[Federal Register Volume 64, Number 147 (Monday, August 2, 1999)]
[Proposed Rules]
[Pages 41843-41851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19572]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4


Performance Data and Disclosure for Commodity Trading Advisors

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: On June 18, 1998, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published in the Federal Register a 
``Concept Release'' seeking public comment on issues relating to the 
computation and presentation of rate of return information and other 
disclosures concerning partially-funded accounts managed by commodity 
trading advisors (``CTAs''). The Concept Release discussed rules 
proposed by National Futures Association (``NFA'') as well as several 
other issues related to the presentation of CTA and commodity pool 
operator disclosure which appeared to warrant further study and 
analysis. The Concept Release requested public comment on both the NFA 
proposal and the other issues. Based on its consideration of comments 
received in response to the Concept Release, the Commission has 
determined to propose revisions to its rules concerning the 
documentation, computation, and disclosure of CTA's past performance 
information. The rules are intended to simplify the recordkeeping and 
computational requirements for CTAs who accept partially-funded client 
accounts, while providing for meaningful and focused disclosure to 
clients regarding the past performance of the CTA, and the risks 
attendant upon trading on a partially-funded basis.

DATES: Comments must be received by October 1, 1999.

ADDRESSES: Comments on the proposed rules may be sent to Jean A. Webb, 
Secretary of the Commission, Commodity Futures Trading Commission, 1155 
21st Street, NW., Washington, DC 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 
``Performance Data and Disclosure for Commodity Trading Advisors.''

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, (202) 418-5092, electronic mail: ``[email protected],'' or 
Eileen R. Chotiner, Futures Trading Specialist,

[[Page 41844]]

(202) 418-5467, electronic mail: ``[email protected],'' Division of 
Trading and Markets, Commodity Futures Trading Commission, 1155 21st 
Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. The Concept Release

    The Concept Release sought public comment on computational and 
disclosure matters relating to participation in programs of commodity 
trading advisors (``CTAs'') on a partially-funded basis and raised 
specific questions regarding a number of issues: (1) Improving risk 
profile data for clients considering participation in CTA programs on a 
partially-funded basis; (2) providing CTA client account information to 
futures commission merchants (``FCMs'') to aid the FCM's risk 
management; (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.
    The Commission initially provided a 60-day comment period on the 
Concept Release, through August 17, 1998. On August 6, 1998, the 
Commission extended the comment period for 30 days, through September 
16, 1998. The Commission received 19 comments on the release: four from 
firms registered as both CTAs and commodity pool operators (``CPOs''); 
three from registered CTAs; one from a registered CPO; one from a bar 
association; one from a futures self-regulatory organization; one from 
a futures industry trade association; two from academicians; one from 
an administrative law judge; two from accounting/compliance firms; two 
from other financial services firms; and one from an individual 
investor.
    The Concept Release addressed in particular rules proposed by the 
National Futures Association (``NFA'').\1\ In the rule submissions, NFA 
proposed that ROR be computed on the basis of the nominal account size, 
rather than the beginning net asset value (``BNAV'') of the account, as 
currently required by Commission Rule 4.35(a)(6). NFA asserted that the 
amount of actual funding in a client's account does not control the 
CTA's trading decisions. In the Concept Release, the Commission raised 
questions about whether nominal account size is a legitimate basis for 
the computation of ROR, as well as whether NFA's proposed documentation 
and disclosure requirements were sufficient to address concerns about 
the impact of partial funding on a client's account.
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    \1\ By letters dated March 15, 1994 and March 15, 1995, NFA 
submitted to the Commission for its approval, pursuant to Section 
17(j) of the Act, NFA Compliance Rule 2-34 and its Interpretive 
Notice regarding documentation and disclosure for partially-funded 
accounts. By letter dated February 26, 1998, NFA submitted a 
revision to NFA Compliance Rule 2-29 regarding the rate of return 
computation.
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    In response to the questions raised in the Concept Release, some 
commenters indicated concern regarding the validity of the nominal 
account size and the ability of clients to interpret and compare 
performance data presented on a basis other than the actual funds 
deposited in a client's account. However, the majority of commenters, 
including NFA, the Managed Funds Association (``MFA''), and several 
CPOs and CTAs, expressed support for the use of nominal account size as 
the basis for computing ROR and presenting the CTA's past performance.
    The Concept Release also discussed the current requirements for 
disclosure of draw-down information pursuant to Rules 4.35(a)(1)(v) and 
(vi), and asked for comment on the possibility of expanding draw-down 
disclosure in two areas. First, the Concept Release sought comment on 
the advisability of requiring draw-down percentage data to be presented 
at two or three partial-funding levels that are representative of those 
offered by the CTA, in addition to the fully-funded level. Second, the 
Concept Release sought comment on the concept of enhancing disclosure 
of a program's historical volatility, possibly by expanding the time 
period for historical performance disclosure; reducing the amount of 
monthly data; and requiring more detailed information concerning the 
volatility of the CTA's program, either through an expanded number of 
worst draw-down months, or by requiring presentation of the standard 
deviation of the monthly returns.
    A number of commenters expressed concern that requiring too many 
items of data would result in less attention being paid to that 
information. The Commission has been attentive to those concerns. In 
seeking to highlight the increased leverage--and consequent increased 
risk--in partially funding accounts, the Commission has proposed a set 
of disclosures that is significantly limited compared to that discussed 
in the Concept Release.
    A number of other ideas discussed in the Concept Release generated 
substantial opposition from commenters. These include a requirement 
that a CTA provide a copy of its agreement with the client to the 
client's FCM and additional reporting requirements for CTAs. The 
Commission has determined not to include these in the proposed rules.

II. The Proposed Rules

    The Commission has carefully considered the comments received, and 
has determined to revise its rules to provide a comprehensive framework 
for addressing certain of the issues raised in the Concept Release. In 
making the current proposal, which incorporates most of the concepts 
included in the NFA proposal, the Commission seeks to simplify the 
recordkeeping and computational requirements for CTAs who accept 
partially-funded client accounts, while providing for meaningful and 
focused disclosure to clients regarding the past performance of the 
CTA, and the risks attendant upon trading on a partially-funded basis.
    In particular, the Commission has determined to revise its rules to 
require that ROR be computed by dividing net performance by the nominal 
account size. This change is intended to reduce regulatory burdens by 
relieving CTAs of the responsibility for tying nominal account size to 
actual funding levels, and to permit a uniform method for CTAs to 
calculate their RORs, regardless of whether they accept partially-
funded client accounts. As discussed below, CTAs who wish to measure 
performance on an actual funds basis may do so by setting the nominal 
account size equal to the actual funding level.
    The risk disclosure requirements included in the proposed rules are 
intended to highlight critical information without overloading the 
client with excessive data. Other changes are proposed primarily to 
codify certain definitions and other information currently contained in 
Commission advisories.\2\
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    \2\ 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).
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A. Documentation of Nominal Account Size

    In order to address concerns regarding documentation of the nominal 
account size and other terms of the CTA's trading for clients' 
accounts, the Commission is proposing to add new paragraph (c) to Rule 
4.33. This provision would require that the CTA execute a written 
agreement with each client that specifies: The nominal account size; 
the name or description of the trading program in which the client is 
participating; the basis for the

[[Page 41845]]

computation fees; how additions or withdrawals of actual funds, or 
profits and losses will affect each of (a) the nominal account size and 
(b) the computation of fees; and whether the client will fully or 
partially fund the account. The provisions of proposed Rule 4.33(c) are 
substantially similar to the documentation requirements that were 
included in NFA's Proposal.
    These requirements will apply to all CTAs, regardless of whether 
they accept partially-funded accounts. A CTA that intends to continue 
to measure its performance using actual funds may establish a nominal 
account size which is defined on an actual funds basis. The information 
specified by Rule 4.33(c) need not be contained in a separate 
agreement, but may be included as part of any other signed written 
agreement between the CTA and the client.

B. Changes to Calculations

    The Commission is proposing to amend and re-order paragraphs (A)--
(F) of Rule 4.35(a)(6)(i) to accommodate the use of nominal account 
size, rather than net asset value, as the basis for performance 
computation.\3\ Rule 4.10(l) would also be amended to define the 
measurement of a CTA's worst peak-to-valley draw-down by net 
performance relative to nominal account size, rather than changes in 
net asset value. Proposed Rules 4.35(a)(6)(i)(D) and (E) address the 
fact that changes to the nominal account size may result either from 
changes in actual amounts, such as additions, withdrawals, profits or 
losses; or from changes to the nominal account size, pursuant to the 
terms of the CTA's agreement with the client in accordance with 
proposed Rule 4.33(c)(1). Proposed Rule 4.35(a)(6)(i)(B) defines net 
performance as the sum of the realized gain or loss on positions closed 
during the period plus the change during the period in unrealized gain 
or loss, plus interest on funds deposited with the client's FCM, less 
fees and expenses. This proposed rule also provides that no interest 
income may be imputed with respect to nominal account sizes or 
otherwise computed on a pro-forma basis.
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    \3\ For example: Under the current method of calculation, if a 
CTA's program has beginning net asset value (BNAV) of 100, ending 
net asset value (ENAV) of 150, additions (ADDS) of 40 and 
withdrawals (WDRS) of 0, then net performance (NET-PERF) is 10, and 
ROR is 10%:
    NET-PERF = ENAV - BNAV - ADDS + WDRS
    10 = 150 - 100 - 40 + 0
    ROR = NET-PERF/BNAV
    10% = 10/100
    Under the proposal, the CTA is not required to monitor net asset 
values, and thus net performance must be calculated directly. Under 
the proposed method of calculation, if the total of the nominal 
account sizes for the CTA's program (BNOM) is 100 at the beginning 
of the month, the realized gain on positions closed during the 
period (RG) is 7, the change in unrealized gains (UN-RG) is 5, and 
fees and expenses (FEES) are 2, then NET-PERF is still 10, and ROR 
is still 10%:
    NET-PERF = RG + UN-RG - FEES
    10 = 7 + 5 - 2
    ROR = NET-PERF/BNOM
    10% = 10/100
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    Although proposed rule 4.35(a)(6)(i)(B) would include, as part of 
net performance, interest on actual funds deposited with the client's 
FCM, this raises questions regarding whether such interest should be 
credited as part of the CTA's performance where the interest is earned 
on investments directed by the FCM (as opposed to the CTA). Reasons 
supporting the inclusion of the interest include the following: (1) 
Since trading fees are charged against the CTA's performance, even 
though the commission rate may be negotiated by the client and the FCM, 
interest earned at the FCM should be credited to the CTA's performance 
to maintain parity; and (2) the interest is, in a real sense, part of 
the return on the funds. Reasons against the inclusion of the interest 
include the following: (1) Since the objective of performance reporting 
is to convey the results from the trading which a CTA performed on 
behalf of a client, it may be misleading to include interest earned on 
investments managed by the FCM (as opposed to the CTA); and (2) as one 
commenter explained, ``(i)f a CTA agrees with each of several clients 
to a nominal account size and each account is traded similarly, the 
performance results of the CTA as they relate to these accounts should 
be the same.'' But, if interest on the funds on deposit with the 
client's FCM is included in the CTA's performance results, then the CTA 
will have different performance results, depending on each client's 
arbitrarily selected funding level. The Commission solicits comment on 
this issue.

C. Disclosure of Actual Funding Levels and Funds Under Management

    In accepting the use of nominal account size to compute ROR, the 
Commission intends to permit CTAs to disclose their trading results as 
they relate to the account size which governs their trading decisions. 
However, the Commission believes that disclosure of the amount of 
client assets managed by the CTA--the funds under management--should 
continue to reflect the amount of actual funds committed by clients to 
the CTA's trading program, rather than the aggregate of nominal account 
sizes. It would be misleading to describe ``notional funds,'' \4\ which 
the client has chosen not to place in an account over which the CTA has 
trading authority, as ``funds under management.'' Rule 4.35(a)(1), 
therefore, would be revised to clarify that the disclosure of funds 
under management must reflect only the actual funds committed to the 
CTA's trading program. The term ``Actual Funds'' is defined in new Rule 
4.10(n), which codifies the definitions included in Commission 
Advisories 87-2 and 93-13.\5\ Rule 4.35(a)(1) would permit a CTA that 
does not posses information about the amount of actual funds a client 
has deposited to meet this disclosure requirement by simply disclosing 
that lack of information. New provisions, set forth in Rule 
4.35(a)(1)(ix), would require that the performance capsule state the 
percentage of client accounts in the program that are fully funded and 
specify that any disclosure of aggregate nominal account sizes must be 
identified clearly as such and presented adjacent to the actual funds 
amounts.
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    \4\ The difference between the nominal account size and the 
actual funding level frequently been referred to as ``notional 
funds.''
    \5\ See supra, note 2.
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D. Disclosure Concerning Draw-Downs

    If the client funds the account traded by the CTA at a level less 
than the nominal account size, then gains or losses will represent a 
greater percentage of the amount funded. In other words, the leverage 
will be increased. This increased leverage increased both the 
likelihood that the client will be faced with a margin call and the 
size of such a potential margin call. It also increases the risk that 
the client will lose more than the funds it has advanced. In order to 
indicate clearly to potential clients the increased leverage--and the 
consequent increased risk--inherent in partial funding, new Rule 
4.35(a)(1)(ix)(A) would require CTAs who accept partially-funded 
accounts to present draw-down figures computed on the basis of the 
actual funds committed to the CTA's program by the client with the 
lowest ratio of actual funds to nominal account size in the trading 
program.\6\ If the CTA does not have sufficient information regarding 
the funding level of its client accounts, or if the lowest ratio is 
zero, the draw-down information would be presented at a funding level 
of 20%. These additional draw-down figures would be presented adjacent 
to the worst monthly and peak-to-valley draw-

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down percentages based on the aggregate nominal account sizes.
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    \6\ For example, if the lowest funding level is 25% and the 
greatest monthly drawdown is 15%, the drawdown shown on the basis of 
actual funding would be 60% (15%25%).
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    The concept release discussed the Commission's concern regarding 
disclosure of the historical volatility of CTA programs and suggested 
that, since extreme market events do not always occur within the five-
year time-frame specified by the regulations, this time-frame may 
permit some CTAs to omit their greatest draw-downs from their 
historical risk profiles. In order to address these concerns, the 
Commission proposes to revise Rules 4.35(a)(1)(v) and (vi) to require 
that the worst monthly and peak-to-valley draw-down, which will be 
based on the composite of accounts, be included in the performance 
capsule for the most recent five years and, in addition, for the life 
of the program, if longer than five years. The Commission does not 
intend that this requirement create a significant additional 
recordkeeping burden for CTAs, and is proposing a corresponding change 
to Rule 4.35(a)(6)(ii) to clarify that only the monthly figures derived 
from the supporting documentation, and not the supporting documentation 
itself, must be maintained beyond the five-year period specified in 
Rule 1.31. However, the Commission specifically invites comment 
regarding the extent to which the additional draw-down disclosure would 
provide a benefit to clients and details regarding the extent of any 
additional burden that is anticipated.7
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    \7\ Of course, prior to the effective date of these proposed 
rule changes, commodity trading advisors would not be obligated to 
maintain records for this purpose longer than the five years 
required under Rule 1.31.
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E. Disclosure Concerning Range of Rates of Return

    The Commission believes that disclosing the range of RORs for 
closed accounts in the offered program provides an important measure of 
the returns experienced by clients and will be useful to prospective 
clients considering participation in the CTA's program. Therefore, the 
Commission is also proposing to revise Rule 4.35(a)(1)(viii) to require 
that the performance capsule for the offered program include, in 
addition to the number of accounts closed with profits and the number 
closed with losses, the range of rates of return for the accounts 
closed with net lifetime profits and accounts closed with net lifetime 
losses, during the five-year period. As previously noted, Rules 
4.35(a)(1)(v) and (vi) would be revised to specify that the worst draw-
down information be based on the composite of accounts. Thus, the draw-
down figures in the CTA's capsule would not reflect the ROR of a client 
account that performed worse than other accounts in composite 
8 In light of the proposed changes to Rules 4.35(a)(1)(v) 
and (vi), the Commission believes that presentation of the range of 
RORs for closed accounts would provide a valuable additional 
perspective on the results experienced by individual clients. The 
Commission does not anticipate a significant additional burden as a 
result of this change due to the existing requirement of Rule 
4.35(a)(1)(viii) that CTAs disclose the number of accounts closed with 
profits and the number of accounts closed with losses.
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    \8\ However, CTAs would remain subject to the requirement of 
Rule 4.34(o) to disclose all material information to existing or 
prospective clients even if such information is not specifically 
required by these regulations.
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F. Disclosure of Monthly Performance

    The Commission wishes to explore the possibility of requiring that 
the monthly RORs be presented in a bar graph, in order to provide a 
more direct visual representation of the variations in RORs from month 
to month. Currently, Rule 4.35(a)(2)(ii) specifies that monthly RORs 
for the offered program must be presented either in a numerical table 
or in bar graph. Proposed revisions to Rule 4.35(a)(2)(ii) would 
require the bar graph to be disclosed in addition to the tabular 
presentation of monthly ROR figures. The Commission is requesting 
comment regarding whether use of a bar graph may communicate the month-
to-month changes in customer returns more effectively than a tabular 
presentation, as well as whether the bar graph should be required in 
lieu of the tabular presentation of RORs. In addition, the Commission 
seeks comment regarding the significance of any additional burden that 
may result from the requirements.

G. Illustrative Performance Capsule

    An example of a performance capsule that would meet the disclosure 
requirements, modified as discussed in Secs. II(C-F) above, is attached 
as Appendix A. This example is not intended to mandate a particular 
format, but only to serve as an illustration.

H. Changes to Definitions and Disclosure Requirements

    Changes are also being proposed to codify definitions and other 
information currently contained in Commission advisories as well as to 
clarify existing rules and definitions in the context of the proposed 
rule revisions. New Rule 4.34(p), in the main, codifies certain of the 
requirements currently set forth in Commission Advisory 93-13, and also 
discussed as part of the NFA Proposal, for disclosure to prospective 
clients of material information concerning the practice of partially 
funding an account and the factors considered by the CTA in determining 
the trading level for a given nominal account size. Definitions of 
``nominal account size,'' ``actual funds'' and ``partially-funded 
account'' are proposed to be added as Rules 4.10(m), (n) and (o), 
respectively.
    Proposed Rule 4.10(p) contains a definition of ``most recent five 
years'' that is intended to simplify the terminology used to designate 
the five calendar years and year-to-date time period for which 
performance is required to be disclosed pursuant to Rules 4.25(a)(5) 
and 4.35(a)(5). This clarification does not affect the existing 
provisions of Rules 4.25(a)(7) and 4.35(a)(4) that require performance 
information in a Disclosure Document to be current as of a date not 
more than three months preceding the date of the Disclosure Document.

I. Commodity Pool Disclosure

    The Concept Release included a detailed discussion of disclosure by 
CPOs. Due to the complexity of pool performance issues, the Commission 
is, generally, deferring consideration of changes to the requirements 
for disclosure of past performance by CPOs, other than changes 
primarily intended to conform the requirements for presentation of CTA 
past performance in pool disclosure documents with the revisions to 
Rule 4.35(a)(1) proposed herein. Other issues relating to pools will be 
considered in the context of the Commission's implementation of 
recommendations included in the President's Working Group on Financial 
Markets' April 1999 study, ``Hedge Funds, Leverage and the Lessons of 
Long-Term Capital Management.''
    In order to highlight a use of leverage by commodity pools, the 
Commission is proposing one substantive revision to commodity pool 
disclosure in Rule 4.25(a)(1)(ii)(H). This provision would be 
applicable only where the CPO allocates, to any of the pool's CTAs, an 
amount of actual funds which is less than the nominal account size 
stated in the pool's written agreement with the CTA. In such cases, the 
CPO would be required to include in the performance capsule for each 
such CTA, in a column adjacent to the presentation of data based on 
nominal account size, the draw-down information required by Rule 
4.25(a)(1)(ii)(E) and (F), computed on the basis of the ratio of the 
nominal account size to the pool's actual funds allocated to the CTA's 
program.

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III. Transitional Provisions

    The Commission proposes to require CTAs and CPOs to comply with the 
revisions proposed herein, including the requirement to obtain the 
documentation required by new Rule 4.33(c) for both new and existing 
clients, by no later than July 1, 2000. The Commission seeks comment on 
any difficulties anticipated in complying with these proposed 
requirements by July 1, 2000. CTAs and CPOs would be permitted to adopt 
these changes immediately upon the effective date of the proposed 
rules.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), U.S.C. 606-11 (1994), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. 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.\9\ The Commission previously has determined 
that registered CPOs are not small entities for the purpose of the 
RFA.\10\ 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.\11\ In this regard, the 
Commission notes that the rule revisions being proposed herein create 
some changes to the content of the documentation and disclosure 
requirements for CTAs, but are not expected to increase such 
requirements, and, in fact, are expected ultimately to ease the 
computational and recordkeeping requirements for CTAs who manage 
partially-funded client accounts. The Commission has previously 
determined that the disclosure requirements governing this category of 
registrant will not have a significant economic impact on a substantial 
number of small entities \12\ Therefore, the Acting Chairman, on behalf 
of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that 
these proposed regulations will not have a significant economic impact 
on a substantial number of small entities. Nonetheless, the Commission 
specifically requests comment on the impact these proposed rules may 
have on small entities.
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    \9\ 47 FR 18618-181621 (April 30, 1982).
    \10\ 47 FR 18619-18620.
    \11\ 47 FR 18618-18620.
    \12\ See 60 FR 38146, 38181 (July 25, 1995) and 48 FR 35248 
(August 3, 1983).
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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 that Act.
    The group of rules contained in all of Part 4, ``Commodity Pool 
Operators and Commodity Trading Advisers,'' of which Rules 4.10, 4.25, 
4.33, 4.34 and 4.35 are a part, was approved on September 4, 1998 and 
assigned OMB control number 3038-0005. The Commission does not 
anticipate that the proposed revisions to the rules will affect the 
total burden of this group of rules. The group of rules contained in 
OMB control number 3038-0005 has the following burden:

Average burden hours per response: 4.95
Number of respondents: 4,624
Frequency of response: On occasion

Copies of the information collection submission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC 
20581, (202) 418-5160.

List of Subjects in 17 CFR Part 4

    Brokers, Commodity futures, Commodity pool operators, Commodity 
trading advisors.

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    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 4.10 is proposed to be amended by revising paragraph (l) 
and adding paragraphs (m), (n), (o) and (p) to read as follows:


Sec. 4.10  Definitions.

* * * * *
    (l) Worst peak-to-valley draw-down means:
    (1) For a commodity pool, the greatest cumulative percentage 
decline in month-end net asset value due to losses sustained 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. Such decline must 
be expressed as a percentage of the initial month-end net asset value, 
together with an indication of the months and year(s) of such decline 
from the initial month-end net asset value to the lowest month-end 
asset value of such decline.
    (2) For an account directed by a commodity trading advisor or for a 
commodity trading advisor's trading program, the greatest negative net 
performance during any period, beginning at the start of one month, and 
ending at the conclusion of that month or a subsequent month. The worst 
peak-to-valley draw-down must be expressed as a percentage of the 
nominal account size at the beginning of the period, together with an 
indication of the months and year(s) of such draw-down.
    (3)(i) For purposes of paragraph (2) of this section, net 
performance for a period is defined as the total of:
    (A) the realized gain or loss on position closed during the period, 
plus
    (B) The change during the period in unrealized gain or loss, plus
    (C) Interest accrued on funds deposited in the client's account at 
a futures commission merchant, plus
    (D) Other income accrued on positions held as part of the CTA's 
program, minus
    (E) Fees and expenses.
    (ii) No income may be imputed with respect to nominal account sizes 
or otherwise computed on a pro-forma basis.
    (4) For purposes of Secs. 4.25 and 4.35, a peak-to-valley draw-down 
which began prior to the beginning of the most recent five calendar 
years is deemed to have occurred during such five-calendar-year period.
    (m) Nominal account size means the account size, designated in the 
written agreement specified in Sec. 4.33(c), which establish he 
client's level of trading in a commodity trading advisor's program.
    (n) Actual funds means the amount of margin-qualifying assets 
committed to a commodity trading advisor's program, either:
    (1) On deposit in an account at a futures commission merchant to 
margin the client account for which a commodity trading advisor has 
trading authority; or
    (2) In another account, so long as the commodity trading advisor 
has written evidence demonstrating the following:
    (i) The client owns the funds and has designated such funds as 
committed to the commodity trading advisor's trading program;
    (ii) The futures commission merchant carrying the client's account 
for which the commodity trading advisor directs trades has the power to 
transfer the funds readily from the other account for the purpose of 
meeting margin requirements in connection with such trades, on a 
routine operational basis

[[Page 41848]]

and without advance notice to the client; and
    (iii) The commodity trading advisor has ready access to information 
concerning the designated balance in the account.
    (o) Partially-funded account means a client participation in the 
program of a commodity trading advisor in which the amount of actual 
funds committed to the trading program is less than the nominal account 
size.
    (p) For purposes of Secs. 4.25 and 4.35, the term most recent five 
years means:
    (1) The time period beginning January 1 of the calendar year five 
years prior to the date of the Disclosure Document and ending as of the 
date of the Disclosure Document or
    (2) The life of the trading program, if less than five years.
    3. Section 4.25 is proposed to be amended by revising paragraphs 
(a)(1)(ii)(D)(1) and (2) and (E) and (F) and by adding paragraph 
(a)(l)(i)(H) to read as follows:


Sec. 4.25  Performance disclosures.

    (a) * * *
    (1) * * *
    (ii) * * *
    (D)(1) The aggregate of actual funds committed to all of the 
trading programs of the trading advisor or other person trading the 
account, as of the date of the Disclosure Document or, if the commodity 
trading advisor does not have sufficient information regarding the 
funding of its client's accounts to determine the aggregate of actual 
funds committed to its programs, a statement of that fact;
    (2) The aggregate of actual funds committed to the specified 
trading program of the commodity trading advisor, as of the date of the 
Disclosure Document or, if the commodity trading advisor does not have 
sufficient information regarding the funding of its clients' accounts 
to determine the aggregate of actual funds which are committed to the 
specified trading program, a statement of that fact.
    (E) The greatest monthly draw-down for the trading program 
specified, expressed as a percentage of aggregate nominal account 
sizes, and indicating the month and year of the draw-down during the 
most recent five years.
    (F) The greatest peak-to-valley draw-down for the trading program 
specified, expressed as a percentage of aggregate nominal account 
sizes, and indicating the month(s) and year(s) of the draw-down during 
the most recent five years.
* * * * *
    (H) In addition to the information specified in 
Sec. 4.25(a)(1)(ii)(A)-(G), where the CPO allocates, to any of the 
pool's, CTAs, an amount of funds which is less than the nominal account 
size states in the written agreement with the CTA, the performance 
capsule for each such CTA must include, in a column adjacent to the 
presentation of data based on nominal account size, the draw-down 
information required by Sec. 4.25(a)(1)(ii)(E) and (F), computed on the 
basis of the ratio of the nominal account size to the pool's actual 
funds allocated to the commodity trading advisor's program.
    4. Section 4.33 is proposed to be amended by adding paragraph (c) 
to read as follows:


Sec. 4.33  Recordkeeping.

* * * * *
    (c) A commodity trading advisor must obtain a written agreement 
signed by each client which, at a minimum, clearly specifies:
    (1) The nominal account size;
    (2) The name or description of the trading program in which the 
client is participating;
    (3) The basis for the computation of fees;
    (4) How each of the following will affect each of the nominal 
account size and the computation of fees: additions or withdrawals of 
actual funds or profits or losses; and
    (5) 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.
    5. Section 4.34 is proposed to be amended by adding paragraph (p) 
to read as follows:


Sec. 4.34  General disclosures required.

* * * * *
    (p) Additional Disclosure by Commodity Trading Advisors Accepting 
Partially-funded Accounts. A commodity trading advisor that accepts a 
partially-funded account (as defined in Sec. 4.10(o)) must disclose:
    (1) 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 the management fees as a 
percentage of actual funds.
    (2) 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 the 
commissions as a percentage of actual funds;
    (3) A statement that partial funding increases leverage, that 
leverage will magnify both profits and losses, and that the greater the 
disparity between the nominal account size and the amount deposited, 
maintained or made accessible to the futures commission merchant, the 
greater the likelihood and frequency of margin calls, and the greater 
the size of margin calls as a percentage of the amount of actual funds 
committed to the commodity trading advisor's program; and
    (4) A description of the factors considered by the commodity 
trading advisor in determining the level of trading for a given nominal 
account size in the offered trading program and an explanation of how 
those factors are applied.
    6. Section 4.35 is proposed to be amended by revising paragraphs 
(a)(1)(iv) through (a)(1)(ix), (a)(2), (a)(6)(i) and (a)(6)(ii) to read 
as follows:


Sec. 4.35  Performance disclosures.

* * * * *
    (a) * * * (1) * * *
    (iv)
    (A) The aggregate of actual funds committed to all of the trading 
programs of the trading advisor or other person trading the account, as 
of the date of the Disclosure Document, of, if the commodity trading 
advisor does not have sufficient information regarding the funding of 
its clients' accounts to determine the aggregate of actual funds 
committed to its programs, a statement of that fact;
    (B) The aggregate of actual funds committed to the specified 
trading program of the commodity trading advisor, as of the date of the 
Disclosure Document, or, if the commodity trading advisor does not have 
sufficient information regarding the funding of its client accounts to 
determine the aggregate of actual funds which are committed to the 
specified trading program, a statement of that fact.
    (v) The greatest monthly draw-down for the trading program 
specified, expressed as a percentage of aggregate nominal account 
sizes, and indicating the month and year of the draw-down during each 
of the following periods:
    (A) The most recent five years and
    (B) If the commodity trading advisor has traded client accounts 
pursuant to the trading program for longer than the most recent five 
years, since the commodity trading advisor began trading the program 
for client accounts.
    (vi) The greatest peak-to-valley draw-down for the trading program 
specified expressed as a percentage of aggregate nominal account sizes, 
and indicating the month(s) and year(s) of the draw-down, during each 
of the following periods:
    (A) The most recent five years and
    (B) If the commodity trading advisor has traded client accounts 
pursuant to

[[Page 41849]]

the trading program for longer than the most recent five years, since 
the commodity trading advisor began trading the program for client 
accounts.
    (vii) Subject to Sec. 4.35(a)(2) for the offered trading program, 
the annual and year-to-date rate-of-return for the program for each of 
the five most recent calendar years and year-to-date, computed on a 
compounded monthly basis; and
    (viii) In the case of the offered trading program:
    (A)(1) The number of accounts traded pursuant to the offered 
trading program that were closed during the period specified in 
Sec. 4.35(a)(5) with positive net lifeline performance (profits) as of 
the date the account was closed, and
    (2) The range of rates of return for the accounts closed with net 
lifetime profits; and
    (B)(1) The number of accounts traded pursuant to the offered 
trading program that were closed during the period specified in 
Sec. 4.35(a)(5) with negative net lifeline performance (losses) as of 
the date the account was closed, and
    (2) The range of rates of return for the accounts closed with net 
lifetime profits; and
    (ix) In addition to the information specified in 
Sec. 4.35(a)(1)(i)-(viii), where the commodity trading advisor accepts 
partially-funded accounts, the performance capsule must include:
    (A) A statement that rates of return are based on nominal account 
size.
    (B) In a column adjacent to the presentation of data based on 
nominal account size, the draw-down information required by 
Sec. 4.35(a)(1)(v) and (vi), divided by the percentage of actual funds 
committed to the commodity trading advisor's program by the client with 
the lowest ratio of actual funds to nominal account size in the trading 
program.
    (1) If the commodity trading advisor does not have sufficient 
information regarding the funding level of its client accounts to 
determine the lowest ratio, or if the lowest ratio is zero, present 
this information at a funding level of 20 percent.
    (2) The percentage basis of the computation, i.e., the actual funds 
ratio or the optional 20 percent, must be disclosed in the heading of 
the column.
    (C) A statement of the percentage of client accounts in the program 
for which the actual funds committed equal the nominal account size. If 
the commodity trading advisor does not have sufficient information 
regarding the amount of actual funds committed by its clients to the 
trading program to determine the percentage of client accounts which 
have actual funding equal to the nominal account size, the commodity 
trading advisor must state that fact.
    (D) If the commodity trading advisor elects to include the 
aggregate of the nominal account sizes of the client accounts in the 
trading program specified, this information must be placed adjacent to 
the disclosure of actual funds under management by the commodity 
trading advisor as required by Sec. 4.35(a)(1)(iv).
    (2) Additional requirements with respect to the offered trading 
program.
    (i) (The performance of the offered trading program must be 
identified as such and separately presented first;
    (ii) The rate of return of the offered trading program must be 
presented on a monthly basis for the most recent five years, in a 
numerical table and in bar graph.
    (iii) (The bar graph used to present monthly rates of return for 
the offered trading program:
    (A) Must show percentage rate of return on the vertical axis and 
monthly increments on the horizontal axis; and
    (B) Must be scaled in such a way as to clearly show month-to-month 
differences in rates of return.
    (iv) The commodity trading advisory must made available to 
prospective and existing clients upon request a table showing the 
information required to be calculated pursuant to Sec. 4.35(a)(6). This 
table must be updated at least quarterly.
    (6) Calculation of, and recordkeeping concerning, performance 
information. (i) * * *
    (A) The nominal account size at the beginning of the period, 
defined as the previous period's ending nominal account size;
    (B)(1) The net performance for the period, which is defined as the 
total of:
    (i) the realized gain or loss on positions closed during the period 
plus
    (ii) the change during the period in unrealized gain or loss, plus
    (iii) interest accrued on funds deposited in the client's account 
at a futures commission merchant, plus
    (iv) other income accrued on positions held as part of the CTA's 
program, minus
    (v) fees and expenses.
    (2) no income may be imputed with respect to nominal account sizes 
or otherwise computed on a proforma a basis.
    (C) The nominal rate of return for the period, which shall be 
calculated by dividing the net performance by the nominal account size 
at the beginning of the period.
    (D) Changes to the nominal account size during the period, pursuant 
to the terms of the CTA's agreement with the client in accordance with 
Sec. 4.33(c)(4). The records should clearly delinate the source of each 
change (additions or withdrawals of actual funds, profits or losses, or 
otherwise).
    (E) Changes to the nominal account size pursuant to the terms of 
the CTA's agrement with the client in accordance with Sec. 433(c)(1). 
The records should clearly delineate the source of each change (the 
opening or closing of accounts during the period or changes to nominal 
account size specifically directed by a client in writing.) If a client 
and the advisor agree that a nominal account size be changed effective 
at the beginning of a period, the change shall be reflected during the 
prior period.
    (F) The nominal account size at the end of the period, defined the 
sum of the nominal account size at the beginning of the period 
(Sec. 4.35(a)(6)(i)(A)) and the changes specified in this 
Sec. 4.35(a)(6)(i) (D) and (E).
    (ii) All supporting documents necessary to substantiate the 
computation of such amounts must be maintained in accordance with 
Sec. 1.31. With respect to the disclosures required by 
Sec. 4.34(a)(1)(v)(B) and Sec. 4.35(a)(1)(vi)(B), the monthly figures 
referred to in Sec. 4.35(a)(6)(i)(a-F) must be maintained for five 
years subsequent to the last date on which disclosure document 
reflecting the specified trading program is prepared.

    Issued in Washington, D.C. on July 26, 1999 by the Commission.
Jean A. Webb,
Secretary of the Commission.

BILLING CODE 6351-01-M

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[GRAPHIC] [TIFF OMITTED] TP02AU99.003



BILLING CODE 6351-01-C

[[Page 41851]]



                                Monthly Rates of Return (January 1994-April 1999)
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                        1999      1998      1997      1996      1995      1994
----------------------------------------------------------------------------------------------------------------
January.............................................       -15        -5        -3        -7        10       -24
February............................................        -2         3         5         8        18         9
March...............................................         4        17        -3         7        -3         4
April...............................................         7       -16        12        -3        -3         3
May.................................................  ........        -5         9       -15        27        18
June................................................  ........       -11        29         2        13       -17
July................................................  ........         2       -13        39        -9        -6
August..............................................  ........        15         2        14        -2        25
September...........................................  ........        -8        15        -8        -1         1
October.............................................  ........        10        -1        -2        12       -20
November............................................  ........        -3        -8        17         8        13
December............................................  ........        18        12         8        33        -7
Annual/YTD..........................................        -7        10        62        63       149       -13
----------------------------------------------------------------------------------------------------------------

[FR Doc. 99-19572 Filed 7-30-99; 8:45 am]
BILLING CODE 6351-01-M