[Federal Register: August 27, 1996 (Volume 61, Number 167)]
[Proposed Rules]
[Page 44009-44013]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au96-27]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
Use of Electronic Media by Commodity Pool Operators and Commodity
Trading Advisors
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')
today is proposing technical changes to its rules requiring filing and
distribution of Disclosure Documents by commodity pool operators
(``CPOs'') and commodity trading advisors (``CTAs''). These proposals
are intended to clarify certain rule provisions that are premised upon
the filing and distribution of paper documents, in light of the
interpretations set forth in a recent interpretative release
``Interpretation Regarding Use of Electronic Media by Commodity Pool
Operators and Commodity Trading Advisors'' (61 FR 42146 (August 14,
1996)) outlining the Commission's views concerning the use of
electronic media by CPOs and CTAs.
DATES: Comments must be received on or before October 28, 1996.
ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary of
the Commission, Commodity Futures Trading Commission, 1155 21st Street,
N.W., Washington, D.C. 20581. In addition, comments may be sent by
facsimile transmission to FAX number (202) 418-5521, or by electronic
mail to [email protected].
FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief
Counsel, or Christopher W. Cummings, Attorney/Advisor, or Gary L.
Goldsholle, Attorney/Advisor, or Tina Paraskevas Shea, Attorney/
Advisor, Division of Trading and Markets, Commodity Futures Trading
Commission, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone
number: (202) 418-5450. FAX number: (202) 418-5536.
SUPPLEMENTARY INFORMATION: In order to clarify certain rules in light
of the interpretations relating to electronic distribution of
information under the Commodity Exchange Act (the ``Act'') <SUP>1 and
the Commission's regulations promulgated under the Act,<SUP>2 published
[[Page 44010]]
in a recent interpretative release (61 FR 42146 (August 14, 1996)) (the
``Interpretative Release''), the Commission is proposing minor
technical amendments to the following rules: 4.1; 4.2; 4.21; 4.26;
4.31; and 4.36. The proposed rule changes are intended to facilitate,
among other things, a pilot program for electronic filing of Disclosure
Documents with the Commission by CPOs and CTAs.
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\1\ 7 U.S.C. 1 et seq. (1994).
\2\ Commission rules are found at 17 CFR Ch. I (1996). The rules
governing CPO and CTA disclosure, reporting and recordkeeping
requirements are found at 17 CFR part 4 (1996).
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I. Proposed Amendments
In the Interpretative Release, the Commission states its views with
respect to the use of electronic media by CPOs and CTAs to disseminate
certain information in compliance with the Act and the Commission's
rules. Part 4 of the Commission's rules sets forth the disclosure and
filing requirements for CPOs and CTAs. The rules that are the subject
of the proposals set forth herein relate to the required filing with
the Commission and distribution to current and prospective pool
participants and managed account clients of Disclosure Documents by
CPOs and CTAs. These rules were adopted on the assumption that
Disclosure Documents would be filed and distributed in paper ``hard
copy'' form. The Commission believes that it is appropriate to modify
these rules in light of the views set forth in the Interpretative
Release, in order to clarify that the Commission's rules do not limit a
CPO's or a CTA's means of document delivery and filing to paper
documents, to the exclusion of electronic media, and to facilitate the
implementation of a pilot program for electronic filing of Disclosure
Documents, as more fully described in the Interpretative Release.
A. General formatting
Commission Rule 4.1(a) requires that each document distributed
pursuant to Part 4 must be clear and legible, paginated and fastened in
a secure manner. These requirements presume that the document is
composed of one or more sheets of paper. Their application to a
document that is transmitted electronically, and that exists only as
data stored on electronic media, may be subject to question. Similarly,
Rule 4.1(b) states that information required to be ``prominently''
disclosed, as provided in various Part 4 rules, must be displayed in
boldface capital letters. The increased emphasis attained by boldface
capital letters in a paper format may be lost on a computer screen,
where the only difference may be an insignificant color change.
Further, paper and electronic versions of a particular document may
differ because graphic, pictorial or audio material in one version of
the document may not be readily included in the other version.
The Commission believes that the same critical information can be
presented in electronic communication as in paper form. However,
presentation adjustments may be required in the context of electronic
media to assure that all versions of a CPO or CTA Disclosure Document
convey the same information with equivalent emphasis, whether or not
identical presentation of the information is possible. Proposed new
paragraph (c) to Rule 4.1 states that in lieu of the paper-based
formatting requirements of Rule 4.1(a), electronically distributed
documents must present all required information in a format ``readily
communicated'' to the recipient. Electronically delivered information
is readily communicated for purposes of Part 4 if it is accessible in a
single ``package'' or by a single data retrieval process, without the
need to download and assemble multiple files, and preferably without
the need to use special ``viewer'' software. Moreover, an
electronically transmitted document must be organized in substantially
the same manner as a paper document with respect to the order of
presentation and relative prominence of information. Where a table of
contents is required, the electronic document should retain page
numbers or employ an equivalently user-friendly cross reference or
indexing tool. The Commission requests comment as to whether greater
specificity should be provided in the rule as to the meaning of
``readily communicated'' or whether this type of simple performance
standard is preferable.
Where information is required to be ``prominently'' disclosed,
electronically distributed documents must present such information in a
manner reasonably calculated to draw the recipient's attention to it
and must accord it greater emphasis than other portions of the text.
For example, underlining that appears as such onscreen, color changes
that contrast with the surrounding text without decreasing legibility,
and pictorial characters designed to call attention (e.g., an arrow or
a pointing hand), may serve to highlight portions of text sufficiently
to give the desired level of prominence. Finally, if graphic, image or
audio material is included in one version of a document but not in the
version filed with the Commission, whether for technological reasons or
otherwise, the filed version of the document must contain a fair and
accurate description or transcript of the omitted material. As noted in
the Interpretative Release, audio, video, graphic or other enhancements
must be used in a manner that is consistent with Commission
requirements as to the order of presentation of information and the
relative prominence of various types of information. Thus, if video or
audio material, for example, is used to convey content that would
constitute supplemental information under Rule 4.24(v) or 4.34(n)
(e.g., a video comparison of trading program rates of return to the
movement of the Standard & Poor's 500 Index over time, or an audio
discussion of modern portfolio theory), such material must be presented
after all required information, and it must not overwhelm or obscure
required information.
Comment is solicited as to whether more specific requirements as to
formatting of electronically distributed documents are appropriate and,
if so, as to what specific standards should be established. For
example, should electronically-transmitted documents be required to
retain page breaks and page numbers corresponding to paper-based
documents?
B. Filing
Rule 4.2 states that material required to be filed with the
Commission is considered filed when received at the Commission's postal
address specified in Rule 4.2(a). In order to facilitate electronic
filing of Disclosure Documents, the proposed amendment to Rule 4.2(a)
states that such documents may be filed at the Commission's electronic
mail address designated for that purpose.<SUP>3 Rule 4.2 is otherwise
unchanged.
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\3\ Currently, this address is [email protected].
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Currently, Rules 4.26(d) and 4.36(d) require CPOs and CTAs to file
two copies of each Disclosure Document and each amendment to a
Disclosure Document with the Commission. Where a document is filed
electronically, this requirement for two copies is unnecessary and
potentially confusing. Proposed amendments to Rules 4.26(d) and 4.36(d)
would clarify that only one copy of the Disclosure Document and of each
amendment is required to be filed if the registrant elects to file
electronically with the Commission.
C. Acknowledgments
Rule 4.21(b) for CPOs and Rule 4.31(b) for CTAs currently provide
that a CPO may not accept or receive funds, securities or other
property from a prospective pool participant, and a CTA may not enter
into an agreement to guide or direct a prospective client's
[[Page 44011]]
account, unless the CPO or CTA first obtains a signed and dated
acknowledgement stating that a Disclosure Document has been received by
the prospective participant or client. As discussed in the
Interpretative Release, the Commission believes that adequate evidence
of receipt of a Disclosure Document may be obtained in ways other than
a manually signed paper receipt. Accordingly, the proposed amendments
to Rules 4.21(b) and 4.31(b) will permit registrants to obtain
acknowledgments by such electronic means as the Commission may approve,
in each case subject to the requirement that an acknowledgment be
received before a CPO accepts property from a prospective pool
participant or a CTA contracts to direct or guide a prospective
client's account. At the present time, the only approved alternative to
a signed paper receipt is the use of a personal identification or
``PIN'' number in lieu of the manual signature, as described in the
Interpretative Release. CPOs and CTAs remain obligated under Rules
4.23(a)(3) and 4.33(a)(2), respectively, to retain all acknowledgments,
and the proposed amendments permit retention in hard copy form or by
other Commission-approved means.
Comment is sought as to whether the Commission should specify in
the rules the acceptable means by which registrants can establish
receipt of Disclosure Documents, or whether a more flexible approach is
advisable.
II. Solicitation of Comments
Any interested persons wishing to submit written comments relating
to the rule proposals, as explained above, are invited to do so by
submitting them by postal mail to Jean A. Webb, Secretary of the
Commission, Commodity Futures Trading Commission, 1155 21st Street,
N.W., Washington, D.C. 20581. Comments may be sent by facsimile
transmission to FAX number (202) 418-5521, or by electronic mail to
[email protected].
III. Cost-Benefit Analysis
Although the Commission anticipates that increased use of
electronic media by registrants will benefit market participants by
making disclosure more efficient and expeditious, it does not expect
the rule amendments proposed herein, in and of themselves, to result in
substantial economic costs or benefits. The proposed amendments are
intended to clarify the application of existing requirements under the
Act and Commission rules in the context of newly developed information
technology. Use of electronic media by CPOs and CTAs for document
filing or delivery of information is optional, and registrants can
weigh for themselves the relative costs and benefits of using
electronic media in specific circumstances. Nevertheless, commenters
are invited to identify any costs or benefits associated with the
proposed amendments that the Commission may have overlooked. Commenters
are also invited to describe any additional actions that they believe
that the Commission should take in connection with the proposed
amendments to reduce compliance burdens and to maximize the benefits of
Disclosure Document delivery while minimizing unnecessary costs.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1988),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments discussed herein
would affect registered CPOs and CTAs. 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.<SUP>4 The Commission previously determined
that registered CPOs are not small entities for the purpose of the
RFA.<SUP>5 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.<SUP>6
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\4\ 47 FR 18618-18621 (April 30, 1982).
\5\ 47 FR 18619-18620.
\6\ 47 FR 18618, 18620.
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The amendments proposed herein do not impose any new burdens upon
CPOs or CTAs. The proposed amendments facilitate the use of alternative
media to meet existing requirements, and they clarify the application
of existing regulations to the use of such media. As a result, the
Commission anticipates that adoption of the proposed amendments will in
many cases reduce the burden of compliance by CPOs and CTAs.
Accordingly, pursuant to Rule 3(a) of the RFA (5 U.S.C. 605(b)), the
Acting Chairman, on behalf of the Commission, certifies that these
proposed amendments would not have a significant economic impact on a
substantial number of small entities. The Commission nonetheless
invites comment from any registered CPO or CTA who believes that these
rules would have a significant impact on its operations.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1980 (Act), 44 U.S.C. 3501 et. seq.,
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the Paperwork Reduction Act.
While these proposed amendments have no burden, the group of rules
(3038-0005) of which this is a part has the following burden:
Average Burden Hours per Response: 124.75.
Number of Respondents: 4,654.
Frequency of Response: on occasion.
Persons wishing to comment on the information which would be
required by this proposed/amended rule should contact Jeff Hill, Office
of Management and Budget, Room 3228, NEOB, Washington, DC 20503, (202)
395-7340. Copies of the information collection submission to OMB are
available from Joe F. Mink, CFTC Clearance Officer, 1155 21st Street
NW, Washington, DC 20581, (202) 418-5170.
List of Subjects in 17 CFR Part 4
Advertising, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and in particular, sections
2(a)(1), 4b, 4c, 4l, 4m, 4n, 4o, and 8a, 7 U.S.C. 2, 6b, 6c, 6l, 6m,
6n, 6o, and 12a, the Commission hereby proposes to amend Chapter I of
Title 17 of the Code of Federal Regulations as follows:
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
Subpart A--General Provisions, Definitions and Exemptions
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 4.1 is proposed to be amended by adding new paragraphs
(c) and (d) to read as follows:
Sec. 4.1 Requirements as to form.
(a) * * *
(b) * * *
(c) Where a document is distributed through an electronic medium:
(1) The requirements of paragraph (a) of this section shall mean
that all required information must be presented
[[Page 44012]]
in a format readily communicated to the recipient. For purposes of this
paragraph (c), information is readily communicated to the recipient if
it is accessible as a single file by means of commonly available
hardware and software, and if the electronically delivered document is
organized in substantially the same manner as would be required for a
paper document with respect to the order of presentation and the
relative prominence of information. Where a table of contents is
required, the electronic document must either include page numbers in
the text or employ a substantially equivalent cross-reference or
indexing method or tool;
(2) The requirements of paragraph (b) of this section shall mean
that such information must be presented in a manner reasonably
calculated to draw the recipient's attention to the information and
accord it greater prominence than the surrounding text; and
(3) A complete paper version of the document must be provided to
the recipient upon request.
(d) If graphic, image or audio material is included in a document
delivered to a prospective or existing client or pool participant, and
such material cannot be reproduced in an electronic filing, a fair and
accurate narrative description, tabular representation or transcript of
the omitted material must be included in the filed version of the
document. Inclusion of such material in a Disclosure Document shall be
subject to the requirements of Sec. 4.24(v) in the case of pool
Disclosure Documents, and Sec. 4.34(n) in the case of commodity trading
advisor Disclosure Documents.
3. Section 4.2 paragraph (a) is proposed to be revised 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, D.C. office (Att:
Special Counsel, Front Office Audit Unit, Division of Trading and
Markets, C.F.T.C., 1155 21st Street N.W., Washington, D.C. 20581).
Disclosure Documents may be filed at an electronic mail address for the
Commission, as designated by the Commission.
* * * * *
Subpart B--Commodity Pool Operators
4. Section 4.21, paragraph (b) is proposed to be revised to read as
follows:
Sec. 4.21 Required delivery of pool Disclosure Document.
(a) * * *
(b) The commodity pool operator may not accept or receive funds,
securities or other property from a prospective participant unless the
pool operator first receives from the prospective participant an
acknowledgment signed and dated by the prospective participant stating
that the prospective participant received a Disclosure Document for the
pool. Where a Disclosure Document is delivered to a prospective pool
participant by electronic means, in lieu of a manually signed and dated
acknowledgment the pool operator may establish receipt by electronic
means approved by the Commission, Provided, however, That the
requirement of Sec. 4.23(a)(3) to retain the acknowledgment specified
in this paragraph (b) applies equally to such substitute evidence of
receipt, which must be retained either in hard copy form or in another
form approved by the Commission.
5. Section 4.26, paragraph (d) is proposed to be revised to read as
follows:
Sec. 4.26 Use, amendment and filing of Disclosure Document.
(a) * * *
(b) * * *
(c) * * *
(d) Except as provided by Sec. 4.8:
(1) The commodity pool operator must file with the Commission two
copies of the Disclosure 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; Provided, however, that a pool
operator electing to file electronically pursuant to Sec. 4.2(a) must
file a single copy of the Disclosure Document; and
(2) The commodity pool operator must file with the Commission two
copies of all subsequent amendments to the Disclosure 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; Provided, however, that
a pool operator electing to file electronically pursuant to Sec. 4.2(a)
must file a single copy of each such amendment.
Subpart C--Commodity Trading Advisors
6. Section 4.31, paragraph (b) is proposed to be revised to read as
follows:
Sec. 4.31 Required delivery of Disclosure Document to prospective
clients.
(a) * * *
(b) The commodity trading advisor may not enter into an agreement
with a prospective client to direct the client's commodity interest
account or to guide the client's commodity interest trading unless the
trading advisor first receives from the prospective client an
acknowledgment signed and dated by the prospective client stating that
the client received a Disclosure Document for the trading program
pursuant to which the trading advisor will direct his account or will
guide his trading. Where a Disclosure Document is delivered to a
prospective client by electronic means, in lieu of a manually signed
and dated acknowledgment the trading advisor may establish receipt by
electronic means approved by the Commission, Provided, however, That
the requirement of Sec. 4.33(a)(2) to retain the acknowledgment
specified in this paragraph (b) applies equally to such substitute
evidence of receipt, which must be retained either in hard copy form or
in another form approved by the Commission.
7. Section 4.36, paragraph (d) is proposed to be revised to read as
follows:
Sec. 4.36 Use, amendment and filing of Disclosure Document.
(a) * * *
(b) * * *
(c) * * *
(d)(1) The trading advisor must file with the Commission two copies
of the Disclosure Document for each 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; Provided, however, that a
trading advisor electing to file electronically pursuant to Sec. 4.2(a)
must file a single copy of the Disclosure Document.
(2) The commodity trading advisor must file with the Commission two
copies of all 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; Provided,
however, that a trading advisor electing to file electronically
pursuant to Sec. 4.2(a) must file a single copy of each such amendment.
[[Page 44013]]
Issued in Washington, D.C. on August 19, 1996, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-21674 Filed 8-26-96; 8:45 am]
BILLING CODE 6351-01-P
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