[Federal Register Volume 61, Number 158 (Wednesday, August 14, 1996)]
[Rules and Regulations]
[Pages 42146-42165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20691]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4


Interpretation Regarding Use of Electronic Media by Commodity 
Pool Operators and Commodity Trading Advisors

AGENCY: Commodity Futures Trading Commission.

ACTION: Interpretation; Solicitation of comment.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') is publishing its views with respect to the use of 
electronic media for transmission and delivery of Disclosure Documents,

[[Page 42147]]

reports and other information by commodity pool operators (``CPOs''), 
commodity trading advisors (``CTAs''), and associated persons (``APs'') 
thereof, under the Commodity Exchange Act and the Commission's rules 
promulgated thereunder. This interpretative guidance is intended to 
assist CPOs, CTAs and their respective APs in using electronic media to 
comply with their disclosure and reporting obligations, and to 
encourage continued research, development and use of electronic media 
for such purposes. The Commission also is announcing a pilot program 
for the electronic filing of CPO and CTA Disclosure Documents with the 
Commission. The Commission seeks comment on the issues discussed in 
this release and any related issues, including other areas as to which 
the Commission could provide guidance concerning use of electronic 
media for filing with the Commission or delivery to customers of 
required reports.

DATES: This interpretation is effective on October 15, 1996. Comments 
should be received on or before October 15, 1996.

ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary of 
the Commission, Commodity Futures Trading Commission, 1155 21st Street, 
N.W., Washington, D.C. 20581. In addition, comments may be sent by 
facsimile transmission to facsimile number (202) 418-5521, or by 
electronic mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief 
Counsel, Gary L. Goldsholle, Attorney/Advisor, Christopher W. Cummings, 
Attorney/Advisor, or Tina Paraskevas Shea, Attorney/Advisor, Division 
of Trading and Markets, Commodity Futures Trading Commission, 1155 21st 
Street, N.W., Washington D.C. 20581. Telephone number: (202) 418-5450. 
Facsimile number: (202) 418-5536. Electronic mail: [email protected]

SUPPLEMENTARY INFORMATION:

I. Background

    By this release, the Commission is publishing its views with 
respect to the use of electronic 1 media by CPOs, CTAs and their 
respective APs,2 for transmission and delivery of Disclosure 
Documents, reports and other information in a manner consistent with 
the Commodity Exchange Act (the ``CEA'' or ``Act'') 3 and the 
Commission's regulations promulgated thereunder.4
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    \1\ For purposes of this release, the term ``electronic'' media 
refers to media such as audiotapes, videotapes, facsimiles, CD-ROM, 
electronic mail, bulletin boards, Internet World Wide Web sites and 
computer networks (e.g., local area networks and commercial on-line 
services) used to provide documents and information required by or 
otherwise affected by the Commodity Exchange Act and the regulations 
promulgated thereunder.
    \2\ The Commission is not addressing the use of electronic media 
by other Commission registrants, such as futures commission 
merchants (``FCMs'') and introducing brokers (``IBs'') at this time 
but has such issues under review.
    \3\ 7 U.S.C. 1 et seq. (1994).
    \4\ Commission rules are found at 17 CFR Ch. I (1996). The rules 
governing the obligations of CPOs and CTAs, including rules relating 
to disclosure and reporting, recordkeeping and advertising, are 
found at 17 CFR Part 4 (1996).
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    The Expanding Electronic Marketplace. In recent years, personal 
computers have gained widespread entry into the mass market.5 
Advances in personal computers and related electronic media technology 
have enabled large sectors of the general population to use computers 
to access the Internet, proprietary on-line services, and multi-media 
applications such as those stored on CD-ROMs. The use of personal 
computers to access the Internet and proprietary on-line services has 
been growing at a spectacular rate.6 This trend appears likely to 
continue or even accelerate.7
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    \5\ Current estimates are that between thirty-five and thirty-
nine percent of households in the United States possess a computer. 
G. Christian Hill, ``Tally of Homes With PCs Increased 16% Last 
Year,'' Wall Street Journal, May 21, 1996, at B10; ``Too Good to 
Last,'' Economist, March 23, 1996, at 62.
    \6\ The actual number of Internet users in the United States 
above age 16 is the focus of debate and has been estimated between 
16.4 and 22.0 million, as of August 1995. Peter H. Lewis, ``New 
Estimates in Old Debate on Internet Use,'' New York Times, April 17, 
1996, at D1.
    \7\ Daniel Akst, ``Postcard from Cyberspace: Proof of 
Skyrocketing Net Growth,'' Los Angeles Times, February 28, 1996, at 
D4. The trend towards Internet usage appears to be so strong that 
certain participants in the computer industry are developing 
``network computers,'' low cost computers whose primary purpose will 
be to connect to the Internet. Don Clark, ``Oracle Chief to Unveil: 
`Info Appliances,' But Will Consumers Want to Buy Them?'' Wall 
Street Journal, May 16, 1996, at B1.
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    The growing use of electronic media is significantly affecting the 
financial services industry. Specifically, it has caused many changes 
in the way industry participants gather, store, and communicate 
information. Electronic media enable private investors as well as 
market professionals to enjoy ready access to ``real-time'' trade data 
and financial news. Similarly, industry professionals and private 
investors can now quickly perform complex analyses of trade and market 
data. Both private investors and market professionals use electronic 
mail and message boards to communicate and disseminate information.
    Within the financial services industry, a wide range of businesses, 
both large and small, have established a presence on the World Wide Web 
and on the Internet. For instance, many securities brokerage houses now 
allow customers to place trades and to review account information over 
the Internet.8 Many mutual fund companies have established sites 
on the World Wide Web or on proprietary on-line services. These sites 
allow potential investors to download prospectuses, transfer 
investments among multiple mutual funds, and complete subscription 
applications without having to wait for such materials to arrive by 
postal mail.9
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    \8\ Estimates of the number of on-line brokerage accounts 
indicate rapid growth. According to one source, there were 412,000 
on-line accounts in 1994, and the number is expected to surpass 1.3 
million by 1998. Greg Miller and Tom Petruno, ``For Investors, the 
Internet has Promise, Perils,'' Los Angeles Times, June 4, 1996, at 
A1, A6.
    \9\ ``Mutual Funds in Cyberspace,'' The Investment Lawyer, Vol. 
2, No. 10, November 1995.
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    The futures industry has similarly been affected by developments in 
electronic media. Many CTAs (including publishers of market 
newsletters), CPOs, FCMs and IBs have established a presence on the 
Internet, generally by operating or otherwise being listed on the World 
Wide Web. Use of the World Wide Web and the Internet appears to be an 
increasingly important component of the business strategies of futures 
professionals. For the most part, these registrants currently are using 
electronic media to supplement their traditional paper-based 
activities. However, many registrants have expressed strong interest in 
using electronic media to comply with various requirements of the Act 
and Commission regulations. In particular, registrants have indicated 
that they are interested in electronically providing Disclosure 
Documents, obtaining acknowledgments of receipt of Disclosure 
Documents, compiling indices of CTA and CPO performance and Disclosure 
Documents, and filing Disclosure Documents and other materials with the 
Commission. The rapid technological advances in computers and growth of 
electronic media have brought the regulatory issues raised by these 
developments to the forefront of the Commission's agenda.10
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    \10\ As Acting Chairman John E. Tull noted in March 14, 1996, in 
testimony before the Subcommittee on Agriculture, Rural Development, 
Food and Drug Administration and Related Agencies of the House 
Committee on Appropriations:
    The Commission is actively working to address market 
participants' interest in using new technologies to increase their 
efficiency and competitiveness. These efforts include: consulting 
with industry representatives concerning current and prospective 
uses of the Internet for communicating with the public and with 
other futures professionals; creating a program for monitoring 
solicitation activity on the Internet; and developing mechanisms for 
electronic filing of reports and other ways to facilitate innovative 
uses of computer technology in a manner consistent with customer 
protection.

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[[Page 42148]]

    Electronic media, most dramatically the Internet and the World Wide 
Web, present regulators with a complex of issues that differ 
significantly from those presented by traditional paper-based or 
telephonic activities. The Internet allows users to reach millions of 
people at very low cost, permitting real-time, simultaneous 
communication by large numbers of persons, with varying degrees of 
anonymity. Communications over the Internet can combine text, audio and 
video. Another unique characteristic of the Internet is that 
information posted thereon can be updated or changed instantaneously, 
and Internet sites can be created and eliminated virtually at will. The 
Internet also is geographically unconstrained; a party using the 
Internet can be located anywhere, even internationally.11 As the 
Internet's popularity has grown, so too has the volume of information 
that can be readily accessed via so-called ``search engines.'' Finally, 
Internet sites can be connected to other sites through hyperlinks, 
which enable users to move readily from place to place within a website 
or to a new website.
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    \11\ The Commission recognizes that the worldwide availability 
of material placed on the Internet presents important issues 
concerning the scope of the regulatory and enforcement jurisdiction 
of individual nations. For example, solicitation materials posted on 
the Internet by CPOs and CTAs registered with the Commission and 
acting in compliance with Commission rules may be accessed by 
persons in foreign jurisdictions under whose laws such a 
solicitation may not be lawful. The International Organization of 
Securities Commissions (``IOSCO''), an international association of 
securities and futures regulatory and self-regulatory organizations, 
has several initiatives underway to address these issues. In 
particular, IOSCO is examining a number of issues, including the 
enforcement and other regulatory challenges for securities and 
futures regulators presented by the increasing use of public 
computer networks. The Commission invites comment from interested 
persons as to how the issues created by application of multiple 
jurisdictions' laws to an international mode of communication such 
as the Internet should be resolved.
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    A number of federal agencies, including the Securities and Exchange 
Commission (``SEC''), have begun to formally address regulatory issues 
presented by activities involving the Internet. In October 1995, the 
SEC issued an interpretative release addressing electronic delivery of 
documents such as prospectuses, annual reports to shareholders, and 
proxy solicitation materials by issuers, third parties (such as persons 
making tender offers or soliciting proxies) and persons acting on their 
behalf. In that release, the SEC set forth its views on the 
requirements and standards to be met by securities issuers and mutual 
funds using electronic media to deliver such documents to persons who 
consent to such delivery.12 In a subsequent release dated May 15, 
1996, the SEC extended its guidance with respect to electronic media to 
broker-dealers, transfer agents, investment advisers and persons acting 
on their behalf.13 In these releases, the SEC articulated its view 
that in most instances, ``the use of electronic media should be at 
least an equal alternative to the use of paper-based media.'' 14
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    \12\ 60 FR 53458 (October 13, 1995). In a companion release, the 
SEC proposed technical revisions to certain of its rules in light of 
the interpretations proffered in the interpretative release. 60 FR 
53468 (October 13, 1995). Much of the guidance provided in the SEC 
interpretative release took the form of fifty-one examples of 
particular uses of electronic media by securities professionals.
    \13\ 61 FR 24644 (May 15, 1996).
    \14\ 60 FR at 53459. On January 7, 1996, the North American 
Securities Administrators Association, Inc. adopted a resolution 
concerning offerings of securities over the Internet. In general, 
this resolution encouraged states to exempt certain offerings over 
the Internet from registration provisions and to take appropriate 
steps to allow such offers and sales to occur subject to specified 
conditions.
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    In addition, the SEC has indicated that, subject to certain 
conditions, Spring Street Brewing Co. (``Spring Street'') may operate 
Wit-Trade, an on-line bulletin board-based trading system on the World 
Wide Web that allows individuals to buy and sell shares of Spring 
Street stock over the Internet. Spring Street had voluntarily suspended 
trading on Wit-Trade on March 20, 1996, apparently due to concern that 
the system, as then structured, did not satisfy SEC 
requirements.15 However, in a March 22, 1996, letter to Spring 
Street, the SEC's Divisions of Corporation Finance and Market 
Regulation expressed support for securities market innovations such as 
Wit-Trade, which they described as ``an innovative mechanism that has 
the potential to provide [Spring Street] shareholders with greater 
liquidity in their investments.'' 16 However, to ensure protection 
of public investors, the SEC also imposed several conditions upon Wit-
Trade's resumption of trading. In order to continue its on-line trading 
system, Wit-Trade, which is not a registered broker-dealer, was 
required to use an independent agent to handle investor funds, to 
supplement the information provided about Spring Street on the World 
Wide Web in order to highlight the risks inherent in investing in 
illiquid and speculative securities and to provide on the website a 
transaction history, including price and volume data, to facilitate 
informed investment decisions. Finally, the SEC stated that Spring 
Street was required to maintain and deliver an offering circular in 
accordance with Regulation A.17
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    \15\ See Rob Wells, ``SEC Allows Brewer to Trade Stock on 
Internet,'' Washington Times, March 26, 1996, at 5B. The developer 
of Spring Street Brewing Co. has created Wit Capital Corporation to 
act as agent in the public offering of securities through the 
Internet and to create an electronic marketplace for the shares of 
such companies. ``Brewer That Began IPOs on Web Plans On-Line 
Exchange,'' The Washington Post, April 3, 1996, at G1.
    \16\ Spring Street Brewing Co., SEC No-Action Letter, [Current 
Transfer Binder] Fed. Sec. L. Rep. (CCH) para. 77,201 (April 17, 
1996).
    \17\ 17 CFR 230.251 et seq. (1996). Regulation A is an exemption 
from registration available to issuers that are neither Securities 
Exchange Act of 1934 reporting companies or investment companies and 
permits interstate offerings of up to $5 million during any twelve 
month period, including up to $1.5 million in non-issuer resales. An 
offering pursuant to Regulation A requires that the issuer file an 
``offering circular'' with the SEC.
    The SEC also noted that its regulatory authority over Wit-Trade 
extends to some categories of Wit-Trade's users. Specifically, the 
SEC cautioned that Spring Street should inform users of the system 
that if they post quotations simultaneously on both the Buyer and 
Seller Bulletin Boards, they may be considered a ``dealer'' and 
required to register as such and comply with the requirements 
applicable to broker-dealers under the federal securities laws. The 
SEC also stated that any transactions facilitated through Wit-Trade 
would be subject to the antifraud provisions of the federal 
securities laws.
    Further, by letter dated June 21, 1996, the SEC's Divisions of 
Market Regulation, Investment Management and Corporation Finance 
granted approval to Real Goods Trading Corp. (``RGTC''), permitting 
it to operate a bulletin board system on the World Wide Web whereby 
persons may post notices regarding purchases or sales of RGTC stock 
in light of representations that, inter alia, RGTC will not receive 
any compensation for creating or maintaining the system and that it 
will not receive, transfer or hold any funds or securities in 
connection with its operation of the system. Real Goods Trading 
Corp., 1996 SEC No-Act. Lexis 566 (June 24, 1996); Jeffrey Taylor, 
``SEC to Allow Firm to Run Market For Its Own Shares on the 
Internet,'' Wall Street Journal, June 27, 1996, at B12.
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    Regulatory programs to address new commercial uses of the Internet 
and World Wide Web have been accompanied by law enforcement actions to 
address apparent abuses involving the use of such media. The Federal 
Trade Commission (``FTC'') has brought several enforcement actions 
involving fraud on the Internet. On May 29, 1996, the FTC announced 
that it had obtained a federal court order against Fortuna Alliance, 
L.L.C., temporarily halting an alleged pyramid scheme advertised over 
the Internet that had taken in over $6 million.18 On June 12, 
1996, the FTC obtained a preliminary injunction, keeping in effect the 
identical provisions of the temporary restraining order. The FTC has 
also established an electronic forum

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intended to develop a set of voluntary principles applicable to the use 
of consumer information in electronic media generally.19 This 
electronic forum is presently soliciting comment from all sources, 
including consumers, industry representatives, and privacy advocates.
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    \18\ FTC v. Fortuna Alliance, L.L.C., Civ. Docket 96-CV-799, 
W.D. Wa. 1996.
    \19\ See FTC's website at http://www.ftc.gov/ftc/privacy.htm.
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    NASD Regulation, Inc. (``NASDR''), the self-regulatory organization 
responsible for oversight of securities firms and professionals and 
over-the-counter securities trading, recently issued a Notice to 
Members addressing supervisory and other obligations related to the use 
of electronic media.20 In that notice, NASDR explained that 
electronic communications are subject to the same approval, 
recordkeeping, and filing requirements as communications by other means 
and emphasized that all communications by its members with the public 
remain subject to the antifraud provisions of the federal securities 
laws. Further, it explained that members must comply with the NASD's 
suitability rule, disclose material adverse facts to customers, and 
implement appropriate supervisory procedures to ensure that their 
associated persons do not misuse electronic communications or engage in 
misconduct while on-line. NASDR also solicited comment from members 
concerning their use of electronic media and whether there is a need 
for ``prophylactic regulatory measures.'' 21
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    \20\ NASD Notice to Members 96-50, July 1996. In a previous 
notice, NASDR provided guidance to its members concerning the 
regulatory implications of certain conduct occurring over various 
electronic media, including the World Wide Web, ``bulletin boards,'' 
electronic mail, ``chat rooms,'' and hyperlinked sites. ``Ask the 
Analyst About Electronic Communications,'' NASD Regulatory & 
Compliance Alert, April 1996.
    \21\ NASD Notice to Members 96-50, July 1996.
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    Regulatory Implications of New Electronic Media. Like its sister 
agencies, the CFTC has been alert to the potential regulatory and law 
enforcement implications of the Internet and electronic media 
generally. For example, like businesses and other government agencies, 
the Commission is using electronic media to increase public awareness 
of and access to its services. The Commission initiated its website on 
the World Wide Web on October 10, 1995. The Commission now regularly 
provides information on its website concerning a broad range of topics, 
including enforcement actions, opinions and orders, commitments of 
traders reports, interpretative letters, press releases, sanctions in 
effect and reparations proceedings (including the necessary forms to 
institute reparations claims).22
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    \22\ The address of the site is http://www.cftc.gov. It is 
visited by thousands of users each month.
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    In addition to its World Wide Web site, the Commission has 
undertaken a variety of initiatives relating to the application of 
technology and electronic media to regulated futures activities. The 
Commission recently concluded five market automation briefings, 
soliciting input from four exchanges and from the brokerage community, 
through representatives of the Futures Industry Association.23 In 
these briefings, the exchanges described the current status and planned 
improvements to clearing, order-routing, trade tracking, surveillance 
and automation systems. The brokerage representatives identified 
technological enhancements, including electronic transaction 
confirmations and recordkeeping capacity, relevant to the continuing 
efficiency and competitiveness of United States futures markets.
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    \23\ Advisory No. 25-96 (May 13, 1996); ``Market Automation 
Examined,'' [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 
Report Letter No. 528 at 5 (June 7, 1996).
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    To date, the Commission has facilitated the use of electronic media 
by providing relief from or interpretations of regulatory requirements 
in a variety of contexts. Recently, the Division of Trading and Markets 
issued a ``no-action'' letter and a related advisory allowing FCMs to 
use facsimile transmissions to send daily confirmation statements to 
certain institutional customers in fulfillment of their obligations 
under Commission Rule 1.33(b).24 The Division of Trading and 
Markets also has issued an advisory concerning the attestation of 
financial reports filed electronically with a self-regulatory 
organization.25 Pursuant to Advisory 28-96, FCMs and IBs who file 
financial reports electronically with a self-regulatory organization 
that operates a program for electronic filing approved by the 
Commission, such as the Chicago Board of Trade (``CBT'') or the Chicago 
Mercantile Exchange (``CME''), may use a personal identification number 
(``PIN'') in lieu of a signature, which will be deemed to be the 
equivalent of a manual signature for purposes of attestation under 
Commission Rule 1.10(d)(4).26 The PIN, therefore, will constitute 
a representation by the user that the information contained in the 
financial report is true, correct and complete. The Division of Trading 
and Markets also is encouraging the CME and the CBT to license the 
electronic filing system developed jointly by these exchanges, and 
currently used by their members to file financial reports 
electronically, at reasonable cost to other markets and is evaluating 
whether to require electronic filing for all but certified financial 
statements. The Division of Trading and Markets also has encouraged the 
use of electronic media to achieve greater efficiency by allowing firms 
to directly enter certain registration filings in connection with the 
National Futures Association (``NFA'') direct entry program.27
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    \24\ Advisory No. 22-96, [Current Transfer Binder] Comm. Fut. L. 
Rep. (CCH) para. 26,679 (May 2, 1996). Throughout this 
Interpretation the Commission refers to various staff interpretative 
letters and advisories. These letters and advisories represent 
interpretations by the Commission's staff and do not necessarily 
represent interpretations by the Commission. The Commission intends 
to issue a separate Federal Register release addressing electronic 
communications and disclosures by FCMs and IBs. Prior to the 
issuance of such a release, the Commission's Division of Trading and 
Markets will continue to resolve issues in this area on a case-by-
case basis.
    \25\ Advisory No. 28-96, [Current Transfer Binder] Comm. Fut. L. 
Rep. (CCH) para. 26,711 (May 28, 1996).
    \26\ The Commission approved rules of the CME and CBT permitting 
electronic filing of financial reports prior to issuing this 
advisory. See CME Rule 970 (approved by the Commission on September 
27, 1993); CBT Capital Rule 311, Appendix 4B (approved by the 
Commission on September 21, 1993). The Commission expects to propose 
its own rules on this subject in the near future.
    \27\ 57 FR 60799 (December 22, 1992).
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    The Commission's Division of Enforcement (``DOE'') is actively 
monitoring activity on the Internet and proprietary on-line services. 
The DOE investigates and prosecutes violations of the CEA by persons 
who use electronic media, as well as any other media, to accomplish 
such violations. For instance, the Commission recently brought an 
action in the United States District Court for the Southern District of 
Florida against certain persons alleging fraud in connection with the 
solicitation and receipt of funds for the purchase and use of computer-
generated trading systems.28 The complaint alleges that the 
defendants in that case marketed the systems in national newspapers and 
on the Prodigy on-line service Money Talk Bulletin Board. On October 
16, 1995, the District Court issued an ex parte order freezing 
defendants' assets. On October 25, 1995, the defendants, without 
admitting or denying the allegations, consented to the entry of an 
Order of Preliminary Injunction which, among other things, prohibited 
them from acting as CTAs without benefit of registration.
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    \28\ CFTC v. Maseri, et al., Case No. 95-6970-Civ-Davis (S.D. 
Fla. 1995).
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    In addition, the DOE will shortly introduce a section of the 
Commission's website through which members of the public can provide it 
with information regarding possible violations of the CEA

[[Page 42150]]

occurring on the Internet or elsewhere. This section will be an 
important part of the DOE's and the Commission's surveillance and 
information gathering activities over the Internet.
    The Commission's Office of Information Resources Management 
(``OIRM'') performs ongoing assessments of the opportunities offered by 
the use of new technology to streamline or otherwise improve the 
effectiveness of the Commission's programs. For example, in addition to 
implementing and maintaining the Commission's website, OIRM has 
recently provided a firewall-protected connection between the 
Commission's internal network and the Internet. This connection 
provides all Commission staff with Internet electronic mail addresses, 
thereby enabling them to receive industry inquiries electronically and 
to respond to such inquiries more rapidly. It also provides select 
Commission staff with full web-browsing capabilities to facilitate 
surveillance and other information gathering activities.
    In sum, the Commission supports the use of new technologies to 
enhance efficiency and competitiveness and believes that electronic 
media can provide an effective alternative to traditional paper-based 
media. The Commission encourages industry participants to consult with 
the Commission as they develop and refine electronic media applications 
in order to assure that transitions to electronic media occur 
efficiently and without loss of regulatory protections.
    The Commission is issuing this release to provide guidance 
concerning a range of issues presented by existing and contemplated 
uses of electronic media by the managed futures industry. The release 
addresses: the applicability of the CEA and Commission regulations to 
the use of electronic media, including registration duties and other 
regulatory requirements applicable to persons who use electronic media 
to provide commodity trading advice or to solicit managed futures 
accounts or pool participations; the criteria and requirements 
applicable to CPOs and CTAs seeking to use electronic media for the 
delivery of Disclosure Documents, reports and other information; and a 
mechanism whereby CPOs and CTAs may use electronic media to file 
Disclosure Documents with the Commission. The Commission invites 
comment on each of these topics, and any related issues of interest to 
futures professionals or other market users.

II. Applicability of the Commodity Exchange Act and Regulations 
Thereunder to Use of Electronic Media: Registration and Other 
Requirements for Commodity Trading Advisors and Commodity Pool 
Operators

    The advent of electronic media, such as the Internet, as common 
modes of commercial communication has given rise to numerous questions 
concerning the applicability of existing regulatory structures to these 
media. Although this release is principally directed toward the use of 
electronic media by managed futures professionals, the Commission also 
wishes to emphasize that, as a general matter, the nature and effect of 
a person's conduct, not the medium of communication chosen, determine 
the applicability of the Commission's regulatory framework. 
Consequently, persons using electronic media are subject to the same 
statutory and regulatory requirements under the Commission's regulatory 
framework as persons employing other modes of communication.
    This conclusion follows from the breadth of the mandates codified 
in the CEA, as well as their express terms. The definition of CPO, for 
example, includes ``any person engaged in a business that is of the 
nature of an investment trust, syndicate, or similar form of 
enterprise, and who, in connection therewith, solicits, accepts or 
receives from others funds, securities or property, either directly or 
through capital contributions, the sale of stock or other forms of 
securities, or otherwise, for the purpose of trading in any commodity 
for future delivery on or subject to the rules of any contract market * 
* *.'' 29 Similarly, the CTA definition includes ``any person who 
* * * for compensation or profit, engages in the business of advising 
others, either directly or through publications, writings or electronic 
media, as to the value of or the advisability of trading in any 
contract of sale of a commodity for future delivery made or to be made 
on or subject to the rules of a contract market * * *.'' 30 
Section 4l of the Act confirms the national public interest in the 
activities of CTAs and CPOs whose advice to and arrangements with 
clients ``take place and are negotiated and performed by the use of the 
mails and other means and instrumentalities of interstate commerce.'' 
31 More generally, Section 18 of the Act directs the Commission to 
establish and maintain, ``as part of its ongoing operations,'' research 
and information programs to determine, inter alia, ``the feasibility of 
trading by computer, and the expanded use of modern information system 
technology, electronic data processing, and modern communication 
systems by commodity exchanges, boards of trade, and by the Commission 
itself for purposes of improving, strengthening, facilitating, or 
regulating futures trading operations.'' 32
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    \29\ 7 U.S.C. 1a(4) (emphasis added).
    \30\ 7 U.S.C. 1a(5)(A) (emphasis added). The definition of the 
term ``commodity trading advisor'' was amended by the Futures 
Trading Act of 1982, Pub. L. No. 97-444, 96 Stat. 2204 in order to 
refer expressly to ``electronic media.'' Similarly, the exclusions 
from the CTA definition for newspaper reporters and publishers were 
amended to add ``electronic media'' to the exclusion for print 
media.
    \31\ 7 U.S.C. 6l (emphasis added).
    \32\ 7 U.S.C. 22 (emphasis added).
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    However, although Congress's intent that the Act should encompass 
and accommodate new technologies is clear, market participants may 
nevertheless benefit from guidance as to the manner in which the Act 
and Commission rules apply in specific contexts. This release is 
intended to facilitate the use of electronic information and 
communications systems by Commission registrants in conducting their 
businesses and in making required filings with the Commission. In 
particular, this release is intended to facilitate the use of 
electronic communication systems by clarifying the manner in which 
Commission rules, generally written to address either oral or hardcopy 
written communications, may be translated into the context of 
electronic media.
    As a threshold matter, the Commission wishes to emphasize the 
registration duties of persons using electronic media to engage in 
activity subject to the Act and Commission regulations. The Act's 
registration requirements for commodity professionals are a cornerstone 
of the regulatory framework enacted by Congress. Determinations as to 
whether a person must register, and in what capacity, require an 
evaluation of all of the ``circumstances surrounding such person's 
commodity-related activities.'' 33 Section 4m(1) of the Act makes 
it unlawful for any CTA or CPO, unless excluded or exempted from 
registration, ``to make use of the mails or any instrumentality of 
interstate commerce in connection with his business as such commodity 
trading advisor or commodity pool operator'' 34 without being 
registered under the Act. Thus, the Act requires the registration of 
persons who use any instrumentality of interstate commerce, including

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electronic media, in connection with their business as a CTA or CPO.
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    \33\ 48 FR 35248, 35253 n.27 (August 3, 1983).
    \34\ 7 U.S.C. 6m(1).
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A. Commodity Trading Advisory Activities

1. Trading Advice Communicated Electronically
    The Act defines the term ``commodity trading advisor'' to include, 
subject to specified exclusions, any person who: ``(i) for compensation 
or profit, engages in the business of advising others, either directly 
or through publications, writings, or electronic media, as to the value 
of or the advisability of trading in'' futures contracts, commodity 
options, or leverage transactions; or ``(ii) for compensation or 
profit, and as part of a regular business, issues or promulgates 
analyses or reports concerning any of the activities referred to in 
clause (i).'' 35 Thus, subject to certain statutory exclusions, 
any persons who for compensation or profit engage in the business of 
advising others concerning trading in futures or commodity options or 
of issuing analyses or reports concerning such trading, are deemed CTAs 
under the Act.
---------------------------------------------------------------------------

    \35\ 7 U.S.C. 1a(5)(A).
---------------------------------------------------------------------------

    A threshold requirement of the CTA definition is that the trading 
advisory activity be undertaken for ``compensation or profit.'' This 
does not, however, require that ``the `compensation or profit' flow 
directly from the person or persons advised * * * [i]t is sufficient 
that the compensation or profit is to result wholly or in part from the 
furnishing of the services specified in section [1a(5)].'' 36 
Accordingly, this requirement has been interpreted by Commission staff 
to include direct or indirect forms of compensation or profit received 
by a CTA, including the attraction of new customers or maintenance of a 
customer base.37
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    \36\ CFTC Interpretative Letter No. 75-11, [1975-1977 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 20,098, at 20,763 n.6 (Office 
of the General Counsel, Trading and Markets, September 15, 1975).
    \37\ CFTC Interpretative Letter No. 76-10, [1975-1977 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 20,157 (Office of the General 
Counsel, April 22, 1976); CFTC Interpretative Letter No. 75-6, 
[1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,093 
(Office of the General Counsel, Trading and Markets, August 13, 
1975). For example, Commission staff have found the ``compensation 
or profit'' requirement of the CTA definition satisfied where a 
CTA's customers receive commission rebates from an FCM that are then 
credited toward payment of the CTA's commodity information service 
subscription fees. Division of Trading and Markets Interpretative 
Letter No. 95-51, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 
para. 26,420 (May 1, 1995).
---------------------------------------------------------------------------

    The term ``commodity trading advice'' has been interpreted 
expansively and includes particularized trading advice that recommends 
specific transactions or trading methodologies as well as advice 
concerning the ``value of or advisability'' of trading in futures or 
commodity options. Consequently, one who advises others concerning the 
value of using futures generally, without providing specific trading 
recommendations, nonetheless is providing commodity trading advice. 
Further, persons may provide commodity trading advice even though they 
``are neither directly or indirectly involved in the solicitation of 
funds or trades or the trading of accounts.'' 38 For example, 
Commission staff have found that a publication that includes general 
information on trading in commodity interests, detailed information on 
price forecasting and specific advice on market conditions that signal 
when persons should trade in the futures markets provides trading 
advice.39 Commodity trading advice may include information already 
contained in the public domain 40 and is not limited to trading 
``recommendations.'' 41
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    \38\ Division of Trading and Markets Interpretative Letter No. 
96-56, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
________ (July 8, 1996).
    \39\ Id.
    \40\ Unpublished letter from Andrea M. Corcoran, Director, 
Division of Trading and Markets, dated March 14, 1990 (``even 
assuming that information contained in the [publication] is 
available elsewhere in the public domain, it is our opinion that the 
CTA definition includes an enterprise which is devoted to compiling 
advice, reports or analyses of others with respect to futures 
markets and to publishing such data in a book such as the 
[publication] on a regular basis'').
    \41\ Unpublished letter from Susan C. Ervin, Deputy Director/
Chief Counsel, Division of Trading and Markets, dated March 14, 1989 
(noting that the absence of interpretative or analytical information 
does not exclude a person from the definition of a CTA). ``The plain 
terms of the statute indicate * * * that Congress intended to cover 
all types of analyses and reports * * *, not just those that advise, 
interpret or make recommendations.'' CFTC Interpretative Letter No. 
76-25, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
20,239 (Office of the General Counsel, December 6, 1976). Thus, a 
person may provide commodity trading advice despite neither 
analyzing nor making any predictions or representations about the 
information provided.
---------------------------------------------------------------------------

    In applying the CTA definition, the Commission has recognized that 
commodity trading advice may be provided through all forms of 
communication, including electronic media. This conclusion is compelled 
by the Act's express terms; as noted by Commission staff, ``[i]n 
distinguishing between trading advice offered directly or through 
publications, writings or electronic media, [the statutory CTA 
definition] is clearly intended to reach `impersonal,' indirect forms 
of trading advice and explicitly recognizes that commodity trading 
advice may be given in forms other than personalized trading advice.'' 
42
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    \42\ Division of Trading and Markets Interpretative Letter No. 
95-101, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
26,565 (November 21, 1995). The Commission has recently filed 
complaints addressing certain forms of alleged CTA activity 
conducted by means of electronic media. For example, the Commission 
and the Attorney General for the State of Florida jointly filed a 
complaint, which was later amended to include a new defendant, in 
CFTC v. JDI Limited Inc. d/b/a Future Vision, Case No. 95-6221-Civ-
Gonzalez (S.D. Fla.), charging defendants with, inter alia, acting 
as unregistered CTAs and violating the antifraud provisions of the 
Act in the marketing, sale and support of a computerized trading 
program. Similarly, the Commission's complaint in In the Matter of 
R&W Technical Services, Ltd., CFTC Docket No. 96-3, alleged that the 
respondents had marketed and sold a computerized futures trading 
system generating trading signals for transactions in various 
financial futures contracts without being registered as CTAs. The 
complaint also charged the parties with violations of antifraud 
provisions of the Act by falsely advertising money-back guarantees 
and hypothetical profits in magazines, telephone solicitations and 
written promotional materials. The Commission expresses no opinion 
on the merits or ultimate outcome of these cases.
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    Commission staff have applied the CTA definition to ``persons who 
make commodity interest trading advice available to the public through 
mass media, such as newsletters, telephone hotlines or electronic 
devices including computer software, rather than through direct 
communication with individual persons.'' 43 Staff letters have 
applied the CTA definition to, for example, designers and distributors 
of computer software programs that generated commodity trading 
recommendations or strategies; 44 a professor who received 
compensation for applying research and periodically updating a computer 
model used for trading commodity interests; 45 the distributor of 
software that analyzed a United States dollar index; 46 and the 
licensor of a computer software program who had developed and licensed 
to more than fifty licensees various computerized trading systems that 
allowed the licensees to input data setting the parameters of futures 
transactions.\47\ These staff positions are consistent with 
applications of the CTA definition to other impersonal or indirect 
forms of communication, such

[[Page 42152]]

as newsletters and other print media 48 and telephone 
hotlines.49
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    \43\ Division of Trading and Markets Interpretative Letter No. 
95-68, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
26,498 (August 10, 1995).
    \44\ Id.
    \45\ Division of Trading and Markets Interpretative Letter No. 
94-51, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
26,115 (May 10, 1994).
    \46\ Division of Trading and Markets Interpretative Letter No. 
93-27, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
25,704 (April 2, 1993).
    \47\ Division of Trading and Markets Interpretative Letter No. 
84-9, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
22,092 (March 1 and April 6, 1984).
    \48\ Division of Trading and Markets Interpretative Letter No. 
93-18, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
25,694 (February 23, 1993) (publications issued on a monthly or 
bimonthly basis which contained analyses and advice concerning 
trading commodity interests, including gold, silver and platinum 
contracts required registration as a CTA); CFTC Interpretative 
Letter No. 75-3, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. 
(CCH) para. 20,090 (Office of the General Counsel, Trading and 
Markets, July 31, 1975) (publisher of newsletter focusing on cash 
commodity markets and that occasionally prints advice concerning the 
use of agricultural futures for hedging purposes is a CTA); Division 
of Trading and Markets Interpretative Letter No. 94-29, [1992-1994 
Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,020 (March 15, 
1994) (responding to general questions regarding newsletter 
publications and CTA registration and concluding that publisher of 
newsletter offering market advice is not a CTA only if advice is 
solely incidental to the publisher's business).
    \49\ Division of Trading and Markets Interpretative Letter No. 
93-43, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
25,734 (May 19, 1993) (requiring CTA registration of IB using a 
``900 line'' that provided prerecorded trade recommendations as well 
as research, market and trade ideas); see also CFTC v. Ehrenberg, 
[1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 21,640, 
at 26,429 (E.D. Ill. 1982) (party who advertised services as pork 
belly trading specialist in commodities magazine and gave commodity 
trading advice over telephone for a fee was required to register as 
CTA).
---------------------------------------------------------------------------

    The Commission wishes to make clear that the nature and scope of 
regulation of trading advisory activity under the CEA depends upon the 
type of activity in which the advisor engages. For example, persons who 
provide commodity trading advice but do so in a manner that is solely 
incidental to the conduct of certain businesses or professions, such as 
banking, news publishing or news reporting, are wholly excluded from 
the definition of a CTA. Persons who provide commodity trading advice 
but do not qualify for a statutory exclusion from the CTA definition 
due to the fact that their trading advice is not incidental to the 
conduct of their business or profession as, e.g., a publisher, are 
required to register as CTAs and maintain specified records; however, 
unless they are managing customer accounts, they are not subject to the 
requirement to deliver a Disclosure Document. Finally, persons who 
manage customer accounts, i.e., direct or guide accounts,50 are 
required to register with the CFTC, deliver a Disclosure Document to 
each prospective customer at or before the time at which he solicits 
such customer, obtain a signed acknowledgment of receipt of the 
Disclosure Document from the customer and maintain specified books and 
records. Persons who solicit managed accounts for a CTA must be 
registered as an AP of the CTA and provide the required Disclosure 
Document at the time of or prior to solicitation of the customer. The 
Commission provides guidance on a case-by-case basis concerning the 
application of these requirements to particular business activities or 
arrangements.
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    \50\ Commission staff have stated that it is not necessary for a 
person to have a power of attorney in order to be ``directing'' or 
``guiding'' accounts. See, e.g., Division of Trading and Markets 
Interpretative Letter No. 86-15, [1986-1987 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) para. 23,165 (July 22, 1986) (``[i]t should be 
noted that, although the CTA has no power of attorney over the 
account, he does have the power to control the client's trades'').
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a. Exclusions From the CTA Definition
    The CEA provides an exclusion from the CTA definition for banks and 
trust companies (and their employees), news reporters, columnists and 
editors, lawyers, accountants and teachers, floor brokers or FCMs, 
publishers or producers of print or electronic data of general and 
regular dissemination (and their employees), contract markets, and 
``such other persons not within the intent of this paragraph as the 
Commission may specify by rule, regulation, or order.'' 51 These 
exclusions apply only if the furnishing of such services by the 
specified persons ``is solely incidental to the conduct of their 
business or profession.'' 52
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    \51\ 7 U.S.C. 1a(5)(B). For instance, Commission Rule 4.14 
exempts from CTA registration various categories of persons, 
including certain dealers, processors, brokers or sellers in the 
cash market for commodities; a registered AP who provides trading 
advice solely in connection with his employment as an AP; registered 
CPOs who provide trading advice solely to pools for which they are 
registered; persons who are exempt from CPO registration who provide 
trading advice solely to pools for which they are exempt from 
registration; and certain persons who are registered as investment 
advisers under the Investment Advisers Act of 1940 or are excluded 
from the definition of the term ``investment adviser.'' 17 CFR 4.14.
    \52\ 7 U.S.C. 1a(5)(C). Pursuant to statutory amendments adopted 
in 1982, the Act also provides that the Commission may, ``by rule or 
regulation, include within the term [CTA] any person advising as to 
the value of commodities or issuing reports or analyses concerning 
commodities if the Commission determines that the rule or regulation 
will effectuate the purposes of this paragraph.'' 7 U.S.C. 1a(5)(D).
---------------------------------------------------------------------------

(1) Publisher or Producer of Electronic Data of General and Regular 
Dissemination
    The CEA's express exclusion from the CTA definition for publishers 
and producers of print or electronic media applies only if two criteria 
are met.53 First, a person must be ``the publisher or producer of 
any print or electronic data of general and regular dissemination.'' 
(emphasis added). Second, ``the furnishing of such services * * * [must 
be] solely incidental to the conduct of their business or profession.'' 
As construed by CFTC staff, the phrase ``general and regular 
dissemination'' applies to publications whose ``primary purpose [is] to 
disseminate news and other items appealing to the interest of all 
segments of the business and financial community.'' 54 In 
contrast, ``if a publication concentrates on disseminating analyses, 
reports or recommendations bearing on a narrow area of interest, such 
as * * * commodity futures trading,'' the staff has construed the 
publication not to be ``a bona fide business or financial publication 
of general and regular circulation'' for purposes of the statutory 
exclusion from the CTA definition.55
---------------------------------------------------------------------------

    \53\ 7 U.S.C. 1a(5) provides in pertinent part:
    (B) Subject to subparagraph (C), the term ``commodity trading 
advisor'' does not include--
    *        *        *        *        *
    (iv) the publisher or producer of any print or electronic data 
of general and regular dissemination, including its employees;
    *        *        *        *        *
    (C) INCIDENTAL SERVICES--Subparagraph (B) shall apply only if 
the furnishing of such services by persons referred to in 
subparagraph (B) is solely incidental to the conduct of their 
business or profession.
    \54\ Division of Trading and Markets Interpretative Letter No. 
76-1, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
20,135 (February 26, 1976) (emphasis added).
    \55\ Id.
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(2) Solely Incidental
    In defining ``solely incidental,'' the Commission does not rely on 
a specific numerical standard or percentage of revenues or business 
but, rather, considers the nature of the overall business and the 
factual context in which the advisory services are rendered.56 
Thus, ``a planned or periodic expression of views as to the 
advisability of trading in commodity futures made by an FCM may be 
solely incidental to its business[,] while the same advice rendered by 
a publisher or bank may not.'' 57 Generally, if a publication has 
a specialized focus upon futures transactions or is largely devoted to 
futures trading, the commodity trading advice furnished therein will 
not be considered to be solely incidental to the conduct of the

[[Page 42153]]

publisher's business.58 Conversely, if a publication covers a 
broad range of topics and futures are not its predominant focus, the 
commodity trading advice provided therein may be ``solely incidental'' 
to the conduct of the publisher's business. For example, Commission 
staff have found that ``reprinting'' by an electronic information 
service of, among other things, specific trading recommendations was 
solely incidental to its broader business as an electronic information 
and communications service, a general computer library whose files 
included a ``broad range of many different types of information.'' 
59 However, advice furnished in a financial publication (and 
related telephone newsline service) that was substantially focused on 
metals futures, was not solely incidental to that entity's publishing 
business, but in the words of the Commission, was ``the very point of 
that business.'' 60 Similarly, where a newsletter devoted a 
substantial number of issues to analyses of the futures markets and 
specific trading recommendations, Commission staff found such advice to 
be ``fundamental,'' rather than solely incidental, to the company's 
business.61
---------------------------------------------------------------------------

    \56\ In the Matter of Armstrong, [1992-1994 Transfer Binder] 
Comm. Fut. L. Rep. (CCH) para. 25,657 (February 8, 1993), rev'd on 
other grounds sub nom., Armstrong v. Commodity Futures Trading 
Commission, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 
para. 25,914 (December 21, 1993) [hereinafter Armstrong]; see also 
52 FR 41975, 41978 (November 2, 1987) (discussing ``solely 
incidental'' as used in Commission Rule 4.6).
    \57\ Division of Trading and Markets Interpretative Letter No. 
76-1, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
20,135 (February 26, 1976).
    \58\ Armstrong; CFTC Interpretative Letter No 75-4, [1975-1977 
Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,091 (Office of 
the General Counsel, Trading and Markets, August 11, 1975).
    \59\ Division of Trading and Markets Interpretative Letter No. 
83-3, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
21,842, at 27,538 (May 25, 1983) (describing the computer 
information and communications service as ``computer library and 
information distribution business'').
    \60\ Armstrong, at 40,149.
    \61\ CFTC Interpretative Letter No. 75-4, [1975-1977 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 20,091, (Office of the 
General Counsel, Trading and Markets, August 11, 1975). The United 
States Supreme Court's interpretation of the term ``investment 
adviser'' in SEC v. Lowe, 472 U.S. 181 (1985), as used in the 
Investment Advisers Act of 1940 (``IAA''), does not mandate a 
different result. In Lowe, after reviewing the language and 
legislative history of the IAA, the Court held that Congress had 
excluded publishers of generalized securities advice from the 
definition of investment adviser. Although a ``facial parallel'' 
exists between the Section 1a(5)(B)(iv) of the CEA and Section 
203(c) of the IAA (the exclusion for ``the publisher of a bona fide 
newspaper, magazine or business of financial publication of general 
and regular circulation''), unlike the investment adviser definition 
of the IAA, the CTA definition in Section 1a(5)(C) of the CEA limits 
the exclusions in Section 1a(5)(B), including the publishers' 
exclusion of Section 1a(5)(B)(iv), to cases where ``the furnishing 
of such services by the foregoing persons is solely incidental to 
the conduct of their business or profession.'' Armstrong, at 40,149. 
Consequently, as the Commission noted in Armstrong, ``[g]iven this 
clear distinction between Congress' exclusionary language in [the 
IAA and the CEA, the Commission is] not persuaded that the holding 
in Lowe mandates a broad construction of the exclusion from the 
definition of CTA for certain publishers.'' Id.
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b. Exemption From Registration for Persons Who Furnish Trading Advice 
to Fifteen or Fewer Persons and Who Do Not Hold Themselves Out as CTAs
    Section 4m(1) of the CEA provides an exemption from registration 
for CTAs who during the preceding twelve months have not furnished 
trading advice to more than fifteen persons and who do not ``hold 
[themselves] out generally to the public as a commodity trading 
advisor.'' 62 A CTA who identifies himself as a CTA or otherwise 
refers to his advisory services or history on a public electronic forum 
such as portions of the Internet or a proprietary on-line service may 
not avail himself of the exemption under Section 4m(1). Such conduct 
constitutes ``holding out'' to the public as a CTA.63 This view is 
consistent with the SEC's views concerning the ineligibility of 
offerings posted on the Internet for the Regulation D safe harbor from 
registration. As stated by the SEC, ``[t]he placing of the offering 
materials on the Internet would not be consistent with the prohibition 
against general solicitation or advertising in Rule 502(c) of 
Regulation D.'' 64
---------------------------------------------------------------------------

    \62\ 7 U.S.C. 6m(1).
    \63\ See examples infra, at the conclusion of this section. 
Likewise, a CPO who advertises a pool on the Internet, e.g., by 
identifying himself as a CPO of a pool, may not obtain an exemption 
from registration relief under Commission Rule 4.13(a)(1), inasmuch 
as such advertising plainly negates one of the required elements of 
the exemption. Commission Rule 4.13(a)(1) provides an exemption from 
registration for a CPO if, among other things, ``it does not receive 
any compensation, directly or indirectly, for operating the pool, 
except reimbursement for ordinary administrative expenses of 
operating the pool;'' ``[i]t operates only one pool at a time;'' and 
``[n]either the person nor any other person involved with the pool 
does any advertising in connection with the pool * * *.'' 17 CFR 
4.13(a)(1) (emphasis added).
    \64\ 60 FR at 53464. SEC Rule 502(c) prohibits ``any form of 
general solicitation or general advertising'' and applies to 
Regulation D offerings pursuant to SEC Rules 505 and 506. 17 CFR 
230.502(c). Thus, CPOs who use electronic media in a manner 
inconsistent with Regulation D may not obtain relief pursuant to 
Commission Rule 4.8, which is available only with respect to 
offerings pursuant to SEC Rules 505 and 506. 17 CFR 4.8.
---------------------------------------------------------------------------

2. Directories and Compilations
    In addition to using electronic media to communicate specific 
commodity trading advice, market participants may engage in activities 
that implicate registration duties and other CFTC requirements by 
operating sites on the World Wide Web that compile information about 
other registrants or futures-related subjects. For example, many 
locations on the Internet provide central repositories for, directories 
of, or mechanisms to access information compiled from multiple sources. 
Persons who compile and reprint information, whether electronically or 
on paper media, may be subject to the Commission's registration 
requirements notwithstanding the fact that they did not originally 
prepare the information disseminated. The terms ``advising'' and 
``issues or promulgates'' are not limited to the author of such 
materials but include the ``dissemination of another's views to third 
persons.'' 65
---------------------------------------------------------------------------

    \65\  CFTC Interpretative Letter No. 76-24, [1975-1977 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 20,234 (Office of the General 
Counsel, August 17, 1976).
---------------------------------------------------------------------------

    Compilations of information may range from listings of performance 
data for all publicly offered commodity pools, comparable to newspaper 
listings of mutual fund returns, to narrowly focused descriptions of 
the trading strategies and history of a single CTA. In determining 
whether such compilations constitute either advice as to ``the value of 
or the advisability of trading'' futures or commodity options or 
``analyses or reports'' concerning such trading, as well as the 
applicability of various statutory exclusions, the Commission considers 
all of the relevant facts and circumstances. However, to facilitate use 
of the Internet by commodity professionals, the Commission wishes to 
clarify the status of certain types of publications of futures-related 
data.
    Publications that compile trading results for commodity pools 
selected on an objective, neutral basis, e.g., all commodity pools of a 
certain size or geographic location, could be viewed as providing 
``reports or analyses'' concerning futures transactions and thus as 
within the CTA definition. To the extent that such compilations are 
presented by a publisher of print or electronic media of ``general and 
regular dissemination'' in a manner solely incidental to that business, 
the publisher would qualify for the statutory exclusion from the CTA 
definition. The publisher of a newspaper of general circulation could 
therefore publish, in a manner incidental to that business, the 
performance results for all commodity pools or for all publicly traded 
commodity pools without registration as a CTA or compliance with the 
statutory and regulatory requirements applicable thereto.
    If a compilation of performance data for publicly offered pools 
were published by a firm that does not qualify as a publisher of data 
of general and regular dissemination, e.g., a business devoted 
exclusively or primarily to operating Internet sites

[[Page 42154]]

providing data concerning CTAs and CPOs, the statutory ``publisher'' 
exclusion would not apply. However, the Commission believes that 
provided such data are developed using objective, neutral criteria, 
such as size or geographical location, and presented as such by a bona 
fide news organization for the purpose of providing current market 
data, registration as a CTA should not be required.66 Similarly, 
an unbiased compilation of all registered CTAs in a given location, 
clearly described as such and without any express or implied evaluation 
or suggestions as to the quality of the services such persons provide, 
may be viewed as equivalent to the telephone ``yellow pages'' 
directory, and would not implicate the Commission's registration 
requirements. However, compilations of selected CTAs, or of CTAs who 
pay a fee for inclusion in a list, may not be neutrally developed 
compilations and may, in effect, promote the services of selected CTAs. 
If the provider of this information is compensated for or receives 
profit from such activities, absent the applicability of a specific 
exclusion, that person is required to register as a CTA.67 
Moreover, even absent such compensation, the presenter of such data may 
be soliciting discretionary accounts on behalf of one or more CTAs and 
thus required to register as an AP of such CTA, or as a CTA.
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    \66\ The Commission stresses, however, that providing even 
objective market or performance history data in the context of a 
publication that has the purpose or effect of providing or marketing 
trading advisory services would require CTA registration. Thus, a 
newsletter published to communicate the trading advice of a 
particular CTA or to promote a CTA ``hotline'' service and also 
including performance data for commodity pools would implicate the 
CTA definition, notwithstanding that such performance data are 
objectively developed, because the publication is predominantly one 
designed to provide trading advice. Thus, whether a particular 
presentation constitutes trading advice depends upon the facts and 
circumstances in which the presentation is made and the 
representations, express or implied, made concerning the content of 
the presentation.
    \67\ As noted above, compensation in this context does not 
require that payment be received for the communication in question. 
Rather, if the provider of such data profits from presenting it, 
even indirectly, such as by promoting its own services, the 
statutory ``compensation or profit'' standard is satisfied.
---------------------------------------------------------------------------

    Compilations presented on electronic media may contain actual 
descriptive data or simply a collection of hyperlinks. Hyperlinks, a 
prominent feature of the World Wide Web, enable a user to connect from 
one location or document to another, a facility without apparent 
analogy in paper-based media. Hyperlinks consist of an address or 
phrase which, when activated by a click of the mouse, connects the user 
to another location on the Internet. The Commission's website, for 
example, has hyperlinks to a number of World Wide Web sites, including 
each of the United States contract markets. Internet directories such 
as Yahoo and Magellan are basically organized collections of 
hyperlinks. Hyperlinks, although fundamentally a connective mechanism 
between websites, nonetheless can be used in such a manner as to 
communicate advice about the value of or advisability of trading in 
commodity interests, e.g., by labeling, describing, or otherwise 
introducing the hyperlinked sites. This would be the case, for example, 
where the operator of a website provides editorial comment about the 
hyperlinks or provides a list of hyperlinks that represent a pre-
selected, defined category of persons or services, whose attributes or 
qualifications are thereby highlighted.68 In such a case, the 
person providing the hyperlinks would be required to register as a CTA.
---------------------------------------------------------------------------

    \68\ In this case, the hyperlink communicates the views of the 
website operator as to the quality of the services addressed or 
referred to at the hyperlinked site.
---------------------------------------------------------------------------

    However, hyperlinks can also be used in a manner that would not 
require a person to register as a CTA. For example, the Commission 
believes that merely providing a list of hyperlinks that is the 
equivalent of a telephone directory or other broad-based source of 
``locational'' data, without more, would not make one a CTA because 
hyperlinks in this context do not necessarily speak ``as to the value 
of or the advisability of trading in'' commodity interests. Similarly, 
a website that contains a search or query function that allows visitors 
to construct searches to obtain data responsive to certain criteria 
they select would not be considered to be providing trading advice, 
provided that the website merely provides the ``data library'' and the 
search vehicle for the viewer's use.69
---------------------------------------------------------------------------

    \69\ This analysis would apply without regard to the criteria 
selected by the viewer, which could, for example, call for all pools 
with rates of return above a specified threshold or for presentation 
of pools in order of rates of return (e.g., high-to-low). However, a 
website that contained this search feature, but also contained 
evaluative or mathematical services (e.g., for the calculation of 
relative rates of return or volatility of returns) would, however, 
indicate a different result.
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3. Applicability of Antifraud Provisions
    Persons using electronic media are subject to the same statutory 
and regulatory requirements under the CEA, including the statutory and 
regulatory antifraud prohibitions and related rules pertaining to CTAs 
and CPOs, as those using other media. These include the antifraud 
provisions of the CEA, including Section 4o,70 as well as the 
provisions of Commission Rule 4.41. Rule 4.41 prohibits CPOs, CTAs, or 
any principals thereof from advertising in a manner which employs any 
fraudulent device or involves any transaction or course of business 
which operates as a fraud or deceit upon any pool participant or client 
or prospective participant or client. Rule 4.41 also bars the 
presentation of any hypothetical or simulated performance data unless 
it is ``prominently'' accompanied by a prescribed cautionary 
statement.71 Both the statutory antifraud provisions and Rule 4.41 
apply to CTAs, CPOs, and their principals, regardless of whether they 
are exempt from registration under the CEA.72 Rule 4.41 expressly 
applies to ``any publication, distribution or broadcast of any report, 
letter, circular, memorandum, publication, writing, advertisement or 
other literature or advice, including the texts of standardized oral 
presentations and of radio, television, seminar or similar mass media 
presentations.'' 73 The requirements of Rule 4.41 thus apply fully 
to electronic media such as the Internet.
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    \70\ 7 U.S.C. 6o provides that no CPO, CTA, or any associated 
persons thereof, may use ``any means or instrumentality of 
interstate commerce, directly or indirectly--(A) to employ any 
device, scheme or artifice to defraud any participant or client or 
prospective client; or (B) to engage in any transaction, practice or 
course of business which operates as a fraud or deceit upon any 
participant or prospective client or participant.''
    \71\ 17 CFR 4.41(b); In re Armstrong, [Current Transfer Binder] 
Comm. Fut. L. Rep (CCH) para. 26,332 (CFTC March 10, 1995), aff'd 
sub nom. Armstrong v. CFTC, No. 95-3161 (3d Cir. January 19, 1996), 
cert. denied, 64 U.S.L.W. 3821 (June 10, 1996). Commission Rule 
4.41(b) requires that hypothetical or simulated performance data be 
accompanied either by the statement specified in Rule 4.41(b)(1) or 
a comparable statement promulgated by a registered futures 
association. The NFA's cautionary statement can be found in NFA Rule 
2-29.
    \72\ See 7 U.S.C. 6o; 17 CFR 4.41(c)(2).
    \73\ 17 CFR 4.41(c)(1).
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    The Commission also notes that capabilities peculiar to the 
Internet, such as anonymity and the ability to operate through aliases 
(e.g., electronic mail addresses, user names), that obscure a person's 
true identity or business affiliation may be exploited in a manner that 
operates as a fraud. For example, the use of ``testimonials'' 
purportedly from third parties but actually created by the CTA or CPO 
that is the subject of the ``testimonial'' would constitute a 
fraudulent practice under statutory antifraud provisions and Rule 4.41.

[[Page 42155]]

    The following examples are illustrative of the requirements 
discussed above.

    (1) (General Internet Directory Not a CTA) Company XYZ operates 
a website that provides a directory of hyperlinks to the World Wide 
Web. XYZ has broad listings under such topics as Arts, Business and 
Economy, Computer and Internet, Education, Entertainment, 
Government, Health, News, Recreation and Sports, Reference, 
Regional, Science, Social Science and Society and Culture. Within 
the Business and Economy section is a subsection covering Futures 
and Options. Among the hyperlinks in the Futures and Options 
sections are those of a number of CTAs. XYZ does not charge CTAs for 
listings in its directory; XYZ's revenues are derived solely from 
advertising on its homepage. XYZ does not exercise any discretion as 
to the inclusion of any CTA on its directory, and any CTA requesting 
inclusion will be included; these facts are prominently disclosed. 
XYZ provides no information about the content of the CTA sites to 
which hyperlinks are provided. XYZ qualifies for the exclusion from 
the definition of a CTA for a producer or publisher of information 
of general and regular dissemination since its homepage provides 
information across all subject matters and the information provided 
by such links is solely incidental to its business, which is to 
provide an index of the World Wide Web.
    (2) (Recommending or Evaluating CTAs) Company XYZ operates a 
website that contains a list of hyperlinks to CTAs described as the 
``Ten Best CTAs for 1996.'' Each of the ten CTAs featured on XYZ's 
homepage is required to pay XYZ a fixed fee. In this scenario, XYZ 
is a CTA and is required to register as such. By making evaluative 
representations about the featured CTAs, XYZ is providing advice 
about the value of or advisability of trading in commodity 
interests. Since XYZ receives a fee from each of the ten featured 
CTAs, the compensation element of the CTA definition is satisfied. 
Absent the availability of an exclusion from the CTA definition, XYZ 
must register as a CTA.
    (3) In the same factual scenario as in Example (2), XYZ does not 
receive a fee from each of the listed CTAs, but instead receives 
revenues from various advertisers on its website. In this case too, 
XYZ is required to register as a CTA. The profit or compensation 
element of the CTA definition includes fees received from 
advertisers and need not flow directly from the person or persons 
advised or from the featured CTAs.
    (4) (Disclaimers) Same facts as Example (2) above, except that 
XYZ also provides a disclaimer on its website that states ``All 
materials and information provided with respect to the CTAs 
contained herein are not intended as commodity trading advice and we 
make no specific recommendations with respect to which CTA best 
suits your investment needs. The information is intended to enhance 
your futures investment decisions, not make them for you.'' Again, 
XYZ would be required to register as a CTA. XYZ has provided trading 
advice and cannot by disclaimer alter the reasonably anticipatable 
effects of the information provided or the consequent registration 
requirements under the Act.
    (5) (Providing Leads) WXY is in the business of generating leads 
and mailing lists for third party vendors who are engaged in various 
businesses. For a monthly fee, WXY's lead generating services are 
open to all businesses who wish to obtain mailing lists to solicit 
customers. WXY's website on the World Wide Web allows site visitors 
to ``sign up'' to receive information on products and services that 
are of particular interest to the site visitors by allowing the site 
visitors to click on various listed categories (e.g., ``Click here 
if you would like to receive information on computers; Click here if 
you would like to receive information on insurance products''). One 
of the categories allows site visitors to click on a particular 
location if they are interested in receiving commodity trading and 
investment information. Site visitors are asked to register in a 
guest book which requests their name, electronic mail address, 
street address, income and other information.
    WXY forwards to various CTAs the names of and other information 
concerning the persons who requested information on commodity 
trading and investments. By engaging in such activities, WXY would 
be operating as a ``finder'' since its purpose would be to seek 
clients on behalf of Commission registrants. WXY must therefore 
register as an AP of the CTAs to whom it furnishes customer names, 
or as a CTA.
    (6) (Electronic Mail to Specific Address May Not Defeat 4m(1) 
Exemption) John Doe, a school teacher who studies the stock and 
futures markets for his own financial benefit and trades futures 
contracts for his own account, discusses his trades with his college 
roommate and friend, George, and two other friends whom he has known 
for twenty years. The three friends ask John to furnish commodity 
trading advice to them and John agrees to act as their CTA. John is 
not registered with the Commission in any capacity, has not 
previously furnished commodity trading advice to any other persons, 
and has not held himself out generally to the public as a CTA. John 
and his three friends all have computers and electronic mail 
addresses and all four persons use electronic mail on a regular 
basis to communicate with one another. John's three friends agree 
that John may provide them with commodity trading advice and other 
information relating to their commodity accounts through electronic 
mail to their electronic mail addresses to which only they have 
access. John's use of an individual electronic mail address for 
purposes of communicating commodity-related information to his three 
friends would not in this case defeat a potential Section 4m(1) 
exemption from CTA registration because the electronic mail 
communication in this instance is personal and direct and is limited 
to electronic correspondence with those three individuals.
    (7) (Placing Performance Data on a Generally Accessible Internet 
Site Would Be Inconsistent With 4m(1) Exemption) Same facts as above 
except John also operates a website and he posts the performance 
data of his friends' trading accounts on his website. By placing the 
performance data on a public electronic forum that can be readily 
accessed by others, John would be holding himself out as a CTA and 
thus would not satisfy one of the criteria of the Section 4m(1) 
exemption from CTA registration.
    (8) (Providing Telephone Directory for CTAs Does Not Require 
Registration as CTA) XYZ operates a website that contains a 
directory which it represents to be a list of each registered CTA, 
containing the name, address, and telephone number for each CTA. 
Although XYZ may receive compensation from advertisers on its 
website, XYZ is not required to register as a CTA. In this case, the 
limited information provided on each CTA does not constitute 
commodity trading advice. Further, by providing a complete directory 
of all registered CTAs, and representing it as such, XYZ is making 
clear that it is not promoting or recommending any particular CTA 
but, rather, is providing a directory which interested persons can 
use to contact CTAs of their choice. Further, as XYZ provides an 
equivalent level of data for each registered CTA, it does not 
implicitly recommend or favor one CTA over another.
    (9) (Providing Biographical and Descriptive Information on 
Selected CTAs in a Manner That Implies Evaluation or Recommendation 
Requires Registration as CTA) XYZ operates a website that contains a 
directory listing each registered CTA, containing the name, address, 
and telephone number for each CTA. Additionally, for certain CTAs, 
XYZ provides information concerning the types of trading programs 
they utilize and certain performance data. XYZ does not charge 
visitors to its website for access to this information but is 
compensated by CTAs for displaying advertisements at the top of 
certain web pages. Under these circumstances, XYZ must register as a 
CTA. Presentation of a compilation of biographical and descriptive 
data on certain CTAs has the effect, whether intended or otherwise, 
of promoting, recommending, or marketing the services provided by 
such CTAs. This conclusion is not affected by the fact that XYZ 
provides very basic biographical data on all CTAs, since XYZ has 
plainly distinguished among CTAs and highlighted certain CTAs for 
specialized attention. Moreover, XYZ is compensated for providing 
this information. As a result, absent the applicability of a 
specific exclusion, XYZ is required to register as a CTA.
    (10) (Compensation or Profit Includes Offer of Free Services for 
a Limited Time) RST has created a new daily ``e-zine'' on the World 
Wide Web that is principally devoted to commodity trading advice 
provided by RST and promotion of RST's advisory services. To promote 
this new e-zine, RST is offering free trial subscriptions for a 
limited time, e.g., ninety days. After this initial trial period, 
users must pay RST's rate of $20 per week. RST is required to 
register as a CTA. Even though RST is offering free subscriptions to 
all persons during its start-up period, it is nonetheless operating 
the ``e-zine'' and providing commodity trading advice for 
compensation or profit. As discussed above, the ``compensation or 
profit'' element of the

[[Page 42156]]

CTA definition includes the attraction of new customers.
    (11) (Gratuitous Leads, Discussions in Chat Rooms) Sally Smith, 
an accountant, frequently interacts with other persons via a 
financial investment ``chat room'' on a major on-line service. 
During the course of these interactions, she advises other persons 
in the chat room concerning a recent investment she made in a 
commodity pool. She informs others in the chat room that she is 
exceptionally pleased with the returns on her investment and that 
she believes that the CPO is an excellent investment manager. In 
support of her remarks, she also provides the pool's performance 
data. Neither the CPO, its principals or anyone involved in the 
pool's operation is affiliated with Sally Smith or her employer. She 
does not receive any compensation or other consideration for her 
participation in the chat room, from the CPO, others in the chat 
room, the site provider, or otherwise, whether directly or 
indirectly. Sally Smith would not be required to register with the 
Commission as her chat room activity and the information that she is 
providing is strictly gratuitous.
    (12) (Compensated Leads, Discussions in Chat Rooms) If in the 
same factual scenario as above in Example (11), Sally Smith is 
compensated by the CPO for soliciting members from the chat room, 
then Sally Smith would be required to register as an AP of the CPO.
    (13) (Use of Aliases, if Undisclosed, May Be Fraudulent) In the 
same factual scenario as Example (11), Dave Doe, the CPO for the 
``Futures Pool,'' is also in the chat room. Unlike Sally Smith, Dave 
Doe does not use his real name when communicating with others in 
chat rooms; he uses the alias ``HonestMan.'' Under this alias, Dave 
Doe tells others in the chat room that he has heard that the 
``Futures Pool'' is an ideal pool for first time investors because 
it offers excellent performance and low fees. In response to an 
inquiry from someone in the chat room, ``HonestMan'' also states 
that ``he has never heard of anyone losing money who invested in the 
Futures Pool,'' which he knows to be untrue. Dave Doe is in 
violation of the antifraud provisions of Section 4o of the CEA and 
Commission Rule 4.41. Additionally, Dave Doe has violated Commission 
Rule 4.21(a) because he has solicited prospective pool participants 
for the ``Futures Pool'' but has not delivered its Disclosure 
Document.
    (14) (Hypothetical Performance Must Be Accompanied by Cautionary 
Statement of Rule 4.41(b)) LMN is a registered CTA who operates a 
website. LMN's website contains a table of contents. One of the 
items listed is a hyperlink to ``Hypothetical Performance.'' On the 
Hypothetical Performance section of its website, which can be 
accessed only after a person has received a copy of LMN's Disclosure 
Document, LMN demonstrates that based upon hypothetical performance 
results, its trading program yields an annualized return of in 
excess of 60 percent. LMN does not provide any statements about the 
significance of hypothetical performance. LMN only states, in bold 
faced type, that ``Past Performance is No Guarantee of Futures 
Results'' and ``Futures Trading Entails Substantial Risk and May Not 
be for Everyone.'' LMN is in violation of Commission Rule 4.41(b), 
which requires that hypothetical or simulated performance be 
accompanied by the legend set forth in Rule 4.41(b)(i) or prescribed 
by the NFA pursuant to 4.41(b)(ii). In order to comply with Rule 
4.41(b), LMN is required to post either the CFTC's or NFA's legend 
regarding hypothetical performance on the same webpage as, and 
presented so as to ``prominently'' accompany, the presentation of 
the hypothetical performance. LMN also may be in violation of the 
antifraud provisions of Section 4o the CEA.
    (15) (Editing Unfavorable Comments From Guestbook May Violate 
Rule 4.41) ABC is a CTA who maintains as part of its website an 
interactive guestbook on which individuals post comments or 
questions concerning ABC's trading system. ABC, which operates the 
website, has the ability to edit the comments received. ABC's 
website description of the guestbook implies that any person can 
post comments on the guestbook, both favorable or unfavorable. If 
ABC then edits any unfavorable comments he receives without 
indicating this fact to visitors, ABC may violate Rule 4.41. ABC 
also may be in violation of the antifraud provisions of Section 4o 
of the CEA.

B. Solicitation Activity

1. Registration
    Other types of communication by means of electronic media may 
constitute solicitation activity, which gives rise to both registration 
and disclosure duties. Section 4k(3) of the Act requires registration 
as an AP of a CTA of any person associated with a CTA ``as a partner, 
officer, employee, consultant, or agent (or any person occupying a 
similar status or performing similar functions), in any capacity which 
involves (i) the solicitation of a client's or prospective client's 
discretionary account or (ii) the supervision of any person or persons 
so engaged.'' \74\ Similarly, Section 4k(2) requires the registration 
as APs of persons associated with a commodity pool operator ``as a 
partner, officer, employee, consultant, or agent (or any person 
occupying a similar status or performing similar functions), in any 
capacity that involves (i) the solicitation of funds, securities, or 
property for a participation in a commodity pool or (ii) the 
supervision of any person or persons so engaged.'' \75\
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    \74\ 7 U.S.C. 6k(3).
    \75\ 7 U.S.C. 6k(2).
---------------------------------------------------------------------------

    ``Solicitation'' activity has been construed by Commission staff to 
include conduct that ``influences even indirectly the investment of 
customer funds.'' \76\ For example, Commission staff have found that 
initiating telephone contacts to identify persons interested in 
receiving information about futures trading \77\ and introduction of 
potential investors to a CPO for compensation,\78\ may constitute 
solicitation activity requiring registration. The breadth of the media 
encompassed by the definition of ``solicitation'' is comparable to that 
of the underlying CTA and CPO definitions, which are written broadly to 
reach all modes of communication and conduct. For instance, the CPO 
definition uses several alternative formulations of the transfer of 
consideration to the CPO, i.e., ``solicit,'' ``accept'' and ``receive'' 
funds, securities, or property for the purpose of trading in futures 
contracts. As stated by CFTC staff, these formulations indicate that 
Congress ``intended to achieve the broadest possible effect--namely, to 
cover all of the means by which a person can obtain control over pool 
participants funds.'' \79\ Similarly, as
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    \76\ Division of Trading and Markets Interpretative Letter No. 
90-11, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
24,872 (June 12, 1990). In Congressional discussions occurring prior 
to the establishment of the Commission as an independent regulatory 
authority, the Subcommittee on Special Business Problems of the 
Permanent Committee on Small Business noted that:
    In order to adequately protect the investing public, the 
subcommittee feels that registration requirements and fitness checks 
should be imposed on commodity solicitors, advisors, and all other 
individuals who are involved either directly or indirectly in 
influencing or advising the investment of customers' funds in 
commodities. This would include any individuals or organizations 
identified as influencing or actually investing funds in the 
commodities markets.
    Subcommittee on Special Business Problems of the House Permanent 
Select Committee on Small Business, H.R. Rep. No. 93-963, 93d Cong., 
2d Sess. at 36-37 (1974) (emphasis added).
    \77\ See Division of Trading and Markets Interpretative Letter 
No. 90-11, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 
para.  24,872 (June 12, 1990); Division of Trading and Markets 
Interpretative Letter 90-8, [1990-1992 Transfer Binder] Comm. Fut. 
L. Rep. (CCH) para. 24,831 (May 7, 1990). The Commission's Office of 
the General Counsel (``OGC'') has stated that employees of a 
registered FCM are required to register as APs if they initiate 
customer contact by telephoning prospective customers even if their 
responsibilities are limited to determining customer interest in 
speaking with a registered representative or receiving promotional 
literature and referring interested customers to a registered AP. 
OGC concluded that the initiation of telephone contact constituted a 
solicitation requiring registration as an AP. CFTC Interpretative 
Letter No. 77-8, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. 
(CCH) para. 20,430 (Office of the General Counsel, May 16, 1977).
    \78\ See, e.g., Division of Trading and Markets Interpretative 
Letter No. 90-4, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. 
(CCH) para. 24,588 (January 31, 1990)(a person who introduces a 
potential investor to a CPO and who is compensated as a ``finder'' 
would be soliciting on behalf of the CPO and thus required to 
register as an AP thereof).
    \79\ CFTC Interpretative Letter No. 75-17, [1975-1977 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 20,112 (Office of the General 
Counsel, Trading and Markets, November 4, 1975).
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[[Page 42157]]

noted above, the CTA definition refers to multiple types of media, 
including electronic media, as vehicles for providing trading advice.
    The Internet provides a medium for a potentially broad range of 
solicitation and promotional activity, as well as for conveying trading 
advice. Plainly, CTAs and CPOs who use electronic media to inform 
members of the public of their futures activities are engaged in the 
solicitation of prospective customers. Thus, most websites of CTAs and 
CPOs on the World Wide Web are forms of solicitation. This is true even 
if the website is limited to biographical or descriptive information, 
for such data announces the CTA's or CPO's business to prospective 
clientele and can reasonably be assumed to elicit the interest of 
potential customers.
    Similarly, a website that is not operated by a CTA or CPO, but 
which identifies potential customers for one or more CTAs or CPOs or 
evokes potential customer interest in such CTAs or CPOs generally would 
constitute a solicitation. For example, a website marketing the trading 
programs of selected CTAs would constitute a solicitation on behalf of 
such CTAs. Likewise, the operator of a website that accepts and 
forwards to a CTA or CPO the names and addresses of potential 
customers, and receives compensation for such referrals from the CTA or 
CPO, would be soliciting on behalf of the CTA or CPO. Consequently, the 
operators of such sites may be required to register as APs of the CTA 
on whose behalf the solicitation was undertaken,80 and as an AP of 
the CPO on whose behalf the solicitation occurs.
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    \80\ If such persons are already registered as CTAs or CPOs, 
registration as an AP of that registration category is not required. 
Further, the definition of an AP of a CTA includes only persons who 
are involved in ``(i) the solicitation of a client's or prospective 
client's discretionary account or (ii) the supervision of any person 
or persons so engaged.'' 7 U.S.C. 6k(3). Thus, the appropriate 
registration category for persons who solicit on behalf of CTAs who 
do not manage accounts is that of CTA, as they are providing trading 
advice by advising concerning or marketing the services of certain 
CTAs.
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2. Required Delivery of Disclosure Document
    Commission regulations require that at or before the time a CTA 
solicits or enters into an agreement to direct or guide a customer's 
account,81 or a CPO directly or indirectly solic its, accepts or 
receives funds from a pool participant,82 such CTA or CPO must 
``deliver or cause to be delivered'' to the prospective client or pool 
participant a Disclosure Document that conforms to the applicable 
rules.83 The requirement to deliver a Disclosure Document attaches 
irrespective of the medium through which solicitation occurs. 
Consequently, a CTA or CPO soliciting prospective customers or pool 
participants by means of electronic media must ``delive[r] or caus[e] 
to be delivered'' a required Disclosure Document prior to such 
solicitation by prominently providing a copy of that document at, or 
through hyperlinks with, the same site at which the solicitation occurs 
or by delivering a hardcopy Disclosure Document to a prospective 
customer prior to providing access to any electronic 
solicitation.84 Application of the delivery requirement in the 
context of electronic media is discussed below in the following 
section.
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    \81\ Rule 4.31(a) provides:
    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.
    17 CFR 4.31(a).
    \82\ Rule 4.21(a) provides:
    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; * * *.
    17 CFR 4.21(a).
    \83\ The Disclosure Document required to be furnished by a CTA 
must contain the information set forth in Rules 4.34 and 4.35. The 
Disclosure Document required to be furnished by a CPO must contain 
the information set forth in Rules 4.24 and 4.25.
    \84\ As discussed below, CTAs and CPOs may provide an outline or 
table of contents of the website prior to the reader receiving a 
Disclosure Document.
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    With respect to CTAs, the requirement to deliver a Disclosure 
Document applies only where the CTA solicits a prospective client to 
``direct'' or ``guide'' his account.85 The term ``direct'' as used 
in Rule 4.31 refers ``to agreements whereby a person is authorized to 
cause transactions to be effected for a client's commodity interest 
account without the client's specific authorization.'' 86 Although 
the term ``guide'' is not defined in Part 4, the Commission referred to 
the term ``guide'' in implementing regulations requiring the delivery 
of a Disclosure Document by CTAs.87 In that release, the 
Commission stated that Rule 4.31 ``established disclosure requirements 
for CTAs that seek to control clients' accounts (e.g., through managed 
accounts) or influence clients' commodity interest trading by means of 
a systematic advisory program (e.g., through guided accounts).'' 
88 Thus, CTAs who solicit actual or prospective clients through 
electronic media for purposes of directing or guiding customer accounts 
must provide each such customer with a Disclosure Document at or before 
the time of solicitation. CTAs who do not direct or guide customer 
accounts, e.g., those who provide trading advice in a newsletter, would 
not be required to provide prospective clients with a Disclosure 
Document.
---------------------------------------------------------------------------

    \85\ See discussion of managing customer accounts, supra note 
50.
    \86\ 17 CFR 4.10(f).
    \87\ 44 FR 1918, 1923 (January 8, 1979).
    \88\ Id.
---------------------------------------------------------------------------

    The following examples are illustrative of the requirements 
discussed above.

    (16) (Posting Promotional Materials is a Solicitation Requiring 
Disclosure Document Delivery) XYZ is a CTA who operates a site on 
the World Wide Web. On its website, XYZ provides a description of 
its principals and a brief summary of its trading strategy and the 
types of accounts it manages. XYZ also provides its phone number and 
electronic mail address for interested persons to contact it. XYZ 
does not provide a copy of its Disclosure Document. In this case, 
XYZ is violating Rule 4.31(a) because it is soliciting prospective 
clients without delivering a Disclosure Document.89
---------------------------------------------------------------------------

    \89\ Guidance regarding the manner by which CTAs and CPOs may 
deliver Disclosure Documents by means of a website is provided in 
the following section.
---------------------------------------------------------------------------

    (17) (Posting Descriptive Performance Information or Performance 
Data is a Solicitation Requiring Disclosure Document Delivery). JKL, 
a registered CPO, operates a site on the World Wide Web. The website 
provides biographical information about the principals of the CPO 
and investment opportunities that the CPO offers, including various 
commodity pools with differing risk parameters and performance 
histories. JKL's website also posts summary performance information 
for the various commodity pools. The posting of biographical and 
investment information operates as a solicitation, as does posting 
of summary performance data. Thus, JKL would be required to provide 
the Disclosure Documents for its various pools to the website 
visitors at or before the time it engages in the solicitation. JKL 
must provide its Disclosure Documents either directly on its website 
or by means of prominently highlighted hyperlinks from its website 
and ensure that visitors receive the Disclosure Documents at the 
same time as or before their viewing of other website materials, 
i.e., the time at which the solicitation occurs. The

[[Page 42158]]

reader must review the Disclosure Document before being permitted 
access to the biographical and other information. JKL also must 
inform visitors that, in addition to reviewing the various 
Disclosure Documents on-line, they may obtain printed copies of the 
Disclosure Documents upon request.
    (18) Same facts as above, except JKL's website does not provide 
a copy of JKL's Disclosure Documents or hyperlink to them. Rather, 
following the performance data, the website provides a telephone 
number that persons can call to request the delivery of specific 
commodity pool Disclosure Documents. The placement of performance 
information on a website followed by a telephone number that 
visitors can call to request a Disclosure Document would be 
insufficient to satisfy the requirements of Rule 4.21(a) as delivery 
of the Disclosure Document would not accompany or precede the 
solicitation.
    (19) (Delivering a Disclosure Document Necessary for 
Solicitation of Prospective Pool Participants) ABC is a registered 
CPO who operates a website on the World Wide Web. On its website, 
ABC provides a brief description of the various commodity pools it 
offers. ABC also provides copies of each of its Disclosure 
Documents, in an acceptable format, which visitors to its website 
must access from a menu of options at the beginning of its homepage, 
before proceeding to any further information concerning one of the 
offered commodity pools. By providing access to each of its 
Disclosure Documents and assuring that the prospective participant 
accessed the relevant Document before receiving any information 
other than a brief description of the pool, ABC has complied with 
Rule 4.21(a), which requires that at or before the time a CPO 
solicits a prospective participant, the CPO deliver to the 
prospective client a Disclosure Document for such commodity pool.
    (20) (Term Sheet Cannot Replace Disclosure Document) In the same 
example as above, instead of providing the Disclosure Documents for 
each of the pools, ABC provides a notice of intended offering and 
statement of the terms of the intended offering (``term sheet''). 
ABC's pools do not accept investors who are not ``accredited 
investors,'' as defined in 17 CFR 230.501(a). Nevertheless, ABC has 
not satisfied the criteria of Rule 4.21(a). Since ABC's term sheet 
can be accessed by persons who are not ``accredited investors,'' ABC 
is soliciting such persons without having provided a copy of its 
Disclosure Document.
    (21) (Distribution of Promotional Materials Through Personal 
Electronic Mail is a Solicitation Requiring Disclosure Document 
Delivery) ABC is a CTA who operates a site on the World Wide Web. 
Visitors to ABC's website, who may not have reviewed ABC's 
Disclosure Document, are invited to give their electronic mail 
address so that ABC can put them on its electronic mailing list. 
Periodically, ABC sends to those persons who have provided 
electronic mail addresses information concerning ABC's monthly 
performance results. Use of electronic mail in this manner operates 
as a form of solicitation. Accordingly, ABC may not send performance 
data or comparable information to prospective clients by means of 
electronic mail unless it has previously delivered its Disclosure 
Document to them. Failure to deliver a Disclosure Document to 
persons whom it solicits by electronic mail would constitute a 
violation of Rule 4.31.
    ABC may periodically send electronic mail to prospective clients 
after they have received a copy of its Disclosure Document for as 
long as that Disclosure Document remains valid. If, however, ABC 
revises its Disclosure Document to reflect changes in its trading 
program, or the Document becomes out of date, ABC would be required 
to cease sending electronic mail to prospective clients until after 
it has delivered to each such client a copy of its new Disclosure 
Document.

III. Electronic Delivery of Disclosure Documents

    The Commission is cognizant of the potential benefits of electronic 
communication of information among participants in the futures markets 
generally and in the managed futures marketplace in particular. 
Electronic technology may enhance information access by market users 
and facilitate communication by brokers and other commodity 
professionals. A number of CTAs and CPOs have expressed interest in 
using electronic media to provide existing and prospective clients or 
pool participants with Disclosure Documents and other required 
disclosures. A central goal of this release is to provide guidance as 
to the circumstances in which electronic media may be used for these 
purposes.
    The Commission believes that, as a general matter, the requirements 
that CTAs and CPOs deliver Disclosure Documents to prospective clients 
and pool participants, respectively, may be satisfied by the use of 
electronic media, provided appropriate measures are taken to assure 
that the purposes of the delivery requirement are achieved. By this 
release, the Commission is giving notice that CTAs and CPOs may use 
electronic media in accordance with the criteria discussed below 
90 to satisfy the Disclosure Document delivery requirement as to 
consenting prospective customers and pool participants and to provide 
certain related documents, as specified below. The Commission invites 
comment on these criteria and any additional criteria that commenters 
believe to be relevant in this context.
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    \90\ Some of these criteria have been noted by the SEC in its 
releases on electronic media. See 61 FR 24644; 60 FR 53458.
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A. Criteria

    Consistency. The Commission believes that it is important to 
maintain consistency in the application of regulatory requirements as 
between electronic and non-electronic media. Information conveyed 
electronically must achieve the same objectives as paper-based 
communications. Further, the rules applicable to such communications 
should not favor one form of communication over another; to the extent 
possible, they should be ``form neutral.'' The medium for providing 
required information should be selected based upon the relative merits 
of the two methods of communication, not the application of the 
Commission's regulations.
    Choice/Consent. Although the Commission supports the use of 
electronic media to enhance the speed and efficiency of communications 
by futures professionals with market participants, it recognizes that 
even among those persons who have access to electronic delivery, many 
may prefer to receive information in paper form. Accordingly, a CTA or 
CPO may use electronic delivery in lieu of traditional paper-based 
delivery of a Disclosure Document only where the intended recipient 
provides informed consent to receipt of the document by means of 
electronic delivery. Similarly, informed consent also must be obtained 
from a pool participant if a CPO plans to use electronic media to 
deliver monthly or quarterly account statements required under Rule 
4.22.91
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    \91\ The requirement of a manual signature on such statements 
pursuant to Rule 4.22(h) may be satisfied if the CPO keeps a 
manually signed copy at its place of business in accordance with 
Rule 4.23. See Division of Trading and Markets Interpretative Letter 
No. 93-61, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 
para. 25,780 (June 24, 1993) (CPO may use facsimile signature 
pursuant to Rule 4.22(h) provided CPO retains the Account Statement 
from which facsimile is made in accordance with Rule 4.23); cf. 
Advisory No. 28-96 [Current Transfer Binder] Comm. Fut. L. Rep. 
(CCH) para. 26,711 (May 28, 1996) (use of personal identification 
number may be deemed equivalent of manual signature for purposes of 
attestation under Commission Rule 1.10(d)(4)), supra note 25. 
Commission regulations do not currently permit CPOs to deliver 
Annual Reports by electronic means. However, the Commission invites 
comment from CPOs, accounting professionals, and other interested 
persons regarding the advisability of amending Rule 1.16 to allow 
for certification of Annual Reports by independent public 
accountants by means of electronic media.
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    CTAs and CPOs who intend to make electronic delivery must inform 
potential recipients concerning: (1) the requirement that prospective 
managed account customers and commodity pool participants receive a 
Disclosure Document for the relevant trading program or commodity pool 
at or prior to the time of solicitation and such other documents as the 
CTA or CPO seeks consent to deliver by electronic media; (2) their 
right to elect to receive the Disclosure Document (and other

[[Page 42159]]

specified documents to the extent consent is sought for electronic 
delivery of other communications) in hardcopy form or by electronic 
means; (3) the specific medium and method by which electronic delivery 
will be made (for example, whether delivery will be limited to users of 
a particular proprietary on-line system, will be made available on the 
World Wide Web, or will be made as an attachment to electronic mail); 
(4) the potential costs associated with receiving or accessing 
electronically delivered documents, such as costs relating to on-line 
access charges, the requirement to maintain an electronic mail account, 
or the need to possess certain proprietary software packages (such as a 
particular word processing program or operating system); (5) the types 
of documents that will be delivered electronically, i.e., documents in 
addition to the Disclosure Document, such as supplements to Disclosure 
Documents and pool account statements, and the form in which they will 
be delivered; and (6) the prospective customers' right to revoke their 
consent to electronic delivery at any time and the period of time 
during which the consent to electronic delivery will be effective, 
absent revocation. Notification concerning at least each of these 
factors is necessary to the receipt of informed consent from the 
intended recipient. As informed consent must be revocable at any time, 
if a person initially agrees to receive certain required disclosures 
electronically, he must be permitted to revoke such consent at any 
time, and the CTA or CPO must then provide him with disclosures in 
hardcopy form. Potential recipients of electronic communication may 
provide their informed consent either in writing or by electronic 
means.
    Delivery and Access. As noted previously, Commission rules require 
that at or before the time at which a CTA or CPO solicits a prospective 
client or pool participant, respectively, he must deliver, or cause to 
be delivered, the applicable Disclosure Document.92 When a person 
delivers a document by means of postal mail or provides the document 
personally, the recipient simultaneously has notice of the delivery of 
the document and receives the actual document. By contrast, when a 
person distributes a document by means of electronic media, the 
document (a) will be available only to persons who possess the 
necessary computer equipment and software to receive it, (b) must be 
brought to the intended recipient's attention and (c) will be 
accessible only to recipients who take certain actions in order to 
access and review the document.
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    \92\ As noted by example above, a CPO may not satisfy the 
requirements of Rule 4.21(a) by electronically posting a ``term 
sheet.'' Rule 4.21(a) provides 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 * * *.'' In posting a term sheet on a public 
electronic forum, a CPO is soliciting all persons who are able to 
access such term sheet, many of whom may not be ``accredited 
investors.'' Consequently, unless a CPO restricts access to its term 
sheet to ``accredited investors'' only, a CPO must also provide a 
copy of its Disclosure Document in accordance with the criteria set 
forth herein in order to comply with the requirements of Rule 
4.21(a). In any event, to the extent that the CPO intends the 
offering to be an exempt private offering under SEC Regulation D, 
such CPO must comply with the solicitation and advertising 
restrictions in SEC Rule 502(c). See 60 FR at 53463-64 (in which 
example (20) of SEC's release indicates that placing offering 
materials on Internet would not be consistent with prohibition 
against general solicitation or advertising in Rule 502(c) of 
Regulation D).
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    The prospective client or pool participant must be provided the 
relevant Disclosure Document prior to or at the time of solicitation. 
In general, the breadth of the term ``solicitation,'' combined with the 
requirement to deliver a Disclosure Document at the time of or prior to 
solicitation, significantly restricts the information that CTAs or CPOs 
may present about their services prior to delivering a Disclosure 
Document. As discussed above, even preliminary contacts or 
communication of basic information may constitute a solicitation. 
Indeed, a website operated by a CTA who simply identifies himself as 
such may operate as a solicitation, even without other content. 
Consequently, if for example, a CTA's Disclosure Document is presented 
at the end of the CTA's website, or made available only at the option 
of the reader, delivery of the Disclosure Document may occur only after 
the solicitation has occurred, if at all. In such instances, the CTA 
operating the website would be in violation of Commission rules with 
respect to delivery of Disclosure Documents prior to or at the time of 
solicitation. To facilitate the operation of websites by CTAs and CPOs 
in a manner consistent with Commission rules and without unduly 
burdening the use of this medium, the Commission provides the following 
guidance.
    First, a website must provide access to the Disclosure Document 
prior to any content other than de minimis introductory material. For 
example, a visitor may be given a general description of the contents 
of a website before reviewing the Disclosure Document. This may be 
accomplished through presentation of an outline or table of contents 
for the website, with the Disclosure Document listed as the first item 
in the outline or table of contents. The outline or table of contents 
may include topic headings that are neutrally stated, such as 
``Disclosure Document'', ``Background of CTAs'' and ``How to Contact 
Us.'' Icons or images also may accompany such topic headings, but both 
the topic headings and any icons or images must be presented neutrally.
    The website must be constructed so that the reader may not proceed 
to subsequent sections of the site until he has first accessed and 
proceeded through the Disclosure Document. Thus, if an outline or table 
of contents is used, the only active hyperlink should be to the 
Disclosure Document. For example, if a visitor attempts to view another 
portion of the website, the website should inform the visitor that he 
must first access the Disclosure Document before he will be allowed 
elsewhere in the website. Only after a visitor has been delivered a 
Disclosure Document and affirmed that he has reviewed it may hyperlinks 
to other sections of the website be activated.
    Delivery of a Disclosure Document for purposes of solicitation, 
i.e., Commission Rules 4.21(a) and 4.31(a), will be complete when the 
recipient scrolls down to the end of the Disclosure Document and 
confirms that he has received the Document. Many website operators 
currently employ similar designs, for example, in requiring persons to 
agree to a set of terms and conditions before proceeding in a website 
or to acknowledge that they are of a certain age. This confirmation of 
delivery is for the purpose of complying with the requirement that the 
Disclosure Document be provided at or before the time of solicitation. 
This confirmation, which is required in the context of electronic 
presentations of solicitation material, is distinct from the receipt of 
acknowledgment that is required before a prospective pool participant 
or client may open an account pursuant to Rules 4.21(b) and 4.31(b). 
The requirements for obtaining a receipt of acknowledgment under Rules 
4.21(b) and 4.31(b) are discussed below in the acknowledgment section.
    Websites that contain multiple trading programs or commodity pools 
may contain a separate Disclosure Document for each such program or 
pool. CTAs or CPOs, however, are not required to deliver a Disclosure 
Document for every trading program or commodity pool before allowing a 
potential client or pool participant access to all portions of a 
website. Rather, a CTA or CPO may

[[Page 42160]]

allow a prospective investor to select a particular trading program or 
commodity pool, and following delivery of the Disclosure Document for 
such program or pool, the prospective investor may access general 
information or material specific to such program or pool. CTAs or CPOs 
who operate several trading programs or commodity pools must ensure 
that there is no solicitation on behalf of programs or pools for which 
a Disclosure Document has not been delivered and reviewed. For example, 
a CPO who delivers a prospective pool participant a Disclosure Document 
for ``Pool A'' must not allow such prospective pool participant to 
access materials on his website pertaining to ``Pool B.''
    Commission rules require that a CPO or CTA deliver a particular 
Disclosure Document only once; consequently, with respect to ``repeat 
visitors,'' separate delivery is not required for subsequent 
solicitations for the same pool or trading program so long as the 
Disclosure Document has not changed or expired. Thus, CTAs and CPOs may 
design websites systems that allow ``repeat visitors'' who have already 
reviewed a Disclosure Document to bypass the requirement to receive 
that Disclosure Document again. For example, a prospective investor, 
after receiving the required Disclosure Document(s), may be given a 
password or PIN to enter at the beginning of a CTA's or CPO's homepage 
to allow him to bypass the consent and Disclosure Document delivery 
portions of the website for the trading program(s) or pool(s) for which 
he has already recieved a Disclosure Document. However, in order to 
comply with Commission Rules 4.26 and 4.36, the password or PIN must 
expire once the CPO or CTA amends his Disclosure Document(s) or the 
effective period of the Disclosure Documents expires.
    Documents can be delivered electronically in a variety of ways; 
some of these methods require very little effort on the part of the 
recipient, whereas others demand substantial computer expertise or 
lengthy download times.93 The Commission believes that delivery 
should be made in a manner that is not unduly burdensome to the 
recipient of the document. In cases where information is unduly 
burdensome to access, the Commission will deem such delivery to be 
ineffective unless the party making delivery can demonstrate that the 
recipient actually accessed the document. In the case of a Disclosure 
Document, an acknowledgment of receipt, provided that it is fully 
informed and voluntary, should suffice for this purpose.
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    \93\ Certain methods of delivery require relatively little 
sophistication on the part of the user. For instance, the content of 
a site on the World Wide Web can be accessed simply by entering that 
address into a ``web browser'' program. Similarly, the contents of 
an electronic mail message are viewed simply by reading the 
electronic mail screen or by viewing an attachment to electronic 
mail that is formatted for a widely available word processing 
program. On the other hand, where a party must download a file and 
also a program to decode that file (e.g., ``unzip'' programs), it is 
less certain that such party will ultimately be able to access the 
document. In raising this concern, the Commission does not 
necessarily intend to preclude any particular types of electronic 
transfer but, instead, is seeking to ensure that the recipient is 
able to access the information communicated without substantial 
burden.
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    However, electronic media present special concerns with respect to 
access because an acknowledgment of receipt in this context does not 
evidence the ability to access the document over time. The Commission 
believes that the recipient of electronically delivered documents 
should be able to have repeated access to the document following 
delivery. Such accessibility should be comparable to that of a paper 
document that can be read and re-read over time.94 The ability to 
re-read a document, such as a Disclosure Document, is often necessary 
to a careful evaluation of the risks and benefits of a particular 
investment or a meaningful comparison of Disclosure Documents of 
different pools or trading programs. Accordingly, in order for the 
electronic delivery of Disclosure Documents to satisfy the Commission's 
requirements, the recipient must be able to access the document upon 
receipt and continually thereafter. If the method of electronic 
delivery of a Disclosure Document requires the reader to download a 
file to a permanent storage device (such as a hard drive) and to 
confirm that he has done so, the accessibility concern may be 
addressed. However, in other circumstances, such as where a Disclosure 
Document is not downloaded, the Commission believes that accessibility 
of the Disclosure Document to the prospective (or actual) CTA client or 
commodity pool participant for a period of nine months after the 
solicitation occurs would be sufficient but requests comment on this 
issue.
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    \94\ For example, a ``one-time'' or ``live'' broadcast over the 
Internet generally does not allow a recipient repeated access to the 
information. In the absence of adequate evidence that the intended 
recipient actually recorded or stored the information, this method 
of presentation would not satisfy the access concerns identified 
above.
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    Acknowledgments. The requirement to deliver a Disclosure Document 
is only part of a CTA's or CPO's obligation. Before a CTA may enter 
into an agreement with a prospective client to direct or guide his 
account, or before a CPO may accept or receive funds, securities or 
property from a prospective pool participant, such CTA or CPO must 
receive a signed and dated acknowledgment from the prospective client 
or pool participant confirming receipt of the Disclosure Document for 
the trading program or pool, respectively.95 A CPO or CTA may not 
rely solely on the fact that a prospective investor may have visited 
the Disclosure Document while reviewing a CPO's or CTA's homepage or 
consented to receive a Disclosure Document by electronic media.96 
The signed and dated acknowledgment is a certification by the 
prospective investor that he has received the required Disclosure 
Document and is among the items required to be kept by CPOs and CTAs 
under the Part 4 recordkeeping requirements.97
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    \95\ See Rule 4.31(b) and Rule 4.21(b) for CTAs and CPOs, 
respectively.
    \96\ As noted previously, the requirement of a signed 
acknowledgment of receipt is distinct from that of delivery, i.e., 
an adequate delivery mechanism may be implemented without receipt of 
a signed acknowledgment of receipt. In the recent revisions to Part 
4, 60 FR 38146 (July 25, 1995), the Commission confirmed the 
importance of the requirement that the prospective investor 
separately acknowledge receipt of the required Disclosure Document 
but commented 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.'' 60 FR at 38181.
    \97\ See Commission Rules 4.23(a)(3) and 4.33(a)(2), 
respectively.
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    The Commission supports the use of electronic media to obtain 
customer acknowledgments but believes that measures must be taken to 
assure an adequate level of verification of the authenticity of such 
acknowledgments. Requiring the reader to send an electronic mail 
message or click on an ``acknowledgment button'' on a website would 
not, without more, be sufficient for this purpose. As discussed above, 
the Division of Trading and Markets has permitted the use of a personal 
identification number (``PIN'') to represent a manual signature for the 
transmission of certain financial reports in which a manual signature 
normally is required.98 The use of a PIN serves two important 
objectives. First, it enables the recipient, to the extent practicable, 
to verify the identity of the person sending the electronic 
communication. If an electronic transmission is

[[Page 42161]]

accompanied by a unique and valid PIN, and the recipient knows the 
identity of the person who requested and received such PIN, it then may 
confirm the identity of the sender of such message. Second, use of PINs 
helps to protect innocent persons from false claims that they have sent 
a particular electronic communication. If a message is sent by one 
person claiming to be another, the failure to include the valid PIN 
assigned to such person would render the message invalid. Although the 
Commission invites comments from interested parties generally on 
methods to assure the validity of electronic acknowledgments, it 
believes that a PIN system similar to that used by FCMs for the filing 
of financial reports with certain self-regulatory organizations would 
provide an acceptable form of obtaining acknowledgments of receipt of 
Disclosure Documents. Under Rules 4.21(b) and 4.31(b), CPOs and CTAs 
bear the burden of obtaining a valid acknowledgment of receipt from 
prospective pool participants and clients; they are thus responsible 
for establishing procedures adequate to establish the authenticity of 
electronic acknowledgments and to preserve records thereof. Currently, 
in light of this concern, if a CTA or CPO wishes to establish a system 
for the electronic acknowledgement of receipt of a Disclosure Document, 
it must create a procedure by which the prospective client or pool 
participant requests and receives by means of electronic or postal mail 
an individualized PIN from the CPO or CTA. Once a person receives a 
PIN, he may then use that PIN in lieu of a manual signature to 
authenticate the acknowledgment of receipt.99 The mechanics of 
using a PIN signature are illustrated by example below. The Commission 
welcomes comment concerning other procedures for electronic 
acknowledgment that are consistent with the objectives stated above.
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    \98\ Advisory No. 28-96, [Current Transfer Binder] Comm. Fut. L. 
Rep. (CCH) para. 26,711 (May 28, 1996), discussed supra note 25.
    \99\ The Commission notes that various states have established 
or are developing requirements for ``digital signatures.'' See, 
e.g., ``Utah Digital Signature Act,'' Utah Code Ann. 46-3-101 et 
seq. (1995). To the extent that a particular state recognizes as 
valid only certain digital signatures, it is the responsibility of 
the registrant to ensure compliance with such rules in order to 
comply with state law requirements.
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    Of course, CTAs or CPOs, even those providing a Disclosure Document 
by electronic media, are not required to obtain acknowledgments of 
receipt electronically. A CTA or CPO may require that the prospective 
client or pool participant provide a signed and dated paper 
acknowledgment by mail or facsimile, although the acknowledgment form 
may be sent to prospective investors by mail, facsimile, or through the 
Internet.
    Format. The Commission's rules contain a number of specific format 
requirements relevant to Disclosure Documents, reflecting the 
Commission's determination that certain information should be accorded 
special prominence in the Disclosure Document. Parameters for the order 
of presentation ensure that certain key information is presented first, 
that important disclosures are not minimized or relegated to the end of 
the document, and that information of lesser relevance is placed after 
matters of greater importance. The prescribed order also facilitates 
the comparison of documents by maintaining the same sequence of topics 
across documents of different registrants. For example, Rules 4.24, 
4.25, 4.34 and 4.35 include specifications as to the placement in 
Disclosure Documents of required risk disclosure and cautionary 
statements, tables of contents, and supplemental information, as well 
as the sequence of various past performance records.100 In 
addition, certain items are required to be set forth in capital letters 
and bold-face type, certain information is required to be accompanied 
by cautionary legends or disclaimers, and in some contexts, page number 
cross-references are required.101
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    \100\ See Rules 4.24(a) through (d), 4.24(v), 4.25(a)(2) and 
(3), 4.34(a) through (d), 4.34(n) and 4.35(a)(2).
    \101\ See Rules 4.24 (a) and (b), 4.25 (a)(9) and (c), 4.34 (a) 
and (b), 4.35 (a)(8) and (b) and 4.41(b)(1).
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    Where Commission rules specify the prominence, location, or other 
attributes of the information required to be delivered, any acceptable 
electronic presentation of such information used to satisfy Commission 
rules must present the information in the same format and order as 
specified in Commission rules and must reflect (if it does not actually 
replicate) the differences in emphasis and prominence that would exist 
in the paper document.102 Further, the addition of any audio, 
video or graphic material, whether included as separate sections or as 
enhancements or overlays to written text, must be consistent with the 
requirements of Commission rules regarding the order of presentation 
and the relative prominence of information.103 Such material would 
constitute ``supplemental information'' 104 and thus must be 
presented in the Disclosure Document in accordance with Rules 4.24(v) 
and 4.34(n).105 Such material may not be presented in a manner 
that obscures or diminishes the prominence of any required disclosures. 
If one version of a document contains audio, video, graphic or other 
material that cannot be included in another version, e.g., if the 
electronic version of a Disclosure Document has an audio narration, 
such material must be reproduced in the medium of the version that does 
not actually contain the material.106
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    \102\ For example, where text is required to be presented in 
bold-face type, acceptable on-screen presentation could be 
accomplished by changing the color or shading of the text and/or the 
background in a prominent manner. In addition, information such as 
the break-even point per unit of initial investment must be 
presented in the forepart of the Disclosure Document and the Risk 
Disclosure Statement, which must appear immediately following 
disclosures required to be on the cover of the Disclosure Document, 
must highlight the page (or highlight the link) where the break-even 
point is presented. If the document is not paginated, a registrant 
may use hyperlinks in lieu of page numbers.
    \103\ For example, Rule 4.25(a)(3)(ii) requires that performance 
results for pools of a different class from the offered pool be 
presented ``less prominently'' than the performance of pools of the 
same class. Audio, video or graphic devices may not be used in a 
manner that is inconsistent with this requirement. Similarly, an 
audio voice-over that asks a prospective client to turn directly to 
the CTA's performance tables, bypassing the cautionary and risk 
disclosure statements and the forepart information required by Rule 
4.34 (a), (b) and (d), is not permitted.
    \104\ ``Supplemental information'' refers to ``information not 
specifically called for by Commission rules or federal or state 
securities laws or regulations.'' 60 FR at 38150.
    \105\ Rules 4.24(v) and 4.34(n) specify that supplemental 
performance information (not including proprietary, hypothetical, 
extracted, pro forma or simulated trading results) must be placed 
after all required performance information in the Disclosure 
Document and that supplemental non-performance information relating 
to a required disclosure may be included with the related required 
disclosure. Other supplemental information may be included only 
after all required disclosures. 17 CFR 4.24(v) and 4.34(n). Rules 
4.24(v) and 4.34(n) also provide that supplemental information may 
not be misleading in content or presentation or inconsistent with 
the required disclosures and is subject to the antifraud provisions 
of the Act and Commission and NFA rules.
    \106\ Commission Rules 4.26(d) and 4.36(d) require that a CPO or 
CTA, respectively, file a Disclosure Document with the Commission 
prior to its use. To the extent that a Disclosure Document contains 
any audio, video, or graphic material, the CPO or CTA must file that 
version as well as any paper version. CPOs and CTAs who are required 
to file a Disclosure Document that contains audio, video, or graphic 
portions should contact the Division of Trading and Markets to 
establish a method whereby the Commission may receive such 
documents.
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    Modifications. Commission Rules 4.26 and 4.36 require that 
Disclosure Documents be used for no more than nine months and that 
performance information included therein be current as of a date not 
more than three months prior to the date of the Disclosure Document. 
Additionally, if at any time the Disclosure Document becomes materially 
inaccurate or incomplete, the registrant must correct the defect and 
distribute the correction to, in the case

[[Page 42162]]

of a CPO, all existing pool participants and previously solicited pool 
participants prior to accepting or receiving funds from such 
prospective participants,107 and in the case of a CTA, all 
existing clients in the trading program and each previously solicited 
client for the trading program prior to entering into an agreement to 
manage such prospective client's account.108 For persons who have 
consented to receive such information electronically, registrants may 
provide amendments and updates in the same manner, provided that such 
recipients' consent to the use of electronic media extends to 
amendments and updates.
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    \107\ 17 CFR 4.26(c)(1).
    \108\ 17 CFR 4.36(c)(1).
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    One of the salient features of electronic media is the ability to 
modify or update information more simply and more frequently than in a 
paper environment. On the Internet, many financial service providers 
update their performance on a daily basis, a practical impossibility 
using conventional postal mail.109 The Commission believes that 
the greater timeliness of information that electronic media is capable 
of providing is an important benefit. Certainly, therefore, information 
contained in electronic form can be expected to be at least as current 
as that in paper form. Consequently, where a registrant employs 
electronic and paper media, the electronic version of any publicly 
disseminated document must be at least as current as any paper-based 
version. If registrants elect to update their performance more 
frequently than is required, any such performance history must be 
calculated and presented in accordance with Commission rules.
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    \109\ Indeed, by the time the recipient received such updated 
information, it would already be out of date.
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    Record Retention. Another important area of regulatory concern in 
the context of electronic media is that of recordkeeping, as provided 
by Commission Rules 4.23 and 4.33.110 These rules require that 
CPOs and CTAs keep, among other records, ``the original or a copy of 
each report, letter, circular, memorandum, publication, writing, 
advertisement or other literature or advice (including the texts of 
standardized oral presentations and of radio, television, seminar or 
similar mass media presentations) distributed or caused to be delivered 
* * * showing the first date of distribution or receipt if not 
otherwise shown on the document.'' 111 The Commission's Part 4 
recordkeeping requirements thus extend to the contents of CTA and CPO 
websites and related electronic mail messages. The Commission's rules 
concerning the use of electronic media for recordkeeping, e.g., optical 
disk or CD-ROM storage, permit storage of computer generated records in 
ASCII or EBCDIC format only.112 These formats generally do not 
allow storage of paper records or electronic images, such as webpages, 
since such records or images are normally not written in ASCII or 
EBCDIC format. Therefore, these records would be required to be 
retained in hardcopy form. The Commission invites interested parties to 
comment concerning whether these rules, and in particular, Rule 1.31, 
are sufficient to address record retention in the current electronic 
environment.
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    \110\ For instance, Rule 4.23(a)(9) provides that a CPO must 
keep:
    The original or a copy of each report, letter, circular, 
memorandum, publication, writing, advertisement or other literature 
or advice (including the texts of standardized oral presentations 
and of radio, television, seminar or similar mass media 
presentations) distributed or caused to be distributed by the 
commodity pool operator to any existing or prospective pool 
participant or received by the pool operator from any commodity 
trading advisor of the pool, showing the first date of distribution 
or receipt if not otherwise shown on the document.
    Analogous requirements for CTAs are found in Rule 4.33(a)(7).
    \111\ Commission Rules 4.23(a)(9) and 4.33(a)(7).
    \112\ 17 CFR 1.31(d). See 58 FR 27458, 27462-63 (May 10, 1993).
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    The following examples are illustrative of the requirements 
discussed above.

    (22) (Hyperlink to Disclosure Document From Homepage Satisfies 
Delivery Obligation) RST is a CTA who operates a site on the World 
Wide Web. RST provides copies of its Disclosure Documents, in an 
acceptable format, which visitors to its website can access from a 
menu of options at the beginning of its website. Before the visitor 
may access data on the website other than the menu or table of 
contents, such as a description of RST's principals and summaries of 
its trading programs, performance data, or other matters, visitors 
must select and view a Disclosure Document for the trading 
program(s) in which they are interested. By providing access to each 
of these Disclosure Documents and assuring that the visitor has 
reviewed the Disclosure Document prior to proceeding, RST has 
complied with Rule 4.31(a), which requires that at or before the 
time a CTA solicits a prospective client, the CTA deliver to the 
prospective client a Disclosure Document for the trading program 
pursuant to which the CTA will direct or guide the account.
    (23) (Obtaining Informed Consent) GHJ is a CTA with a site on 
the World Wide Web. On the first page of GHJ's website, and before 
any solicitation materials are presented, is a page requesting 
informed consent from visitors to receive GHJ's Disclosure Document 
by electronic means. This page informs visitors that: (a) 
prospective managed account clients must receive a Disclosure 
Document; (b) they can receive the Disclosure Document in hardcopy 
if they prefer; (c) the electronic version of the Disclosure 
Document will be contained in a portion of GHJ's website; (d) 
persons accessing the electronic version of the Disclosure Document 
may incur charges relating to on-line access fees; (e) the original 
Disclosure Document as well as any amendments thereto will be 
provided on the website; and (f) visitors have the right to revoke 
their consent to receive electronic delivery at any time. At the 
bottom of the webpage is a button for visitors to ``click'' if they 
consent to receive electronic delivery of GHJ's Disclosure Document 
and any amendments thereto. If a visitor ``clicks'' on the 
acknowledgment button, he is hyperlinked to a copy of GHJ's 
Disclosure Document. If a visitor ``clicks'' on a button signifying 
that he does not provide his consent to receive a Disclosure 
Document by electronic means, he is then hyperlinked to a form 
asking for his name and postal address, which will be used to send a 
hardcopy Disclosure Document through postal mail and is not allowed 
to view any other portions of the website. GHJ's website properly 
obtains informed consent from visitors. Before engaging in any 
solicitation activity, GHJ obtains informed consent to deliver the 
Disclosure Document electronically. Then, immediately upon receipt 
of such consent, visitors are delivered the Disclosure Document. 
Once a visitor scrolls down to the end of the Disclosure Document 
and acknowledges that he has received the Disclosure Document, he 
may view other data on the site. However, before the visitor may 
open a managed account with GHJ, an acknowledgment of receipt of the 
Disclosure Document in accordance with Rule 4.31(b) must be 
obtained, either electronically (see example 25 below) or in 
hardcopy.
    (24) (Registrant May Require Acknowledgment to be Returned by 
Postal Mail) X, a registered CTA, has established a site on the 
World Wide Web. After users review X's Disclosure Document, they may 
access other portions of X's website. In the section dealing with 
opening an account, users are informed that before a trading account 
may be opened with X, a prospective client must download X's 
Disclosure Document and return a signed acknowledgment of receipt 
thereof. On X's website is a form receipt of acknowledgment, with a 
statement informing the user that the acknowledgment must be 
printed, and signed, dated and returned to X by postal mail before X 
will open an account for the user. Receipt of such an acknowledgment 
would comply with Rule 4.31(b). Registrants are permitted to 
distribute Disclosure Documents to prospective clients 
electronically and may obtain acknowledgments of receipt 
electronically. However, they are not required to do so. A CTA 
operating a site on the World Wide Web may require that 
acknowledgments be signed, dated and returned by postal mail.
    (25) (Acknowledgments May Be Signed Electronically With a 
Personal Identification Number) LMN, a registered CTA, operates a

[[Page 42163]]

site on the World Wide Web. LMN's website permits prospective 
clients to acknowledge receipt of its Disclosure Document by 
electronic media. Jill Doe visits LMN's website and wishes to open a 
managed futures account. LMN's website instructs Jill Doe that in 
order for her to acknowledge receipt of its Disclosure Document, she 
must receive a PIN. LMN's website asks Jill Doe to provide her 
electronic mail address, to which a PIN may be sent. Upon receipt of 
Jill Doe's electronic mail address, LMN then sends her a PIN. Jill 
Doe may then use that PIN in lieu of a manual signature required 
under Commission Rule 4.31(b).
    (26) (Consent To Receive Monthly Statements Electronically Can 
Be Withdrawn) JKL is the registered CPO of the Fund. John Smith and 
Jane Doe are both participants in the Fund. In September, JKL sends 
a notice to participants indicating that it will be sending monthly 
account statements to participants via electronic mail through the 
Internet, as Microsoft Word documents. JKL informs all pool 
participants that persons wishing to receive monthly account 
statements by means of electronic mail may incur costs relating to 
on-line access time, maintaining an electronic mail account, and 
owning a licensed copy of Microsoft Word. Further, JKL informs pool 
participants that electronic delivery of the monthly account 
statements will begin in January 1997. At the bottom of the notice 
is a form for participants to complete if they are interested in 
receiving monthly account statements electronically. The form asks 
for the participant's electronic mail address and for the 
participant's signature agreeing to the conditions of the electronic 
delivery.
    John Smith and Jane Doe complete the form and mail it back to 
JKL in November. In December, John Smith decides that he prefers to 
receive monthly account statements by means of postal mail and 
notifies JKL that he no longer agrees to electronic delivery. In 
January, JKL can send monthly account statements to Jane Doe by 
means of electronic mail but must send such statements to John Smith 
by means of postal mail. The requirements for manual signatures 
under 4.22(h) for these reports will be satisfied if JKL keeps such 
signed reports in paper form at its place of business.
    (27) (Registrant Must Abide by Parameters of Consent) In the 
same example as above, JKL now decides to post its monthly account 
statements on its World Wide Web homepage. JKL sends electronic mail 
to Jane Doe informing her that the monthly account statement can be 
accessed on JKL's homepage on the World Wide Web. This form of 
delivery would not satisfy the requirements of Rule 4.22. Jane Doe 
has only consented to receive monthly account statements as 
Microsoft Word attachments to Internet electronic mail. If JKL 
changes its method of electronic delivery, it must again obtain 
informed consent from pool participants. Jane Doe's consent to 
receive monthly account statements was limited to the means 
specified in the September notice. JKL cannot assume that Jane Doe 
has access to the World Wide Web or that she will agree to receive 
her monthly account statements by viewing them on JKL's homepage.
    (28) (Use of Hyperlinks in Table of Contents Acceptable) WXY, a 
CPO, posts her Disclosure Document on the World Wide Web. As it 
appears on the World Wide Web, the Disclosure Document is without 
any ``pages;'' instead it is a continuous stream of HTML text, which 
contains all of the required disclosures. In lieu of page numbers as 
contemplated by Rule 4.24, WXY has placed in the table of contents a 
series of hyperlinks, i.e., subject headings which trigger access to 
the various sections of the Disclosure Document. In addition, in the 
Risk Disclosure statement, where page numbers are required for the 
discussion of expenses, break-even point and principal risk factors, 
WXY has provided hyperlinks to those sections. This would comply 
with the format requirements of Rule 4.24. Where a Disclosure 
Document is posted on the World Wide Web without pages, the CPO may 
use readily comprehensible hyperlinks instead of page numbers to 
denote specific sections. Both page numbers and hyperlinks allow the 
reader to locate a particular section.
    (29) (Electronic Version Identical to Paper Version) ABC is a 
CTA who operates a homepage on the World Wide Web, with a hyperlink 
to enable visitors to download her Disclosure Document. The 
Disclosure Document can be downloaded in a form compatible with 
Microsoft Word for Windows or WordPerfect for DOS. Once downloaded, 
the Disclosure Document is in all respects identical to the paper 
version, including page numbers, bold-faced text and capsule 
performance information. In this case, ABC has met the format 
requirements of Rules 4.34.
    (30) (Electronic Version of Disclosure Document May Include More 
Recent Performance Data) ABC is a CTA who operates a website. ABC's 
hardcopy Disclosure Document is dated August 1 and reflects the 
ABC's performance through July 31. It is now October 1, and ABC 
wants to amend the performance section of its Disclosure Document 
that appears on the website to include performance through September 
30. ABC may amend the performance section of the website Disclosure 
Document to include more recent performance data. However, the 
calculation and presentation of such recent performance data must be 
in accordance with Commission rules. ABC is not required to amend 
its hardcopy Disclosure Document, which still may reflect ABC's 
performance through July 31. Under Rule 4.26, ABC may solicit 
prospective clients with the October 1 Disclosure Document and the 
version on its website with more recent performance data. However, 
on May 1 of the next year (i.e., nine months after date of the 
hardcopy Disclosure Document), ABC may no longer use the hardcopy 
Disclosure Document. Beginning May 1, ABC must use a new Disclosure 
Document. In addition, the Disclosure Document used on the website, 
which contains updated performance data, must also be amended to 
conform to any other changes reflected in the new hardcopy 
Disclosure Document.
    (31) (Disclosure Documents Delivered Electronically Must Be 
Current and Updated) DEF is a CTA who distributes a hardcopy of its 
Disclosure Document and also operates a website with an electronic 
version of its Disclosure Document. DEF solicits through its website 
but also sends each prospective client a hardcopy of its Disclosure 
Document via postal mail. The Disclosure Document DEF sends its 
prospective clients has been updated to reflect some material 
changes, but the electronic version on the Internet has not. DEF is 
in violation of Rule 4.36. Even though DEF provides its prospective 
customers with a current version of its Disclosure Document, it may 
not solicit customers using a superseded or out-of-date Disclosure 
Document.
    (32) (Outdated Disclosure Documents May Not Be Used on 
Electronic Media) ABC is a CTA who operates a site on the World Wide 
Web. ABC's website contains a Disclosure Document that is more than 
nine months old. The website also contains a form that allows 
persons to request a current version of ABC's Disclosure Document. 
ABC is in violation of Rule 4.36. Even though ABC allows prospective 
clients to obtain a current version of its Disclosure Document, ABC 
may not continue to provide its out-of-date Disclosure Document on 
the World Wide Web.
    (33) (Outdated Disclosure Document Contained on CD-ROM Cannot Be 
Used To Solicit Clients) RST is a CTA who has created a CD-ROM 
containing promotional materials and a Disclosure Document. The date 
of the Disclosure Document on the CD-ROM is January 15, 1995. On 
December 15, 1995, RST provides a prospective client with a copy of 
his CD-ROM but at the same time provides the client with a revised 
Disclosure Document dated October 1, 1995, which reflects certain 
material changes. Even though RST has provided the prospective 
client with a revised Disclosure Document, RST is in violation of 
Rule 4.36(b) because the CD-ROM contains a Disclosure Document dated 
more then nine months prior to its use. After October 15, 1995, RST 
may no longer distribute the CD-ROM with the Disclosure Document 
dated January 15, 1995.

IV. Electronic Filing With the Commission

A. Pilot Program Commencing October 15, 1996

    In response to numerous inquiries from managed futures 
professionals, the Commission is evaluating the potential benefits and 
costs of electronic document filing, both to registrants and to the 
Commission's regulatory program. The Commission is also considering the 
relative merits of several alternatives for implementing an electronic 
filing system. In furtherance of this objective, the Commission is 
announcing a pilot program for optional electronic filing of Disclosure 
Documents and is requesting comments concerning the standards and 
specifications that should be utilized if the Commission elects to 
establish a permanent program for electronic filing.
    The Commission has determined to initiate a six-month pilot program 
for

[[Page 42164]]

electronic filing of CPO and CTA Disclosure Documents, commencing 
October 15, 1996. Participation in the pilot program will be voluntary 
and will be open to all registered CPOs and CTAs who are members of 
NFA. The pilot program will be conducted by the Commission's Division 
of Trading and Markets and will be restricted (at least initially) to 
electronic submission of Disclosure Documents (and amendments thereto) 
which CTAs and CPOs are required to file with the Commission pursuant 
to Rules 4.36 and 4.26, respectively. Electronic filing of other 
documents, such as annual reports for commodity pools required to be 
filed pursuant to Rule 4.22, and documents filed to obtain relief 
available under certain Commission rules, such as notices of 
eligibility under Rule 4.5, notices of claims of exemption under Rule 
4.7, claims of exemption under Rule 4.12(b) and notices of exemption 
under Rule 4.14(a)(8), may be implemented in the future.113 
Participation in the pilot program will not obligate a registrant to 
provide its Disclosure Documents to prospective clients or pool 
participants by electronic means.
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    \113\ The Commission is considering electronic filing of the 
entire range of documents and reports covered by the Act and 
Commission rules, including without limitation, Forms 1-FR for FCMs 
and IBs, Form 103 (Large Trader Reporting Form), and Form 40 
(Statement of Reporting Trader). As noted in Section I, the 
Commission has approved self-regulatory organization (``SRO'') 
programs (notably those of the CBT and the CME) permitting FCMs and 
IBs to file electronically with such SROs the periodic financial 
reports on Form 1-FR required by Commission Rule 1.10. In Advisory 
28-96, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
26,711 (May 28, 1996), the Commission noted its intention to 
implement procedures to permit FCMs and IBs that file electronically 
with SROs also to file their financial reports electronically with 
the Commission.
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    Under the pilot program as currently envisioned, a partici-pating 
registrant will transmit its Disclosure Document, as an attachment to 
electronic mail, to an address specified by the Commission for purposes 
of this program. Receipt of the filed document will be acknowledged by 
electronic mail, followed by the customary review process conducted by 
Commission staff. Electronic mail also may be used by Commission staff 
for providing comments on the filed Disclosure Document and by the 
registrant to submit document revisions in response to staff comments.
    The Commission's pilot program will accommodate use of two widely 
utilized commercial word processing systems without the need for 
extensive formatting specifications, and it will not require 
specialized coding and formatting of numerical tables. At the outset, 
Documents filed under the Commission's pilot program will not be made 
publicly available in an electronic equivalent of a public reference 
room, as is currently the case with the document dissemination function 
of the EDGAR system; however, this enhancement may be considered in the 
future.114
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    \114\ Persons may, of course, obtain hardcopies of Disclosure 
Documents filed under the pilot program through a request made under 
the Freedom of Information Act, 5 U.S.C. 552 (1994), as implemented 
in Part 145 of the Commission rules.
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B. Filing Procedure Under the Pilot Program

    The Commission is establishing the following procedures for CTAs 
and CPOs seeking to employ electronic filing under the pilot program. 
The Commission welcomes comments concerning the adequacy and 
appropriateness of these requirements, and suggestions concerning any 
additional criteria that the Commission should consider in the pilot 
program.
    Beginning October 15, 1996, a CPO or CTA may file a Disclosure 
Document (or amendment) by taking the following steps:
    1. Save the Disclosure Document as a WordPerfect for DOS (version 
5.1 or earlier) or a Microsoft Word for Windows (version 6.0 or 
earlier) file. Retain both a hardcopy and a diskette or tape backup.
    2. Use the participating registrant's NFA identification number as 
the file name for the saved Disclosure Document, and add a file 
extension (DD1, DD2, DD3, . . . D10, D11, etc.) indicating whether the 
submission is sequentially the first, second, etc. submission by the 
registrant.115
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    \115\ For example, XYZ, whose NFA identification number is 
99999999, is a CTA with separate Disclosure Documents for two 
trading programs. XYZ names one Disclosure Document ``99999999.DD1'' 
and the other ``99999999.DD2.'' The first amendment to either 
Disclosure Document will be named ``99999999.DD3,'' and each 
subsequent submission will follow the same pattern. In the event 
that a registrant has more than one version of the Disclosure 
Document for a particular trading program or pool offering, each 
version would similarly be given a separate file extension.
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    3. Add the file as an attachment to an electronic mail message 
addressed to [email protected].116 Persons who participate 
in the pilot program must agree to receive comments from Commission 
staff by electronic mail. Accordingly, the message text should include 
the electronic mail address where comments, if any, may be sent. 
Confirmation of receipt of the filed Disclosure Document will be 
provided by Commission staff to the electronic mail address supplied by 
the participating registrant, and the Disclosure Document will undergo 
the customary review process. Following review of the filed document, 
staff comments also will be transmitted to the participating 
registrant's electronic mail address as an electronic mail attachment 
in Microsoft Word for Windows or WordPerfect 5.1 for DOS format.
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    \116\ Persons participating in the pilot program are not 
required to make duplicate filings under Rules 4.26(d) or 4.36(d).
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    4. Submit the registrant's response to staff comments by electronic 
mail message to the Commission's electronic mail filing address. The 
message should indicate the date of the staff comment message, and any 
revised text or pages should be attached in the same manner as the 
original filing (using the registrant's NFA identification number and 
the appropriate sequential file extension as described in No. 2, 
above).
    For purposes of the pilot program, a document of up to one megabyte 
(approximately 230 pages) can be received as an electronic mail 
attachment. If a participating registrant's Disclosure Document exceeds 
one megabyte, the registrant should contact the Division of Trading and 
Markets, Managed Funds Branch, for guidance.

C. Expansion of Pilot Program; Request for Comments

    The Commission intends to use its experience with the pilot program 
to develop and implement a permanent system for electronic filing of 
Disclosure Documents. As stated previously, the Commission will also 
consider permitting electronic filing of other types of required 
documents (e.g., annual reports to commodity pool participants, and 
notices of claims of exemption filed pursuant to Commission rules), as 
well as permanent implementation of electronic filing of CPO and CTA 
Disclosure Documents, either as an alternative to paper filing or as 
the sole filing method.
    Interested persons are invited to comment on the proposed structure 
of the pilot program, as well as the contemplated adoption of a 
permanent electronic filing system. Specifically, the Commission seeks 
comment on: (1) whether it is preferable to retain the option for 
registrants to submit documents in paper form or to eliminate that 
alternative in favor of a universal requirement to file electronically; 
(2) whether security concerns make it advisable to require that filings 
be encrypted or otherwise protected from unauthorized interception and 
use, and if so, what measures would be appropriate (e.g., commercially 
available encryption software); (3)

[[Page 42165]]

whether there is a need for a graphics capability (beyond that 
currently offered by the WordPerfect 5.1 for DOS and Microsoft Word for 
Windows programs) to permit transmission of pictorial or graphic 
material included in Disclosure Documents or in other documents 
required to be filed with the Commission; (4) whether the Commission 
should specify uniform formatting requirements for electronically-filed 
documents (e.g., margin dimensions, type font and point size, 
pagination, etc.) and if so, what the appropriate requirements would 
be; and (5) whether the selection of word processing formats currently 
being considered by the Commission for use in the pilot program 
(WordPerfect 5.1 for DOS or Microsoft Word for Windows) is adequate, 
and if not, which additional word processing programs or text formats 
registrants should be permitted to use.

D. Unsolicited Proposal Recently Presented to the Commission

    The Commission has been approached by a prospective vendor 
(``Vendor'') with a proposal to implement a system to permit electronic 
filing of Disclosure Documents utilizing a computer system developed by 
Vendor. The Vendor's prototype system assumes use of a WordPerfect or 
Microsoft Word word processing system in a Microsoft Windows operating 
system environment. Registrants would download from the Commission's 
Internet website a document ``packaging'' program, which would prompt 
the registrant to provide identifying information and facilitate secure 
uploading of the registrant's Disclosure Document to Vendor's 
system.117 Vendor has offered to develop a separate program for 
Commission staff handling and tracking of filed Disclosure Documents 
during the review process. Vendor's system, if implemented, may be 
designed to accommodate other required Commission filings, including 
CPO annual reports to pool participants. Under one variation of 
Vendor's system, filed Disclosure Documents would ``reside'' 
electronically on a server located at Vendor's offices, rather than at 
the Commission's headquarters.
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    \117\ The document packaging software includes a scrambling or 
encryption function enabling transmission of the document over phone 
lines without permitting unauthorized persons to read or alter the 
text.
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    The Commission plans to publish in Commerce Business Daily a notice 
seeking information and indications of interest on the part of 
proprietary vendors and developers of data processing and 
telecommunication systems with respect to developing and implementing a 
system to accept, track and control electronically-filed documents, as 
well as incoming and outgoing correspondence in connection with such 
documents.
    Comment is sought regarding the advisability of the Commission's 
selecting and entering into a contractual relationship with one or more 
independent vendors to facilitate electronic filing of documents on 
behalf of the Commission, and/or to serve as a repository or 
dissemination point to provide public access to electronically-filed 
documents. Finally, to the extent that a filing fee would be necessary 
to cover the operating and development costs of Vendor's system, the 
Commission seeks comment on the willingness of registrants to bear such 
costs and suggestions concerning how such fees should be calculated.

E. Future Releases

    The Commission invites comment not only on the specific issues 
discussed in this release, but also on any other approaches or issues 
that should be considered in connection with facilitating the use of 
electronic media. In the future, the Commission may issue further 
releases, as may be suitable to expand or provide additional guidance 
regarding the pilot program; to propose and adopt rules and amendments 
to existing rules to implement electronic filing procedures; or to give 
guidance generally with respect to the use of electronic media in the 
context of the Commission's regulatory program.

    Issued in Washington, DC, on May 8, 1996, by the Commission.
Catherine D. Dixon,
Assistant to the Secretary of the Commission.
[FR Doc. 96-20691 Filed 8-13-96; 8:45 am]
BILLING CODE 6351-01-P