[Federal Register Volume 63, Number 60 (Monday, March 30, 1998)]
[Proposed Rules]
[Pages 15112-15115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8147]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4


Two-Part Documents for Commodity Pools

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed Rule amendments.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has 
determined pursuant to Section 17(j) of the Commodity Exchange Act 
1 (``Act'') to review the National Futures Association's 
(``NFA's'') Compliance Rule 2-35 (``the Rule'') and its Interpretive 
Notice regarding commodity pool Disclosure Documents. The Rule requires 
the commodity pool operator (``CPO'') of a commodity pool required to 
register its securities under the Securities Act of 1933 (``public 
pool'') to deliver a two-part document to prospective participants. The 
first part of the document must be the Disclosure Document required by 
Commission Rule 4.21(a),2 written using plain English 
principles and limited to specific disclosure information. The second 
part is a Statement of Additional Information (``SAI''), which may 
include information that is not in the Disclosure Document, provided 
that the information is not misleading or otherwise inconsistent with 
applicable statutes, rules or regulations.3 The CPO of a 
commodity pool that is not required to register its securities under 
the Securities Act of 1933 (``private pool'') 4 must prepare 
a Disclosure Document and may prepare and distribute an SAI, but is not 
required to do so. Should the Rule be approved by the Commission, it 
will be necessary to amend Commission Rules 4.24(v), 4.25(a)(2) and 
4.25(c)(5) to permit the use of the two-part document format. 
Accordingly, these amendments are contingent upon Commission approval 
of NFA Compliance Rule 2-35. The Commission, therefore, is providing 
the opportunity for comment prior to accepting NFA Compliance Rule 2-35 
and implementing the related proposed amendments to Commission rules.
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    \1\ 7 U.S.C. 21(j) (1994).
    \2\ Commission rules referred to herein can be found at 17 CFR 
Ch. I (1997).
    \3\ Theoretically, the CPO of a public pool could prepare a 
Disclosure Document containing all of the required information and 
not need to prepare a separate SAI containing additional 
information. In that case, the CPO would not be required to deliver 
a two-part document, but would instead deliver only a Disclosure 
Document. However, most, if not all, public pools include more than 
the required information, such as trading comparison charts, 
additional text describing the market system, and the limited 
partnership agreement. Therefore, it is not expected that CPOs of 
public pools would prepare a Disclosure Document without also 
preparing an SAI.
    \4\ Pursuant to Commission Rule 4.24(d)(3)(i), a ``private 
pool'' is one that is privately offered pursuant to section 4(2) of 
the Securities Act of 1933, as amended, or pursuant to Regulation D 
thereunder.

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DATES: Comments must be received by April 29, 1998.

ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary of the Commission, Commodity Futures Trading 
Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In 
addition, comments may be sent by facsimile transmission to facsimile 
number (202) 418-5221, or by electronic mail to [email protected]. 
Reference should be made to ``Two-Part Documents for Commodity Pools.''

FOR FURTHER INFORMATION CONTACT: Leanna L. Morris, Staff Attorney, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
1155 21st Street, N.W.,

[[Page 15113]]

Washington, D.C. 20581. Telephone: (202) 418-5434.

SUPPLEMENTARY INFORMATION :

I. Introduction

    By letters dated December 24, 1997 and January 20, 1998, NFA 
submitted to the Commission for its approval, pursuant to Section 17(j) 
of the Act, NFA Compliance Rule 2-35 and its Interpretive Notice 
regarding commodity pool Disclosure Documents. NFA's submission 
indicated that it intends to implement the Rule on or after a date at 
least six months following receipt of notice of Commission approval. 
Should the Rule be approved by the Commission, it will be necessary to 
amend Commission Rules 4.24(v), 4.25(a)(2) and 4.25(c)(5) to permit the 
use of the two-part document format. Commission Rule 4.24(v) would be 
amended to require that supplemental information be disclosed only in 
the second part of the two-part document. Commission Rule 4.25(a)(2) 
would be amended to allow monthly rate of return information of the 
offered pool to be provided in the second part of the two-part 
document. Commission Rule 4.25(c)(5) would be amended to allow such 
required information to be provided in the second part of the two-part 
document.

II. Description of NFA Compliance Rule 2-35

    NFA's Interpretive Notice regarding commodity pool Disclosure 
Documents states that ``[a] Disclosure Document should provide 
essential information about the fundamental characteristics of a pool, 
and it should provide the information in a way that will assist 
investors in making informed decisions about whether to invest in the 
pool.'' Accordingly, the Rule adopts a two-part document format and 
plain English principles, described below, for a more 
``understandable'' document.
    The Rule requires that the CPO of a public pool deliver a two-part 
document. The first part of the document must be the Disclosure 
Document required by Commission Rule 4.21(a), written using plain 
English principles 5 and limited to specific disclosure 
information, as discussed in detail below. The second part is a 
Statement of Additional Information (``SAI''), which may include 
information that is not in the Disclosure Document, provided that the 
information is not misleading or otherwise inconsistent with applicable 
statutes, rules or regulations.
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    \5\ NFA's Interpretive Notice to Rule 2-35 provides guidance on 
what is meant by the use of ``plain English principles.'' Such 
principles include: using active voice; using short sentences and 
paragraphs; breaking up the document into short sections; using 
titles and sub-titles that specifically describe the contents of 
each section; using words that are definite, concrete, and part of 
everyday language; avoiding legal jargon and highly technical terms; 
using glossaries to define technical terms that cannot be avoided; 
avoiding multiple negatives; and using tables and bullet lists, 
where appropriate. (See NFA's Interpretive Notice to Rule 2-35). The 
Rule does not affect the prescribed statements of Commission Rules 
4.24(a) and 4.24(b).
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    The CPO of a private pool must prepare and distribute a Disclosure 
Document and may prepare and distribute an SAI, but is not required to 
do so. If the CPO of a private pool chooses to prepare an SAI, it may 
be bound together with the Disclosure Document, so long as the 
Disclosure Document comes first. If the CPO of a private pool binds the 
SAI separately, the CPO is not required to provide it to a prospective 
participant unless requested by the prospective participant.
    The Rule requires that the Disclosure Document required by 
Commission Rule 4.21(a) be clear and concise, written using plain 
English principles, and be limited to the following: information 
required by Commission Rules 4.24 and 4.25, with some exceptions to the 
required performance disclosures discussed below; any other information 
necessary to understand the fundamental characteristics of the pool or 
to keep the Disclosure Document from being misleading; and any other 
information required by the Securities and Exchange Commission or state 
securities administrators to be included in Part 1 of a two-part 
document.
    With respect to performance disclosures, the Rule states that a CPO 
may provide the monthly rate of return information required under 
Commission Rule 4.25(a)(1)(i)(H) and the performance information 
required under Commission Rule 4.25(c)(5) in the SAI. Although the CPO 
may include the monthly rate of return information in the SAI, the 
Disclosure Document must still include annual rate of return 
information for the pool for the most recent five calendar years and 
year-to-date. It should be noted that, if the CPO does not prepare an 
SAI, the monthly rate of return information required under Commission 
Rule 4.25(a)(1)(i)(H) and the performance information required under 
Commission Rule 4.25(c)(5) must be included in the Disclosure Document.

III. Commission Policy and Rules

    In the Commission's Policy Statement of January 21, 1997, the 
Commission confirmed its support in principle of the use of two-part 
documents. As currently written, however, Commission Rules 4.24(v), 
4.25(a)(2) and 4.25(c)(5) do not permit the use of a two-part document 
format due to a specified order and placement of supplemental 
information and performance disclosures. Accordingly, if the Commission 
approves NFA Compliance Rule 2-35, it is necessary to amend Commission 
Rules 4.24(v), 4.25(a)(2) and 4.25(c)(5) to permit certain disclosures 
to be provided in the second part of a two-part document.
    Commission Rule 4.24(v) provides that, if supplemental information, 
as defined by the regulation, is included in the Disclosure Document, 
the information must be disclosed in a specified order. Certain 
supplemental performance information must be placed after all 
specifically required performance information, while certain other 
supplemental performance information must be included in the Disclosure 
Document following all required and non-required disclosures. 
Supplemental non-performance information relating to a required 
disclosure may be included with the related required disclosure.
    Commission Rule 4.25(a)(2) provides that, in addition to the 
required performance disclosures of Commission Rule 4.25(a)(1)(i)(H), 
the rate of return of the offered pool must be presented on a monthly 
basis for the period specified in Commission Rule 4.25(a)(5).
    Commission Rule 4.25(c)(5) provides that, with respect to commodity 
trading advisors (``CTAs'') and investee pools for which performance is 
not required to be disclosed pursuant to Commission Rules 4.25(c)(3) 
and 4.25(c)(4) (hereinafter ``non-major CTAs and investee 
pools''),6 the CPO must provide a summary description of the 
performance history of each of such advisors and pools.
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    \6\ Commission Rule 4.10(d)(5) defines ``major investee pool'' 
as any investee pool that is allocated or intended to be allocated 
at least ten percent of the net asset value of the pool. Commission 
Rule 4.10(i) defines ``major commodity trading advisor'' as, with 
respect to a pool, any CTA that is allocated or intended to be 
allocated at least ten percent of the pool's funds available for 
commodity interest trading. Accordingly, ``non-major CTAs and 
investee pools'' do not meet the ten percent allocation requirement.
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    Should the Commission approve NFA's Compliance Rule 2-35, the 
Commission believes that certain amendments to Commission Rules 
4.24(v), 4.25(a)(2) and 4.25(c)(5), as discussed below, would permit 
the use of two-part documents by CPOs.

[[Page 15114]]

IV. Discussion

    The Commission believes that the adoption of a two-part document 
format and plain English principles will assist investors in making an 
informed decision prior to investing in a pool by providing clear and 
concise information about the possible investment. Material information 
would be provided in the first part of a two-part document and written 
in a manner that is easily digested by avoiding technical or legal 
terminology and excessive detail. Should the CPO desire to include more 
information about the pool, its program, or other non-misleading 
disclosures, it could be provided in the second part of a two-part 
document. Accordingly, the two-part format will keep the emphasis on 
the material, required information found in the Disclosure Document.
    The amendments to the Commission rules proposed herein would 
support the use of a two-part document by permitting that certain 
required disclosures be provided in the second part of a two-part 
document. Specifically, Commission Rule 4.24(v) would be amended to 
provide that all supplemental information must be contained only in the 
second part of a two-part document.
    Commission Rule 4.25(a)(2) would be amended to provide that the 
monthly rate of return performance of the offered pool may be provided 
in the second part of a two-part document.7
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    \7\ Pursuant to NFA Compliance Rule 2-35, the annual rate of 
return performance information of the offered pool must be provided 
in the first part of a two-part Disclosure Document.
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    Commission Rule 4.25(c)(5) would be amended to provide that the 
required summary description of the performance history of non-major 
CTAs and investee pools, as defined above, may be provided in the 
second part of a two-part document.
    As noted earlier, these amendments would not take effect unless the 
Commission approves NFA Compliance Rule 2-35. Accordingly, the 
Commission seeks comments on NFA Compliance Rule 2-35 and its 
Interpretive Notice regarding commodity pool Disclosure Documents and 
the related proposed Commission rule amendments for the purpose of 
permitting two-part documents for CPOs.
    Copies of the Rule and its Interpretive Notice will be available 
for inspection at the Office of the Secretariat, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., 
Washington, D.C., 20581. Copies also may be obtained through the Office 
of the Secretariat at the above address or by telephoning (202) 418-
5100.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611, 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The rule amendments discussed herein 
will affect registered CPOs. 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.8 The Commission previously has determined that 
registered CPOs are not small entities for the purpose of the 
RFA.9 Therefore, the Chairperson, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
action taken herein will not have a significant economic impact on a 
substantial number of small entities.
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    \8\ 47 FR 18618-18621 (April 30, 1982).
    \9\ 47 FR 18619-18620.
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 10 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.
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    \10\ Pub. L. 104-13 (May 13, 1995).
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    There is no burden associated with the proposed rule amendments to 
Commission Rules 4.24(v), 4.25(a)(2) or 4.25(c)(5). While these 
proposed rule amendments have no burden, the group of rules 3038-0005 
of which these rules are a part has the following burden:
    Average burden hours per response: 124.65.
    Number of respondents: 4,624.
    Frequency of response: On occasion.
    Persons wishing to comment on the information which would be 
required by these proposed rules should contact the Desk Officer, CFTC, 
Office of Management and Budget, Room 10202, NEOB, Washington, D.C. 
20503, (202) 395-7340. Copies of the information collection submission 
to OMB are available from the CFTC Clearance Officer, 1155 21st Street, 
N.W., Washington, D.C. 20581, (202) 418-5160.

List of Subjects in 17 CFR Part 4

    Brokers, commodity futures, commodity pool operators and commodity 
trading advisors.

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

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.

    2. Section 4.24(v) is amended by revising paragraph (v)(3) 
introductory text to read as follows:


Sec. 4.24  General disclosures required.

* * * * *
    (v) * * *
    (3) Must be placed as follows, unless otherwise specified by 
Commission rules, provided that where a two-part disclosure document is 
used pursuant to rules promulgated by a registered futures association 
pursuant to Section 17(j) of the Act, all supplemental information must 
be provided in the second part of the two-part document:
* * * * *
    3. Section 4.25 is amended by revising paragraphs (a)(2)(i) and 
(c)(5) introductory text to read as follows:


Sec. 4.25  Performance disclosures.

    (a) * * *
    (2) * * * (i) The performance of the offered pool must be 
identified as such and separately presented first, provided that where 
the pool operator uses a two-part disclosure document pursuant to the 
rules promulgated by a registered futures association pursuant to 
section 17(j) of the Act, the rate of return of the offered pool on a 
monthly basis may be provided, in the format set forth in 
Sec. 4.25(a)(2)(ii) and Sec. 4.25(a)(2)(iii), in the second part of the 
two-part document;
* * * * *
    (c) * * *
    (5) With respect to commodity trading advisors and investee pools 
for which performance is not required to be disclosed pursuant to 
Sec. 4.25(c)(3) and (4), the pool operator must provide a summary 
description of the performance history of each of such advisors and 
pools including the following information, provided that where the pool 
operator uses a two-part disclosure document pursuant to the rules 
promulgated by a registered futures association pursuant to section 
17(j) of the Act, such summary

[[Page 15115]]

description may be provided in the second part of the two-part 
document:
* * * * *
    Dated: March 23, 1998.

    By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-8147 Filed 3-27-98; 8:45 am]
BILLING CODE 6351-01-P