[Federal Register Volume 61, Number 167 (Tuesday, August 27, 1996)]
[Proposed Rules]
[Pages 44009-44013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21674]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'') 
today is proposing technical changes to its rules requiring filing and 
distribution of Disclosure Documents by commodity pool operators 
(``CPOs'') and commodity trading advisors (``CTAs''). These proposals 
are intended to clarify certain rule provisions that are premised upon 
the filing and distribution of paper documents, in light of the 
interpretations set forth in a recent interpretative release 
``Interpretation Regarding Use of Electronic Media by Commodity Pool 
Operators and Commodity Trading Advisors'' (61 FR 42146 (August 14, 
1996)) outlining the Commission's views concerning the use of 
electronic media by CPOs and CTAs.

DATES: Comments must be received on or before October 28, 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 FAX number (202) 418-5521, or by electronic 
mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief 
Counsel, or Christopher W. Cummings, Attorney/Advisor, or Gary L. 
Goldsholle, 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. FAX number: (202) 418-5536.

SUPPLEMENTARY INFORMATION: In order to clarify certain rules in light 
of the interpretations relating to electronic distribution of 
information under the Commodity Exchange Act (the ``Act'') 1 and 
the Commission's regulations promulgated under the Act,2 published

[[Page 44010]]

in a recent interpretative release (61 FR 42146 (August 14, 1996)) (the 
``Interpretative Release''), the Commission is proposing minor 
technical amendments to the following rules: 4.1; 4.2; 4.21; 4.26; 
4.31; and 4.36. The proposed rule changes are intended to facilitate, 
among other things, a pilot program for electronic filing of Disclosure 
Documents with the Commission by CPOs and CTAs.
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    \1\ 7 U.S.C. 1 et seq. (1994).
    \2\ Commission rules are found at 17 CFR Ch. I (1996). The rules 
governing CPO and CTA disclosure, reporting and recordkeeping 
requirements are found at 17 CFR part 4 (1996).
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I. Proposed Amendments

    In the Interpretative Release, the Commission states its views with 
respect to the use of electronic media by CPOs and CTAs to disseminate 
certain information in compliance with the Act and the Commission's 
rules. Part 4 of the Commission's rules sets forth the disclosure and 
filing requirements for CPOs and CTAs. The rules that are the subject 
of the proposals set forth herein relate to the required filing with 
the Commission and distribution to current and prospective pool 
participants and managed account clients of Disclosure Documents by 
CPOs and CTAs. These rules were adopted on the assumption that 
Disclosure Documents would be filed and distributed in paper ``hard 
copy'' form. The Commission believes that it is appropriate to modify 
these rules in light of the views set forth in the Interpretative 
Release, in order to clarify that the Commission's rules do not limit a 
CPO's or a CTA's means of document delivery and filing to paper 
documents, to the exclusion of electronic media, and to facilitate the 
implementation of a pilot program for electronic filing of Disclosure 
Documents, as more fully described in the Interpretative Release.

A. General formatting

    Commission Rule 4.1(a) requires that each document distributed 
pursuant to Part 4 must be clear and legible, paginated and fastened in 
a secure manner. These requirements presume that the document is 
composed of one or more sheets of paper. Their application to a 
document that is transmitted electronically, and that exists only as 
data stored on electronic media, may be subject to question. Similarly, 
Rule 4.1(b) states that information required to be ``prominently'' 
disclosed, as provided in various Part 4 rules, must be displayed in 
boldface capital letters. The increased emphasis attained by boldface 
capital letters in a paper format may be lost on a computer screen, 
where the only difference may be an insignificant color change. 
Further, paper and electronic versions of a particular document may 
differ because graphic, pictorial or audio material in one version of 
the document may not be readily included in the other version.
    The Commission believes that the same critical information can be 
presented in electronic communication as in paper form. However, 
presentation adjustments may be required in the context of electronic 
media to assure that all versions of a CPO or CTA Disclosure Document 
convey the same information with equivalent emphasis, whether or not 
identical presentation of the information is possible. Proposed new 
paragraph (c) to Rule 4.1 states that in lieu of the paper-based 
formatting requirements of Rule 4.1(a), electronically distributed 
documents must present all required information in a format ``readily 
communicated'' to the recipient. Electronically delivered information 
is readily communicated for purposes of Part 4 if it is accessible in a 
single ``package'' or by a single data retrieval process, without the 
need to download and assemble multiple files, and preferably without 
the need to use special ``viewer'' software. Moreover, an 
electronically transmitted document must be organized in substantially 
the same manner as a paper document with respect to the order of 
presentation and relative prominence of information. Where a table of 
contents is required, the electronic document should retain page 
numbers or employ an equivalently user-friendly cross reference or 
indexing tool. The Commission requests comment as to whether greater 
specificity should be provided in the rule as to the meaning of 
``readily communicated'' or whether this type of simple performance 
standard is preferable.
    Where information is required to be ``prominently'' disclosed, 
electronically distributed documents must present such information in a 
manner reasonably calculated to draw the recipient's attention to it 
and must accord it greater emphasis than other portions of the text. 
For example, underlining that appears as such onscreen, color changes 
that contrast with the surrounding text without decreasing legibility, 
and pictorial characters designed to call attention (e.g., an arrow or 
a pointing hand), may serve to highlight portions of text sufficiently 
to give the desired level of prominence. Finally, if graphic, image or 
audio material is included in one version of a document but not in the 
version filed with the Commission, whether for technological reasons or 
otherwise, the filed version of the document must contain a fair and 
accurate description or transcript of the omitted material. As noted in 
the Interpretative Release, audio, video, graphic or other enhancements 
must be used in a manner that is consistent with Commission 
requirements as to the order of presentation of information and the 
relative prominence of various types of information. Thus, if video or 
audio material, for example, is used to convey content that would 
constitute supplemental information under Rule 4.24(v) or 4.34(n) 
(e.g., a video comparison of trading program rates of return to the 
movement of the Standard & Poor's 500 Index over time, or an audio 
discussion of modern portfolio theory), such material must be presented 
after all required information, and it must not overwhelm or obscure 
required information.
    Comment is solicited as to whether more specific requirements as to 
formatting of electronically distributed documents are appropriate and, 
if so, as to what specific standards should be established. For 
example, should electronically-transmitted documents be required to 
retain page breaks and page numbers corresponding to paper-based 
documents?

B. Filing

    Rule 4.2 states that material required to be filed with the 
Commission is considered filed when received at the Commission's postal 
address specified in Rule 4.2(a). In order to facilitate electronic 
filing of Disclosure Documents, the proposed amendment to Rule 4.2(a) 
states that such documents may be filed at the Commission's electronic 
mail address designated for that purpose.3 Rule 4.2 is otherwise 
unchanged.
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    \3\ Currently, this address is [email protected].
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    Currently, Rules 4.26(d) and 4.36(d) require CPOs and CTAs to file 
two copies of each Disclosure Document and each amendment to a 
Disclosure Document with the Commission. Where a document is filed 
electronically, this requirement for two copies is unnecessary and 
potentially confusing. Proposed amendments to Rules 4.26(d) and 4.36(d) 
would clarify that only one copy of the Disclosure Document and of each 
amendment is required to be filed if the registrant elects to file 
electronically with the Commission.

C. Acknowledgments

    Rule 4.21(b) for CPOs and Rule 4.31(b) for CTAs currently provide 
that a CPO may not accept or receive funds, securities or other 
property from a prospective pool participant, and a CTA may not enter 
into an agreement to guide or direct a prospective client's

[[Page 44011]]

account, unless the CPO or CTA first obtains a signed and dated 
acknowledgement stating that a Disclosure Document has been received by 
the prospective participant or client. As discussed in the 
Interpretative Release, the Commission believes that adequate evidence 
of receipt of a Disclosure Document may be obtained in ways other than 
a manually signed paper receipt. Accordingly, the proposed amendments 
to Rules 4.21(b) and 4.31(b) will permit registrants to obtain 
acknowledgments by such electronic means as the Commission may approve, 
in each case subject to the requirement that an acknowledgment be 
received before a CPO accepts property from a prospective pool 
participant or a CTA contracts to direct or guide a prospective 
client's account. At the present time, the only approved alternative to 
a signed paper receipt is the use of a personal identification or 
``PIN'' number in lieu of the manual signature, as described in the 
Interpretative Release. CPOs and CTAs remain obligated under Rules 
4.23(a)(3) and 4.33(a)(2), respectively, to retain all acknowledgments, 
and the proposed amendments permit retention in hard copy form or by 
other Commission-approved means.
    Comment is sought as to whether the Commission should specify in 
the rules the acceptable means by which registrants can establish 
receipt of Disclosure Documents, or whether a more flexible approach is 
advisable.

II. Solicitation of Comments

    Any interested persons wishing to submit written comments relating 
to the rule proposals, as explained above, are invited to do so by 
submitting them by postal mail to Jean A. Webb, Secretary of the 
Commission, Commodity Futures Trading Commission, 1155 21st Street, 
N.W., Washington, D.C. 20581. Comments may be sent by facsimile 
transmission to FAX number (202) 418-5521, or by electronic mail to 
[email protected].

III. Cost-Benefit Analysis

    Although the Commission anticipates that increased use of 
electronic media by registrants will benefit market participants by 
making disclosure more efficient and expeditious, it does not expect 
the rule amendments proposed herein, in and of themselves, to result in 
substantial economic costs or benefits. The proposed amendments are 
intended to clarify the application of existing requirements under the 
Act and Commission rules in the context of newly developed information 
technology. Use of electronic media by CPOs and CTAs for document 
filing or delivery of information is optional, and registrants can 
weigh for themselves the relative costs and benefits of using 
electronic media in specific circumstances. Nevertheless, commenters 
are invited to identify any costs or benefits associated with the 
proposed amendments that the Commission may have overlooked. Commenters 
are also invited to describe any additional actions that they believe 
that the Commission should take in connection with the proposed 
amendments to reduce compliance burdens and to maximize the benefits of 
Disclosure Document delivery while minimizing unnecessary costs.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1988), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The rule amendments discussed herein 
would affect registered CPOs and CTAs. The Commission has previously 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on such entities in 
accordance with the RFA.4 The Commission previously determined 
that registered CPOs are not small entities for the purpose of the 
RFA.5 With respect to CTAs, the Commission has stated that it 
would evaluate within the context of a particular rule proposal whether 
all or some affected CTAs would be considered to be small entities and, 
if so, the economic impact on them of any rule.6
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    \4\ 47 FR 18618-18621 (April 30, 1982).
    \5\ 47 FR 18619-18620.
    \6\ 47 FR 18618, 18620.
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    The amendments proposed herein do not impose any new burdens upon 
CPOs or CTAs. The proposed amendments facilitate the use of alternative 
media to meet existing requirements, and they clarify the application 
of existing regulations to the use of such media. As a result, the 
Commission anticipates that adoption of the proposed amendments will in 
many cases reduce the burden of compliance by CPOs and CTAs. 
Accordingly, pursuant to Rule 3(a) of the RFA (5 U.S.C. 605(b)), the 
Acting Chairman, on behalf of the Commission, certifies that these 
proposed amendments would not have a significant economic impact on a 
substantial number of small entities. The Commission nonetheless 
invites comment from any registered CPO or CTA who believes that these 
rules would have a significant impact on its operations.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1980 (Act), 44 U.S.C. 3501 et. seq., 
imposes certain requirements on federal agencies (including the 
Commission) in connection with their conducting or sponsoring any 
collection of information as defined by the Paperwork Reduction Act. 
While these proposed amendments have no burden, the group of rules 
(3038-0005) of which this is a part has the following burden:
    Average Burden Hours per Response: 124.75.
    Number of Respondents: 4,654.
    Frequency of Response: on occasion.
    Persons wishing to comment on the information which would be 
required by this proposed/amended rule should contact Jeff Hill, Office 
of Management and Budget, Room 3228, NEOB, Washington, DC 20503, (202) 
395-7340. Copies of the information collection submission to OMB are 
available from Joe F. Mink, CFTC Clearance Officer, 1155 21st Street 
NW, Washington, DC 20581, (202) 418-5170.

List of Subjects in 17 CFR Part 4

    Advertising, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act, and in particular, sections 
2(a)(1), 4b, 4c, 4l, 4m, 4n, 4o, and 8a, 7 U.S.C. 2, 6b, 6c, 6l, 6m, 
6n, 6o, and 12a, the Commission hereby proposes to amend Chapter I of 
Title 17 of the Code of Federal Regulations as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

Subpart A--General Provisions, Definitions and Exemptions

    1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 
23.

    2. Section 4.1 is proposed to be amended by adding new paragraphs 
(c) and (d) to read as follows:


Sec. 4.1  Requirements as to form.

    (a) * * *
    (b) * * *
    (c) Where a document is distributed through an electronic medium:
    (1) The requirements of paragraph (a) of this section shall mean 
that all required information must be presented

[[Page 44012]]

in a format readily communicated to the recipient. For purposes of this 
paragraph (c), information is readily communicated to the recipient if 
it is accessible as a single file by means of commonly available 
hardware and software, and if the electronically delivered document is 
organized in substantially the same manner as would be required for a 
paper document with respect to the order of presentation and the 
relative prominence of information. Where a table of contents is 
required, the electronic document must either include page numbers in 
the text or employ a substantially equivalent cross-reference or 
indexing method or tool;
    (2) The requirements of paragraph (b) of this section shall mean 
that such information must be presented in a manner reasonably 
calculated to draw the recipient's attention to the information and 
accord it greater prominence than the surrounding text; and
    (3) A complete paper version of the document must be provided to 
the recipient upon request.
    (d) If graphic, image or audio material is included in a document 
delivered to a prospective or existing client or pool participant, and 
such material cannot be reproduced in an electronic filing, a fair and 
accurate narrative description, tabular representation or transcript of 
the omitted material must be included in the filed version of the 
document. Inclusion of such material in a Disclosure Document shall be 
subject to the requirements of Sec. 4.24(v) in the case of pool 
Disclosure Documents, and Sec. 4.34(n) in the case of commodity trading 
advisor Disclosure Documents.
    3. Section 4.2 paragraph (a) is proposed to be revised to read as 
follows:


Sec. 4.2  Requirements as to filing.

    (a) All material filed with the Commission under this part 4 must 
be filed with the Commission at its Washington, D.C. office (Att: 
Special Counsel, Front Office Audit Unit, Division of Trading and 
Markets, C.F.T.C., 1155 21st Street N.W., Washington, D.C. 20581). 
Disclosure Documents may be filed at an electronic mail address for the 
Commission, as designated by the Commission.
* * * * *

Subpart B--Commodity Pool Operators

    4. Section 4.21, paragraph (b) is proposed to be revised to read as 
follows:


Sec. 4.21  Required delivery of pool Disclosure Document.

    (a) * * *
    (b) The commodity pool operator may not accept or receive funds, 
securities or other property from a prospective participant unless the 
pool operator first receives from the prospective participant an 
acknowledgment signed and dated by the prospective participant stating 
that the prospective participant received a Disclosure Document for the 
pool. Where a Disclosure Document is delivered to a prospective pool 
participant by electronic means, in lieu of a manually signed and dated 
acknowledgment the pool operator may establish receipt by electronic 
means approved by the Commission, Provided, however, That the 
requirement of Sec. 4.23(a)(3) to retain the acknowledgment specified 
in this paragraph (b) applies equally to such substitute evidence of 
receipt, which must be retained either in hard copy form or in another 
form approved by the Commission.
    5. Section 4.26, paragraph (d) is proposed to be revised to read as 
follows:


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

    (a) * * *
    (b) * * *
    (c) * * *
    (d) Except as provided by Sec. 4.8:
    (1) The commodity pool operator must file with the Commission two 
copies of the Disclosure Document for each pool that it operates or 
that it intends to operate not less than 21 calendar days prior to the 
date the pool operator first intends to deliver the Document to a 
prospective participant in the pool; Provided, however, that a pool 
operator electing to file electronically pursuant to Sec. 4.2(a) must 
file a single copy of the Disclosure Document; and
    (2) The commodity pool operator must file with the Commission two 
copies of all subsequent amendments to the Disclosure Document for each 
pool that it operates or that it intends to operate within 21 calendar 
days of the date upon which the pool operator first knows or has reason 
to know of the defect requiring the amendment; Provided, however, that 
a pool operator electing to file electronically pursuant to Sec. 4.2(a) 
must file a single copy of each such amendment.

Subpart C--Commodity Trading Advisors

    6. Section 4.31, paragraph (b) is proposed to be revised to read as 
follows:


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

    (a) * * *
    (b) The commodity trading advisor may not enter into an agreement 
with a prospective client to direct the client's commodity interest 
account or to guide the client's commodity interest trading unless the 
trading advisor first receives from the prospective client an 
acknowledgment signed and dated by the prospective client stating that 
the client received a Disclosure Document for the trading program 
pursuant to which the trading advisor will direct his account or will 
guide his trading. Where a Disclosure Document is delivered to a 
prospective client by electronic means, in lieu of a manually signed 
and dated acknowledgment the trading advisor may establish receipt by 
electronic means approved by the Commission, Provided, however, That 
the requirement of Sec. 4.33(a)(2) to retain the acknowledgment 
specified in this paragraph (b) applies equally to such substitute 
evidence of receipt, which must be retained either in hard copy form or 
in another form approved by the Commission.
    7. Section 4.36, paragraph (d) is proposed to be revised to read as 
follows:


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

    (a) * * *
    (b) * * *
    (c) * * *
    (d)(1) The trading advisor must file with the Commission two copies 
of the Disclosure Document for each trading program that it offers or 
that it intends to offer not less than 21 calendar days prior to the 
date the trading advisor first intends to deliver the Document to a 
prospective client in the trading program; Provided, however, that a 
trading advisor electing to file electronically pursuant to Sec. 4.2(a) 
must file a single copy of the Disclosure Document.
    (2) The commodity trading advisor must file with the Commission two 
copies of all subsequent amendments to the Disclosure Document for each 
trading program that it offers or that it intends to offer within 21 
calendar days of the date upon which the trading advisor first knows or 
has reason to know of the defect requiring the amendment; Provided, 
however, that a trading advisor electing to file electronically 
pursuant to Sec. 4.2(a) must file a single copy of each such amendment.


[[Page 44013]]


    Issued in Washington, D.C. on August 19, 1996, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-21674 Filed 8-26-96; 8:45 am]
BILLING CODE 6351-01-P