[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.

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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.).
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    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).
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    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.
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    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.
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    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.
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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.
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    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).
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B. Required Performance Disclosures \24\

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

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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.
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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.
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    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.
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    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).
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    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.
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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).
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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.
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    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).
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    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.
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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.
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    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.''
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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.
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    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.
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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.
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    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.
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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.
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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.
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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.
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    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.

    (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

    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