[Federal Register Volume 59, Number 114 (Wednesday, June 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14479]
[[Page Unknown]]
[Federal Register: June 15, 1994]
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COMMODITY FUTURES TRADING COMMISSION
The National Futures Association's Proposed Requirements for
Break-Even Analyses in Commodity Pool Disclosure Documents
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed registered futures association rule change.
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SUMMARY: The National Futures Association (``NFA'') has submitted to
the Commodity Futures Trading Commission (``Commission'') for its
approval, pursuant to section 17(j) of the Commodity Exchange Act
(``Act''), a proposed amendment to Compliance Rule 2-13 and a proposed
Interpretive Notice to Compliance Rule 2-13. The proposal would
establish requirements regarding the use of break-even analyses in
commodity pool disclosure documents. The Commission has determined that
publication of NFA's proposal is in the public interest, will assist
the Commission in considering the views of interested persons and is
consistent with the purposes of the Act.
DATES: Comments must be received by July 15, 1994.
ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K
Street, NW., Washington, DC 20581. Telephone: (202) 254-6314.
FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
2033 K Street, NW., Washington, DC 20581. Telephone: (202) 254-8955.
SUPPLEMENTARY INFORMATION:
I. Introduction
By letters dated March 15, 1994 and March 30, 1994, the NFA
submitted to the Commission for its approval, pursuant to section 17(j)
of the Act, a proposed amendment and Interpretive Notice to NFA
Compliance Rule 2-13. The proposal would establish various requirements
regarding the use of break-even analyses in commodity pool disclosure
documents. NFA's submission indicated that it intended to make the
proposed amendment and interpretive notice effective upon receipt of
notice of Commission approval.
II. Description of NFA's Proposal
The NFA is proposing an amendment and an associated Interpretive
Notice to its Compliance Rule 2-13. Specifically, the amendment to Rule
2-13, a new subsection (b), would require member commodity pool
operators (``CPOs'') to include a tabular analysis of a pool's ``break-
even point'' in the pool's disclosure document. The break-even analysis
would take into account any anticipated fees and expenses and would
indicate how much trading profits would have to be achieved in the
first year of trading to recoup the customer's initial
investment.1
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\1\Commission Regulation 4.21 requires that CPOs must deliver a
disclosure document to prospective pool participants. Commission
Regulation 4.21(a)(1) through (18) mandates the content of any such
disclosure document.
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The proposed amendment to Compliance Rule 2-13 states that this
analysis must be ``presented in the manner prescribed by NFA's Board of
Directors.'' In this connection, NFA's proposed Interpretive Notice to
Compliance Rule 2-13 would establish guidelines for the determination
of a break-even point and the preparation of break-even analyses for
pool disclosure documents.
In order to determine a pool's break-even point, the soliciting CPO
first would have to calculate the amount of basic fees and expenses
which the pool would be expected to incur during its first year and
itemize them in tabular form within the disclosure document.2 The
CPO would be required to calculate this fee and expense amount for the
pool based upon his actual knowledge or experience, and if not known,
the CPO must present a good faith estimate. If any fees were dependent
on the amount of funds that the pool raised, an assumed funding level
could be stated, but the analysis also would have to indicate
alternative break-even points using the minimum and maximum amount of
funds the pool could raise.
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\2\If the pool had any redemption fees, they would have to be
clearly shown and included in the fees and expenses calculation. The
pool's incentive fees would not be included in this calculation.
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Second, as part of the required break-even analysis the CPO would
have to subtract from the pool's fee and expense total the amount of
interest income the CPO expected the pool to earn in its first year.
This calculation would produce a ``gross trading profits before
incentive fees'' figure, or preliminary gross trading profits, which
the pool would have to earn in its first year to retain its initial net
asset value.
Third, the proposed interpretive notice would require a CPO to
determine the amount of additional trading profits that would have to
be earned to offset the amount of incentive fees which the CPO would
charge in managing the pool. This additional trading profit figure
would be calculated by determining the incentive fees which would be
charged if a pool earned the preliminary gross trading profits amount,
and then dividing that amount by one minus the incentive fee percentage
rate.3
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\3\The proposed Interpretive Notice also would require that any
break-even analysis particularly state this incentive fee amount in
terms of a percentage of profits.
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Finally, under the proposal a CPO would be required to calculate
the total amount of trading income which his pool must earn for the
pool's net asset value per unit to equal its initial selling price per
unit after one year. The break-even analysis also would have to express
this amount as a percentage of the pool's initial selling price per
unit.
The NFA believes that its proposed tabular presentation of break-
even analysis for pools would be an effective means of providing useful
information to prospective pool participants when they make their
investment decision. The NFA indicates that its proposed form of break-
even analysis already is used widely throughout the commodity pool
industry.
III. Request for Comments
The Commission requests public comment on NFA's proposed amendment
and Interpretive Notice to Compliance Rule 2-13. Copies of NFA's
proposed rule amendment and Interpretive Notice will be available for
inspection at the Office of the Secretariat, Commodity Futures Trading
Commission, 2033 K Street, NW., Washington, DC 20581, except to the
extent that the proposal may be entitled to confidential treatment as
set forth in 17 CFR 145.5 and 145.9. Copies also may be obtained
through the Office of the Secretariat at the above address or by
telephoning (202) 254-6314.
Any person interested in submitting written data, views or
arguments on NFA's proposed rule amendment or Interpretive Notice or
with respect to other materials submitted by the NFA in support of the
proposal should send such comments to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, 2033 K Street, NW., Washington,
DC 20581, by the specified date.
Issued in Washington, DC on June 9, 1994.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-14479 Filed 6-14-94; 8:45 am]
BILLING CODE 6351-01-P
