[Federal Register Volume 65, Number 145 (Thursday, July 27, 2000)]
[Proposed Rules]
[Pages 46122-46126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18909]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AB60


Profile Documents for Commodity Pools

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule amendments.

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SUMMARY: Commodity Futures Trading Commission (``Commission'') Rule 
4.21(a) \1\ currently requires that commodity pool operators (``CPOs'') 
deliver a disclosure document, containing specified information, to 
prospective participants before soliciting or accepting any funds, 
securities or other property from such participants. National Futures 
Association's (``NFA's'') Compliance Rule 2-35(d) would permit CPOs to 
deliver a shorter profile document containing only key information 
about the pool to prospective participants prior to providing them with 
the pool's Disclosure Document. Pursuant to section 17(j) of the 
Commodity Exchange Act \2\ (``Act''), NFA has requested that the 
Commission review NFA Compliance Rule 2-35(d) and its Interpretive 
Notice regarding profile documents for commodity pools. NFA has also 
submitted a petition for rulemaking which requests that the Commission 
amend Rule 4.21(a) to permit use of the profile. The amendment to 
Commission Rule 4.21(a) proposed herein will be necessary to allow 
commodity pool operators (``CPOs'') to use a profile document. The 
Commission is also proposing amendments to Commission Rule 4.26 to 
establish procedures for the use, amendment and filing of profile 
documents that are parallel to those applicable to disclosure 
documents.
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    \1\ Commission rules referred to herein can be found at 17 CFR 
Ch. I (2000).
    \2\ 7 U.S.C. 21(j) (1994).
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    In addition, certain technical amendments related to filings by 
CPOs and commodity trading advisors (``CTAs'') are proposed. The 
primary change would decrease regulatory burden by reducing the number 
of copies of disclosure documents that CPOs and CTAs must file with the 
Commission. The Commission is also proposing to revise Rule 4.2(a), 
which permits that disclosure documents may be filed electronically, to 
expand the availability of electronic filing to profile documents. 
Technical amendments to Rule 4.2(a) would correct the address

[[Page 46123]]

specified for hard copy filing and specify the address for electronic 
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filing.

DATES: Comments must be received by August 28, 2000.

ADDRESSES: Interested persons should submit their views and comments 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) 418-5521, or by electronic mail to [email protected]. Reference 
should be made to ``Profile Documents for Commodity Pools.''

FOR FURTHER INFORMATION CONTACT: Eileen R. Chotiner, Futures Trading 
Specialist, Division of Trading and Markets, Commodity Futures Trading 
Commission, 1155 21st Street, NW., Washington, DC 20581. Telephone: 
(202) 418-5467; electronic mail: ``[email protected].''

SUPPLEMENTARY INFORMATION:

I. Rule 4.21(a)

    Commission Rule 4.21(a) requires that CPOs deliver a disclosure 
document, containing specified information, to prospective participants 
before soliciting or accepting any funds, securities or other property 
from such participants. \3\ Currently, the rule permits a CPO to 
provide a more summary disclosure (a ``Term Sheet'') prior to the 
delivery of a disclosure document, in the form of a notice of intended 
offering and a statement of the terms of such offering. A Term Sheet 
may only be delivered to ``accredited investors,'' \4\ subject to rules 
promulgated by a registered futures association pursuant to Section 
17(j) of the Act. In 1996, the Commission approved amendments to NFA 
Compliance Rule 2-13 implementing provisions for the Term Sheet.\5\
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    \3\ A publicly offered commodity pool refers to a distribution 
of units, some or all of which are registered under the Securities 
Act of 1933 (``Securities Act''). Commission Rule 4.24(d)(3)(i) 
defines ``privately offered'' commodity pools as those ``offered 
pursuant to section 4(2) of the Securities Act of 1933, as amended 
(15 U.S.C. 77d(2)), or pursuant to Regulation D thereunder (17 CFR 
230.501 et seq.).'' Section 4(2) of the Securities Act exempts from 
registration transactions by an issuer not involving any public 
offering; Regulation D contains rules for the limited offer and sale 
of securities without registration under the Securities Act.
    \4\ The term ``accredited investor'' is defined in 17 CFR 
230.501(a).
    \5\ NFA Compliance Rule 2-13(d) requires the notice of intended 
offering and statement of terms to include ``no more than'' the 
following information:
    (1) The name of the CPO, issuer, underwriter, and selling agent;
    (2) The name of the pool;
    (3) The title, amount, minimum escrow, and basic terms of the 
equity interests the CPO proposes to offer;
    (4) The date the offering begins, how long it will remain open 
and a brief statement of the manner of the offering;
    (5) The type of pool (multi-advisor, single-advisor, principal-
protected, speculative, hedge) and interests to be traded and, if a 
single-advisor pool, the name of the CTA;
    (6) Any limitations regarding who may invest in the pool or the 
amount of any investment;
    (7) Any statement or legend required by any applicable laws, 
regulations, or rules or by any state, federal or foreign regulator; 
and
    (8) The name and address and/or telephone number to obtain a 
copy of the disclosure document.
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    By letter dated March 7, 2000,\6\ NFA submitted to the Commission 
for its review and approval, pursuant to Section 17(j) of the Act, NFA 
Compliance Rule 2-35(d) and its Interpretive Notice regarding commodity 
pool profile documents. The use of profile documents would not be 
limited to accredited investors. The profile document is based on a 
rule adopted by the Securities and Exchange Commission (``SEC'') that 
permits mutual funds to solicit and accept investments using a shorter 
``profile'' document instead of a prospectus. \7\ NFA also submitted a 
petition for rulemaking to amend Commission Rule 4.21(a) in order to 
allow a profile document to be delivered, in advance of the pool's 
disclosure document, to potential participants, whether or not they are 
accredited investors. CPOs who wish to use a profile document would be 
required to do so in accordance with the rules of a registered futures 
association, such as NFA Compliance Rule 2-35(d).
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    \6\ Prior versions of the proposal, which were submitted in 
letters dated September 10, 1998 and April 13, 1999, were withdrawn 
by NFA on October 27, 1999.
    \7\ 17 CFR 230.498. SEC Rule 498 permits profile documents to be 
used only by open-end management investment companies that register 
on Form N-1A (17 CFR 274.11A). The SEC noted in its adopting release 
that it would assess the use of profiles by mutual funds over a 
period of time before considering a rule to permit use of profiles 
by other types of investment companies.
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    The purpose of the profile document is to provide prospective 
participants with succinct disclosure of the key aspects of a commodity 
pool offering in an easily accessible format. A more accessible 
disclosure format is more likely to be read and therefore more likely 
to be useful to a person considering a commodity pool investment. The 
Commission believes that the benefits of a profile document are no less 
applicable to prospective pool participants who are not accredited 
investors. Therefore, the Commission is proposing to expand Rule 
4.21(a) to allow CPOs to provide all prospective participants with a 
profile document prior to delivery of a Disclosure Document, subject to 
compliance with rules promulgated by a registered futures association 
pursuant to Section 17(j) of the Commodity Exchange Act (``Act'').\8\
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    \8\ CPOs would continue to have the option to provide a notice 
of intended offering and term sheet to accredited investors.
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II. Background

    In September 1998, the Commission approved NFA Compliance Rules 2-
35(a)-(c), which require that disclosure documents be presented in a 
two-part format, and that they be prepared using ``plain English'' 
principles.\9\ The Commission also adopted corresponding changes to 
Commission Rules 4.24 and 4.25. These changes are intended to make 
commodity pool documents more understandable. NFA's Interpretive Notice 
to the two-part document rule states that ``[a] Disclosure Document 
should provide essential information about the fundamental 
characteristics of a pool, and it should provide the information in a 
way that will assist investors in making informed decisions about 
whether to invest in the pool.'' \10\
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    \9\ NFA's Interpretive Notice to Rule 2-35(a)-(c) provides 
guidance on what is meant by the use of ``plain English 
principles.'' Such principles include: using active voice; using 
short sentences and paragraphs; breaking up the document into short 
sections; using titles and subtitles that specifically describe the 
contents of each section; using words that are definite, concrete, 
and part of everyday language; avoiding legal jargon and highly 
technical terms; using glossaries to define technical terms that 
cannot be avoided; avoiding multiple negatives; and using tables and 
bullet lists, where appropriate.
    \10\ NFA Interpretive Notice para.9035, Compliance Rule 2-35: 
Guidelines for Filing Two-Part Disclosure Documents for Commodity 
Pools (board of Directors, April 30, 1999).
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    In approving these NFA rules, the Commission noted that ``* * * the 
adoption of a two-part document format and plain English principles 
will assist investors in making an informed decision prior to investing 
in a pool by providing clear and concise information about the possible 
investment.'' \11\ The Commission believes that the profile document 
described in NFA Rule 2-35(d) would further enhance the ability of 
prospective participants to evaluate the key characteristics of 
commodity pools prior to making investment decisions. Because the 
profile document must be followed with a complete disclosure document 
prior to the CPO's acceptance of any funds or property from a 
prospective pool participant, participants will receive all required

[[Page 46124]]

disclosure about the offered pool before committing their funds.
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    \11\ 63 FR 15112, 15114 (March 30, 1998).
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III. Description of NFA Compliance Rule 2-35(d)

    Rule 2-35(d) would permit CPOs to deliver a profile document, 
containing key information about a commodity pool, to a prospective 
participant prior to delivery of the pool's disclosure document. The 
profile document must clearly state that an investment in the pool may 
not be made until after the prospective participant has received the 
pool's disclosure document. Further, the profile may not be accompanied 
by any advertising or other promotional material unless also 
accompanied by the pool's disclosure document.
    The profile is required to include key information about the pool, 
such as: The risks of participating in commodity pools, and any 
specific risks that are material to the particular pool; a break-even 
analysis that reflects all fees and expenses of the pool; a discussion 
of the pool's trading strategy; any conflicts of interest material to 
the pool; a summary of any material actions against the CPO and its 
principals within the past five years; a brief description of the 
pool's redemption policies; and the performance of the offered pool. No 
information other than that specified in Rule 2-35(d) may be included 
in the profile. Rule 2-35(d) also specifies that the profile document 
is subject to the filing requirements of CFTC Rule 4.26 and must be 
submitted with the pool's disclosure document.
    NFA is also proposing to issue a new Interpretive Notice to Rule 2-
35(d) regarding CPO profile documents. The Interpretive Notice provides 
further guidance as to the types of risk factors and conflicts of 
interest that should be discussed in the profile document.

IV. Related Changes to Commission Rules 4.2 and 4.26

    Pursuant to Rule 4.26, a CPO may use a disclosure document for nine 
months from its date of first use, must amend the document if it is 
materially inaccurate or incomplete and distribute the changes to 
existing and previously solicited prospective participants, and must 
file the disclosure document and amendments thereto with the 
Commission. The Commission is proposing to revise Rule 4.26 to 
establish the same requirements for profile documents. The Commission 
is also proposing to revise Rule 4.2(a) to permit profile documents to 
be filed electronically along with the disclosure documents to which 
they pertain. The proposed changes to Rules 4.2(a) and 4.26(d) would 
incorporate the requirement in NFA Rule 2-35(d) that the profile 
document be filed along with the disclosure document.

V. Technical Changes

    In order to reduce regulatory burden for CPOs and CTAs, the 
Commission is proposing to amend Rules 4.26 and 4.36 to reduce the 
number of copies of the Disclosure Document that must be filed with the 
Commission by CPOs and CTAs. The proposed changes would require that 
only one copy of each disclosure document be filed with the Commission, 
rather than the two copies currently required by these rules. A single 
copy of the profile document, if one is used, would be required to be 
filed with the CPO's disclosure document for the applicable pool. The 
only proposed rule revision that is applicable to CTAs is the proposed 
reduction in the number of copies of disclosure documents that CTAs 
must file with the Commission under Rule 4.36(d).\12\
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    \12\ Although NFA's initial submission of Rule 2-35 included 
provisions for use of profile documents by CTAs, these provisions 
were eliminated from their recent submission because CTA documents 
are ``not nearly as voluminous as CPO documents. * * *'' Letter from 
Daniel J. Roth, Executive Vice President and General Counsel, NFA, 
to Jean A. Webb, Secretary of the Commission, dated March 7, 2000.
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    Technical changes to Rule 4.2(a) are also proposed to correct the 
address to which hard copy filings must be sent and to specify the e-
mail address for electronic filings.

VI. Additional Request for Comment

    The amendments to Rules 4.2(a), 4.21(a) and 4.26 that are related 
to use of a profile document are being proposed to enable the 
Commission to approve NFA Compliance Rule 2-35(d). Accordingly, the 
Commission seeks comments both on the proposed amendments to the 
Commission's rules for the purpose of permitting profile documents for 
CPOs and clarifying procedures for their use, amendment and filing, as 
well as comments on the disclosure format established by proposed NFA 
Compliance Rule 2-35(d). The Commission also seeks comments on the 
proposed technical amendments to reduce the number of copies of 
disclosure documents that CPOs and CTAs must file. The text of NFA 
Compliance Rule 2-35(d) and its Interpretive Notice are attached to 
this release as Appendix A.

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The 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.\13\ The Commission previously has determined 
that registered CPOs are not small entities for the purpose of the 
RFA.\14\ 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.\15\ The portion of the 
rule proposal herein that affects CTAs makes no change in existing 
requirements other than to reduce the number of copies of the 
disclosure document that CTAs seeking to direct or guide client 
accounts must file pursuant to Rule 4.31(a). Therefore, the Chairman, 
on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 
605(b), that the action taken herein will not have a significant 
economic impact on a substantial number of small entities.
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    \13\ 47 FR 18618-18621 (April 30, 1982).
    \14\ 47 FR 18619-18620.
    \15\ 47 FR 18618-18620.
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA''),\16\ which imposes 
certain requirements on federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA, does not apply to this rule. The 
Commission believes the proposed rule revisions do not contain 
information collection requirements which require the approval of the 
Office of Management and Budget. The purpose of this rule is to permit 
the use of a summary profile document for commodity pools, and other 
technical changes related to filing of disclosure documents.
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    \16\ 44 U.S.C. 3507(d).
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List of Subjects in 17 CFR Part 4

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

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

[[Page 46125]]

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 4.2 is proposed to be amended by revising paragraph (a) 
to read as follows:


Sec. 4.2  Requirements as to filing.

    (a) All material filed with the Commission under this part 4 must 
be filed with the Commission at its Washington, DC office (Att: Managed 
Funds Branch, Division of Trading and Markets, CFTC, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC, 20581; Provided, 
however, that Disclosure Documents, profile documents, and amendments 
thereto may be filed at the following electronic mail address: [email protected].
* * * * *
    3. Section 4.21 is proposed to be amended by revising paragraph (a) 
to read as follows:


Sec. 4.21  Required delivery of pool Disclosure Document.

    (a)(1) No commodity pool operator registered or required to be 
registered under the Act may, directly or indirectly, solicit, accept 
or receive funds, securities or other property from a prospective 
participant in a pool that it operates or intends to operate unless, on 
or before the date it engages in that activity, the commodity pool 
operator delivers or causes to be delivered to the prospective 
participant a Disclosure Document for the pool containing the 
information set forth in Sec. 4.24.
    (2) Notwithstanding the requirements regarding solicitation 
specified in paragraph (a)(1) of this section, a commodity pool 
operator may provide to a prospective participant either of the 
following documents prior to delivery of a Disclosure Document, subject 
to compliance with rules promulgated by a registered futures 
association pursuant to section 17(j) of the Act:
    (i) A profile document;
    (ii) Where the prospective participant is an accredited investor, 
as defined in 17 CFR 230.501(a), a notice of intended offering and 
statement of the terms of the intended offering.
* * * * *
    3. Section 4.26 is proposed to be amended by revising paragraphs 
(a), (b) and (d) to read as follows:


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

    (a) (1) Subject to paragraph (c) of this section, all information 
contained in the Disclosure Document and, where used, profile document, 
must be current as of the date of the Document; Provided, however, that 
performance information may be current as of a date not more than three 
months prior to the date of the Document.
    (2) No commodity pool operator may use a Disclosure Document or 
profile document dated more than nine months prior to the date of its 
use.
    (b)(1) If the commodity pool operator knows or should know that the 
Disclosure Document or profile document is materially inaccurate or 
incomplete in any respect, it must correct that defect and must 
distribute the correction to:
    (i) All existing pool participants within 21 calendar days of the 
date upon which the pool operator first knows or has reason to know of 
the defect; and
    (ii) Each previously solicited prospective pool participant prior 
to accepting or receiving funds, securities or other property from any 
such prospective participant.
    (2) The pool operator may furnish the correction by any of the 
following means:
    (i) An amended Disclosure Document or profile document;
    (ii) With respect to a hard copy of the Disclosure Document, a 
sticker affixed to the Disclosure Document; or
    (iii) Other similar means.
    (3) The pool operator may not use the Disclosure Document or 
profile document until such correction has been made.
* * * * *
    (d) Except as provided by Sec. 4.8:
    (1) The commodity pool operator must file with the Commission one 
copy of the Disclosure Document and profile document for each pool that 
it operates or that it intends to operate not less than 21 calendar 
days prior to the date the pool operator first intends to deliver the 
Document to a prospective participant in the pool; and
    (2) The commodity pool operator must file with the Commission one 
copy of the subsequent amendments to the Disclosure Document and 
profile document for each pool that it operates or that it intends to 
operate within 21 calendar days of the date upon which the pool 
operator first knows or has reason to know of the defect requiring the 
amendment.
    4. Section 4.36 is proposed to be amended by revising paragraph (d) 
to read as follows:


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

* * * * *
    (d)(1) The commodity trading advisor must file with the Commission 
one copy of the Disclosure Document for trading program that it offers 
or that it intends to offer not less than 21 calendar days prior to the 
date the trading advisor first intends to deliver the Document to a 
prospective client in the trading program; and
    (2) The commodity trading advisor must file with the Commission one 
copy of the subsequent amendments to the Disclosure Document for each 
trading program that it offers or that it intends to offer within 21 
calendar days of the date upon which the trading advisor first knows or 
has reason to know of the defect requiring the amendment.

    Issued in Washington, D.C. on July 20, 2000 by the Commission.
Jean A. Webb,
Secretary of the Commission.

    Note: The following appendix will not appear in the Code of 
Federal Regulations:

Appendix A: Proposed NFA Compliance Rule 2-35(d) and Related 
Interpretive Notice

VIII. COMPLIANCE RULES

    * * *

Part 2--Rules Governing the Business Conduct of Members Registered With 
the Commission

    * * *

RULE 2-35. CPO/CTA DISCLOSURE DOCUMENTS.

    * * *
    (d) CPO Profile Document.
    (1) A Member CPO may deliver a profile document, as defined in 
paragraph (2) below, to a prospective participant prior to the 
delivery of a Disclosure Document, provided that the profile clearly 
states that an investment in the pool may not be made until after 
the prospective participant has received the Disclosure Document. A 
Member CPO shall not provide any advertising or other promotional 
materials with the profile unless it is also accompanied by the 
pool's Disclosure Document.
    (2) A profile document shall not present information on more 
than one pool. A profile document shall include the following 
information, and only the following information, in the order 
indicated:
    (i) A cover page which contains the following information:
     The following legend:

This profile summarizes key information about the pool that is 
included in the pool's disclosure document. The disclosure document 
includes additional information about the pool, including a more 
detailed description of the risks associated with investing in the 
pool, that you should consider before you invest. Before accepting

[[Page 46126]]

any funds or other property from you for investment in this pool, 
the operator of this pool is required to provide you with a copy of 
the pool's disclosure document and obtain a signed and dated 
acknowledgment from you indicating that you have received the pool's 
disclosure document. You may obtain the disclosure document and 
other information about the pool at no cost by contacting ________ 
at ________.
     The name, main business address, main business 
telephone number and form of organization of the pool;
     The name, main business address, main business 
telephone number and form of organization of the pool operator;
     A statement identifying the document as a ``profile'' 
without using the term ``disclosure document;''
     The approximate date of the profile's first use;
     A break-even analysis which includes a tabular 
presentation of all fees and expenses presented in a manner 
prescribed by NFA's Board of Directors;
    (ii) The following cautionary statement:
    Before investing in a commodity pool, you should carefully 
consider the following:
     Futures and options trading can quickly lead to large 
losses as well as gains.
     Trading losses can sharply reduce the net asset value 
of a pool and the value of your interest in the pool.
     Some pools have restrictions on redemptions that may 
affect your ability to withdraw your investment in the pool.
     Some pools are subject to substantial charges for 
management, advisory and brokerage fees. In order to cover these 
fees, the pool may have to experience substantial trading profits.
    This profile document does not provide all the information you 
need to evaluate your participation in this pool. You should 
carefully review the pool's disclosure document which contains 
detailed information on the pool's principal risk factors, the 
expenses that will be charged to the pool and a more detailed 
description of the break-even analysis for this pool.
    You should also be aware that neither the Commodity Futures 
Trading Commission nor the National Futures Association has passed 
upon the merits of participating in this pool nor the adequacy or 
accuracy of this profile.
    (iii) The identity of each principal of the pool operator, the 
pool's trading manager and its principals, if any, each major 
investee pool, the operator of the pool and its principals, and each 
major CTA and its principals (for natural persons, this should 
include name and title);
    (iv) A non-marketing orientated discussion of the trading 
strategy used to trade the pool;
    (v) A discussion of any additional risk factors not highlighted 
in the cautionary statement which are material to this particular 
pool;
    (vi) A discussion of any conflicts of interest which are 
material to the particular pool;
    (vii) A summary of any material administrative or criminal 
actions, whether pending or concluded, within five years of the date 
of the profile, against the commodity pool operator or any of its 
principals;
    (viii) A brief description of any restrictions on transfers of a 
participant's interest in the pool;
    (ix) A brief description of how a participant may redeem his 
interest in the pool and a statement of redemption charge, if any;
    (x) If applicable, a statement indicating the extent to which a 
participant may be held liable for obligations of the pool in excess 
of the funds contributed by the participant for the purchase of an 
interest in the pool;
    (xi) For pools with prior operating history, the capsule 
performance information for the offered pool as required by 
Commodity Futures Trading Commission Regulation 4.25(a)(1)(i), 
exclusive of the requirement of Regulation 4.25(a)(2). In addition, 
if applicable, notice to the prospective participant that the pool 
operator is required to report performance information on other 
pools operated by the pool operator in its Disclosure Document under 
CFTC Regulation 4.25 and the specific section in the Disclosure 
Document where this information may be found; and
    (xii) For pools with no operating history, a statement that the 
pool has no operating history and, if applicable, notice to the 
prospective participant that the pool operator is required to report 
performance information on other pools operated by the pool operator 
and performance information on major CTAs trading the pool in its 
Disclosure Document under CFTC Regulation 4.25 and the specific 
section in the Disclosure Document where this information may be 
found.
    (3) The profile document is subject to the filing requirements 
of CFTC Regulation 4.26. A particular pool's profile document must 
be filed with the disclosure document required under CFTC Regulation 
4.21(a).
    * * *

CPO Profile Documents: Compliance Rule 2-35 Interpretive Notice

    NFA Compliance Rule 2-35 permits Member CPOs to conduct initial 
customer solicitations with a profile document, provided that a 
customer is given the disclosure document prior to investing in the 
pool. The profile document should provide a summary of key 
information regarding an investment in the commodity pool being 
offered. Among other things, the profile requires a discussion of 
the risk factors material to the particular pool being offered and a 
discussion of any conflicts of interest material to the offered 
pool. The information provided under both these sections should be 
tailored to the pool being offered and should not include a generic 
discussion of risks or conflicts of interest typical of all 
commodity pools.
    The discussion of risk factors should focus on characteristics 
of the pool that go beyond risks that are associated with commodity 
pool investments in general. This section should not contain 
boilerplate or generic language on the risks related to volatility 
and leverage which are associated with all commodity pool 
investments. If, however, these risk factors raise any special 
considerations with respect to the offered pool, the profile should 
contain a complete discussion of these special considerations. Other 
risk factors that should be discussed in this section include but 
are not limited to risks associated with allocating a substantial 
portion of a pool's assets to one CTA or a group of CTAs whose 
trading methods do not provide any diversification (e.g., a single 
CTA fund which invested exclusively in agricultural products); 
counterparty creditworthiness issues that may arise if the pool's 
assets are concentrated in OTC or foreign instruments; liquidity 
issues that may arise if the pool itself is invested in illiquid 
products; and leverage issues that may exist if the pool will engage 
in borrowing or if assets are allocated among the pool's CTAs in 
such a way that the total allocations to the pool's CTAs are greater 
than the total assets of the pool.
    The discussion on conflicts of interest should focus on 
arrangements or relationships among the pool's CPO, trading manager, 
major CTAs, CPOs of major investee pools, and any other person 
providing services to the pool that may compromise the pool 
participants' interest with respect to trading costs, fees, 
execution, or any other aspects of the pool's operation. For 
example, if the CPO provides other services to the pool for 
compensation, the CPO has a financial disincentive to replace itself 
even if it would be in the best interest of the pool. In addition, 
the compensation the CPO receives for providing these services will 
not have been set by arm's length negotiation. Other conflicts of 
interest that should be disclosed include, but are not limited to, 
situations where the CPO or CTA receives per trade compensation or 
where the CPO participates in soft dollar arrangements with the 
pool's FCM.
    This interpretive notice is not intended to provide an inclusive 
list of the risk factors and conflicts of interest that must be 
disclosed in the profile.
[FR Doc. 00-18909 Filed 7-26-00; 8:45 am]
BILLING CODE 6351-01-P