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

[Rules and Regulations]

[Page 8106-8109]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]





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: [email protected] or [email protected], 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 http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/foia/fedreg06/foi060823a.pdf



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 http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/foia/comment06/foi06_005_1.htm


\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]


Last Updated: May 9, 2012