[Federal Register Volume 62, Number 140 (Tuesday, July 22, 1997)]
[Rules and Regulations]
[Pages 39104-39115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19147]


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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 for Delivery of 
Disclosure Documents and Other Materials

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Interpretation; Final Rules.

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[[Page 39105]]

SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') is modifying in part the interpretation set forth in its 
August 14, 1996 release (61 FR 42146) to clarify the Commission's views 
concerning electronic delivery of required Disclosure Documents and 
other materials by commodity pool operators (``CPOs'') and commodity 
trading advisors (``CTAs''). The Commission also is adopting technical 
amendments to its rules governing the form of documents distributed by 
CPOs and CTAs and the requirement that a CPO or CTA obtain a signed 
acknowledgment when a Disclosure Document is delivered. The rule 
amendments were proposed in the Commission's August 27, 1996 release 
(61 FR 44009) and are intended to facilitate the use of electronic 
media by CPOs and CTAs.

EFFECTIVE DATE: August 21, 1997.

FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief 
Counsel, or Christopher W. Cummings, Special Counsel, 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

    On August 8, 1996, the Commission issued a proposed interpretation 
regarding the use of electronic media \1\ by commodity pool operators 
(``CPOs''), commodity trading advisors (``CTAs'') and their associated 
persons (``Initial Release''). The Initial Release provided guidance to 
CPOs and CTAs concerning the application of the Commodity Exchange Act 
(``CEA'') and the Commission's regulations thereunder to activities 
involving electronic media. The original effective date of the Initial 
Release, which was published in the Federal Register on August 14, 
1996, was October 15, 1996, with a sixty day period for the submission 
of public comments. On October 15, 1996, the Commission postponed the 
effective date for sixty days and extended the comment period on the 
Initial Release for thirty days to provide additional time for the 
public to submit comments. On December 11, 1996, the Commission 
indefinitely postponed the effective date of the Initial Release to 
enable a full review and consideration of the comments received and 
issues presented.\2\
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    \1\ The term ``electronic media'' refers to such media 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 pilot program for electronic filing of Disclosure 
Documents announced in the Initial Release was implemented October 
15, 1996 and was not affected by postponement of the Initial 
Release's effective date.
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    On August 19, 1996, the Commission proposed a series of technical 
changes to Part 4 of its rules (the ``Proposed Rules'') to clarify 
application of paper-based formatting, filing and acknowledgment 
requirements in light of the interpretations set forth in the Initial 
Release. The Proposed Rules were published for public comment in the 
Federal Register on August 27, 1996.\3\ The Commission did not receive 
any comments specifically addressed to the Proposed Rules. However, 
because the proposed changes to Rules 4.1, 4.21 and 4.31 codified 
portions of the Initial Release, the Commission is considering the 
comments received in response to the Initial Release as applicable also 
to those proposed rule amendments.
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    \3\ 61 FR 44009 (August 27, 1996).
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    The Initial Release discussed the application of the existing 
statutory and regulatory regime to the use of electronic media, 
including in Section II a discussion of the registration implications 
of using electronic media and in Section III specific guidance for the 
use of electronic media for delivery of Disclosure Documents. In 
Section IV the Commission announced an optional, six month pilot 
program for the electronic filing of Disclosure Documents (the ``Pilot 
Program'').
    Based upon its review of the comments received and its experience 
with the Pilot Program, on April 9, 1997, the Commission determined to 
convert the electronic filing program to a permanent, voluntary filing 
program.\4\ On April 9, 1997, the Commission adopted the proposed 
changes to Rules 4.2(a), 4.26(d) and 4.36(d) substantially as proposed 
to implement the electronic filing program.\5\ This Release addresses 
the issues relating to the electronic delivery of Disclosure Documents 
and other documents by CPOs and CTAs discussed in Section III of the 
Initial Release. This Release does not affect the status of Section II 
of the Initial Release, which principally addressed registration 
issues, the effectiveness of which was indefinitely postponed by the 
Commission's Federal Register release of December 16, 1996.\6\
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    \4\ 62 FR 18265 (April 15, 1997).
    \5\ 62 FR 18265 (April 15, 1997). Rule 4.2(a) was changed to 
provide for electronic filing at an e-mail address to be designated 
by the Commission. Rules 4.26(d) and 4.36(d) were changed to provide 
that, when a Disclosure Document is filed electronically, only one 
copy need be submitted.
    \6\ 61 FR 65940 (December 16, 1996).
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    The Commission received comment letters from seventy-seven sources: 
twenty-six from persons registered as CTAs, nineteen from CPOs/CTAs, 
two from CTAs/introducing brokers (``IBs''), one from a CTA/futures 
commission merchant, one from a CTA/CPO/IB, one from a contract market, 
one from a futures industry trade association, one from a self-
regulatory organization, one from a public interest legal center, one 
from a publishers' trade association and the remainder from various 
unregistered persons or entities. The comments received expressed broad 
support for the Commission's initiative to provide guidance regarding 
the use of electronic media but raised issues concerning a number of 
specific applications of the requirements for delivery of Disclosure 
Documents.\7\ Based upon the Commission's consideration of the comments 
received and its own reconsideration of the Initial Release, the 
Commission has determined to modify the interpretation as discussed 
below. The Commission also has determined to adopt the remaining 
technical amendments to Part 4 in substantially the form in which they 
were proposed.
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    \7\ Because final action on Section II of the Initial Release is 
not being taken at this time, the Commission is not addressing in 
this release the comments received concerning registration-related 
issues.
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    As the Commission stated in the Initial Release, ``electronic media 
can provide an effective alternative to traditional paper-based 
media.'' \8\ Thus, as a general proposition, the Commission supports 
consistency in the application of regulatory requirements to electronic 
and non-electronic media to ensure that information is conveyed in a 
manner that achieves the relevant regulatory objectives, regardless of 
the medium selected. The following guidance is designed to aid in the 
application of the rules to delivery of Disclosure Documents and other 
documents by means of electronic media in a manner that achieves the 
same objectives as delivery of hardcopy documents.
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    \8\ 61 FR at 42150.
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II. Delivery of Disclosure Documents to Prospective Investors--
Compliance With Rules 4.21(a) and 4.31(a)

    Commission rules require that CPOs and CTAs deliver a Disclosure 
Document at or prior to the time of solicitation of customers. 
Commission Rule 4.21(a) provides that ``no CPO

[[Page 39106]]

* * * may, directly or indirectly, solicit, accept or receive funds, 
securities or other property from a prospective pool 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 CPO delivers or causes 
to be delivered to the prospective participant a Disclosure Document 
for the pool * * *.'' \9\ Similarly, Rule 4.31(a) provides that ``no 
CTA * * * 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 * * *.'' \10\
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    \9\ 17 CFR 4.21(a). CPOs and CTAs are reminded of their 
obligations, regardless of the medium used, to disclose all material 
information to existing or prospective clients (see Rules 4.24(w) 
and 4.34(o)) and not to mislead (see Sections 4b and 4o of the Act, 
7 U.S.C. 6b and 6o).
    \10\ 17 CFR 4.31(a).
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    The Initial Release provided guidance to CPOs and CTAs concerning 
the use of electronic media to comply with the requirements of Part 4 
of the Commission's regulations for the delivery of Disclosure 
Documents by CPOs and CTAs and distribution of monthly or quarterly 
statements and annual reports by CPOs. The requirement to deliver 
Disclosure Documents to prospective customers is an essential component 
of the Commission's regulatory regime for CPOs and CTAs. The Commission 
reaffirms the view expressed in the Initial Release that ``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 requirements are 
achieved.'' \11\ In the Initial Release, the Commission identified 
criteria to guide CPOs and CTAs in making use of electronic media to 
effect delivery of Disclosure Documents and other required 
communications in a manner that assures that the purposes of the 
delivery requirements are achieved. The Commission invited comment 
concerning the criteria highlighted in the Initial Release and any 
additional criteria that commenters believed to be relevant. The 
Commission has reviewed the Initial Release in light of the comments 
received and has determined to make several modifications of the 
guidance provided, as discussed more fully below.
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    \11\ 61 FR at 42158.
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    Consent. In the past, compliance with Part 4 of the Commission's 
rules has required delivery of Disclosure Documents in paper form. 
While the Commission supports the use of electronic media as an 
alternative medium for delivery of Disclosure Documents, it recognizes 
that some persons may prefer to receive disclosure in paper form. Paper 
disclosures generally have a greater degree of permanence and 
portability than electronic disclosures and in some contexts may be 
easier to review, e.g., if one wishes to review several pages ``side by 
side.'' Accordingly, CPOs and CTAs may use electronic delivery in lieu 
of delivery of a hardcopy Disclosure Document only where the intended 
recipient has provided informed consent to receipt of the document by 
means of electronic delivery.
    In the Initial Release, the Commission set forth six generic 
factors that must be disclosed by a CPO or CTA to obtain informed 
consent to delivery of required documents electronically: (1) the 
regulatory requirement to deliver the relevant document, such as a 
Disclosure Document, to prospective commodity pool participants or 
managed account customers, as applicable; (2) the right to elect to 
receive such document in hardcopy form or by means of electronic 
delivery; (3) the specific media and method by which electronic 
delivery will be made; \12\ (4) the potential costs associated with 
receiving or accessing electronically delivered documents; (5) the 
types of documents that will be delivered through electronic media, if 
documents in addition to the Disclosure Document are to be delivered 
electronically; and (6) the prospective customer's right to revoke his 
consent to receive documents by electronic means at any time.
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    \12\ This information should include, for example, 
identification of software (other than that which the customer/user 
is using to view the disclosures given to obtain informed consent) 
needed to download the Disclosure Document and, as appropriate, an 
indication that download times may be lengthy.
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    Two commenters, the National Futures Association (``NFA'') and the 
Managed Futures Association (``MFA''), contended that the Commission's 
procedures for obtaining informed consent were complicated and required 
unnecessary information. For example, NFA questioned whether in an 
electronic environment a CPO should be required to obtain informed 
consent concerning delivery of pool account statements at the time of 
initial solicitation. NFA was also concerned as to how registrants 
could provide estimates concerning the cost of receiving electronic 
disclosures when such costs are likely to vary substantially from user 
to user. Similarly, MFA's comment letter asked that the Commission 
clarify what is required for obtaining informed consent and contended 
that the requirement of informed consent could amount to a ``penalty'' 
for using electronic media. MFA urged that both informed consent and 
acknowledgment of delivery be required only at the point of sale, 
rather than at initial solicitation.
    The Commission does not believe that obtaining informed consent 
need require complex or burdensome procedures and is providing further 
clarification to address concerns expressed by various commenters. With 
respect to NFA's concern that a CPO might be required to obtain 
informed consent concerning delivery of other required pool reports 
such as pool account statements at the time of initial solicitation, 
the Commission notes that the Initial Release was only intended to set 
forth the consent criteria that would apply to all potentially required 
communications without addressing when each relevant consent need be 
obtained. It did not require that such consents be obtained at the time 
of initial solicitation, except consent to delivery of the Disclosure 
Document electronically, since such delivery is required to occur at or 
prior to solicitation.\13\ With respect to explaining the potential 
costs of electronic delivery, the Commission did not intend that CPOs 
or CTAs provide the actual amount of attendant costs other than costs 
added by the deliverer for the electronic delivery of required 
documents. This means that if charges specific to access and receipt of 
the Disclosure Document, in addition to basic Internet or electronic 
media access fees, will be incurred, CPOs and CTAs must so specify. 
Consequently, for materials posted on the World Wide Web and accessible 
without charge, as is the case with materials presented on the vast 
majority of Internet sites, there would be no duty to disclose 
potential costs. In many, if not most, cases the consent requirements 
should be satisfiable with a single sentence identifying the document 
to be delivered electronically, the prospective customer's right to 
receive a hardcopy, and the prospective customer's right to

[[Page 39107]]

revoke consent to electronic delivery. As discussed more fully below, 
the disclosures requisite to obtaining informed consent may be included 
in the disclosure statement presented in lieu of the full Disclosure 
Document at the beginning of the solicitation material to permit access 
to a CPO or CTA Internet site.
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    \13\ See discussion below as to how such delivery (i.e., 
presubscription delivery) may be accomplished in an electronic 
environment.
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    Delivery. Commission Rules 4.21(a) and 4.31(a) require that, at or 
before the time at which a CPO or CTA solicits a prospective pool 
participant or client, respectively, he must deliver the applicable 
Disclosure Document. In the Initial Release, the Commission construed 
the requirements of Rules 4.21(a) and 4.31(a) (which, by reference to 
Rules 4.24 and 4.34, impose both specific presentation and order of 
disclosure requirements) in the context of electronic media to require 
that the full Disclosure Document be delivered electronically to a 
prospective investor prior to providing access to any solicitation 
materials concerning the offered pool or managed account services other 
than de minimis introductory material. In order not to constrain unduly 
the ability to provide a menu of available information, the Commission 
indicated that a general description of the contents of a website, 
through presentation of an outline or table of contents for the website 
in which the Disclosure Document is listed as the first item, would 
satisfy Rules 4.21(a) and 4.31(a) provided that the prospective pool 
participant or client would be unable to review other sections of the 
site before accessing and scrolling through the Disclosure Document and 
affirming that he or she had received it.
    This ``click and scroll'' requirement addressed both the 
Commission's concern that prospective investors actually have the 
Disclosure Document brought to their attention with a comparable degree 
of directness and immediacy as would normally be attained by postal 
mail or personal delivery, and the ``order'' of disclosure requirements 
of Commission rules. Postal mail or personal delivery assures actual 
notice to the recipient of receipt of a document as well as actual 
receipt of the document. By contrast, electronic media have the 
capability of making vast inventories of documents passively available 
through indices or hyperlinks, which provide a computer connection to 
documents often too numerous for any viewer to access or, in many 
cases, even to identify as being of particular relevance to that 
viewer. Consequently, announcing the availability of a document by 
means of electronic media may have far less significance to, and impact 
upon, a prospective customer than actual delivery of a hardcopy 
Disclosure Document. Thus, in the Initial Release, the Commission 
endeavored to give guidance designed to balance the regulatory interest 
in the prospective pool participant's or managed account customer's 
actually having notice and immediate receipt of the Disclosure Document 
with the CPO's and CTA's interest in the efficiencies obtainable 
through the use of electronic media.
    However, a number of commenters argued that application of the 
delivery requirement in the manner suggested in the Initial Release was 
unduly burdensome. They objected to the requirement that investors 
access and scroll to the end of a Disclosure Document prior to 
receiving promotional material on the ground that hardcopy documents, 
while provided before other material, may not be read completely. These 
commenters believed that such a requirement might discourage persons 
from obtaining information concerning managed futures on the Internet. 
Although the ``click and scroll'' procedure permits a viewer to scroll 
through a document in a matter of seconds, some commenters viewed the 
requirement that the viewer scroll through the Disclosure Document as 
excessive and analogous to ``requir[ing] registrants to ensure that 
prospective customers review each page of the hardcopy document before 
proceeding with a solicitation.'' \14\ NFA's comment letter proposed 
that, in lieu of requiring that viewers actually proceed through the 
full text of the Disclosure Document before receiving any additional 
solicitation material, CPOs and CTAs instead provide a concise risk 
disclosure statement, which viewers would be required to scroll 
through, together with immediate electronic (or hardcopy) access to the 
full electronic (or hardcopy) Disclosure Document. NFA's comment letter 
also proposed that the Disclosure Document be deemed to have been 
delivered if: (1) the Disclosure Document is prominently available and 
in close proximity to the solicitation information requiring delivery 
of a Disclosure Document; (2) the Disclosure Document and all 
supplements are made accessible electronically for the time period for 
which the Disclosure Document is effective; and (3) the Disclosure 
Document is available upon request in paper form or able to be 
downloaded by the recipient.\15\ Further, some commenters contended 
that the Commission's interpretation of delivery differed from that of 
the Securities and Exchange Commission (``SEC''), which permits the use 
of hyperlinks to effectuate delivery in certain circumstances.\16\
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    \14\ NFA comment letter at 2.
    \15\ NFA also referenced the interpretations of the SEC 
concerning electronic delivery of required disclosures. NFA's 
tripartite test is consistent with that of the SEC.
    \16\ For example, the SEC stated that during the ``post-
effective'' period of a public securities offering, a company could 
place its sales literature on the World Wide Web provided that the 
sales literature contains a hyperlink to the Company's final 
prospectus where an individual may click on a box marked ``final 
prospectus'' and almost instantly the final prospectus appears on 
the individual's computer screen. The SEC noted that ``[s]ales 
literature, whether in paper or electronic form, is required to be 
preceded or accompanied by a final prospectus. The hyperlink 
function enables the final prospectus to be viewed directly as if it 
were packaged in the same envelope as the sales literature. 
Therefore, the final prospectus would be considered to have 
accompanied the sales literature.'' 60FR 53458, 53463 (October 13, 
1995).
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    Based upon further consideration of the issues and the comments 
received, the Commission believes that the delivery requirements of 
Rules 4.21 and 4.31 may be satisfied in the context of electronic media 
by methods that do not require the prospective customer to scroll 
through the entire Disclosure Document prior to receiving other 
solicitation material, provided that the requirements on prominence of 
presentation and comparable availability discussed herein are followed. 
One such method acceptable to the Commission would be providing a 
simple, concise statement highlighting the nature of the risks relevant 
to the pool or managed account program being offered and directing the 
viewer to the Disclosure Document for a fuller explanation of the 
nature of the proposed investment and its attendant risks and costs. 
The same explanatory statement could be used to satisfy the requirement 
to obtain the informed consent of prospective customers who elect to 
receive the Disclosure Document electronically rather than through 
delivery of a hardcopy document. This risk disclosure statement would 
be filed with the Commission together with the registrant's Disclosure 
Document. In this scenario, the prospective investor is using 
electronic media to consent to electronic receipt of the Disclosure 
Document and is also receiving on that medium a summary risk statement 
highlighting the availability of the Disclosure Document and a 
hyperlink or other similarly immediate connection to the Disclosure 
Document. In this context, the CPO or CTA has delivered the relevant 
Disclosure Document at the

[[Page 39108]]

time of or prior to solicitation of the prospective customer.\17\
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    \17\ However, if a prospective investor were solicited other 
than by electronic media, providing a summary risk disclosure 
statement and notice of the electronic availability of a Disclosure 
Document would not constitute delivery of the Disclosure Document at 
the time of or prior to solicitation.
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    For purposes of providing this concise risk disclosure and 
highlighting the contents and availability of the Disclosure Document, 
the Commission believes that the ``risk disclosure statement'' set 
forth in Rules 4.24 and 4.34 and required to be presented at the 
beginning of the Disclosure Document for commodity pools and commodity 
trading advisors, respectively, may provide a useful template, with 
minor adjustments. A sample ``short form'' risk disclosure statement 
for a commodity pool might read as follows:

    YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION 
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU 
SHOULD BE AWARE THAT FUTURES AND OPTION TRADING CAN QUICKLY LEAD TO 
LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY 
REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF 
YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS 
MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
    FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES 
FOR MANAGEMENT AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY 
FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE 
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF 
THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE 
DESCRIPTION OF THE PRINCIPAL RISK FACTORS, EACH EXPENSE TO BE 
CHARGED THIS POOL AND A STATEMENT OF THE AMOUNT, AS A PERCENTAGE 
RETURN AND DOLLAR AMOUNT, NECESSARY TO BREAK EVEN, THAT IS, TO 
RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT.\18\
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    \18\ Ideally, individual disclosure documents provided 
electronically would include electronic tables of contents, 
providing hyperlinks (or comparable features) to highlight and 
facilitate access to the principal risk factors, costs, and break-
even amounts, matters which are required to be highlighted in 
hardcopy disclosure. In any event, a table of contents is required 
by Rules 4.24(c) and 4.34(c) to be included in all Disclosure 
Documents.
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    THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION 
(``CFTC'') REQUIRE THAT PROSPECTIVE INVESTORS RECEIVE A DISCLOSURE 
DOCUMENT WHEN THEY ARE SOLICITED TO INVEST FUNDS IN A COMMODITY POOL 
AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS 
READILY ACCESSIBLE AT THIS SITE. THIS BRIEF STATEMENT CANNOT 
DISCLOSE ALL OF THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE 
YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, YOU SHOULD 
PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY 
TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF 
YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE 
DISCLOSURE DOCUMENT BY CLICKING BELOW. YOU WILL NOT INCUR ANY 
ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY 
ALSO REQUEST DELIVERY OF A HARDCOPY OF THE DISCLOSURE DOCUMENT, 
WHICH ALSO WILL BE PROVIDED TO YOU AT NO COST. THE CFTC HAS NOT 
PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR ON THE 
ADEQUACY OR ACCURACY OF THE DISCLOSURE DOCUMENT.
    PLEASE ACKNOWLEDGE YOUR UNDERSTANDING OF THIS IMPORTANT 
STATEMENT.

Similarly, a CTA's ``short form'' risk disclosure statement might read 
as follows:

    THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU 
SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE 
FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.
    THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN 
COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE 
OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
    IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO 
SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE 
NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO 
MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF 
THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE 
DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED 
TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (``CTA'').
    THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION 
(``CFTC'') REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A 
DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN 
AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S 
COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE 
HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS 
BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER 
SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD 
PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY 
TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF 
YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE 
DISCLOSURE DOCUMENT BY CLICKING BELOW. YOU WILL NOT INCUR ANY 
ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY 
ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT, 
WHICH ALSO WILL BE PROVIDED TO YOU AT NO COST. THE CFTC HAS NOT 
PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR 
ON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE DOCUMENT.
    OTHER DISCLOSURE STATEMENTS ARE REQUIRED TO BE PROVIDED YOU 
BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU.
    PLEASE ACKNOWLEDGE YOUR UNDERSTANDING OF THIS IMPORTANT 
STATEMENT.

    At a minimum, such a risk disclosure statement should state: (1) 
that the risk of loss in trading futures contracts or commodity options 
can be substantial; (2) that Commission rules require delivery at or 
prior to the time of solicitation of a Disclosure Document, which 
explains, among other things, the principal risk factors and costs of 
the proposed participation in the commodity pool or managed account 
program including the potential impact of fees and expenses, the 
``break even'' point in dollars and the percentage return necessary to 
recover one's initial investment, and restrictions on redeeming or 
withdrawing one's initial investment; (3) that a hardcopy Disclosure 
Document may be obtained from the CPO or CTA at no cost at any 
time;\19\ and (4) that the Commission has not passed upon the merits of 
participating in a particular investment or on the adequacy or accuracy 
of the Disclosure Document. At the end of the risk disclosure 
statement, the prospective investor would be required to acknowledge 
that he or she understands the statement. CPOs and CTAs may tailor the 
risk disclosure statement to the particular facts of their 
situation.\20\
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    \19\ Inclusion of an indication of the time required to download 
the Disclosure Document may assist the prospective client in 
determining whether to request a paper copy and is therefore 
strongly encouraged by the Commission.
    \20\After experience with this arrangement, the Commission may 
develop more explicit rules, as determined to be necessary.
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    This summary risk disclosure statement should be accompanied by the 
Disclosure Document, made accessible by means of a hyperlink or 
similarly immediate connection and presented in a form that is readily 
accessible to the recipient. In stating that the Disclosure Document be

[[Page 39109]]

``readily accessible,'' the Commission requires that the Disclosure 
Document be accessible on a comparable basis to other promotional 
material on the CPO's or CTA's website. Thus, to the extent that a 
Disclosure Document is in a form that requires use of a specially 
designated viewer or software, the other promotional material should 
require use of such viewer or software. This requirement is necessary 
to prevent the situation where a user may access promotional materials, 
such as performance data or a narrative description of the trading 
methodology, but is unable to access the Disclosure Document.\21\ Use 
of a concise risk disclosure statement which highlights the immediate 
availability of the Disclosure Document and electronic hyperlinking or 
other similarly accessible arrangement that requires no greater 
facility or steps than access to other materials on the site should 
balance the need for electronic delivery of Disclosure Documents to be 
no more cumbersome than hardcopy delivery with the need for a customer 
to be properly informed of the relevant costs and risks of the proposed 
investment. Prospective pool participants or advisory clients would be 
required to access only the abbreviated risk disclosure statement and 
not to ``click and scroll'' through the entire Disclosure Document. 
Permitting delivery of the Disclosure Document in the manner discussed 
above also promotes consistency with the approach of other financial 
regulators such as the SEC.\22\ Specific examples illustrating how CPOs 
and CTAs may use electronic media to deliver Disclosure Documents are 
provided in Section V.
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    \21\ The SEC has reflected similar concerns. For example, in 
example (38), the SEC stated, ``A server available through the 
Internet contains a fund's prospectus and application form in 
separate files. Users can download or print the application form 
without first accessing, downloading or printing the prospectus; the 
form includes a statement that by signing the form, the investor 
certifies that he or she has received the prospectus. Logistically, 
it is significantly more burdensome to access the prospectus than 
the application form (e.g., the investor needs to download special 
software before accessing the prospectus). The statement in the form 
about receipt of the prospectus would not by itself constitute 
electronic delivery of the prospectus, and the application form is 
not evidence of delivery of the prospectus, given the need to 
download special software before the prospectus can be viewed.'' 60 
FR 53458, 53465 (October 13, 1995).
    \22\ See footnote 16 supra.
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    Delivery of a risk disclosure statement in the form provided above 
or with minor adjustments should satisfy the requirements for informed 
consent with respect to delivery of a Disclosure Document. Where the 
sample risk disclosure statement provided does not address all required 
disclosures, such as where the Disclosure Document is delivered in a 
different manner from the risk disclosure statement, e.g., where a 
Disclosure Document will be delivered by means of electronic mail, or 
where accessing the electronic Disclosure Document entails additional 
costs, CPOs or CTAs should modify the risk disclosure statement to 
address these additional factors. In every case, the Disclosure 
Document should be as accessible as promotional material.
    Format. Commission rules include a number of format requirements 
which are designed to assure that certain information is accorded 
special prominence or emphasis in the Disclosure Document. These 
requirements create an order of presentation under which certain basic 
information must be placed at the beginning of the document, 
information of lesser relevance is presented after matters of greater 
importance, and voluntarily presented information follows required 
disclosures. The prescribed order also facilitates comparison of 
documents by maintaining the same sequence of topics across documents 
of different registrants. In the Initial Release and the Proposed 
Rules, the Commission recognized that a Disclosure Document could be 
presented in electronic form in place of paper form, provided that 
documents electronically delivered comply with the formatting standards 
specified in Commission rules. Specifically, the Commission noted that, 
where Commission rules specify the prominence, location, or other 
attributes of the information required to be delivered, an electronic 
version of such information must present the information in the same 
order and must reflect (if not replicate) the differences in emphasis 
and prominence that would exist in a hardcopy document.
    The Commission received only one comment addressed to format 
issues.\23\ The commenter noted that certain electronic document 
formats do not have standard ``pages'' and thus may not present 
legends, disclaimers and notes in the same manner as documents in 
hardcopy form. To address this disparity, the commenter proposed that 
the Commission require the use of certain technologies that make the 
appearance of electronic documents nearly identical to their paper 
versions, such as the currently popular Adobe Acrobat. The Commission 
recognizes that electronic and paper versions of the same document may 
differ in some respects as to format, but as noted above, does not 
intend to limit the technologies that CPOs or CTAs may use to deliver 
their Disclosure Documents as long as such documents present 
information in the same format and order as specified in Commission 
rules, and reflect ``the differences in emphasis and prominence that 
would exist in the paper document.'' \24\ The Initial Release suggested 
methods by which the electronic versions of documents might present 
information for which special presentation requirements exist. For 
example, the Commission noted that where text is required to be 
presented in boldface type, an electronic presentation might achieve 
the same objective by changing the color or shading of the text or the 
background in a manner that causes that portion of the text to be 
emphasized.
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    \23\ That commenter also asked whether an electronic Disclosure 
Document must be contained as a single file or may be several files 
linked together. This comment appears to address language in 
proposed Rule 4.1, which equated readily communicated information 
with material in a ``single file.'' 61 FR at 44012. This commenter 
favored linking several files together so that the Disclosure 
Document may be downloaded in portions, each of which could be 
downloaded more rapidly than the entire document. This comment and 
the Commission's modifications to proposed Rule 4.1 are discussed 
below in Section VI.
    \24\ 61 FR at 42161.
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    Receipt of Acknowledgments by Electronic Media--Compliance with 
Rules 4.21(b) and 4.31(b). Commission Rule 4.21(b) provides that a 
``commodity pool operator may not accept or receive funds, securities 
or other property from a prospective pool participant unless the pool 
operator first receives from the prospective pool participant an 
acknowledgment signed and dated by the prospective participant stating 
that the prospective participant received a Disclosure Document for the 
pool.'' \25\ Similarly, Commission Rule 4.31(b) provides that a 
``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.'' \26\ This acknowledgment of delivery is required of a 
subscribing participant as opposed to one who is merely solicited, a 
distinction preserved in the electronic context. A signed and dated 
acknowledgment certifies that the

[[Page 39110]]

prospective investor has received the Disclosure Document, and the 
acknowledgment is one of the records that CPOs and CTAs are required to 
maintain under Part 4.
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    \25\ 17 CFR 4.21(b).
    \26\ 17 CFR 4.31(b).
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    In the Initial Release, the Commission stated that it ``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.'' \27\ 
Similarly, in the Rule Proposal, the Commission stated that ``adequate 
evidence of receipt of a Disclosure Document may be obtained in ways 
other than a manually signed paper receipt.'' \28\ In the Initial 
Release, the Commission stated that use of personal identification 
numbers (``PINs'') to verify the identity of a recipient represented a 
non-exclusive method of obtaining electronic acknowledgments of receipt 
of a Disclosure Document, and the Commission invited comment concerning 
the validity of electronic acknowledgments. The Commission noted that 
PINs serve two important objectives: (1) they enable the CPO or CTA, to 
the extent practicable, to verify the identity of the person sending 
the electronic communication; and (2) they help to protect innocent 
persons from false claims that they have sent a particular electronic 
communication.\29\ Failure to include a valid PIN assigned to the 
intended party would render invalid any message purportedly sent by 
that person. The Commission has approved the use of PINs in lieu of 
manual signatures in other contexts, e.g., by FCMs filing financial 
reports with self-regulatory organizations. Consequently, in the 
Initial Release, the Commission confirmed that the use of PINs ``would 
provide an acceptable method of obtaining acknowledgments of receipt of 
Disclosure Documents.'' \30\ Further, the Commission noted that under 
Rules 4.21(b) and 4.31(b), CPOs and CTAs bear the burden of obtaining a 
valid acknowledgment of receipt of Disclosure Documents and are thus 
responsible for establishing procedures adequate to establish the 
authenticity of electronic acknowledgments. The Commission originally 
stated that if a CPO or CTA plans to accept electronic acknowledgments, 
it is responsible for establishing a system for issuing individualized 
PINs, but requested comment concerning alternative methods of 
authentication. In a subsequent release, the Commission stated that the 
methodology specified was not intended to be exclusive, provided that 
the CPO or CTA could satisfy the relevant criteria for 
verifiability.\31\
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    \27\ 61 FR at 42160.
    \28\ 61 FR at 44011.
    \29\ 61 FR at 42161.
    \30\ Id.
    \31\ 61 FR at 44011.
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    A number of commenters, including the NFA, MFA and the Chicago 
Mercantile Exchange, objected to the requirement of use of a PIN to 
verify the authenticity of electronic acknowledgments. These commenters 
expressed concern that the Commission's discussion of a PIN system 
mandated the use of that technology and prevented use of any other 
means of verification. The MFA, for example, contended that existing 
regulations do not require that a registrant verify the authenticity of 
a customer's signature and recommended that, in light of multiple 
technologies and procedures which may satisfy the regulatory 
requirements, the Commission ``require that a registrant develop 
procedures to ensure a means of identifying uniquely the recipient from 
whom an acknowledgment is required,'' without mandating a particular 
procedure. Although NFA objected to a requirement of authentication, it 
agreed that the rules currently require ``receipt of an executed 
acknowledgment which uniquely identifies an individual and purports to 
be his signature.''
    The Commission believes that it is reasonable to require that 
electronic acknowledgments incorporate use of a PIN or other comparably 
efficacious form of verifying the identity of the recipient. The 
Commission recognizes, however, that different levels of verification 
control may be required depending upon the sensitivity of the signature 
obtained (e.g., chief financial officers currently are permitted to 
sign electronically by PIN) and believes that greater flexibility may 
be appropriate where a signature merely evidences receipt of a document 
rather than validation of its contents. Further, the Commission does 
not wish to freeze its approaches to new technologies. The Commission 
therefore agrees that the acknowledgment requirement may be satisfied 
by any electronic methodology that uniquely identifies a specified 
person who has confirmed receipt of a document. As use of electronic 
media raises particular concerns of unique identification and 
attribution, a verification requirement of this nature is necessary and 
prudent.\32\ Moreover, verification procedures should benefit CPOs and 
CTAs insofar as they may reduce the risk of customer complaints of 
failure to provide required disclosures. Thus, to the extent that 
methods other than PINs for verifying the identity of a person are 
available and provide a comparable level of identification of the 
recipient, the Commission does not intend PIN systems to be the 
exclusive method of obtaining electronic acknowledgments of receipt.
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    \32\ Indeed, many parties on the Internet presently use PIN 
systems to verify the identity of an individual.
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    In the Initial Release, the Commission requested comment concerning 
alternatives to the use of PINs to verify receipt of electronically 
delivered documents. The commenters alluded to a number of 
alternatives, including electronic gating, security coded electronic 
mail, digital and electronic signatures, cryptography, public key-
private key configurations and certificates of identity. However, the 
commenters' discussion of these alternatives did not provide 
information sufficient to assess the efficacy of these methods. 
Accordingly, the Commission has determined to continue to treat 
acknowledgment by PIN as adequate but also to set out a performance 
standard for the use of alternative mechanisms for receipt of 
electronic acknowledgments.
    The performance standard requires use of a unique identifier to 
confirm the identity of the person sending the electronic 
acknowledgment to convey the acknowledgment in order to protect persons 
from claims that they have received a particular electronic 
communication when in fact they have not. Hard copy or electronic 
evidence of each use of such a system must be retained in order that 
the Commission and other authorities can verify that the acknowledgment 
was in fact given.\33\ Registrants who develop alternative systems that 
meet this performance criterion are permitted, but not required, to 
submit such systems to the Commission's Division of Trading and Markets 
for review.
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    \33\ See Section IV, infra, concerning electronic recordkeeping.
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III. Use of Electronic Media To Deliver Documents Other Than Disclosure 
Documents

A. Account Statements for Pools

    In the Initial Release, the Commission also provided guidance 
concerning the delivery of documents other than Disclosure Documents 
(specifically, monthly and quarterly account statements required to be 
delivered to pool participants by Rule 4.22, and modifications of 
Disclosure

[[Page 39111]]

Documents).\34\ As discussed in the Initial Release, CPOs may deliver 
electronically monthly and quarterly account statements required by 
Rule 4.22 provided that the CPO obtains the pool participant's informed 
consent. The procedures outlined for obtaining informed consent 
discussed above provide a single mechanism for establishing informed 
consent to delivery of Disclosure Documents as well as other required 
documents. A CPO seeking informed consent to deliver monthly or 
quarterly account statements would disclose: (1) that the CPO is 
required to deliver the monthly or quarterly account statement; (2) the 
right of the pool participant to elect to receive such statement in 
hardcopy form or by means of electronic delivery; (3) the specific 
media and method by which electronic delivery will be made; (4) the 
potential costs associated with receiving or accessing the electronic 
account statement; and (5) the prospective customer's right to revoke 
his consent to electronic delivery of account statements at any time.
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    \34\ In the Initial Release, the Commission invited comment from 
CPOs, accounting professionals, and other interested persons 
concerning the advisability of amending Rule 1.16 to allow for 
certification of Annual Reports by independent public accountants by 
means of electronic media. The Commission received no comments on 
this issue.
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    The Commission received no comments with respect to electronic 
delivery of monthly or quarterly account statements other than NFA's 
comment, discussed above, concerning whether a CPO is required to 
obtain informed consent to deliver pool account statements at the time 
it obtains informed consent to deliver a Disclosure Document. As noted 
above, CPOs may obtain informed consent concerning pool account 
statements at any time, either in conjunction with informed consent to 
deliver a Disclosure Document or separately, as long as the informed 
consent is obtained prior to electronic delivery of the document in 
question.

B. Modifications

    Commission Rules 4.26 and 4.36 require that Disclosure Documents be 
used for no longer than nine months and contain performance information 
that is current as of a date not more than three months prior to the 
date of the Disclosure Document. Rules 4.26 and 4.36 also require that, 
in the event that a CPO or CTA knows or should know that a Disclosure 
Document is materially inaccurate or incomplete, the registrant must 
correct the defect and distribute the correction to, in the case of a 
CPO, all existing pool participants and previously solicited pool 
participants prior to accepting or receiving funds from such 
prospective participants 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. The Initial Release made clear that CPOs 
and CTAs may use electronic media to comply with the amendment 
requirements of Rules 4.26 and 4.36 provided that the intended 
recipient has consented to electronic delivery of such information. Due 
to the relatively lower costs of electronic publishing, a CPO or CTA 
may wish to update its electronically presented Disclosure Documents 
more frequently than it would a hardcopy version of such document 
distributed in the customary manner. As stated in the Initial Release, 
however, the electronic version of a Disclosure Document must be at 
least as current as any paper-based version.\35\
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    \35\ Ideally, the paper version would explain that more frequent 
updates could be obtained electronically.
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    In the Initial Release, the Commission stated that CPOs and CTAs 
relying upon electronic delivery of a Disclosure Document must continue 
to provide access to the Disclosure Document for a period of nine 
months to allow repeated access to the Disclosure Document used at the 
time of solicitation. The requirement that Disclosure Documents be 
maintained at a CPO's or CTA's website for a period of nine months was 
designed to coincide with the maximum effective period of a Disclosure 
Document. However, NFA commented that the Commission's proposal would 
require CPOs and CTAs to maintain multiple versions of their Disclosure 
Documents on their websites and that this would have the potential to 
confuse prospective investors. The Commission agrees with this comment 
and, to avoid the potential confusion described by NFA, adopts NFA's 
recommendation that CPOs and CTAs be required to maintain only the most 
current version of their Disclosure Documents on their websites.\36\ 
The informed consent required for electronic delivery of a Disclosure 
Document provides that a CPO or CTA furnish a hardcopy Disclosure 
Document to a prospective investor at any time. Consequently, 
individuals who may have visited a website earlier and who wish to 
receive a prior version of a Disclosure Document may contact the CPO or 
CTA, who must provide the previous version of the Disclosure Document, 
either in hardcopy (or electronic form if the individual consents).
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    \36\ Additionally, this prevents any potential confusion that 
could result in prospective investors being solicited through use of 
an out-of-date Disclosure Document. See Rules 4.26(a)(2) and 
4.36(b). Rules 4.24(d)(4) and 4.34(d)(2) state that a Disclosure 
Document must contain the date on which the CPO or CTA first intends 
to use the document, and Rules 4.26(a)(1) and 4.36(a)(1) require 
that all information must be current as of that date (although 
performance information may be current as of a date up to three 
months prior thereto).
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C. Term Sheets

    Rule 4.21(a) provides that a CPO soliciting a prospective pool 
participant who is an accredited investor, as defined in 17 CFR 
230.501(a), may provide the prospective participant with a notice of 
intended offering and statement of the terms of the intended offering, 
i.e., a ``term sheet,'' prior to delivery of a Disclosure Document. 
This is an exception to the general prohibition against solicitation of 
prospective pool participants unless a Disclosure Document has been 
given previously or is given contemporaneously. In the Initial Release, 
the Commission stated that a CPO may not satisfy the requirements of 
Rule 4.21(a) by electronically posting a ``term sheet'' because ``[i]n 
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).'' \37\ In its comment letter, MFA agreed that, ``where 
the registrant is able to restrict access to the term sheet when it is 
distributed electronically in the same manner as he restricts access to 
paper-based versions of the term sheet, he should be permitted to use 
term sheets distributed electronically.'' Thus, term sheets may be used 
electronically in accordance with Rule 4.21(a) provided that access to 
such term sheets is restricted to persons who the CPO reasonably 
believes to be accredited investors.\38\ For example, a CPO might 
present on its website a series of questions to determine whether an 
individual is an accredited investor and restrict access to its term 
sheet to those persons who, based upon the responses to such questions, 
it reasonably believes are accredited investors. Similarly, if a CPO 
requires the use of a password to

[[Page 39112]]

access its term sheet and restricts such passwords to persons it 
reasonably believes to be accredited investors based upon information 
available to it, such CPO also would be in compliance with Rule 
4.21.\39\
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    \37\ 61 FR at 42159 n.92.
    \38\ See also IPONET, 1996 SEC No-Act. LEXIS 642 (July 26, 
1996).
    \39\ In the Initial Release, the Commission noted that the SEC 
has taken the position that placing offering materials on the 
Internet would not be consistent with the prohibition against 
general solicitation or advertising in Rule 502(c) of Regulation D 
unless the prospective accredited investor purchasers who are 
permitted to access the offering materials have been otherwise 
located without a general solicitation. 60 FR at 53463-64. For 
example, the SEC has approved the use of a password protected page 
of a website that is accessible only to persons previously 
identified as qualified accredited investors as not involving any 
form of ``general solicitation'' or ``general advertising'' within 
the meaning of Rule 502(c) of Regulation D provided that the process 
whereby accredited investors are identified is generic in nature and 
does not reference any specific transactions. See IPONET, supra note 
38.
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D. Review of Websites

    The Commission also received a comment that NFA should offer to 
review the content of websites much in the way as it reviews 
promotional materials. Pursuant to NFA Compliance Rule 2-29 and the 
related Interpretive Notice dated May 1, 1989,\40\ as a service to its 
members, NFA will review promotional material prior to its first 
use.\41\ To the extent that CPOs and CTAs favor a voluntary prior 
review process for electronic media, they may propose this to NFA 
directly.
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    \40\ National Futures Association Manual, Vol. 3, No. 2, (Jan. 
1, 1997) at para. 9009.
    \41\ Registrants have the options to file promotional material 
unless otherwise required to do so by rule or directive.
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IV. Maintenance of Records

    A substantial number of the comments received in response to the 
Initial Release concerned the application of the Commission's 
recordkeeping requirements in the context of electronic media. Rule 
4.23, with respect to CPOs, and Rule 4.33, with respect to CTAs, 
specify books and records that must be maintained by CPOs and CTAs in 
accordance with Rule 1.31. These records include the acknowledgments 
required by Rules 4.21(b) and 4.31(b), as well as the original or a 
copy of each report, letter, circular, memorandum, publication, 
writing, advertisement or other literature or advice distributed by 
CPOs and CTAs. Rule 1.31, requires among other things, that records be 
retained for a period of five years and be readily accessible during 
the first two years of the five-year period. Rule 1.31(b) provides that 
copies may be retained on microfilm, microfiche, or optical disk but 
must be maintained in accordance with the standards set forth in Rule 
1.31(c) and (d).\42\
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    \42\ Rule 1.31(d) states, among other things, that all records 
preserved on optical media pursuant to Rule 1.31(b) must be 
preserved on non-rewritable, write once read many (``WORM'') media. 
In addition, the technology must have write-verify capabilities that 
continuously and automatically verify the quality and accuracy of 
the information stored and automically correct quality and accuracy 
defects. Rule 1.31(d)(1) states that an optical storage system must: 
(i) use removable disks; (ii) serialize the disks; (iii) time-date 
all files of information placed on the disks, reflecting the 
computer run time of the file of information and using a permanent 
and non-erasable time-date; and (iv) write files in ASCII or EBCDIC 
format. As the Commission has noted, the ASCII and EBCDIC 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 hard[]copy form.'' 61 FR at 
42162.
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    To facilitate CPOs' and CTAs' use of electronic media when possible 
and to avoid imposing duplicative or inconsistent requirements on 
registrants who may also be registered with the SEC, the Commission 
hereby permits a CPO or CTA, whether or not registered with the SEC, to 
use guidelines set forth by the SEC in its recent rulemaking in 
connection with recordkeeping requirements for broker-dealers.\43\ 
Accordingly, a CPO or CTA may maintain required records pursuant to 
Commission Rule 1.31 or as allowed by SEC regulations.\44\ For that 
purpose, in the case of CPOs and CTAs, the designated examining 
authority would be considered to be the NFA.
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    \43\ SEC Release No. 34-38245, 62 FR 6469 (February 12, 1997). 
The SEC amended its Rule 17a-4(f) to provide for the production or 
reproduction of records by means of electronic storage media, with 
the limited exception of those records required for penny stocks. 
Rather than specify particular electronic storage media, the SEC 
provided that the particular medium chosen must meet certain 
criteria:
    (A) Preserve the records exclusively in a non-rewrit[]able, non-
erasable format;
    (B) Verify automatically the quality and accuracy of the storage 
media recording process;
    (C) Serialize the original and, if applicable, duplicate units 
of storage media, and time-date for the required period of retention 
the information placed on such electronic storage media; and
    (D) Have the capacity to readily download indexes and records 
preserved on the electronic storage media to any medium acceptable 
under [Rule 17a-4(f)] as required by the [SEC] or the [SROs] or 
which the member, broker, or dealer is a member.
    17 CFR Sec. 240.17a-4(f)(ii) (1997). If a broker-dealer chooses 
to use electronic storage media, it must notify its designated 
examining authority prior to using such media and, if the broker-
dealer uses media other than optical disk technology or CD-ROM, it 
must provide notice of at least 90 days. The SEC also set forth, 
among other things, the following requirements: maintenance of 
duplicates of records, which can be stored on any medium satisfying 
the above criteria; organizing and indexing of both original and 
duplicate records; an audit system that can record both the entry 
and modification of records; a third-party download provider, whose 
name is provided to the SRO and who agrees to promptly furnish to 
the SEC and SRO(s) information necessary to access and download 
records; and, where a broker-dealer uses an outside service bureau 
to preserve records, an escrow agent who keeps a current copy of the 
information necessary to access and download records.
    \44\ A substantial number of Commission registrants are also 
registered with the SEC. As of March 31, 1997, 113 of 236 futures 
commission merchants (``FCM'') were registered with the SEC as 
broker-dealers. Therefore, the Commission has attempted, where 
possible, to coordinate its regulatory efforts with SEC 
requirements. For instance, Rule 1.10(h) permits an FCM to file 
reports concerning its financial condition by submitting a copy of 
its Financial and Operational Combined Uniform Single report filed 
with the SEC in lieu of the Commission's Form 1-FR-FCM, and Rules 
1.14 and 1.15, the Commission's risk assessment rules, attempt to 
avoid duplication of similar SEC rules with regard to recordkeeping 
and reporting.
    In the Commission's recent advisory (62 Fed. Reg. 31507 (June 
10, 1997) permitting FCMs to deliver confirmations, purchase and 
sale statements and monthly statements electronically, it also 
stated that they may comply with recordkeeping requirements by 
following either Commission Rule 1.31 or the SEC's guidance as set 
forth in Release No. 34-38245.
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    Concerning the storage and maintenance of records of electronic 
communications, the Commission understands that it may be difficult or 
impossible as a technical matter to store certain data in exactly the 
format in which it is transmitted to customers. However, the CPO or CTA 
must be able to store and maintain required records in order that, upon 
request of any representative of the Commission or the United States 
Department of Justice, the CPO or CTA can reproduce the recorded 
materials in substantially the same form \45\ and containing the same 
information as was transmitted to customers.
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    \45\ For example, registrant logos may be deleted.
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V. Illustrative Examples

    (1) Disclosure Document Must be Readily Accessible and Delivery of 
Risk Disclosure Statement May be Sufficient to Obtain Informed Consent. 
ABC is a registered CTA who operates a site on the World Wide Web. The 
first page of ABC's website sets forth the risk disclosure statement 
followed by ``yes'' or ``no'' lines which can be clicked upon for 
viewers to confirm that they have read the statement and wish to 
continue or do not wish to continue. After ``clicking'' to continue, 
the user is hyperlinked to a document containing recent performance 
data as well as a prominent hyperlink to the Disclosure Document. 
Access to the Disclosure Document is comparably accessible as was 
access to the page displaying the performance data. In this case, ABC 
has complied with the requirements of Rule 4.31(a).

[[Page 39113]]

    (2) Disclosure Document Must be Comparably Accessible as Other 
Promotional Material. ABC is a registered CTA who operates a site on 
the World Wide Web. The first page of ABC's website sets forth the risk 
disclosure statement with a section for individuals to indicate by 
clicking on the appropriate statement that they have read the statement 
and wish to continue. After ``clicking'' to continue, the user is 
hyperlinked to a document containing recent performance data as well as 
a prominent hyperlink to the Disclosure Document. For some users, 
clicking on the Disclosure Document hyperlink brings up instructions 
and hyperlinks concerning how to download the required software viewer 
to access the Disclosure Document. By contrast, accessing the 
performance data on the website does not require the use of the same 
viewer. In this case, ABC has not complied with Rule 4.21(a). The 
Disclosure Document is not as accessible as promotional material. 
Although some users may have the viewer already installed on their web 
browser, others may not. Requiring users to use specialized software to 
view the Disclosure Document but not the promotional material does not 
satisfy the requirement that the Disclosure Document be comparably 
accessible as the promotional material. The Disclosure Document must be 
as readily accessible as performance data and other promotional 
material.
    (3) Informed Consent Necessary to Deliver Monthly Account 
Statements at World Wide Web Site. XYZ is a registered CPO who operates 
a site on the World Wide Web. XYZ plans to offer its pool participants 
the choice of receiving monthly account statements by electronic media 
or by postal mail. In a letter to pool participants, XYZ informs its 
investors that it plans to post its monthly account statements on its 
World Wide Web site and that persons who wish to receive monthly 
account statements electronically may elect to do so. In its letter, 
XYZ explains that the monthly account statements will be hyperlinked to 
its website. The letter also explains that pool participants electing 
to receive disclosures solely by electronic media may revoke their 
election at any time and request that any monthly account statement be 
sent to them in hardcopy. At the bottom of the letter is a form for 
pool participants to complete and mail or fax back to XYZ indicating 
that they consent to delivery of monthly account statements by 
electronic media. Pool participants who do not complete the form will 
continue to receive monthly account statements in hardcopy. XYZ has 
complied with the requirements for informed consent to deliver monthly 
account statements.
    (4) Informed Consent Necessary to Deliver Monthly Account 
Statements Through Electronic Mail. RST is a registered CPO who 
operates a site on the World Wide Web. RST's website complies with all 
Commission requirements with respect to delivery of a concise risk 
disclosure statement and Disclosure Document. In order to provide RST's 
pool participants with access to monthly account statements faster and 
at less expense, RST has decided to use electronic mail to deliver 
monthly account statements to those pool participants interested in 
receiving such statements in this manner. On its website is a section 
devoted to providing information on how pool participants may receive 
monthly account statements by electronic mail. In addition to 
requesting the pool participant's electronic mail address, the section 
explains: (1) that RST is required to deliver monthly account 
statements; (2) the pool participant's right to elect to receive such 
statements either in hardcopy or electronic form; (3) that electronic 
account statements will be delivered as a part of an electronic mail 
message; (4) that there is no charge for electronic delivery of account 
statements; and (5) that pool participants' election to receive monthly 
account statements by electronic mail may be revoked at any time and 
that RST would then resume delivery of hardcopy statements. At the 
conclusion of these disclosures is an electronic form for pool 
participants to complete if they are interested in receiving monthly 
account statements in this manner. RST has complied with the 
requirement to obtain informed consent to delivery monthly account 
statements.
    (5) Modifications to Disclosure Document. ABC is a registered CTA 
who operates a site on the World Wide Web. ABC posts its Disclosure 
Document on its website in a manner consistent with the requirements 
for obtaining informed consent. Because of the additional flexibility 
that electronic media provide, ABC updates the performance data on a 
monthly basis. For example, by the 5th day of every month, ABC's 
Disclosure Document performance data is current as of the month that 
just expired. ABC is not required to keep prior months' Disclosure 
Documents on its website even though prospective managed account 
customers may have viewed them without obtaining a copy. If a 
prospective client wishes to see a Disclosure Document as of a date 
several months ago, ABC must furnish that Disclosure Document to the 
prospective client, either in hardcopy or by electronic media if the 
prospective client consents. Based upon the modifications made in this 
Release, CTAs (or CPOs) are no longer required to maintain each 
Disclosure Document posted on the website for a period of nine months.

VI. Final Rules

    Rule 4.1--Requirements as to form. Commission Rule 4.1(a) sets 
forth the form requirements for documents distributed pursuant to Part 
4 and requires generally that documents be clear and legible, paginated 
and fastened in secure manner and that information required to be 
``prominently'' disclosed must be in capital letters and in boldface 
type. Rule 4.1, which was adopted by the Commission in 1981, was 
designed to address hardcopy documents. The proposed amendments to Rule 
4.1 issued by the Commission on August 19, 1996, were designed to 
reflect the reality that many documents today are presented in 
electronic media. Proposed Rule 4.1 was designed to make clear that 
documents may be distributed by electronic media. To this end, proposed 
Rule 4.1(c)(1) would have required that for documents distributed 
through an electronic medium, ``all required information must be 
presented in a format readily communicated to the recipient'' and that 
for this purpose ``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.'' \46\ Proposed Rule 4.1(c)(2) also 
would have applied to electronic media the requirement of existing Rule 
4.1(b) that information required to be ``prominently'' disclosed be 
displayed in capital letters and boldface type by requiring that such 
information be presented in a manner that is reasonably calculated to 
draw it to the recipient's attention. Proposed Rule 4.1(c)(3) would 
have required that a complete paper version of a document be provided 
to a recipient upon request. Finally,

[[Page 39114]]

proposed Rule 4.1(d) required that if any graphic, image or audio 
material that is included with or that accompanies the Disclosure 
Document delivered to a recipient cannot be filed with the Commission 
in the form in which delivered to the recipient, the CPO or CTA must 
provide a fair and accurate narrative description, tabular 
representation or transcript of the omitted material in the version 
filed with the Commission.
---------------------------------------------------------------------------

    \46\ Additionally, the Commission stated in the preamble to the 
August 27, 1996 Federal Register release that ``[e]lectronically 
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.'' 61 FR at 44010.
---------------------------------------------------------------------------

    The only comment received concerning these proposed amendments to 
Rule 4.1 was from a CTA who noted that requiring the use of a single 
file containing the Disclosure Document was unnecessarily restrictive 
and may not be advantageous since CTAs could link several sections of 
the Disclosure Document to a table of contents and thus accelerate the 
download time as compared to the time required for a single file. The 
Commission agrees that Rule 4.1(c)(1) need not specify whether a 
document is contained in a single or multiple files. Although the 
Commission believes that delivery procedures typically will result in 
delivery of the Disclosure Document in a single file, the Commission 
does not believe that it is necessary to specify such procedures by 
rule nor does the Commission wish to restrict the flexibility of CPOs 
or CTAs to devise alternative methods of delivery so long as such 
delivery ``readily communicates'' the information to the required 
recipient.\47\
---------------------------------------------------------------------------

    \47\ Of course, where multiple files must be downloaded by the 
recipient in order to view the entire Disclosure Document, the CPO 
or CTA must make this fact clear.
---------------------------------------------------------------------------

    As adopted, Rule 4.1(c)(2) clarifies that, where use of capital 
letters and bold-face type is required by Commission rules, this type 
of presentation would also be required in the context of electronic 
presentations. However, where the use of capital letters and bold-face 
type would not in the context of electronic media achieve the purpose 
of highlighting and emphasizing specified information, another method 
reasonably calculated to draw attention to the specified information 
should be used. Rule 4.1(c)(3), as adopted, clarifies that the paper 
version that must be made available to recipients of electronically-
transmitted documents upon request must comply with applicable paper-
based Part 4 rules. Based upon the Commission's further consideration 
of proposed Rule 4.1, section (d) is being adopted as proposed.
    Rules 4.21 and 4.31--Required delivery of pool Disclosure Document 
and Required delivery of Disclosure Document to prospective clients. 
Rules 4.21(b) and 4.31(b) establish the requirement that CPOs and CTAs 
obtain a signed and dated acknowledgment of receipt of the Disclosure 
Document before accepting any funds from a prospective pool participant 
or client. As proposed, Rules 4.21(b) and 4.31(b) would have been 
modified to permit CPOs and CTAs to obtain acknowledgments 
electronically in a form approved by the Commission. Proposed Rules 
4.21 and 4.31 provided that, ``[w]here 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.'' 
The proposed rules also would have required that the CPO and CTA retain 
the acknowledgment in accordance with Rules 4.23 and 4.33, 
respectively, either in hardcopy or in another form approved by the 
Commission.
    The Commission did not receive any comments addressing the proposed 
amendments to Rules 4.23 and 4.33. While the Commission did receive 
comments concerning the requirements for and use of electronic 
acknowledgments, these comments were addressed in section II, supra, 
and Rules 4.21(b) and 4.31(b) have been modified in conformity with the 
analysis set forth above. Specifically, final Rules 4.21(b) and 4.31(b) 
have been modified to permit alternative methods of electronic 
verification so long as the performance criteria enunciated in section 
II are satisfied. As discussed above, use of a PIN or other unique 
identifier to confirm the identity of the person acknowledging receipt 
provides an acceptable method of obtaining electronic acknowledgments 
of receipt. This modification responds to the concerns of commenters 
that PINs might be considered the exclusive means of complying with 
Rules 4.21(b) and 4.31(b) with respect to electronic media. As 
discussed above, to facilitate use of electronic media, CPOs and CTAs 
may maintain required records either pursuant to Commission Rule 1.31 
or as permitted by SEC regulations.

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994), 
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.\48\ The Commission previously determined that 
registered CPOs are not small entities for the purpose of the RFA.\49\ 
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.\50\
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    \48\ 47 FR 18618-21 (April 30, 1982).
    \49\ 47 FR 18619-20.
    \50\ 47 FR 18618, 18620.
---------------------------------------------------------------------------

    The amendments adopted herein do not impose any new burdens upon 
CPOs or CTAs. Rather, these amendments facilitate the use of electronic 
media to meet existing requirements, and they clarify the application 
of existing regulations to the use of such media. Consequently, the 
Commission believes that the adoption of these rule amendments will in 
many cases reduce the burden of compliance by CPOs and CTAs. Moreover, 
CPOs and CTAs are free to continue using paper documents.
    In certifying pursuant to section 3(a) of the of the RFA that the 
proposed revisions would not have a significant economic impact on a 
substantial number of small entities, the Commission invited comments 
from any CPOs and CTAs who believed that the proposed revisions, if 
adopted, would have a significant impact on their activities. No such 
comments were received on the revisions adopted herein.
    Accordingly, pursuant to Rule 3(a) of the RFA, the Chairperson, on 
behalf of the Commission, certifies that the action taken herein will 
not have a significant impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995, Pub. L. 104-13 (May 13, 1995), 
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 this rule has 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.

[[Page 39115]]

    Copies of the OMB approved information collection package 
associated with this rule may be obtained from: Desk Officer, CFTC, 
Office of Management and Budget, Room 10202, NEOB Washington DC 20503, 
(202) 395-7340.

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 amends 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 amended by adding 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 paragraphs (a) of this section shall mean 
that required information must be presented in a format that is readily 
communicated to the recipient. For purposes of this paragraph (c), 
information is readily communicated to the recipient if it is 
accessible to the ordinary user 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 capital letters and boldface 
type or, as warranted in the context, another 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 that complies with the 
applicable provisions of this part 4 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 4.21 paragraph (b) is to be revised to read as follows:

Subpart B--Commodity Pool Operators


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 that use a unique identifier to confirm the identity of the 
recipient of such Disclosure Document, 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.

Subpart C--Commodity Trading Advisors

    4. Section 4.31 paragraph (b) is 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 that use a unique identifier to confirm the identity 
of the recipient of such Disclosure Document, 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.

    Issued in Washington, DC on July 15, 1997, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-19147 Filed 7-21-97; 8:45 am]
BILLING CODE 6351-01-P