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  • [Federal Register: February 23, 2007 (Volume 72, Number 36)]

    [Rules and Regulations]

    [Page 8106-8109]

    From the Federal Register Online via GPO Access []





    17 CFR Part 4

    RIN 3038-AC35

    Advertising by Commodity Pool Operators, Commodity Trading Advisors, and the Principals Thereof

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rules.


    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) has amended Regulation 4.41, which governs advertising by commodity pool operators (CPOs), commodity trading advisors (CTAs), and the principals thereof, (1) To restrict the use of testimonials, (2) to clarify the required placement of the prescribed simulated or hypothetical performance disclaimer, and (3) to include within the regulation's coverage advertisement through electronic media (Amendments). This action is in furtherance of the Commission's longstanding view that all advertisements by CPOs, CTAs, and their principals must not be fraudulent, deceptive or misleading.

    EFFECTIVE DATE: March 26, 2007.

    FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,

    or Peter B. Sanchez, Staff Attorney, Division of Clearing and

    Intermediary Oversight, Commodity Futures Trading Commission, 1155 21st

    Street, NW., Washington, DC 20581, telephone numbers: (202) 418-5450 or

    (202) 418-5237, respectively; facsimile number: (202) 418-5528; and

    electronic mail: or, respectively.


    I. Background

    A. Regulation 4.41

    Part 4 of the Commission's regulations governs the operations and

    activities of CPOs and CTAs.\1\ In particular, Regulation 4.41 pertains

    to advertising by CPOs, CTAs, and the principals \2\ thereof, an issue

    first addressed by the Commission over 25 years ago. The Commission

    originally proposed that CPOs, CTAs, and their principals could not

    advertise their actual past performance results in a format other than

    that which the CPO or CTA was required to use in its Disclosure

    Document,\3\ and that the presentation of simulated or hypothetical

    performance of a CPO, CTA, or the principals thereof would be

    prohibited.\4\ In response to the comments received and its further

    deliberations on these proposals, the Commission adopted less

    restrictive advertising regulations.\5\


    \1\ 17 CFR Part 4 (2006). The Commodity Exchange Act (Act), 7

    U.S.C. 1 et seq. (2000), and the Commission's regulations issued

    thereunder may be accessed through the Commission's Web site, at

    \2\ The definition of the term ``principal'' is set forth in

    Regulation 4.10(e)(1), which cross-references the definition of the

    term in Regulation 3.1(a). An example of a principal of a CPO

    organized as a corporation would be the corporation's chief

    executive officer.

    \3\ Regulations 4.21 and 4.24-4.26 and 4.31 and 4.34-4.36

    concern the Disclosure Document that registered CPOs and CTAs,

    respectively, must prepare, deliver, and file.

    \4\ 45 FR 51600 (Aug. 4, 1980).

    \5\ 46 FR 26004 (May 8, 1981).


    With respect to the presentation of actual past performance, the

    Commission explained that it had adopted in Regulation 4.41(a) ``a rule

    that leaves to the discretion of the [CPO, CTA, or principal]

    advertising performance results--whether actual, simulated or

    hypothetical--the format of that presentation, so long as that format

    is not false, misleading or deceptive.'' \6\ With regard to the

    presentation of simulated or hypothetical performance results, the

    Commission explained that it had adopted in Regulation 4.41(b) ``a rule

    that allows the presentation of those results, provided that the

    presentation is accompanied by the statement prescribed in the rule,''

    whose purpose was ``to alert prospective customers to the limitations

    inherent in simulated and hypothetical past performance

    [[Page 8107]]

    results.'' \7\ The Commission also noted the scope of new Regulation

    4.41--that it applied to both oral and written communications and

    regardless of whether a CPO or a CTA was exempt from registration under

    the Act.\8\


    \6\ While acknowledging that it was not possible to identify

    every advertisement that was prohibited by new Regulation 4.41, the

    Commission nonetheless gave notice in the Federal Register release

    announcing the adoption of the rule that it would consider the

    following, non-exclusive list of advertisements, to be prohibited:

    (1) References only to successful trades, if during the same

    time period, trades which were unsuccessful were also recommended or

    executed; (2) references to the results during a specific time

    period, if the results claimed were not fairly representative of

    results achieved for comparable periods; (3) suggestions, assurances

    or claims of profit potential that do not also fairly present the

    possibility of loss; (4) statements of opinions or predictions which

    are not clearly labeled as such or which have no reasonable basis in

    fact; and (5) failure to disclose whether, and to what extent, fees,

    commissions and other expenses are reflected in the past performance

    results. Id. at 26012.

    \7\ Id.

    \8\ Section 4m(1) of the Act, 7 U.S.C. 6m(1) (2000), generally

    requires the registration of CPOs and CTAs. Regulation 4.13 provides

    exemptions from CPO registration for certain persons, and Sections

    4m(1) and 4m(3) and Regulation 4.14 provide exemptions from CTA

    registration for certain other persons.


    B. The Proposal

    Based upon its experience with the operation of Regulation 4.41

    over the course of the past 25 years, on August 23, 2006, the

    Commission published for comment proposed amendments to the regulation

    (Proposing Release).\9\ Specifically, the Commission proposed to amend

    Regulation 4.41: (1) To restrict the use of testimonials; (2) to

    clarify the required placement of the prescribed simulated or

    hypothetical performance disclaimer; and (3) to include within the

    regulation's coverage advertisement through electronic media



    \9\ 71 FR 49387. The Proposing Release may be accessed through

    the Commission's Web site, at



    C. The Comments on the Proposal

    The Commission received six comment letters in response to the

    Proposal, as follows: \10\ one from a registered futures association;

    one from a bar association; one from a futures industry trade

    association; and three from unregistered CTAs.\11\ The first three

    commenters supported the Proposal, stating that it would further the

    goals of Regulation 4.41. The CTAs, however, questioned the

    Commission's authority to adopt and maintain Regulation 4.41



    \10\ The comments on the Proposal similarly may be accessed

    through the Commission's Web site, at


    \11\ It appears that each of these CTAs is exempt from

    registration pursuant to Regulation 4.14(a)(9), which provides an

    exemption from registration for a CTA who does not direct client

    accounts or who does not provide commodity interest trading advice

    based on, or tailored to, the commodity interest or cash market

    positions or other circumstances or characteristics of particular



    Specifically, they objected to Regulation 4.41 on the grounds that

    it violates the First Amendment as applied to some CTAs. However, as

    the Commission explained in the Proposing Release, false, deceptive or

    misleading commercial speech is not protected by the First Amendment,

    and disclosure requirements to ensure that commercial speech is not

    false, deceptive or misleading are a constitutionally permissible form

    of regulation.\12\ Thus, the Commission continues to believe that,

    because Regulation 4.41 applies to forms of communication used by CTAs

    and CPOs for marketing their services, the regulation is subject to the

    constitutional standards for commercial speech and it complies with

    those standards.


    \12\ 71 FR at 49389, citing Zauderer v. Office of Disciplinary

    Counsel, 471 U.S. 626, 638 (1985), and Pearson v. Shalala, 164 F.3d

    650, 655 (D.C. Cir. 1999).


    In light of the foregoing and the specific comments the Commission

    received on the Proposal, which are discussed more fully below, the

    Commission is adopting the revisions to Regulation 4.41 as proposed. In

    the Proposing Release, the Commission provided a detailed explanation

    of each revision it had proposed to make. Accordingly, the scope of

    this Federal Register release generally is restricted to responding to

    the comments received on the Proposal. The Commission invites

    interested persons to read the Proposing Release for a fuller

    discussion of the purpose of each of the amendments contained in the


    II. Responses to the Comments

    A. New Regulation 4.41(a)(3): Testimonials on Actual Past Performance

    of CPOs, CTAs, and Their Principals

    As proposed and as adopted, Regulation 4.41(a)(3) requires

    advertisements of the actual past performance of a CPO, CTA, or a

    principal thereof that refer to a testimonial to prominently disclose

    specified information about the testimonial--e.g., that it may not be

    representative of the experience of other clients. As the Commission

    noted, it modeled this provision upon Rule 2210(d)(2) of the National

    Association of Securities Dealers, Inc. (NASD), which sets similar

    limits on the use of testimonials in advertisements and other marketing

    materials applicable to NASD members--i.e., persons who are registered

    as securities broker-dealers under the Securities Exchange Act of 1934



    \13\ 71 FR at 49388 n.9.


    One commenter questioned why the Commission proposed to regulate

    the use of testimonials along the lines of the NASD requirement for

    BDs, as opposed to adopting an outright prohibition against their use--

    as the Securities and Exchange Commission has done with respect to

    persons registered or required to be registered as investment

    advisers.\14\ The same commenter asked the Commission to explain its

    rationale for how it approached the use of testimonials--e.g., whether

    the Commission had based its approach on problems the Commission had

    observed or on requests for clarification from CPOs and CTAs.


    \14\ See 17 CFR 275.206(4)-1(a)(1) (2006).


    The purpose of this amendment, as with all of the Amendments, is to

    ``modernize and clarify'' the Commission's regulations concerning

    communications with the public--which was the same purpose of the NASD

    in proposing its Rule 2210(d)(2).\15\ While the Commission based this

    amendment on the observations of its staff, those observations were not

    of a nature so as to justify the adoption of an outright ban on

    testimonials at this time. In addition, the Commission notes that, as

    proposed and as adopted, Regulation 4.41(a)(3) applies to all CPOs and

    CTAs, not solely to those CPOs and CTAs subject to registration.


    \15\ See 68 FR 27116 at 27117 (May 19, 2003).


    B. Amended Regulation 4.41(b): The Statement That Must Accompany

    Simulated or Hypothetical Performance of CPOs, CTAs, and Their


    1. Regulation 4.41(b)(1): The Text of the Statement

    Regulation 4.41(b)(1) prohibits the presentation of simulated or

    hypothetical performance results of a CPO, CTA, or principal thereof

    unless that presentation is accompanied by either: (1) The statement

    prescribed by the regulation; or (2) a statement prescribed by a

    registered futures association. The National Futures Association (NFA)

    currently is the sole registered futures association, and it has

    prescribed such a statement in its Compliance Rule 2-29(c).\16\ As

    proposed, the Commission has amended Regulation 4.41(b)(1) so as to

    clarify the meaning of the term ``accompanied by'' in the context of

    the statement prescribed by the regulation.\17\


    \16\ All of NFA's rules can be accessed through NFA's Web site,

    \17\ The Commission additionally has conformed the reference to

    performance in the statement to the references throughout Regulation

    4.41(b), so the statement now refers to ``simulated or

    hypothetical'' performance (whereas previously it referred to

    ``hypothetical or simulated'' performance).


    One of the commenters on the Proposal questioned the need for

    alternative statements under the regulation. In response, the

    Commission notes that the availability of alternative statements

    provides a meaningful option for compliance with the regulation.

    Indeed, in the more than ten years following NFA's adoption of

    [[Page 8108]]

    Compliance Rule 2-29(c),\18\ the Commission has not been made aware of

    any compliance or other issues arising from the existence of

    alternative cautionary statements in Regulation 4.41(b)(1).\19\

    Accordingly, the Commission has not adopted the recommendation of this

    commenter that it abandon its own prescribed statement in favor of the

    prescribed NFA statement.


    \18\ See NFA Notice to Members, Notice I-95-24 (Dec. 28, 1995).

    \19\ The Commission also notes that the use of alternative

    cautionary statements is not restricted to the presentation of

    simulated or hypothetical performance results. Commission Regulation

    1.55(b) sets forth the risk disclosure statement to be made to

    customers by futures commission merchants (FCMs) and introducing

    brokers (IBs). Regulation 1.55(a) provides, however, that the

    Commission may approve a risk disclosure statement authorized by one

    or more foreign regulatory agencies or self-regulatory

    organizations. In 1994, the Commission approved the use of an

    alternative risk disclosure for use by FCMs and IBs for trading in

    futures and options in the United States, the United Kingdom, and

    Ireland. 59 FR 34376 (Jul. 5, 1994). The Commission similarly is

    unaware of any compliance or other problems arising from the

    existence of such dual general risk disclosures.


    Two commenters recommended that the Commission adopt an exception

    to its prescribed statement where advertisements are directed solely to

    persons who meet the definition of ``qualified eligible person'' (QEP)

    in Commission Regulation 4.7.\20\ They claimed adoption of such an

    exception would be consistent with NFA Compliance Rule 2-29(c)(6).

    However, based upon its review of the record of the adoption of the NFA

    rule, the Commission has concluded that the NFA rule does not provide

    for any such exception.


    \20\ Regulation 4.7 makes relief from otherwise applicable

    disclosure, reporting and recordkeeping requirements available to

    registered CPOs and CTAs whose participants and clients are solely

    QEPs--e.g., certain Commission and SEC registrants, ``knowledgeable

    employees'' and ``qualified purchasers,'' and accredited investors

    who have investments with an aggregate market value of $2 million.


    In its Notice to Members announcing the adoption of amendments to,

    and a formal interpretation of, Compliance Rule 2-29(c), NFA stated:

    Compliance Rule 2-29(c) and the Interpretative Notice do not

    apply to promotional materials directed exclusively to [QEPs] as

    defined in CFTC Regulation 4.7. However, CFTC Regulation 4.41(b)

    requires CPOs and CTAs to provide all potential pool participants or

    clients with either the disclaimer in NFA Compliance Rule 2-29(c) or

    the shorter disclaimer in CFTC Regulation 4.41(b)(1)(i) if they are

    using hypothetical performance results. Therefore, promotional

    materials directed to QEPs by CPOs and CTAs should continue to

    include the disclaimer in CFTC Regulation 4.41(b)(i) (unless they

    include the disclaimer in Compliance Rule 2-29(c)) (emphasis in the



    \21\ See supra n. 18.

    This NFA advice was issued pursuant to the Commission's letter

    approving the amendments and interpretation, which stated:

    Under recently-amended Commission Regulation 4.41, persons who

    present commodity interest hypothetical trading results in their

    promotional material must include in such materials either the

    disclaimer specified in Commission Regulation 4.41(b)(1)(i) or a

    disclaimer which complies with the rules promulgated by a registered

    futures association pursuant to Section 17(j) of the Act.

    Accordingly, NFA should inform its members that while new NFA

    Compliance Rule 2-29(c)(4) would not require members to provide

    [QEPs] with any disclaimer under Rule 2-29, members would be

    required to provide QEPs with a disclaimer pursuant to Commission

    Regulation 4.41(b)(1)(i). Letter from Jean A. Webb, Secretary of the

    Commission, to Daniel J. Roth, NFA's General Counsel, dated Dec. 12,


    Moreover, given the nature of simulated or hypothetical performance

    results, the Commission does not believe that it is appropriate to

    extend the approach of fewer disclosures to QEPs in this instance. Due

    to their financial sophistication and/or wealth, QEPs may justifiably

    be presumed to be better equipped to obtain information regarding

    industry professionals and to scrutinize the risks and rewards for

    particular investments. However, it is not clear that QEPs, solely by

    virtue of their being QEPs, are able to identify each instance in which

    otherwise unexplained performance results are simulated or


    Accordingly, the Commission has not adopted the recommendation of

    these commenters.

    2. Regulation 4.41(b)(2): The Meaning of ``In Immediate Proximity''

    Regulation 4.41(b)(2) requires that the statement prescribed by

    Regulation 4.41(b)(1) be ``prominently disclosed'' if the simulated or

    hypothetical performance that is presented is other than oral. In order

    to make clear that simulated or hypothetical performance is clearly

    identified as such, as proposed and as adopted, Regulation 4.41(b)(2)

    specifies that the prescribed disclaimer also must be ``in immediate

    proximity to the simulated or hypothetical performance being


    One commenter suggested that the proposed amendment lacked

    specificity as to the term ``in immediate proximity.'' The commenter

    requested that the Commission either define the term ``in immediate

    proximity'' or provide examples of how compliance with that requirement

    would be assessed in practice.

    In determining what constitutes ``in immediate proximity'' for the

    purpose of Regulation 4.41(b), the Commission does not believe that a

    bright-line test is practical for all circumstances. Rather, the

    Commission believes that, in determining what would constitute ``in

    immediate proximity'' to the simulated or hypothetical performance

    being advertised, the person providing the prescribed statement should

    use its best judgment. If it would be clear to someone viewing the

    simulated or hypothetical performance results that the statement is

    intended to refer to those particular performance results, then the

    statement would be ``in immediate proximity'' to the performance

    results.\22\ Thus, placing the statement on the cover page of a

    document would not be sufficient, because it would be on a different

    page from the simulated or hypothetical performance being shown.

    Similarly, if simulated or hypothetical performance results appear on

    several pages, the statement should appear on a sufficient number of

    pages so as to leave no doubt as to the nature of the performance

    results as they appear on each of those several pages.


    \22\ Additional guidance regarding unacceptable practices can be

    gleaned from past enforcement actions concerning violations of

    Section 4o of the Act and Regulation 4.41. See, e.g., CFTC v.

    Vartuli, 228 F.3d 94 (2d Cir. 2000) (prescribed statement appears on

    a separate page from the hypothetical trading results), and CFTC v.

    Heffernan, 245 F.Supp.2d 1276 (S.D. Ga. 2003) (statement on a

    webpage, but not included in the original advertisement containing

    the hypothetical performance).


    II. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \23\ requires that agencies,

    in proposing regulations, consider the impact of those regulations 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 regulations on such entities in accordance

    with the RFA.\24\


    \23\ 5 U.S.C. 601 et seq.

    \24\ 47 FR 18618 (Apr. 30, 1982).


    With respect to CTAs, the Commission has previously 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 the proposal.\25\ Moreover, the

    Commission stated that CPOs would be considered small entities if they

    are exempt from registration by virtue of Regulation 4.13(a).\26\ The

    Commission does not believe that the Amendments will have a significant

    impact on affected CTAs,

    [[Page 8109]]

    CPOs, and their principals. This is because the only burden that will

    be imposed by the Amendments will be in furtherance of the obligation

    to comply with the antifraud provisions of Section 4o of the Act when

    presenting the past performance of CTAs, CPOs, and their principals--

    whether by way of actual, simulated or hypothetical performance or

    through the use of testimonials. Assuming arguendo, however, that

    compliance with Section 4o will constitute a significant burden, the

    burden is neither new nor additional, because the Amendments are

    consistent with the Commission's longstanding interpretation of Section

    4o as applicable to all advertisements by CTAs, CPOs, and their

    principals, including advertisements that are viewed electronically,

    and with the requirement that such advertisements must not be false or



    \25\ Id. at 18620.

    \26\ Id.


    The Commission did not receive any comments relative to its

    analysis of the application of the RFA to the Proposal.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \27\ 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. The Amendments do not require a new

    collection of information on the part of any entities.


    \27\ 44 U.S.C. 3501 et seq.


    The Commission did not receive any comments relative to its

    analysis of the application of the PRA to the Proposal.

    C. Cost-Benefit Analysis

    Section 15(a) of the Act \28\ requires the Commission to consider

    the costs and benefits of its action before issuing a new regulation

    under the Act. By its terms, Section 15(a) does not require the

    Commission to quantify the costs and benefits of a new regulation or to

    determine whether the benefits of the proposed regulation outweigh its

    costs. Rather, Section 15(a) simply requires the Commission to

    ``consider the costs and benefits'' of its action.


    \28\ 7 U.S.C. 19(a) (2000).


    Section 15(a) further specifies that costs and benefits shall be

    evaluated in light of five broad areas of market and public concern:

    Protection of market participants and the public; efficiency,

    competitiveness, and financial integrity of futures markets; price

    discovery; sound risk management practices; and other public interest

    considerations. Accordingly, the Commission could in its discretion

    give greater weight to any one of the five enumerated areas and could

    in its discretion determine that, notwithstanding its costs, a

    particular regulation was necessary or appropriate to protect the

    public interest or to effectuate any of the provisions or to accomplish

    any of the purposes of the Act.

    The Commission did not receive any comments relative to its cost-

    benefit analysis of the Proposal.

    List of Subjects in 17 CFR Part 4

    Advertising, Commodity pool operators, Commodity trading advisors,

    Commodity futures, Commodity options, Customer protection, Reporting

    and Recordkeeping.


    For the reasons presented above, the Commission hereby amends chapter I

    of Title 17 of the Code of Federal Regulations as follows:



    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



    2. Section 4.41 is amended by removing ``or'' at the end of paragraph

    (a)(1), removing the period and adding a semi-colon and ``or'' at the

    end of paragraph (a)(2), adding new paragraph (a)(3), and revising

    paragraphs (b)(1)(i), (b)(2), and (c)(1) to read as follows:

    Sec. 4.41 Advertising by commodity pool operators, commodity trading

    advisors, and the principals thereof.

    (a) * * *

    (3) Refers to any testimonial, unless the advertisement or sales

    literature providing the testimonial prominently discloses:

    (i) That the testimonial may not be representative of the

    experience of other clients;

    (ii) That the testimonial is no guarantee of future performance or

    success; and

    (iii) If, more than a nominal sum is paid, the fact that it is a

    paid testimonial.

    (b) * * *

    (1) * * *

    (i) The following statement: ``These results are based on simulated

    or hypothetical performance results that have certain inherent

    limitations. Unlike the results shown in an actual performance record,

    these results do not represent actual trading. Also, because these

    trades have not actually been executed, these results may have under-or

    over-compensated for the impact, if any, of certain market factors,

    such as lack of liquidity. Simulated or hypothetical trading programs

    in general are also subject to the fact that they are designed with the

    benefit of hindsight. No representation is being made that any account

    will or is likely to achieve profits or losses similar to these being

    shown.'' ; or

    * * * * *

    (2) If the presentation of such simulated or hypothetical

    performance is other than oral, the prescribed statement must be

    prominently disclosed and in immediate proximity to the simulated or

    hypothetical performance being presented.

    (c) * * *

    (1) To any publication, distribution or broadcast of any report,

    letter, circular, memorandum, publication, writing, advertisement or

    other literature or advice, whether by electronic media or otherwise,

    including information provided via internet or e-mail, the texts of

    standardized oral presentations and of radio, television, seminar or

    similar mass media presentations; and

    * * * * *

    Issued in Washington, DC, on February 16, 2007, by the


    Eileen A. Donovan,

    Acting Secretary of the Commission.

    [FR Doc. E7-3122 Filed 2-22-07; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: May 9, 2012