[Federal Register: July 27, 2000 (Volume 65, Number 145)]
[Proposed Rules]
[Page 46122-46126]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy00-16]
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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: ddoc-
[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
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