[Federal Register Volume 63, Number 117 (Thursday, June 18, 1998)]
[Proposed Rules]
[Pages 33297-33304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16075]



[[Page 33297]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Concept Release: Performance Data and Disclosure for Commodity 
Trading Advisors and Commodity Pools

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for Comments.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') wishes to obtain public comment regarding possible 
changes to regulatory requirements which apply to the programs offered 
to the public by commodity trading advisors (``CTAs'') and commodity 
pool operators (``CPOs''). The proposals discussed in this release 
originate from two sources. First, National Futures Association 
(``NFA'') submitted a set of proposals (the ``NFA Proposal'') to the 
Commission for its approval, which concern computational and disclosure 
matters relating to participating in CTA programs on a partially-funded 
basis. Second, the Commission staff's preliminary review of the NFA 
Proposal gave rise to a number of additional related proposals which 
the Commission also wishes to consider. The NFA Proposal is set forth 
separately in a section entitled ``NFA Proposal,'' in the form in which 
it was submitted to the Commission for approval. NFA's and the 
Commission staff's related proposals, collectively, fall within the 
following categories: (1) improving risk profile data for clients 
considering participation in CTA programs on a partially-funded basis, 
(2) providing CTA client account information to FCMs for risk 
management purposes, (3) improving risk profile data on commodity 
pools, (4) providing a theoretically sound basis of computation and 
presentation for rate of return (``ROR'') and related risk profile 
data, (5) improving the presentation of historical performance and risk 
profile data, and (6) providing periodic statements of program activity 
and results to CTA clients.
    All of the proposals, including the NFA Proposal and the additional 
proposals originated by the Commission staff, are discussed in detail 
in Part IV of this release, entitled ``Request for Comment.'' At the 
end of each section, questions are posed to help focus public comment 
on the issues raised. Comment would also be welcome on any related 
issue and need not be limited to the questions posed in this release.
    After considering the comments received, the Commission may approve 
or disapprove the NFA Proposal without further public notice, may 
request NFA to amend its proposal, or may propose for public comment 
changes to various Commission rules, advisories or interpretations 
pertaining to performance reporting and disclosure.

DATE: Comments must be received on or before August 17, 1998.

ADDRESS: Interested parties should submit their comments to Jean A. 
Webb, Secretary of the Commission, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, 
D.C. 20581. Reference should be made to ``Performance Data and 
Disclosure for Commodity Trading Advisors and Commodity Pools.'' In 
addition, comments may be sent by facsimile transmission to (202) 418-
5221 or by electronic mail to [email protected].

FOR FURTHER INFORMATION CONTACT:
Paul H. Bjarnason, Jr., Chief Accountant, (202) 418-5459, electronic 
mail: ``[email protected];'' Robert B. Wasserman, Special Counsel, (202) 
418-5092, electronic mail: ``[email protected];'' Kevin P. Walek, 
Branch Chief, (202) 418-5463, electronic mail: ``[email protected];'' or 
Eileen R. Chotiner, Futures Trading Specialist, (202) 418-5467, 
electronic mail: ``[email protected],'' Division of Trading and 
Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., 
Washington, D.C. 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    Past performance information presented to clients and prospective 
clients is a primary marketing tool for CTA programs and commodity 
pools. This type of information appears in disclosure documents, 
advertisements, promotional materials, and in compendia prepared by 
third-party services. Performance information is also reported either 
directly to clients to communicate the results of the CTA's trading on 
behalf of their accounts or in periodic report to investors in public 
and private commodity pools.
    The Commission's aim is that information provided to clients be 
accurate, complete, and understandable. The Commission believes that 
performance data can be useful to clients as a way of making risk and 
return comparisons among investment alternatives. Performance 
information can assist clients in distinguishing one CTA from another 
in terms of historical willingness to undertake risk, fee load, 
volatility and longer term results or facilitating comparisons with 
other investment opportunities. However, the Commission recognizes that 
requiring more data does not always result in better information for 
clients. It does not wish to overload clients with excessive amounts of 
data, nor does it wish to burden CTAs and CPOs with excessive 
requirements. As noted above, the Commission and NFA have identified 
ways to improve existing regulatory requirements that apply to CTAs and 
CPOs. This release discusses a variety of issues and requests public 
comment thereon.

II. Discussion

A. Rate-of-Return

    The Commission's current requirements for the presentation of ROR 
data are based upon the ``return on investment'' (``ROI'') concept used 
by economists, financial analysts and other professionals throughout 
the business world to measure the results of a variety of investment 
activities, from real estate development to internal capital budgeting 
to securities or commodities trading. ROI is used to compare various 
types of investments, as well as different investment managers. 
However, in all areas outside of commodities trading, the divisor used 
in the calculation of ROI represents an actual ``investment'' of 
tangible assets of the client--that is, the divisors used are amounts 
of actual cash funding that are owned or borrowed by the investor.
    ROR is calculated, in accordance with Commission regulations, by 
dividing the net performance \1\ by the beginning net asset value 
(``BNAV'') as of the beginning of the period.\2\ Under current 
Commission advisories,\3\ the BNAV used to calculate the ROR must be 
based on a set of ``fully-funded'' accounts--accounts for which the 
``nominal account size'' \4\ at the inception of the trading program is 
equal to the ``actual

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funds'' \5\ subject to the CTA's access and control.\6\
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    \1\ Commission Rules 4.25(a)(7)(i)(D) and 4.35(a)(6)(i)(D) 
specify that net performance represents the change in the net asset 
value net of additions, withdrawals, redemptions, fees and expenses.
    \2\ Commission Rules 4.25(a)(7)(i)(A) and 4.35(a)(6)(i)(A). 
Commission Rule 4.10(b) defines ``net asset value'' as ``total 
assets minus total liabilities, determined in accord with generally 
accepted accounting principles, with each position in a commodity 
interest accounted for at fair market value.''
    \3\ CFTC Advisory 87-2 [1986-87 Transfer Binder] Comm. Fut. L. 
Rep. (CCH) para. 23,624 (June 2, 1987); CFTC Advisory 93-13, 58 FR 
8226 (February 12, 1993).
    \4\ ``Nominal account size'' is discussed in the next section.
    \5\ CFTC Advisory 93-13 defines actual funds as `'the amount of 
margin-qualifying assets on deposit in a commodity interest account, 
generally cash and marketable securities.''
    \6\ A CPO may only report the performance of a pool on the basis 
of actual funds. See Advisory 93-13, 58 FR at 8229. However, the 
issues discussed herein are applicable to CPOs with respect to 
disclosure of CTA performance in pool disclosure documents.
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    ``Actual funds'' held pursuant to the CTA's trading program are 
funds deposited with the client's FCM either (1) in an account for 
which the CTA is granted discretionary trading authority or (2) in 
another account, subject to a binding agreement permitting the FCM to 
transfer funds to the first account at the direction of the CTA and 
committed to the CTA's trading program, as demonstrated by factors 
specified in Advisory 87-2.\7\
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    \7\ These factors include the following: (1) the client must 
have the same ownership interest in each account; (2) the funds must 
be available for transfer to the client's trading account; (3) the 
client must commit the funds to the CTA's program under a written 
agreement, signed by the FCM, which permits the FCM to transfer up 
to a specific amount to the client's regulated commodity account at 
the direction of the CTA, and (4) the CTA must be able to 
demonstrate that the funds committed to his control were actually 
deposited in accounts to which he had access.
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    Commission Rules 4.25 and 4.35 require that the performance of 
accounts directed by a CTA be disclosed for the past five years and the 
current year to date. In order to permit performance data to be 
disclosed without excessive detail and repetition, the rules permit the 
performance of all reasonably comparable accounts in each of a CTA's 
programs to be shown on a composite basis.\8\ When performance 
disclosure requirements were first adopted by the Commission over 20 
years ago, the data required under the rules provided only a simple 
historical perspective on the profits earned or losses incurred by the 
participants in a CTA's or CPO's programs. However, in recent years the 
Commission has amplified the requirements to include data which 
provides a clearer focus on volatility, as opposed to simply displaying 
profits and losses. The performance capsules are now required to 
include, among other things, monthly rates of return for the most 
recent five calendar years and the current year-to-date, the worst 
monthly percentage drawdown \9\ during that time period, the worst 
peak-to-valley percentage drawdown \10\ for the time period, and the 
amount of funds under management.\11\
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    \8\ Commission Rules 4.25(a)(4) and 4.35(a)(3).
    \9\ Commission Rule 4.10(k) defines ``drawdown'' as ``losses 
experienced by a pool or account over a specified period.''
    \10\ Worst peak-to-valley drawdown is defined in Commission Rule 
4.10(l) as ``the greatest cumulative percentage decline in month-end 
net asset value due to losses sustained by a pool, account or 
trading program during any period in which the initial month-end net 
asset value is not equaled or exceeded by a subsequent month-end net 
asset value.''
    \11\ The table must also include any additional notes needed to 
avoid misleading the reader about the CTA's program or the data 
presented. Commission Rules 4.24(w) and 4.34(o).
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B. Nominal Account Size

    The ``nominal account size'' is an amount the CTA and the customer 
have agreed upon, usually in a written contract.\12\ It determines the 
level of trading for the client relative to other accounts in the CTA's 
program, regardless of the level of actual funds.\13\ This means that 
customers of a given CTA who have the same nominal account size will 
have the same trades placed for their accounts. Generally, it also 
means that a customer who has agreed to a nominal account size of twice 
that of another customer of the same CTA will have twice the number of 
positions.\14\ The use of nominal account sizes simplifies management 
of the trading for a multiplicity of accounts, especially where the 
desired level of trading by the clients is not represented by the 
actual funding levels, as explained below.
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    \12\ A written contract would be required under the NFA Proposal 
and is required under Advisory 93-13.
    \13\ Advisory 93-13.
    \14\ In practice, there are exceptions to this rule. For 
example, in some programs newly-opened accounts will take up to a 
few months to be fully phased into a program. Therefore, an account 
being phased in will not always have the full gamut of positions in 
it, as compared to the other accounts. Also, in some programs the 
smaller accounts may not be large enough to carry the full range of 
trades indicated by a CTA's program. In such a case, the CTA may 
only include the smaller accounts together with the larger accounts 
in the composite and in calculating ROR if it can be demonstrated 
that the RORs are materially the same. Advisory 93-13, 58 FR at 
8228.
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    It is important to point out what nominal account size does not 
represent. It does not represent a particular number of positions, 
since there are times when a CTA may believe it prudent to stay out of 
the markets entirely or, alternatively, to be more aggressive than 
usual. It is not a function of margin requirements, nor is there any 
absolute or constant relationship to margin requirements arising from 
the CTA's trading. While in a retail context, the nominal account size 
is sometimes described as an amount sufficient to make it unlikely that 
any further cash deposits will be necessary over the course of the 
client's participation in the CTA's program, the client may not look to 
the nominal account size as a maximum possible loss, since unexpected 
losses could exceed the nominal account size. Therefore, the nominal 
account size does not represent the limit of the customer's liability, 
nor may any CTA represent that it is an indication of the maximum 
likely or possible loss that may be incurred.
    Nominal account sizes are not comparable from one CTA to the next. 
In discussions with representatives of the industry concerning this 
issue over the past ten years, it has become clear to the Commission 
staff that there is no method in common use in the industry relating 
the nominal account sizes to the number of positions traded. Indeed, 
NFA has reported that setting such levels ``is inherently a subjective 
process'' and ``a matter of the CTA's judgement.'' \15\
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    \15\ October 2, 1997 letter from Daniel J. Roth, General 
Counsel, NFA, to Paul H. Bjarnason, Jr., Chief Accountant, Division 
of Trading and Markets, CFTC.
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    Nominal account size is sometimes referred to as a ``legally 
binding'' amount. While the amount specified does establish some 
legally binding obligations between the customer and the CTA, these 
only extend to (1) the basis of the management fees to be paid by the 
customer and (2) the trading level to be employed by the CTA for this 
account relative to other accounts managed under the same program. the 
nominal account size does not represent an obligation to furnish an 
amount of actual funds. The account arrangement between the CTA and its 
client may be terminated by the client at any time regardless of the 
amounts deposited in any account over which the CTA has or had trading 
authority. Of course, the client must settle any debits left in the 
account at the FCM as a result of trades ordered by the CTA before 
termination. As indicated above, these debits could exceed the nominal 
account size.
    The fact that nominal account size does not represent an actual 
investment--or even a comitment--of tangible funds and the lack of a 
commonly accepted method for determining the nominal account size have 
been major factors in the Commission's reluctance to permit the use of 
the nominal account size in determining ROR, except as permitted by 
Advisory 93-13.\16\
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    \16\ Advisory 93-13 describes the use of a fully-funded subset 
to compute ROR. The fully-funded subset is a device to link the 
nominal account sizes assigned by the CTA to its clients to tangible 
funding.

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C. Evolution of Present Commission Requirements

    As mentioned above, the Commission's requirements have evolved over 
time in response to identified problems and issues. One of the issues 
which has been at the forefront of consideration is the so-called 
`'notional funds'' issue. This issue pertains to the determination of 
the BNAV, which is the amount to be used as the divisor in the 
computation of ROR. The Commission first addressed this issue in 1987. 
Consistent with current Commission rules on the matter, Advisory 87-2 
affirmed that only actual funds on deposit could be used in determining 
BNAV. Its purpose was to permit inclusion in BNAV of funds which are 
not carried at the FCM, but which can be reached by the FCM to satisfy 
a margin call. Advisory 87-2 provided that actual funds for the ROR 
calculation could include funds carried at the FCM or located at other 
depositories to which the FCM had access. This Advisory was needed 
because a literal application of the Commission's rules resulted in the 
exclusion of some funding for accounts which logically should have been 
included. For the successful trader, the undue minimization of BNAV had 
the effect of resulting in unrealistically magnified RORs. The converse 
was true for losses. However, issuing Advisory 87-2 did not solve all 
of the reporting issues.
    Some clients deposit to the account managed by a CTA actual funds 
which are only a fractional percentage of the nominal account size. 
This practice is referred to as ``notional funding'' or ``partial 
funding.'' As indicated by NFA, the widespread use of partially-funded 
accounts raises the issue of how to report the performance of these 
accounts in a manner which is not misleading and without creating an 
undue number of performance tables. Prior to 1993, the Commission's 
reporting scheme was entirely based on ``actual funds.''
    Advisory 93-13's main feature was the ``fully-funded subset'' 
method of ROR reporting. Under this method, the RORs presented in the 
performance table were not based upon all the accounts in a CTA's 
program. The RORs were based only upon the fully-funded accounts--
hence, the name ``fully-funded subset'' method. The Advisory provided 
for a matrix to permit clients to convert the fully-funded subset RORs 
to RORs for various partial funding levels. To qualify for the method, 
the fully-funded accounts must, in the aggregate, represent at least 
ten percent of the total nominal amount of funds traded by the CTA in 
the trading program. The Advisory also requires that the CTA make 
certain additional calculations to ensure that the subset is 
representative of the CTA's program.\17\ As long as the two tests are 
met, this method produces approximately the same ROR as does a method 
(such as the NFA Proposal) that bases BNAV on the nominal account size.
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    \17\ The latter requirement is not unique to partially-funded 
accounts, since all accounts include in a composite must be similar 
to one another. The calculation simply established or proved that 
the accounts of the fully-funded subset performed similarly to all 
of the other accounts.
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    The Commission has also sought to highlight the risk of CTA trading 
programs and commodity pools. In August 1995, the Commission enhanced 
requirements for the disclosure of the risk of volatility in all CTA 
and CPO programs by adding two new disclosure requirements--the largest 
percentage monthly drawdown and peak-to-valley drawdown for each 
program or pool offered by a CTA or CPO. The Commission felt that this 
new dimension to performance data provided a valuable heightened focus 
upon the risk of commodities trading, namely the possibility of large 
drawdowns of equity--either on a monthly or continuous basis.\18\
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    \18\ While there is generally agreement that past performance 
data is not predictive of future performance, academic studies have 
shown that it does some predictive value as to volatility. See Scott 
H. Irwin, et al., The Predictability of Managed Futures Returns, J. 
Derivatives 20, 23 (Winter 1994). This is why the Commission has 
sought to emphasize the drawndown aspects of ROR, as opposed to the 
profitability aspects.
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    Since August 1995, the Commission has received requests to address 
CTAs that have difficulty achieving the fully-funded subset necessary 
to qualify to use Advisory 93-13. The interest in this issue suggests 
that partially-funded account programs are becoming more prevalent. 
Because of the possibility that more clients are participating on a 
partially-funded basis, the Commission has become concerned that full-
funded basis data may be irrelevant or misleading for a growing segment 
of clients. Since partially-funded accounts are more highly leveraged 
than fully-funded accounts, they will incur magnified gains and losses 
compared to fully-funded accounts. For example, a customer who is 
funding its account at 25% of the nominal account size will realize 
gains--and losses--at four times the rate experienced by a fully-funded 
client. A loss of 30% on a fully-funded basis will result in a loss of 
120% of the investment of a customer which funds its account at 25% of 
the nominal level, wiping out the initial investment and leaving a 
deficit to be repaid by the customer.
    The Commission has also noted that commodity pools are accessing 
CTA programs on a partially-funded basis. Therefore, commodity pools 
raise similar concerns because their disclosure documents contain 
information on the pool's CTAs only on a fully-funded basis.

III. NFA Proposal

    On February 26, 1998, NFA submitted for Commission approval a 
change to its Compliance Rule 2-29(b)(5) that would require RORs for 
CTAs to be based on the nominal account size as described in proposed 
NFA Compliance Rule 2-34, rather than upon the actual funds which are 
associated with the CTA's program, as presently required by Commission 
regulations. Proposed NFA Compliance Rule 2-34 and a related 
Interpretive Notice, both of which were previously submitted for 
Commission approval, specify certain requirements regarding account 
documentation and disclosure for partially-funded accounts, as well as 
certain disclosure requirements for COPs.\19\ Together, the amendments 
to NFA Compliance Rule 2-29(b)(5), proposed NFA Compliance Rule 2-34, 
and the proposed Interpretive Notice constitute the NFA Proposal.\20\
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    \19\ The full text of NFA Compliance Rules 2-29(b)(5) and 2-34 
and the Interpretive Notice are attached to this release as Appendix 
I.
    \20\ The Commission notes that approval of the NFA Proposal by 
the Commission would, in order to avoid conflicts between NFA and 
Commission rules, require the Commission to rescind its Advisories 
87-2 and 93-13, which are discussed elsewhere in this release.
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    The NFA Proposal requires a CTA who directs a client's account to 
enter into a written agreement with the client that includes:
    (1) The account size which the CTA will use as the basis for its 
trading decisions, i.e., the nominal account size;
    (2) The name or description of the trading program in which the 
client is participating;
    (3) Whether the client will deposit, maintain or make accessible 
the FCM an amount equal to or less than the nominal account size; and
    (4) How additions, withdrawals, profit and losses will affect the 
nominal account size and the computation of fees.
    The CTA would be required to provide a copy of this agreement to 
the FCM carrying the client's account. The CTA would be required to 
disclose, in writing, the factors considered by the CTA in determining 
any minimum account size of the trading program in

[[Page 33300]]

which the client is participating. In addition, unless a client is a 
qualified eligible client as defined in Commission Rule 4.7,\21\ the 
CTA would be required to disclose the following information in writing:
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    \21\ Commission Rule 4.7 provides an exemption from certain Part 
4 requirements with respect to the operators of commodity pools 
whose participants are limited to qualified eligible participants 
(``QEPs'') and with respect to commodity trading advisors whose 
clients are qualified eligible clients (``QECs''), as those term are 
defined by the Rule.
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    (1) An estimated range of the amount of customer equity generally 
devoted to margin requirements or option premiums, expressed as a 
percentage of the nominal account size, and an explanation of the 
effect of partially funding an account at that percentage;
    (2) A description of how management fees will be computed, 
expressed as a percentage of the nominal account size, and an 
explanation of the effect of partially funding an account at that 
percentage;
    (3) An estimated range of the commissions generally charged to an 
account, expressed as a percentage of the nominal account size, and an 
explanation of the effect of partially funding an account at that 
percentage; and
    (4) A statement that the greater the disparity between the nominal 
account size and the amount deposited, maintained with or made 
available to the FCM, the greater the likelihood, and possible size, of 
margin calls.
    The NFA Proposal prohibits the use of ROR figures in promotional 
material unless such figures are calculated in a manner consistent with 
that required under CFTC regulations and are based on the nominal 
account size as described in NFA Compliance Rule 2-34.\22\
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    \22\ The NFA Proposal would appear to prohibit the presentation 
of ROR figures based on any of the ``actual funds'' methods required 
in Commission regulations or permitted in Advisories 87-2 and 93-13. 
This language would also appear to prohibit the presentation of 
worst month and worst peak-to-valley figures--which are rate-of-
return figures--on a partially-funded basis to prospective 
investors. As discussed below, the Commission is requesting comment 
on a proposal that CTAs who permit the use of partial funding levels 
present such ``worst-case'' information to potential investors on a 
partially-funded, ``as-if'' basis, in order to highlight the 
increased risk imposed by the leveraging that partial funding 
represents. The NFA Proposal would thus proscribe the disclosure of 
risks which the Commission proposal would require.
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    The NFA Proposal also imposes disclosure requirements on CPOs who 
allocate assets among the pool's CTAs in such a way that the total 
allocations to its CTAs are greater than the total assets of the pool. 
In particular, the CPO must disclose the following information in 
writing to all participants except QEPs, as defined in Commission Rule 
4.7:
    (1) A statement of the total amount allocated to CTAs as a 
percentage of the pool's net assets;
    (2) A description of how management fees charged by the CPO and the 
CTAs will be computed, including a statement of the total amount of 
management fees charged to the pool as a percentage of the pool's net 
assets;
    (3) An estimated range of the amount of commissions and transaction 
fees that will be charged to the pool in the next twelve months and an 
estimate of these fees as a percentage of the pool's net assets; and
    (4) A statement that allocating in excess of the pool's net assets 
among CTAs has the effect of proportionately magnifying the profits and 
losses that may be incurred by the pool.
    NFA presents several reasons for its Proposal. NFA states that 
basing BNAV solely on the amount deposited by the client with the FCM 
can distort the past performance results reported to clients. The 
accounts of two clients who have permitted the CTA to base its trade 
orders on the same account size during the same time period, using the 
same program, can show very different RORs based solely on their cash 
management strategies. According to NFA, this factor has nothing to do 
with the CTA's trading decisions. NFA believes that a CTA's performance 
history should reflect the results of the CTA's trading decisions and 
should not be affected by the client's cash management strategies. NFA 
further believes that computing ROR for partially-funded accounts based 
on actual funds on deposit overstates both positive and negative 
returns in those accounts. In addition, NFA believes that the fully-
funded subset is so restrictive that more and more CTAs have been 
unable to use it.
    NFA also recognizes that there are valid concerns regarding the 
documentation, disclosure, and sales practice problems that notional 
funding can create. According to NFA, however, these concerns are not 
computational issues to be addressed through BNAV but are separate 
issues that should be addressed independently of the ROR calculation. 
Therefore, NFA has proposed using the nominal account size for 
calculating BNAV and imposing the separate requirements, which are set 
forth above, to address these compliance concerns.

IV. Request for Comment

    The Commission shares NFA's concern for accurate disclosure. In 
this connection, the proposals, collectively, are designed to ease the 
calculation of ROR for CTAs and enhance the amount and quality of data 
available to prospective clients of CTAs and investors in commodity 
pools. In considering the issues involved, the Commission wishes to 
obtain as much information as possible and to consider all relevant 
options. The sections below contain discussion and pose questions 
regarding several broad topic areas. The Commission does not wish to 
limit comment to the issues and questions set forth below, and comment 
is welcome on any aspect of CTA or commodity pool ROR reporting, 
accounting or disclosure.

A. Disclosure of Risk Profile Data on CTA Programs for Clients 
Considering Participation on a Partially-Funded Basis

    The Commission staff suggests consideration of expanded disclosure 
of historical percentage drawdown data, as explained below.
    Discussion: Presently, drawdown data is required to be presented 
for CTA programs only on a fully-funded basis. The Commission staff has 
become concerned that historical drawdown data presented only on a 
fully-funded basis may mislead investors who are considering a 
partially-funded participation. It is important to convey to investors, 
as clearly as possible, that partially-funded participation in a CTA 
program will result in proportionately greater volatility--and 
proportionately greater drawdowns--compared to a fully-funded 
participation. Accordingly, the Commission wishes to explore the costs 
and benefits of requiring drawdown percentage data to be presented at 
two or three partial-funding levels that are representative of those 
offered by the CTA (e.g., at the 25% 50%, and 75% levels) in addition 
to the fully-funded level. Presenting actual drawdown data on a 
partially-funded basis would illustrate the volatility of partial 
funding with a clarity that could not be achieved in a textual 
discussion. A CTA would not be required to present information for 
partial funding levels which are below the minimum offered by that CTA 
(e.g., a CTA which does not accept accounts which are funded at less 
than 50% partial funding would not be required to present information 
at the 25% level).
    Questions:
    (1) What would be the costs and benefits of presenting drawdown 
figures geared to two or three partial funding levels?
    (2) What would be the most effective format for the presentation?

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B. Presentation of Data Concerning Estimated Margin Ratios

    NFA proposes to require CTAs to disclose, to any client which is 
not a QEC under Commission Rule 4.7 and which partially funds a 
participation in a CTA's program:

    An estimated range of the amount of customer equity generally 
devoted to margin requirements or option premiums, expressed as a 
percentage of the nominal account size of the accounts traded by the 
CTA, and an explanation of the effect of partially funding an 
account at that percentage.

Proposed Rule 2-34(b)(1) (emphasis added).
    Discussion: This ratio, which is to be presented to partially-
funded customers, is nonetheless a measure of the CTA's program on a 
fully-funded basis, since it is based upon the nominal account size. It 
appears that use of the ratio is intended to provide a measure or 
indicator of the risk of the CTA's program. The addition textual 
requirement is designed to help clients understand how partial funding 
increases such risk.
    The Commission believes any new required disclosure should be 
assessed in light of its clarity, reliability in achieving its intended 
purpose, and its potential for being misunderstood by investors. If 
this proposed disclosure were required, it is possible that prospective 
clients will compare CTAs on the basis of this ratio. This possibility 
leads to the following issues for consideration:
     In determining whether presentation of the margin ratio 
should be required, it is important to consider whether aggregate 
margin requirements are a reliable indicator of risk. It is unclear 
that any two portfolios with the same aggregate margin requirement are 
equal as to their level of risk, regardless of the mix of commodities 
represented or the mix of futures, long and short options comprising 
the portfolio. The Commission knows of no academic studies on the 
matter, and the staff's experience reviewing margin requirements 
indicates that there can be significant differences between margin 
requirements relative to the level of risk on different contracts. For 
example, the margin requirements on stock index futures are generally 
more conservative (i.e., higher relative to volatility) than the margin 
requirements on energy products.
     The NFA Proposal's provision that the ``estimated'' range 
be disclosed allows the CTA to exceed the upper limit of the range 
presented. The Commission staff is concerned that disclosure of such a 
range might create a misleading expectation of limited losses.
     It is unclear that a textual explanation of the risk of 
partially funding a CTA program participation, added to the currently 
required disclosures, is likely to attract the attention of the 
potential investor.
    Questions:
    (1) Will disclosure of information concerning the margin ratio, as 
discussed above, be useful to potential investors? Please give details 
of how potential investors will use this information.
    (2) What evidence, in the form of studies or otherwise, supports 
the proposition that margin requirements are a reliable indicator of 
the level of risk?
    (3) Does a requirement that CTAs disclose an ``estimated'' range of 
the amount of customer equity ``generally'' devoted to margin involve a 
standard so inherently discretionary that it creates a danger of 
presenting information that is misleading to potential investors?
    (4) Would a requirement that CTAs commit to an absolute maximum 
percentage of customer equity devoted to margin, beyond which no 
margin-increasing changes will be made, provide a more useful 
disclosure structure? What would be the advantages and disadvantages of 
such a structure? How should such a structure be implemented?
    (5) Would any other alternative structures present more useful 
information? What would be the advantages and disadvantages of such 
structures?

C. Providing the CTA/Client Agreement to the FCM

    The NFA Proposal calls for the CTA to provide a copy of the CTA/
client agreement to the FCM carrying the customer's account.
    Discussion: NFA has indicated that it believes an FCM would find 
the nominal account size useful as a general indicator of the amount 
and size of trading intended to be undertaken in the account on behalf 
of the customer. The FCM could use this information in making a 
determination as to whether to accept this client and, if so, under 
what credit terms.
    Questions:
    (1) Do FCMs consider the client's nominal account size useful 
information? Do they currently obtain such information? Would the 
imposition of a regulatory requirement aid them in doing so?
    (2) Would a different method of providing the FCM with information 
concerning nominal account sizes be more efficient? What method (if 
any) of communication should be required? What should the timing and 
the form of this communication be?

D. Presentation of Risk Profile Data on Commodity Pools

    The NFA Proposal imposes various disclosure requirements on CPOs 
that allocate assets among a pool's CTAs in such a way that the total 
allocations to its CTAs are greater than the total assets of the pool. 
One of the requirements is for the CPO to provide a statement of the 
total amount of nominal account sizes allocated to a pool's CTAs as a 
percentage of the pool's net assets. The Commission desires to obtain 
comment on an alternative method of presenting a risk profile for a 
commodity pool which was developed by its staff.
    Discussion: The most readily apparent use for NFA's proposed ratio 
would be for prospective clients to compare one commodity pool to 
another. On initial consideration, it might seem that the greater the 
amount of the nominal account size compared to pool net assets, the 
greater the risk of a pool would be. But in this connection there are 
some issues that should be explored.
    Although nominal account sizes may be useful in the context of an 
individual CTA, it does not follow that the ratio would be a consistent 
measure for even a single pool over time. As noted above, nominal 
account sizes are not comparable across CTAs. Therefore, a ratio based 
on the aggregate of nominal account sizes would not lend itself to 
making accurate and reliable comparisons between pools. Moreover, the 
ratio of one CTA's nominal account size to the others may change over 
time. The Commission is interested in reviewing evidence which 
contradicts or supports this preliminary conclusion.
    The Commission wishes to explore an alternative approach to 
enhancing the presentation of risk profile data for pools. This 
approach is founded on the precept that the volatility of a pool is a 
function of the volatilities of the investment vehicles (i.e., CTA 
programs or investee funds) in which it has invested. Therefore, the 
Commission wishes to consider requiring the presentation of data 
disclosing, on a pro forma basis, the effect of the worst historical 
drawdown for each of the vehicles the pool invested in over the course 
of the year. Such a presentation requirement might be implemented as 
follows:

    (1) For each investment vehicle selected, present the worst 
monthly and worst peak-to-valley drawdown percentages on a leveraged 
basis for:

[[Page 33302]]

    (a) the investment vehicle itself, at the pool's leveraged basis 
(e.g., if the fully-funded worst drawdown for CTA ``X'' was 10 
percent and the pool funds its participation in the program of CTA 
``X'' on a 50 percent basis, the worst drawdown would be presented 
as 20 percent); and
    (b) the investment vehicle's historical pro-forma impact on the 
pool, as though the highest percentage of pool assets over the past 
year were invested in the investment vehicle for the full historical 
period, at the leverage level of the pool (e.g., if CTA ``X'' had 
been allocated 25 percent of the pool's net assets, the 20 percent 
worst monthly drawdown would be presented as a 5 percent impact (20% 
* 25%) upon the pool's net assets).
    (2) For major investee funds, data on the investee fund's major 
investments would be required on a ``look-through'' basis, if they 
qualified as material under the selection criteria discussed below.
    (3) Finally, for each investment vehicle, identify the number of 
days during the year that the fund was invested in the vehicle and 
whether it is currently so invested.
    An example of such a presentation follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Investment (leveraged)                        Impact on fund                    
                                                                     ----------------------------    Highest   ----------------------------   Number of 
                             Investment                                              Worst peak-   percentage                  Worst peak-    days held 
                                                                      Worst  month    to-valley      of fund    Worst  month    to-valley               
--------------------------------------------------------------------------------------------------------------------------------------------------------
CTA X ..............................................................        (20%)          (Y%)           25%          (5%)      (Y *25%)           365 
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The purpose of the selection criteria is to select investment 
vehicles for which detailed risk profile data must be provided, i.e., 
those which expose the pool to the risk of material loss. It is also 
important to limit the number of vehicles for which information is 
presented, to avoid overwhelming the investor with an excessive volume 
of data. Finally, the criteria should consider the pool's investments 
over the course of a year, rather than on a particular date, to avoid 
strategic behavior aimed at ``cleaning up'' the portfolio for a single 
measurement day. One example of a selection method would be the 
following:

    Identify each investment vehicle in which, at any time during 
the course of the year, the actual funds invested by the pool 
equaled or exceeded five percent of the pool net assets. For each 
such investment vehicle, calculate an index which is the product of 
(A) the greatest amount invested (by notional value) times (B) the 
vehicle's worst monthly drawdown percentage, times (C) the number of 
days during the year that the pool was invested in this vehicle. 
Present the data described above for the investment vehicles with 
the top N index values.

    Questions:
    (1) What evidence supports or contradicts the proposition that the 
ratio between aggregate notional value and total pool net asset value 
is a useful measure of the risk level of a commodity pool?
    (2) Would presentation of leverage worst drawdown data, as 
described above, for a selection of a commodity pool's investment 
vehicles provide useful information to potential investors? What would 
be the disadvantages of providing such information? What is the most 
effective means of presenting such information? Should the results of 
the calculations described above be presented, or should different 
information be presented?
    (3) Are the selection criteria described above useful? Would a 
different selection method be more appropriate? For how many investment 
vehicles should the data be presented?
    (4) When should this table be presented: in disclosure documents? 
Sales literature? Pool annual reports?

E. Theoretical Soundness of the Basis of Computation and Presentation 
for ROR and Related Risk-Profile Data

    The NFA Proposal does not require CTAs to maintain any fully-funded 
accounts to validate their nominal account sizes. By contrast, current 
practice, as described in Advisory 93-13, requires a fully-funded 
subset comprised of fully-funded accounts accounting for ten percent of 
the aggregate nominal account sizes, to validate the nominal account 
sizes. The Commission wishes to explore the implications of this 
change.
    Discussion: The Commission has always sought to ensure that the 
methodologies it has required or permitted to be used in the various 
reporting schemes under its jurisdiction are based upon sound economic 
and accounting principles. In this connection, wherever possible, the 
Commission adheres to Generally Accepted Accounting Principles 
(``GAAP'') in CTA, commodity pool, and FCM financial reporting. The 
fully-funded subset method permitted in Advisory 93-13 is consistent 
with the Commission's historical approach to standards by requiring 
that the nominal account sizes set by the CTA be validated by the 
existence of a subset of accounts that are fully-funded with actual 
assets, pursuant to GAAP. This explicit linkage to actual funds, in 
effect, permitted to RORs to have some basis in traditional financial 
and accounting methods. By contrast, the NFA Proposal, which permits 
unrestricted use of the subjectively established nominal account size, 
lacks such an anchor or reference point.
    Question:
    (1) Should the fully-funded subset requirement be retained to 
validate the nominal account sizes used by the CTA, or should it be 
dropped entirely?
    (2) Does the fact that many CTAs may have difficulty in obtaining a 
fully-funded subset demonstrate a flaw in the regulatory methodology, 
or does it demonstrate an unrealistic setting of nominal account sizes? 
In other words, if the greatest actual funding level for any of a given 
CTA's accounts was 50% (e.g., all $1 million nominal accounts are 
funded at $500,000 or less), is it not more accurate to express the 
nominal account sizes at 50% of their initial level?
    (3) If the fully-funded subset should be dropped, what would be the 
theoretical basis for the method of computing ROR, in terms of economic 
and financial accounting theory?
    (4) How do nominal account sizes used by CTAs generally fit into 
the broader world of financial services, so that a potential investor 
might fairly compare investments in commodity pools with other 
potential investments?

F. Changes in the Presentation of Historical Data

    Current regulations require disclosure of approximately five years 
of historical ROR data, presented on a monthly basis, and presentation 
on a capsule basis of the single worst monthly drawdown and worst peak-
to-valley drawdown during the same period.\23\ The Commission wishes to 
consider the costs and benefits of requiring a longer time-frame for 
disclosing performance data for CTAs and commodity pools while reducing 
the period for which disclosure of monthly data is necessary in the 
basic disclosure documents.\24\

[[Page 33303]]

The focus of the disclosure document would be to provide key profile 
information. The Commission staff has also suggested that the 
Commission consider expanding the number of worst drawdown months 
presented, from one to three or possibly six. The overall effect of 
this change would be to reduce the number of data items presented in 
the disclosure document, while increasing the scope of the information 
made available to the investor.
---------------------------------------------------------------------------

    \23\ Commission Rule 4.25(a)(1)(F), (G); Rule 4.25(a)(2)(ii). 
The time required is ``the most recent five calendar years and year-
to-date.'' Commission Rule 4.25(a)(5).
    \24\ The Commission anticipates that monthly data would be made 
available by some means to potential investors who wish it, such as 
by mail on request or by inclusion on the CTA's website.
---------------------------------------------------------------------------

    Discussion: In many markets, extreme market events do not always 
occur within a five-year time-frame, which is the limit of the present 
requirement. Often the time interval between market events is ten years 
or more. Thus, limiting the historical presentation requirements to a 
five-year period, as the current regulations do, may permit some CTAs 
and commodity pools to omit their greatest drawdowns from their 
historical risk profiles.\25\ Requiring data for a longer period will 
present a fuller picture to prospective clients.\26\ Such disclosure is 
especially important where notional funding is used, given the 
magniification of drawdowns inherent in partial funding.
---------------------------------------------------------------------------

    \25\ Commission Advisory 96-1 allows, but does not require, CTAs 
to present the performance of offered programs, and CPOs to present 
the performance of offered pools, since inception provided that such 
performance capsules include, among other things, worst monthly and 
peak-to-valley drawdown percentages for both the required five-year 
and year-to-date period and since inception of trading for the 
program or pool. Comm. Fut. L. Rep. (CCH) para. 26,639 (March 6, 
1996).
    \26\ For example, recent revisions to the Securities and 
Exchange Commission's (``SEC'') Form N-1A, which is used by mutual 
funds to register their securities and offer their shares, require 
that a fund's risk/return summary include a bar chart showing the 
fund's annual returns for each of the last 10 calendar years and a 
table comparing the fund's average annual returns for the last 1-, 
5-, and 10-fiscal years to those of a broad-based securities market 
index. In order to assist investors in understanding the variability 
of a fund's returns and the risks of investing in the fund, a fund 
must also disclose its best and worst returns for a quarter during 
the 10-year (or other) period reflected in the bar chart. Securities 
& Exchange Commission, Registration Form Used by Open-End Management 
Investment Companies, 63 FR 13916, 13947-52 (March 23, 1998).
---------------------------------------------------------------------------

    The Commission also seeks to strike a balance between the sometimes 
conflicting goals of requiring all data that would be useful and 
avoiding the presentation of a volume of data that is cumbersome to 
read and analyze or too complex or voluminous to be easily assimilated 
by the prospective client. Therefore, the Commission staff has 
suggested that the Commission consider reducing the number of years for 
which monthly data is required and presenting the balance of the 
information on an annual basis or on some other summary basis, as 
discussed below.
    In connection with consideration of reducing the number of monthly 
data items, the Commission staff has suggested that the Commission 
consider requiring more detailed information concerning the volatility 
of the CTA's program, either by requiring presentation of an expanded 
number of worst drawdown months, e.g., the three worst months or the 
six worst months, or by requiring presentation of the standard 
deviation of the monthly returns. Presently, only disclosure of the 
worst single monthly return is required. Given the unreliability of 
past performance data as a predictor of future performance and the 
relatively greater correlation between past and future volatility, 
presentation of data which is more indicative of volatility seems 
warranted.
    Questions: 
    (1) What are the costs and benefits of requiring performance data 
for a period greater than the past five years? What period should be 
required?
    (2) How many years of monthly data should be required? What would 
be the most effective method of presenting such data? What would be the 
most appropriate method of presenting data for earlier periods (e.g., 
annual performance, annual performance plus footnoted standard 
deviation of monthly performance, etc.)?
    (3) What data should be presented to enable investors to measure 
the volatility of returns from a CTA's program or a commodity pool? How 
many months of worst drawdown data should be required (e.g., one, 
three, six)? What would be the most effective format for the 
presentation of this data?

G. Keeping Clients Regularly Informed Regarding CTA Program Status

    The Commission seeks to ensure that clients receive timely and 
complete information on the status of their participation in CTA 
programs.
    Discussion: Commission rules do not currently require that CTAs 
provide any periodic reports to their clients.\27\ Presently, the only 
information the Commission requires to be reported to a client is that 
provided to the FCM (e.g. trade confirmations and monthly account 
statements provided to the CTA's clients and to the CTA).\28\ However, 
this information does not fully inform the customer as to the status of 
its participation in the CTA's program. Among the items the customer 
may also need are the following: (a) account fees (e.g., the amount of 
fees earned/charged during the period, payments received from client on 
amounts owed during the period both through charges to the client 
account at the FCM and from sources outside the FCM account, and may 
balance unpaid by or credit due to the client at end of the period); 
(b) information on the basis of incentive fee calculations (including 
the amount of unrecovered prior losses carried forward); and (c) the 
current nominal account (i.e., amount originally agreed to, changes 
during the period and balance at end of period). It also may be useful 
to require the monthly statement to contain the management and 
incentive fee percentages, even though they are contained in the CTA/
client agreement. This would permit the clients more easily to verify 
the amount charged.
---------------------------------------------------------------------------

    \27\ However, Commission Rule 4.36(c)(1)(i) specifies that if a 
CTA knows or should know that its Disclosure Document is materially 
inaccurate or incorporate in any respect, it must distribute 
corrected information to its existing clients.
    \28\ Commission Rule 1.33.
---------------------------------------------------------------------------

    Questions:
    (1) Which of the data items discussed above would be valuable for 
clients to receive on a regular basis from CTAs? Are there any other 
data items which should be required? How often should this information 
be reported to clients? Is there a particular format which should be 
required?
    (2) What would be the costs for CTAs to report this information to 
clients on a regular basis?
    (3) On balance, what reporting requirements, if any, should be 
established?

V. Conclusion

    The Commission believes that it is appropriate to examine concerns 
regarding ROR computation and other performance issues which are raised 
in connection with the proposals made by the Commission staff and NFA. 
The Commission hopes to develop a balanced approach to address these 
issues that will enable performance data provided to customers to be as 
useful and meaningful as possible, while not being excessively 
burdensome to CTAs and CPOs. To this end, the Commission requests 
public comment on the proposals and the related issues set forth above.


[[Page 33304]]


    Issued in Washington, D.C. on June 11, 1998 by the Commission.
Jean A. Webb,
Secretary of the Commission.

Concept Release: Performance Data and Disclosure for Commodity Trading 
Advisor and Commodity Pools

Statement of Commissioner John E. Tull, Jr.

    I concur in issuing this Concept Release, because I believe 
wholeheartedly in the practice that a better informed agency makes 
smarter, better decisions in carrying out its regulatory functions. And 
as I have consistently maintained, I believe this agency should defer 
to the private sector and self-regulatory organizations to the fullest 
extent possible in fulfilling our mission to protect the integrity of 
the markets and their users.
    Therefore, I welcome and endorse this concept release. I am not 
entirely convinced that the rule changes discussed may not create more 
confusion than they would resolve. At this point I personally believe 
that using the notional amount of an account may be the simplest and 
most uniform method of disclosing risk and performance data. This, 
after all, is the objective of the rules under consideration.
    With that in mind, I look forward to reviewing the comments to this 
Concept Release.
John E. Tull, Jr.,
June 11, 1998.

Appendix I--Compliance Rules

* * * * *

RULE 2-29. COMMUNICATIONS WITH THE PUBLIC AND PROMOTIONAL MATERIAL

* * * * *
    (b) Content of Promotional Material.
    No Member or Associate shall use any promotional material which:
* * * * *
    (5) includes any specific numerical or statistical information 
about the past performance of any actual accounts (including rate of 
return) unless such information is and can be demonstrated to NFA to 
be representative of the actual performance for the same time period 
of all reasonably comparable accounts and, in the case of rate of 
return figures, unless such figures are calculated in a manner 
consistent with that required under CFTC Rule 4.25(a)(7)(i)(F) and 
are based on the nominal account size (as described in Compliance 
Rule 2-34).
* * * * *

RULE 2-34. DIRECTED ACCOUNTS AND COMMODITY POOLS

    (a) At the time a Member CTA enters into an agreement to direct 
a client's account, the Member CFT must obtain a written agreement 
signed by the client (or someone legally authorized to act on the 
client's behalf) which states:
    (1) the account size which the CTA will use as the basis for its 
trading decisions, i.e., ``the nominal account size'';
    (2) the name or description of the trading program in which the 
client is participating;
    (3) whether the client will deposit, maintain or make accessible 
to the FCM an amount equal to or less than the nominal account size, 
i.e., to fully or partially fund the account; and
    (4) how additions, withdrawals, profits and losses will affect 
the nominal account size and the computation of fees.
    The Member CTA must provide a copy of the agreement to the FCM 
carrying the account. The Member CTA must also disclose in writing 
the factors considered by the CTA in determining any minimum account 
size of the trading program in which the client is participating.
    (b) Unless the client is a qualified eligible client under CFTC 
Rule 4.7, any Member CTA which directs a partially funded account 
must provide the following information in writing to the client:
    (1) an estimated range of the amount of customer equity 
generally devoted to margin requirements or options premiums 
expressed as a percentage of the nominal account size and an 
explanation of the effect of partially funding an account on that 
percentage;
    (2) a description of how the management fees will be computed, 
expressed as a percentage of the nominal account size and an 
explanation of the effect of partially funding an account on that 
percentage;
    (3) an estimated range of the commissions generally charged to 
an account expressed as a percentage of the nominal account size and 
an explanation of the effect of partially funding an account on that 
percentage;
    (4) a statement that the greater the disparity between the 
nominal account size and the amount deposited, maintained or made 
accessible to the FCM, the greater the likelihood, and possible size 
of, margin calls.
    (c) Unless the pool participants are qualified eligible 
participants under CFTC Rule 4.7, any Member CPO which allocates 
assets among the pool's CTAs in such a way that the total 
allocations to its CTAs is greater than the total assets of the pool 
must provide the following information in writing to the pool 
participants:
    (1) a statement of the total amount allocated to CTAs as a 
percentage of the pool's net assets;
    (2) a description of how management fees charged by the CPO and 
the CTAs will be computed, including a statement of the total amount 
of management fees charged to the pool as a percentage of the pool's 
net assets;
    (3) an estimated range of the amount of commissions and 
transaction fees which will be charged to the pool in the next 
twelve months and an estimate of such fees as a percentage of the 
pool's net assets; and
    (4) a statement that allocating in excess of the pool's net 
assets among CTAs has the effect of proportionately magnifying the 
profits and losses which may be incurred by the pool.
    (d) Each CTA Member which directs accounts and each CPO Member 
which allocates assets among CTAs in such a way that the total 
committed is greater than the total assets of the pool shall 
maintain the records required by this Rule in the form and for the 
period of time required by CFTC Rule 1.31.
    (e) Each CTA Member which directs accounts and each CPO Member 
to which this rule applies allocates assets among CTAs in such a way 
that the total allocated is greater than the total assets of the 
pool shall establish and enforce adequate procedures to review all 
records made pursuant to this Rule and to supervise the activities 
of its Associates in complying with this Rule.
* * * * *

INTERPRETIVE NOTICE NFA COMPLIANCE RULE 2-34

    The Board of Directors recently passed NFA Compliance Rule 2-34, 
Documentation and Disclosure for Partially Funded Accounts. The 
Board recognized that certain customers may, for their own 
legitimate business purposes, deposit with the FCMs carrying their 
accounts less than the amount which they have directed the CTA 
trading their account to use as the basis for trading decisions. The 
Board sought to ensure that in such situations performance records 
accurately reflect trading results, that there is an adequate audit 
trail to verify past performance records and that customers receive 
adequate disclosures on the implications of partially funded 
accounts.
    In the Board's view, the solicitation of partially funded 
accounts, particularly with less sophisticated customers, raises a 
number of compliance issues. Therefore, the Board wishes to make 
clear that NFA Compliance Rule 2-34 does not in any way diminish a 
Member's responsibilities under other NFA rules, most notably NFA's 
sales practice rules, when dealing with a customer who is 
considering a partially funded account.
    Specifically, the Member must ensure that any solicitation 
present a balanced view of the risks and benefits of such an 
arrangement and disclose all material information. Furthermore, 
under NFA Compliance Rule 2-30, the Member must obtain the specified 
information regarding its customer's experience and financial 
condition and, in light of that information, must provide the 
customer with an adequate description of the risks of his 
investment. As the Board stated in its Interpretive Notice of that 
rule, for some customers the only adequate disclosure is that 
futures trading is simply too risky for that customer. That is 
particularly true when retail customers are induced to increase 
their leverage further by partially funding a trading account.
    Any Member soliciting unsophisticated customers to trade with a 
partially funded account will bear the burden of demonstrating that 
its solicitation was in compliance with all NFA requirements.

[FR Doc. 98-16075 Filed 6-17-98; 8:45 am]
BILLING CODE 6351-01-M