does not affect the prescribed statements of Commission Rules
4.24(a) and 4.24(b).
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The CPO of a private pool must prepare and distribute a Disclosure
Document and may prepare and distribute an SAI, but is not required to
do so. If the CPO of a private pool chooses to prepare an SAI, it may
be bound together with the Disclosure Document, so long as the
Disclosure Document comes first. If the CPO of a private pool binds the
SAI separately, the CPO is not required to provide it to a prospective
participant unless requested by the prospective participant.
The Rule requires that the Disclosure Document required by
Commission Rule 4.21(a) be clear and concise, written using plain
English principles, and be limited to the following: information
required by Commission Rules 4.24 and 4.25, with some exceptions to the
required performance disclosures discussed below; any other information
necessary to understand the fundamental characteristics of the pool or
to keep the Disclosure Document from being misleading; and any other
information required by the Securities and Exchange Commission or state
securities administrators to be included in Part 1 of a two-part
document.
With respect to performance disclosures, the Rule states that a CPO
may provide the monthly rate of return information required under
Commission Rule 4.25(a)(1)(i)(H) and the performance information
required under Commission Rule 4.25(c)(5) in the SAI. Although the CPO
may include the monthly rate of return information in the SAI, the
Disclosure Document must still include annual rate of return
information for the pool for the most recent five calendar years and
year-to-date. It should be noted that, if the CPO does not prepare an
SAI, the monthly rate of return information required under Commission
Rule 4.25(a)(1)(i)(H) and the performance information required under
Commission Rule 4.25(c)(5) must be included in the Disclosure Document.
III. Commission Policy and Rules
In the Commission's Policy Statement of January 21, 1997, the
Commission confirmed its support in principle of the use of two-part
documents. As currently written, however, Commission Rules 4.24(v),
4.25(a)(2) and 4.25(c)(5) do not permit the use of a two-part document
format due to a specified order and placement of supplemental
information and performance disclosures. Accordingly, if the Commission
approves NFA Compliance Rule 2-35, it is necessary to amend Commission
Rules 4.24(v), 4.25(a)(2) and 4.25(c)(5) to permit certain disclosures
to be provided in the second part of a two-part document.
Commission Rule 4.24(v) provides that, if supplemental information,
as defined by the regulation, is included in the Disclosure Document,
the information must be disclosed in a specified order. Certain
supplemental performance information must be placed after all
specifically required performance information, while certain other
supplemental performance information must be included in the Disclosure
Document following all required and non-required disclosures.
Supplemental non-performance information relating to a required
disclosure may be included with the related required disclosure.
Commission Rule 4.25(a)(2) provides that, in addition to the
required performance disclosures of Commission Rule 4.25(a)(1)(i)(H),
the rate of return of the offered pool must be presented on a monthly
basis for the period specified in Commission Rule 4.25(a)(5).
Commission Rule 4.25(c)(5) provides that, with respect to commodity
trading advisors (``CTAs'') and investee pools for which performance is
not required to be disclosed pursuant to Commission Rules 4.25(c)(3)
and 4.25(c)(4) (hereinafter ``non-major CTAs and investee
pools''),6 the CPO must provide a summary description of the
performance history of each of such advisors and pools.
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\6\ Commission Rule 4.10(d)(5) defines ``major investee pool''
as any investee pool that is allocated or intended to be allocated
at least ten percent of the net asset value of the pool. Commission
Rule 4.10(i) defines ``major commodity trading advisor'' as, with
respect to a pool, any CTA that is allocated or intended to be
allocated at least ten percent of the pool's funds available for
commodity interest trading. Accordingly, ``non-major CTAs and
investee pools'' do not meet the ten percent allocation requirement.
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Should the Commission approve NFA's Compliance Rule 2-35, the
Commission believes that certain amendments to Commission Rules
4.24(v), 4.25(a)(2) and 4.25(c)(5), as discussed below, would permit
the use of two-part documents by CPOs.
[[Page 15114]]
IV. Discussion
The Commission believes that the adoption of a two-part document
format and plain English principles will assist investors in making an
informed decision prior to investing in a pool by providing clear and
concise information about the possible investment. Material information
would be provided in the first part of a two-part document and written
in a manner that is easily digested by avoiding technical or legal
terminology and excessive detail. Should the CPO desire to include more
information about the pool, its program, or other non-misleading
disclosures, it could be provided in the second part of a two-part
document. Accordingly, the two-part format will keep the emphasis on
the material, required information found in the Disclosure Document.
The amendments to the Commission rules proposed herein would
support the use of a two-part document by permitting that certain
required disclosures be provided in the second part of a two-part
document. Specifically, Commission Rule 4.24(v) would be amended to
provide that all supplemental information must be contained only in the
second part of a two-part document.
Commission Rule 4.25(a)(2) would be amended to provide that the
monthly rate of return performance of the offered pool may be provided
in the second part of a two-part document.7
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\7\ Pursuant to NFA Compliance Rule 2-35, the annual rate of
return performance information of the offered pool must be provided
in the first part of a two-part Disclosure Document.
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Commission Rule 4.25(c)(5) would be amended to provide that the
required summary description of the performance history of non-major
CTAs and investee pools, as defined above, may be provided in the
second part of a two-part document.
As noted earlier, these amendments would not take effect unless the
Commission approves NFA Compliance Rule 2-35. Accordingly, the
Commission seeks comments on NFA Compliance Rule 2-35 and its
Interpretive Notice regarding commodity pool Disclosure Documents and
the related proposed Commission rule amendments for the purpose of
permitting two-part documents for CPOs.
Copies of the Rule and its Interpretive Notice will be available
for inspection at the Office of the Secretariat, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W.,
Washington, D.C., 20581. Copies also may be obtained through the Office
of the Secretariat at the above address or by telephoning (202) 418-
5100.
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments discussed herein
will affect registered CPOs. The Commission has previously established
certain definitions of ``small entities'' to be used by the Commission
in evaluating the impact of its rules on such entities in accordance
with the RFA.8 The Commission previously has determined that
registered CPOs are not small entities for the purpose of the
RFA.9 Therefore, the Chairperson, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
action taken herein will not have a significant economic impact on a
substantial number of small entities.
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\8\ 47 FR 18618-18621 (April 30, 1982).
\9\ 47 FR 18619-18620.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 10 imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the Paperwork Reduction Act.
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\10\ Pub. L. 104-13 (May 13, 1995).
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There is no burden associated with the proposed rule amendments to
Commission Rules 4.24(v), 4.25(a)(2) or 4.25(c)(5). While these
proposed rule amendments have no burden, the group of rules 3038-0005
of which these rules are a part has the following burden:
Average burden hours per response: 124.65.
Number of respondents: 4,624.
Frequency of response: On occasion.
Persons wishing to comment on the information which would be
required by these proposed rules should contact the Desk Officer, CFTC,
Office of Management and Budget, Room 10202, NEOB, Washington, D.C.
20503, (202) 395-7340. Copies of the information collection submission
to OMB are available from the CFTC Clearance Officer, 1155 21st Street,
N.W., Washington, D.C. 20581, (202) 418-5160.
List of Subjects in 17 CFR Part 4
Brokers, commodity futures, commodity pool operators and commodity
trading advisors.
In consideration of the foregoing and pursuant to the authority
contained in the Commodity Exchange Act and in particular sections
2(a)(1), 4l, 4m, 4n, 4o, and 8a, 7 U.S.C. 2, 6l, 6m, 6n, 6o, and 12(a),
the Commission hereby proposes to amend Chapter I of Title 17 of the
Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.
2. Section 4.24(v) is amended by revising paragraph (v)(3)
introductory text to read as follows:
Sec. 4.24 General disclosures required.
* * * * *
(v) * * *
(3) Must be placed as follows, unless otherwise specified by
Commission rules, provided that where a two-part disclosure document is
used pursuant to rules promulgated by a registered futures association
pursuant to Section 17(j) of the Act, all supplemental information must
be provided in the second part of the two-part document:
* * * * *
3. Section 4.25 is amended by revising paragraphs (a)(2)(i) and
(c)(5) introductory text to read as follows:
Sec. 4.25 Performance disclosures.
(a) * * *
(2) * * * (i) The performance of the offered pool must be
identified as such and separately presented first, provided that where
the pool operator uses a two-part disclosure document pursuant to the
rules promulgated by a registered futures association pursuant to
section 17(j) of the Act, the rate of return of the offered pool on a
monthly basis may be provided, in the format set forth in
Sec. 4.25(a)(2)(ii) and Sec. 4.25(a)(2)(iii), in the second part of the
two-part document;
* * * * *
(c) * * *
(5) With respect to commodity trading advisors and investee pools
for which performance is not required to be disclosed pursuant to
Sec. 4.25(c)(3) and (4), the pool operator must provide a summary
description of the performance history of each of such advisors and
pools including the following information, provided that where the pool
operator uses a two-part disclosure document pursuant to the rules
promulgated by a registered futures association pursuant to section
17(j) of the Act, such summary
[[Page 15115]]
description may be provided in the second part of the two-part
document:
* * * * *
Dated: March 23, 1998.
By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-8147 Filed 3-27-98; 8:45 am]
BILLING CODE 6351-01-P
