[Federal Register: July 22, 1997 (Volume 62, Number 140)]
[Rules and Regulations]
[Page 39104-39115]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22jy97-2]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
Interpretation Regarding Use of Electronic Media by Commodity
Pool Operators and Commodity Trading Advisors for Delivery of
Disclosure Documents and Other Materials
AGENCY: Commodity Futures Trading Commission.
ACTION: Final Interpretation; Final Rules.
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[[Page 39105]]
SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') is modifying in part the interpretation set forth in its
August 14, 1996 release (61 FR 42146) to clarify the Commission's views
concerning electronic delivery of required Disclosure Documents and
other materials by commodity pool operators (``CPOs'') and commodity
trading advisors (``CTAs''). The Commission also is adopting technical
amendments to its rules governing the form of documents distributed by
CPOs and CTAs and the requirement that a CPO or CTA obtain a signed
acknowledgment when a Disclosure Document is delivered. The rule
amendments were proposed in the Commission's August 27, 1996 release
(61 FR 44009) and are intended to facilitate the use of electronic
media by CPOs and CTAs.
EFFECTIVE DATE: August 21, 1997.
FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief
Counsel, or Christopher W. Cummings, Special Counsel, Division of
Trading and Markets, Commodity Futures Trading Commission, 1155 21st
Street, N.W., Washington, D.C. 20581. Telephone Number: (202) 418-5450.
Facsimile Number: (202) 418-5536. Electronic Mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
On August 8, 1996, the Commission issued a proposed interpretation
regarding the use of electronic media \1\ by commodity pool operators
(``CPOs''), commodity trading advisors (``CTAs'') and their associated
persons (``Initial Release''). The Initial Release provided guidance to
CPOs and CTAs concerning the application of the Commodity Exchange Act
(``CEA'') and the Commission's regulations thereunder to activities
involving electronic media. The original effective date of the Initial
Release, which was published in the Federal Register on August 14,
1996, was October 15, 1996, with a sixty day period for the submission
of public comments. On October 15, 1996, the Commission postponed the
effective date for sixty days and extended the comment period on the
Initial Release for thirty days to provide additional time for the
public to submit comments. On December 11, 1996, the Commission
indefinitely postponed the effective date of the Initial Release to
enable a full review and consideration of the comments received and
issues presented.\2\
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\1\ The term ``electronic media'' refers to such media as
audiotapes, videotapes, facsimiles, CD-ROM, electronic mail,
bulletin boards, Internet World Wide Web sites and computer networks
(e.g., local area networks and commercial on-line services) used to
provide documents and information required by or otherwise affected
by the Commodity Exchange Act and the regulations promulgated
thereunder.
\2\ The pilot program for electronic filing of Disclosure
Documents announced in the Initial Release was implemented October
15, 1996 and was not affected by postponement of the Initial
Release's effective date.
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On August 19, 1996, the Commission proposed a series of technical
changes to Part 4 of its rules (the ``Proposed Rules'') to clarify
application of paper-based formatting, filing and acknowledgment
requirements in light of the interpretations set forth in the Initial
Release. The Proposed Rules were published for public comment in the
Federal Register on August 27, 1996.\3\ The Commission did not receive
any comments specifically addressed to the Proposed Rules. However,
because the proposed changes to Rules 4.1, 4.21 and 4.31 codified
portions of the Initial Release, the Commission is considering the
comments received in response to the Initial Release as applicable also
to those proposed rule amendments.
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\3\ 61 FR 44009 (August 27, 1996).
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The Initial Release discussed the application of the existing
statutory and regulatory regime to the use of electronic media,
including in Section II a discussion of the registration implications
of using electronic media and in Section III specific guidance for the
use of electronic media for delivery of Disclosure Documents. In
Section IV the Commission announced an optional, six month pilot
program for the electronic filing of Disclosure Documents (the ``Pilot
Program'').
Based upon its review of the comments received and its experience
with the Pilot Program, on April 9, 1997, the Commission determined to
convert the electronic filing program to a permanent, voluntary filing
program.\4\ On April 9, 1997, the Commission adopted the proposed
changes to Rules 4.2(a), 4.26(d) and 4.36(d) substantially as proposed
to implement the electronic filing program.\5\ This Release addresses
the issues relating to the electronic delivery of Disclosure Documents
and other documents by CPOs and CTAs discussed in Section III of the
Initial Release. This Release does not affect the status of Section II
of the Initial Release, which principally addressed registration
issues, the effectiveness of which was indefinitely postponed by the
Commission's Federal Register release of December 16, 1996.\6\
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\4\ 62 FR 18265 (April 15, 1997).
\5\ 62 FR 18265 (April 15, 1997). Rule 4.2(a) was changed to
provide for electronic filing at an e-mail address to be designated
by the Commission. Rules 4.26(d) and 4.36(d) were changed to provide
that, when a Disclosure Document is filed electronically, only one
copy need be submitted.
\6\ 61 FR 65940 (December 16, 1996).
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The Commission received comment letters from seventy-seven sources:
twenty-six from persons registered as CTAs, nineteen from CPOs/CTAs,
two from CTAs/introducing brokers (``IBs''), one from a CTA/futures
commission merchant, one from a CTA/CPO/IB, one from a contract market,
one from a futures industry trade association, one from a self-
regulatory organization, one from a public interest legal center, one
from a publishers' trade association and the remainder from various
unregistered persons or entities. The comments received expressed broad
support for the Commission's initiative to provide guidance regarding
the use of electronic media but raised issues concerning a number of
specific applications of the requirements for delivery of Disclosure
Documents.\7\ Based upon the Commission's consideration of the comments
received and its own reconsideration of the Initial Release, the
Commission has determined to modify the interpretation as discussed
below. The Commission also has determined to adopt the remaining
technical amendments to Part 4 in substantially the form in which they
were proposed.
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\7\ Because final action on Section II of the Initial Release is
not being taken at this time, the Commission is not addressing in
this release the comments received concerning registration-related
issues.
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As the Commission stated in the Initial Release, ``electronic media
can provide an effective alternative to traditional paper-based
media.'' \8\ Thus, as a general proposition, the Commission supports
consistency in the application of regulatory requirements to electronic
and non-electronic media to ensure that information is conveyed in a
manner that achieves the relevant regulatory objectives, regardless of
the medium selected. The following guidance is designed to aid in the
application of the rules to delivery of Disclosure Documents and other
documents by means of electronic media in a manner that achieves the
same objectives as delivery of hardcopy documents.
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\8\ 61 FR at 42150.
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II. Delivery of Disclosure Documents to Prospective Investors--
Compliance With Rules 4.21(a) and 4.31(a)
Commission rules require that CPOs and CTAs deliver a Disclosure
Document at or prior to the time of solicitation of customers.
Commission Rule 4.21(a) provides that ``no CPO
[[Page 39106]]
* * * may, directly or indirectly, solicit, accept or receive funds,
securities or other property from a prospective pool participant in a
pool that it operates or that it intends to operate unless, on or
before the date it engages in that activity, the CPO delivers or causes
to be delivered to the prospective participant a Disclosure Document
for the pool * * *.'' \9\ Similarly, Rule 4.31(a) provides that ``no
CTA * * * may solicit a prospective client, or 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 by means of
a systematic program that recommends specific transactions, unless the
commodity trading advisor, at or before the time it engages in the
solicitation or enters into the agreement (whichever is earlier),
delivers or causes to be delivered to the prospective client a
Disclosure Document for the trading program * * *.'' \10\
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\9\ 17 CFR 4.21(a). CPOs and CTAs are reminded of their
obligations, regardless of the medium used, to disclose all material
information to existing or prospective clients (see Rules 4.24(w)
and 4.34(o)) and not to mislead (see Sections 4b and 4o of the Act,
7 U.S.C. 6b and 6o).
\10\ 17 CFR 4.31(a).
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The Initial Release provided guidance to CPOs and CTAs concerning
the use of electronic media to comply with the requirements of Part 4
of the Commission's regulations for the delivery of Disclosure
Documents by CPOs and CTAs and distribution of monthly or quarterly
statements and annual reports by CPOs. The requirement to deliver
Disclosure Documents to prospective customers is an essential component
of the Commission's regulatory regime for CPOs and CTAs. The Commission
reaffirms the view expressed in the Initial Release that ``the
requirements that CTAs and CPOs deliver Disclosure Documents to
prospective clients and pool participants, respectively, may be
satisfied by the use of electronic media, provided appropriate measures
are taken to assure that the purposes of the delivery requirements are
achieved.'' \11\ In the Initial Release, the Commission identified
criteria to guide CPOs and CTAs in making use of electronic media to
effect delivery of Disclosure Documents and other required
communications in a manner that assures that the purposes of the
delivery requirements are achieved. The Commission invited comment
concerning the criteria highlighted in the Initial Release and any
additional criteria that commenters believed to be relevant. The
Commission has reviewed the Initial Release in light of the comments
received and has determined to make several modifications of the
guidance provided, as discussed more fully below.
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\11\ 61 FR at 42158.
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Consent. In the past, compliance with Part 4 of the Commission's
rules has required delivery of Disclosure Documents in paper form.
While the Commission supports the use of electronic media as an
alternative medium for delivery of Disclosure Documents, it recognizes
that some persons may prefer to receive disclosure in paper form. Paper
disclosures generally have a greater degree of permanence and
portability than electronic disclosures and in some contexts may be
easier to review, e.g., if one wishes to review several pages ``side by
side.'' Accordingly, CPOs and CTAs may use electronic delivery in lieu
of delivery of a hardcopy Disclosure Document only where the intended
recipient has provided informed consent to receipt of the document by
means of electronic delivery.
In the Initial Release, the Commission set forth six generic
factors that must be disclosed by a CPO or CTA to obtain informed
consent to delivery of required documents electronically: (1) the
regulatory requirement to deliver the relevant document, such as a
Disclosure Document, to prospective commodity pool participants or
managed account customers, as applicable; (2) the right to elect to
receive such document in hardcopy form or by means of electronic
delivery; (3) the specific media and method by which electronic
delivery will be made; \12\ (4) the potential costs associated with
receiving or accessing electronically delivered documents; (5) the
types of documents that will be delivered through electronic media, if
documents in addition to the Disclosure Document are to be delivered
electronically; and (6) the prospective customer's right to revoke his
consent to receive documents by electronic means at any time.
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\12\ This information should include, for example,
identification of software (other than that which the customer/user
is using to view the disclosures given to obtain informed consent)
needed to download the Disclosure Document and, as appropriate, an
indication that download times may be lengthy.
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Two commenters, the National Futures Association (``NFA'') and the
Managed Futures Association (``MFA''), contended that the Commission's
procedures for obtaining informed consent were complicated and required
unnecessary information. For example, NFA questioned whether in an
electronic environment a CPO should be required to obtain informed
consent concerning delivery of pool account statements at the time of
initial solicitation. NFA was also concerned as to how registrants
could provide estimates concerning the cost of receiving electronic
disclosures when such costs are likely to vary substantially from user
to user. Similarly, MFA's comment letter asked that the Commission
clarify what is required for obtaining informed consent and contended
that the requirement of informed consent could amount to a ``penalty''
for using electronic media. MFA urged that both informed consent and
acknowledgment of delivery be required only at the point of sale,
rather than at initial solicitation.
The Commission does not believe that obtaining informed consent
need require complex or burdensome procedures and is providing further
clarification to address concerns expressed by various commenters. With
respect to NFA's concern that a CPO might be required to obtain
informed consent concerning delivery of other required pool reports
such as pool account statements at the time of initial solicitation,
the Commission notes that the Initial Release was only intended to set
forth the consent criteria that would apply to all potentially required
communications without addressing when each relevant consent need be
obtained. It did not require that such consents be obtained at the time
of initial solicitation, except consent to delivery of the Disclosure
Document electronically, since such delivery is required to occur at or
prior to solicitation.\13\ With respect to explaining the potential
costs of electronic delivery, the Commission did not intend that CPOs
or CTAs provide the actual amount of attendant costs other than costs
added by the deliverer for the electronic delivery of required
documents. This means that if charges specific to access and receipt of
the Disclosure Document, in addition to basic Internet or electronic
media access fees, will be incurred, CPOs and CTAs must so specify.
Consequently, for materials posted on the World Wide Web and accessible
without charge, as is the case with materials presented on the vast
majority of Internet sites, there would be no duty to disclose
potential costs. In many, if not most, cases the consent requirements
should be satisfiable with a single sentence identifying the document
to be delivered electronically, the prospective customer's right to
receive a hardcopy, and the prospective customer's right to
[[Page 39107]]
revoke consent to electronic delivery. As discussed more fully below,
the disclosures requisite to obtaining informed consent may be included
in the disclosure statement presented in lieu of the full Disclosure
Document at the beginning of the solicitation material to permit access
to a CPO or CTA Internet site.
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\13\ See discussion below as to how such delivery (i.e.,
presubscription delivery) may be accomplished in an electronic
environment.
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Delivery. Commission Rules 4.21(a) and 4.31(a) require that, at or
before the time at which a CPO or CTA solicits a prospective pool
participant or client, respectively, he must deliver the applicable
Disclosure Document. In the Initial Release, the Commission construed
the requirements of Rules 4.21(a) and 4.31(a) (which, by reference to
Rules 4.24 and 4.34, impose both specific presentation and order of
disclosure requirements) in the context of electronic media to require
that the full Disclosure Document be delivered electronically to a
prospective investor prior to providing access to any solicitation
materials concerning the offered pool or managed account services other
than de minimis introductory material. In order not to constrain unduly
the ability to provide a menu of available information, the Commission
indicated that a general description of the contents of a website,
through presentation of an outline or table of contents for the website
in which the Disclosure Document is listed as the first item, would
satisfy Rules 4.21(a) and 4.31(a) provided that the prospective pool
participant or client would be unable to review other sections of the
site before accessing and scrolling through the Disclosure Document and
affirming that he or she had received it.
This ``click and scroll'' requirement addressed both the
Commission's concern that prospective investors actually have the
Disclosure Document brought to their attention with a comparable degree
of directness and immediacy as would normally be attained by postal
mail or personal delivery, and the ``order'' of disclosure requirements
of Commission rules. Postal mail or personal delivery assures actual
notice to the recipient of receipt of a document as well as actual
receipt of the document. By contrast, electronic media have the
capability of making vast inventories of documents passively available
through indices or hyperlinks, which provide a computer connection to
documents often too numerous for any viewer to access or, in many
cases, even to identify as being of particular relevance to that
viewer. Consequently, announcing the availability of a document by
means of electronic media may have far less significance to, and impact
upon, a prospective customer than actual delivery of a hardcopy
Disclosure Document. Thus, in the Initial Release, the Commission
endeavored to give guidance designed to balance the regulatory interest
in the prospective pool participant's or managed account customer's
actually having notice and immediate receipt of the Disclosure Document
with the CPO's and CTA's interest in the efficiencies obtainable
through the use of electronic media.
However, a number of commenters argued that application of the
delivery requirement in the manner suggested in the Initial Release was
unduly burdensome. They objected to the requirement that investors
access and scroll to the end of a Disclosure Document prior to
receiving promotional material on the ground that hardcopy documents,
while provided before other material, may not be read completely. These
commenters believed that such a requirement might discourage persons
from obtaining information concerning managed futures on the Internet.
Although the ``click and scroll'' procedure permits a viewer to scroll
through a document in a matter of seconds, some commenters viewed the
requirement that the viewer scroll through the Disclosure Document as
excessive and analogous to ``requir[ing] registrants to ensure that
prospective customers review each page of the hardcopy document before
proceeding with a solicitation.'' \14\ NFA's comment letter proposed
that, in lieu of requiring that viewers actually proceed through the
full text of the Disclosure Document before receiving any additional
solicitation material, CPOs and CTAs instead provide a concise risk
disclosure statement, which viewers would be required to scroll
through, together with immediate electronic (or hardcopy) access to the
full electronic (or hardcopy) Disclosure Document. NFA's comment letter
also proposed that the Disclosure Document be deemed to have been
delivered if: (1) the Disclosure Document is prominently available and
in close proximity to the solicitation information requiring delivery
of a Disclosure Document; (2) the Disclosure Document and all
supplements are made accessible electronically for the time period for
which the Disclosure Document is effective; and (3) the Disclosure
Document is available upon request in paper form or able to be
downloaded by the recipient.\15\ Further, some commenters contended
that the Commission's interpretation of delivery differed from that of
the Securities and Exchange Commission (``SEC''), which permits the use
of hyperlinks to effectuate delivery in certain circumstances.\16\
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\14\ NFA comment letter at 2.
\15\ NFA also referenced the interpretations of the SEC
concerning electronic delivery of required disclosures. NFA's
tripartite test is consistent with that of the SEC.
\16\ For example, the SEC stated that during the ``post-
effective'' period of a public securities offering, a company could
place its sales literature on the World Wide Web provided that the
sales literature contains a hyperlink to the Company's final
prospectus where an individual may click on a box marked ``final
prospectus'' and almost instantly the final prospectus appears on
the individual's computer screen. The SEC noted that ``[s]ales
literature, whether in paper or electronic form, is required to be
preceded or accompanied by a final prospectus. The hyperlink
function enables the final prospectus to be viewed directly as if it
were packaged in the same envelope as the sales literature.
Therefore, the final prospectus would be considered to have
accompanied the sales literature.'' 60FR 53458, 53463 (October 13,
1995).
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Based upon further consideration of the issues and the comments
received, the Commission believes that the delivery requirements of
Rules 4.21 and 4.31 may be satisfied in the context of electronic media
by methods that do not require the prospective customer to scroll
through the entire Disclosure Document prior to receiving other
solicitation material, provided that the requirements on prominence of
presentation and comparable availability discussed herein are followed.
One such method acceptable to the Commission would be providing a
simple, concise statement highlighting the nature of the risks relevant
to the pool or managed account program being offered and directing the
viewer to the Disclosure Document for a fuller explanation of the
nature of the proposed investment and its attendant risks and costs.
The same explanatory statement could be used to satisfy the requirement
to obtain the informed consent of prospective customers who elect to
receive the Disclosure Document electronically rather than through
delivery of a hardcopy document. This risk disclosure statement would
be filed with the Commission together with the registrant's Disclosure
Document. In this scenario, the prospective investor is using
electronic media to consent to electronic receipt of the Disclosure
Document and is also receiving on that medium a summary risk statement
highlighting the availability of the Disclosure Document and a
hyperlink or other similarly immediate connection to the Disclosure
Document. In this context, the CPO or CTA has delivered the relevant
Disclosure Document at the
[[Page 39108]]
time of or prior to solicitation of the prospective customer.\17\
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\17\ However, if a prospective investor were solicited other
than by electronic media, providing a summary risk disclosure
statement and notice of the electronic availability of a Disclosure
Document would not constitute delivery of the Disclosure Document at
the time of or prior to solicitation.
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For purposes of providing this concise risk disclosure and
highlighting the contents and availability of the Disclosure Document,
the Commission believes that the ``risk disclosure statement'' set
forth in Rules 4.24 and 4.34 and required to be presented at the
beginning of the Disclosure Document for commodity pools and commodity
trading advisors, respectively, may provide a useful template, with
minor adjustments. A sample ``short form'' risk disclosure statement
for a commodity pool might read as follows:
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU
SHOULD BE AWARE THAT FUTURES AND OPTION TRADING CAN QUICKLY LEAD TO
LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY
REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF
YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS
MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES
FOR MANAGEMENT AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY
FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF
THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE
DESCRIPTION OF THE PRINCIPAL RISK FACTORS, EACH EXPENSE TO BE
CHARGED THIS POOL AND A STATEMENT OF THE AMOUNT, AS A PERCENTAGE
RETURN AND DOLLAR AMOUNT, NECESSARY TO BREAK EVEN, THAT IS, TO
RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT.\18\
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\18\ Ideally, individual disclosure documents provided
electronically would include electronic tables of contents,
providing hyperlinks (or comparable features) to highlight and
facilitate access to the principal risk factors, costs, and break-
even amounts, matters which are required to be highlighted in
hardcopy disclosure. In any event, a table of contents is required
by Rules 4.24(c) and 4.34(c) to be included in all Disclosure
Documents.
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THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(``CFTC'') REQUIRE THAT PROSPECTIVE INVESTORS RECEIVE A DISCLOSURE
DOCUMENT WHEN THEY ARE SOLICITED TO INVEST FUNDS IN A COMMODITY POOL
AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS
READILY ACCESSIBLE AT THIS SITE. THIS BRIEF STATEMENT CANNOT
DISCLOSE ALL OF THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE
YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, YOU SHOULD
PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY
TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF
YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE
DISCLOSURE DOCUMENT BY CLICKING BELOW. YOU WILL NOT INCUR ANY
ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY
ALSO REQUEST DELIVERY OF A HARDCOPY OF THE DISCLOSURE DOCUMENT,
WHICH ALSO WILL BE PROVIDED TO YOU AT NO COST. THE CFTC HAS NOT
PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR ON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURE DOCUMENT.
PLEASE ACKNOWLEDGE YOUR UNDERSTANDING OF THIS IMPORTANT
STATEMENT.
Similarly, a CTA's ``short form'' risk disclosure statement might read
as follows:
THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU
SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE
FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.
THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN
COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE
OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO
SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE
NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO
MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF
THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE
DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED
TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (``CTA'').
THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(``CFTC'') REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A
DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN
AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S
COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE
HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS
BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER
SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD
PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY
TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF
YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE
DISCLOSURE DOCUMENT BY CLICKING BELOW. YOU WILL NOT INCUR ANY
ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY
ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT,
WHICH ALSO WILL BE PROVIDED TO YOU AT NO COST. THE CFTC HAS NOT
PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR
ON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE DOCUMENT.
OTHER DISCLOSURE STATEMENTS ARE REQUIRED TO BE PROVIDED YOU
BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU.
PLEASE ACKNOWLEDGE YOUR UNDERSTANDING OF THIS IMPORTANT
STATEMENT.
At a minimum, such a risk disclosure statement should state: (1)
that the risk of loss in trading futures contracts or commodity options
can be substantial; (2) that Commission rules require delivery at or
prior to the time of solicitation of a Disclosure Document, which
explains, among other things, the principal risk factors and costs of
the proposed participation in the commodity pool or managed account
program including the potential impact of fees and expenses, the
``break even'' point in dollars and the percentage return necessary to
recover one's initial investment, and restrictions on redeeming or
withdrawing one's initial investment; (3) that a hardcopy Disclosure
Document may be obtained from the CPO or CTA at no cost at any
time;\19\ and (4) that the Commission has not passed upon the merits of
participating in a particular investment or on the adequacy or accuracy
of the Disclosure Document. At the end of the risk disclosure
statement, the prospective investor would be required to acknowledge
that he or she understands the statement. CPOs and CTAs may tailor the
risk disclosure statement to the particular facts of their
situation.\20\
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\19\ Inclusion of an indication of the time required to download
the Disclosure Document may assist the prospective client in
determining whether to request a paper copy and is therefore
strongly encouraged by the Commission.
\20\After experience with this arrangement, the Commission may
develop more explicit rules, as determined to be necessary.
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This summary risk disclosure statement should be accompanied by the
Disclosure Document, made accessible by means of a hyperlink or
similarly immediate connection and presented in a form that is readily
accessible to the recipient. In stating that the Disclosure Document be
[[Page 39109]]
``readily accessible,'' the Commission requires that the Disclosure
Document be accessible on a comparable basis to other promotional
material on the CPO's or CTA's website. Thus, to the extent that a
Disclosure Document is in a form that requires use of a specially
designated viewer or software, the other promotional material should
require use of such viewer or software. This requirement is necessary
to prevent the situation where a user may access promotional materials,
such as performance data or a narrative description of the trading
methodology, but is unable to access the Disclosure Document.\21\ Use
of a concise risk disclosure statement which highlights the immediate
availability of the Disclosure Document and electronic hyperlinking or
other similarly accessible arrangement that requires no greater
facility or steps than access to other materials on the site should
balance the need for electronic delivery of Disclosure Documents to be
no more cumbersome than hardcopy delivery with the need for a customer
to be properly informed of the relevant costs and risks of the proposed
investment. Prospective pool participants or advisory clients would be
required to access only the abbreviated risk disclosure statement and
not to ``click and scroll'' through the entire Disclosure Document.
Permitting delivery of the Disclosure Document in the manner discussed
above also promotes consistency with the approach of other financial
regulators such as the SEC.\22\ Specific examples illustrating how CPOs
and CTAs may use electronic media to deliver Disclosure Documents are
provided in Section V.
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\21\ The SEC has reflected similar concerns. For example, in
example (38), the SEC stated, ``A server available through the
Internet contains a fund's prospectus and application form in
separate files. Users can download or print the application form
without first accessing, downloading or printing the prospectus; the
form includes a statement that by signing the form, the investor
certifies that he or she has received the prospectus. Logistically,
it is significantly more burdensome to access the prospectus than
the application form (e.g., the investor needs to download special
software before accessing the prospectus). The statement in the form
about receipt of the prospectus would not by itself constitute
electronic delivery of the prospectus, and the application form is
not evidence of delivery of the prospectus, given the need to
download special software before the prospectus can be viewed.'' 60
FR 53458, 53465 (October 13, 1995).
\22\ See footnote 16 supra.
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Delivery of a risk disclosure statement in the form provided above
or with minor adjustments should satisfy the requirements for informed
consent with respect to delivery of a Disclosure Document. Where the
sample risk disclosure statement provided does not address all required
disclosures, such as where the Disclosure Document is delivered in a
different manner from the risk disclosure statement, e.g., where a
Disclosure Document will be delivered by means of electronic mail, or
where accessing the electronic Disclosure Document entails additional
costs, CPOs or CTAs should modify the risk disclosure statement to
address these additional factors. In every case, the Disclosure
Document should be as accessible as promotional material.
Format. Commission rules include a number of format requirements
which are designed to assure that certain information is accorded
special prominence or emphasis in the Disclosure Document. These
requirements create an order of presentation under which certain basic
information must be placed at the beginning of the document,
information of lesser relevance is presented after matters of greater
importance, and voluntarily presented information follows required
disclosures. The prescribed order also facilitates comparison of
documents by maintaining the same sequence of topics across documents
of different registrants. In the Initial Release and the Proposed
Rules, the Commission recognized that a Disclosure Document could be
presented in electronic form in place of paper form, provided that
documents electronically delivered comply with the formatting standards
specified in Commission rules. Specifically, the Commission noted that,
where Commission rules specify the prominence, location, or other
attributes of the information required to be delivered, an electronic
version of such information must present the information in the same
order and must reflect (if not replicate) the differences in emphasis
and prominence that would exist in a hardcopy document.
The Commission received only one comment addressed to format
issues.\23\ The commenter noted that certain electronic document
formats do not have standard ``pages'' and thus may not present
legends, disclaimers and notes in the same manner as documents in
hardcopy form. To address this disparity, the commenter proposed that
the Commission require the use of certain technologies that make the
appearance of electronic documents nearly identical to their paper
versions, such as the currently popular Adobe Acrobat. The Commission
recognizes that electronic and paper versions of the same document may
differ in some respects as to format, but as noted above, does not
intend to limit the technologies that CPOs or CTAs may use to deliver
their Disclosure Documents as long as such documents present
information in the same format and order as specified in Commission
rules, and reflect ``the differences in emphasis and prominence that
would exist in the paper document.'' \24\ The Initial Release suggested
methods by which the electronic versions of documents might present
information for which special presentation requirements exist. For
example, the Commission noted that where text is required to be
presented in boldface type, an electronic presentation might achieve
the same objective by changing the color or shading of the text or the
background in a manner that causes that portion of the text to be
emphasized.
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\23\ That commenter also asked whether an electronic Disclosure
Document must be contained as a single file or may be several files
linked together. This comment appears to address language in
proposed Rule 4.1, which equated readily communicated information
with material in a ``single file.'' 61 FR at 44012. This commenter
favored linking several files together so that the Disclosure
Document may be downloaded in portions, each of which could be
downloaded more rapidly than the entire document. This comment and
the Commission's modifications to proposed Rule 4.1 are discussed
below in Section VI.
\24\ 61 FR at 42161.
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Receipt of Acknowledgments by Electronic Media--Compliance with
Rules 4.21(b) and 4.31(b). Commission Rule 4.21(b) provides that a
``commodity pool operator may not accept or receive funds, securities
or other property from a prospective pool participant unless the pool
operator first receives from the prospective pool participant an
acknowledgment signed and dated by the prospective participant stating
that the prospective participant received a Disclosure Document for the
pool.'' \25\ Similarly, Commission Rule 4.31(b) provides that a
``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.'' \26\ This acknowledgment of delivery is required of a
subscribing participant as opposed to one who is merely solicited, a
distinction preserved in the electronic context. A signed and dated
acknowledgment certifies that the
[[Page 39110]]
prospective investor has received the Disclosure Document, and the
acknowledgment is one of the records that CPOs and CTAs are required to
maintain under Part 4.
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\25\ 17 CFR 4.21(b).
\26\ 17 CFR 4.31(b).
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In the Initial Release, the Commission stated that it ``supports
the use of electronic media to obtain customer acknowledgments but
believes that measures must be taken to assure an adequate level of
verification of the authenticity of such acknowledgments.'' \27\
Similarly, in the Rule Proposal, the Commission stated that ``adequate
evidence of receipt of a Disclosure Document may be obtained in ways
other than a manually signed paper receipt.'' \28\ In the Initial
Release, the Commission stated that use of personal identification
numbers (``PINs'') to verify the identity of a recipient represented a
non-exclusive method of obtaining electronic acknowledgments of receipt
of a Disclosure Document, and the Commission invited comment concerning
the validity of electronic acknowledgments. The Commission noted that
PINs serve two important objectives: (1) they enable the CPO or CTA, to
the extent practicable, to verify the identity of the person sending
the electronic communication; and (2) they help to protect innocent
persons from false claims that they have sent a particular electronic
communication.\29\ Failure to include a valid PIN assigned to the
intended party would render invalid any message purportedly sent by
that person. The Commission has approved the use of PINs in lieu of
manual signatures in other contexts, e.g., by FCMs filing financial
reports with self-regulatory organizations. Consequently, in the
Initial Release, the Commission confirmed that the use of PINs ``would
provide an acceptable method of obtaining acknowledgments of receipt of
Disclosure Documents.'' \30\ Further, the Commission noted that under
Rules 4.21(b) and 4.31(b), CPOs and CTAs bear the burden of obtaining a
valid acknowledgment of receipt of Disclosure Documents and are thus
responsible for establishing procedures adequate to establish the
authenticity of electronic acknowledgments. The Commission originally
stated that if a CPO or CTA plans to accept electronic acknowledgments,
it is responsible for establishing a system for issuing individualized
PINs, but requested comment concerning alternative methods of
authentication. In a subsequent release, the Commission stated that the
methodology specified was not intended to be exclusive, provided that
the CPO or CTA could satisfy the relevant criteria for
verifiability.\31\
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\27\ 61 FR at 42160.
\28\ 61 FR at 44011.
\29\ 61 FR at 42161.
\30\ Id.
\31\ 61 FR at 44011.
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A number of commenters, including the NFA, MFA and the Chicago
Mercantile Exchange, objected to the requirement of use of a PIN to
verify the authenticity of electronic acknowledgments. These commenters
expressed concern that the Commission's discussion of a PIN system
mandated the use of that technology and prevented use of any other
means of verification. The MFA, for example, contended that existing
regulations do not require that a registrant verify the authenticity of
a customer's signature and recommended that, in light of multiple
technologies and procedures which may satisfy the regulatory
requirements, the Commission ``require that a registrant develop
procedures to ensure a means of identifying uniquely the recipient from
whom an acknowledgment is required,'' without mandating a particular
procedure. Although NFA objected to a requirement of authentication, it
agreed that the rules currently require ``receipt of an executed
acknowledgment which uniquely identifies an individual and purports to
be his signature.''
The Commission believes that it is reasonable to require that
electronic acknowledgments incorporate use of a PIN or other comparably
efficacious form of verifying the identity of the recipient. The
Commission recognizes, however, that different levels of verification
control may be required depending upon the sensitivity of the signature
obtained (e.g., chief financial officers currently are permitted to
sign electronically by PIN) and believes that greater flexibility may
be appropriate where a signature merely evidences receipt of a document
rather than validation of its contents. Further, the Commission does
not wish to freeze its approaches to new technologies. The Commission
therefore agrees that the acknowledgment requirement may be satisfied
by any electronic methodology that uniquely identifies a specified
person who has confirmed receipt of a document. As use of electronic
media raises particular concerns of unique identification and
attribution, a verification requirement of this nature is necessary and
prudent.\32\ Moreover, verification procedures should benefit CPOs and
CTAs insofar as they may reduce the risk of customer complaints of
failure to provide required disclosures. Thus, to the extent that
methods other than PINs for verifying the identity of a person are
available and provide a comparable level of identification of the
recipient, the Commission does not intend PIN systems to be the
exclusive method of obtaining electronic acknowledgments of receipt.
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\32\ Indeed, many parties on the Internet presently use PIN
systems to verify the identity of an individual.
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In the Initial Release, the Commission requested comment concerning
alternatives to the use of PINs to verify receipt of electronically
delivered documents. The commenters alluded to a number of
alternatives, including electronic gating, security coded electronic
mail, digital and electronic signatures, cryptography, public key-
private key configurations and certificates of identity. However, the
commenters' discussion of these alternatives did not provide
information sufficient to assess the efficacy of these methods.
Accordingly, the Commission has determined to continue to treat
acknowledgment by PIN as adequate but also to set out a performance
standard for the use of alternative mechanisms for receipt of
electronic acknowledgments.
The performance standard requires use of a unique identifier to
confirm the identity of the person sending the electronic
acknowledgment to convey the acknowledgment in order to protect persons
from claims that they have received a particular electronic
communication when in fact they have not. Hard copy or electronic
evidence of each use of such a system must be retained in order that
the Commission and other authorities can verify that the acknowledgment
was in fact given.\33\ Registrants who develop alternative systems that
meet this performance criterion are permitted, but not required, to
submit such systems to the Commission's Division of Trading and Markets
for review.
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\33\ See Section IV, infra, concerning electronic recordkeeping.
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III. Use of Electronic Media To Deliver Documents Other Than Disclosure
Documents
A. Account Statements for Pools
In the Initial Release, the Commission also provided guidance
concerning the delivery of documents other than Disclosure Documents
(specifically, monthly and quarterly account statements required to be
delivered to pool participants by Rule 4.22, and modifications of
Disclosure
[[Page 39111]]
Documents).\34\ As discussed in the Initial Release, CPOs may deliver
electronically monthly and quarterly account statements required by
Rule 4.22 provided that the CPO obtains the pool participant's informed
consent. The procedures outlined for obtaining informed consent
discussed above provide a single mechanism for establishing informed
consent to delivery of Disclosure Documents as well as other required
documents. A CPO seeking informed consent to deliver monthly or
quarterly account statements would disclose: (1) that the CPO is
required to deliver the monthly or quarterly account statement; (2) the
right of the pool participant to elect to receive such statement in
hardcopy form or by means of electronic delivery; (3) the specific
media and method by which electronic delivery will be made; (4) the
potential costs associated with receiving or accessing the electronic
account statement; and (5) the prospective customer's right to revoke
his consent to electronic delivery of account statements at any time.
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\34\ In the Initial Release, the Commission invited comment from
CPOs, accounting professionals, and other interested persons
concerning the advisability of amending Rule 1.16 to allow for
certification of Annual Reports by independent public accountants by
means of electronic media. The Commission received no comments on
this issue.
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The Commission received no comments with respect to electronic
delivery of monthly or quarterly account statements other than NFA's
comment, discussed above, concerning whether a CPO is required to
obtain informed consent to deliver pool account statements at the time
it obtains informed consent to deliver a Disclosure Document. As noted
above, CPOs may obtain informed consent concerning pool account
statements at any time, either in conjunction with informed consent to
deliver a Disclosure Document or separately, as long as the informed
consent is obtained prior to electronic delivery of the document in
question.
B. Modifications
Commission Rules 4.26 and 4.36 require that Disclosure Documents be
used for no longer than nine months and contain performance information
that is current as of a date not more than three months prior to the
date of the Disclosure Document. Rules 4.26 and 4.36 also require that,
in the event that a CPO or CTA knows or should know that a Disclosure
Document is materially inaccurate or incomplete, the registrant must
correct the defect and distribute the correction to, in the case of a
CPO, all existing pool participants and previously solicited pool
participants prior to accepting or receiving funds from such
prospective participants and, in the case of a CTA, all existing
clients in the trading program and each previously solicited client for
the trading program prior to entering into an agreement to manage such
prospective client's account. The Initial Release made clear that CPOs
and CTAs may use electronic media to comply with the amendment
requirements of Rules 4.26 and 4.36 provided that the intended
recipient has consented to electronic delivery of such information. Due
to the relatively lower costs of electronic publishing, a CPO or CTA
may wish to update its electronically presented Disclosure Documents
more frequently than it would a hardcopy version of such document
distributed in the customary manner. As stated in the Initial Release,
however, the electronic version of a Disclosure Document must be at
least as current as any paper-based version.\35\
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\35\ Ideally, the paper version would explain that more frequent
updates could be obtained electronically.
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In the Initial Release, the Commission stated that CPOs and CTAs
relying upon electronic delivery of a Disclosure Document must continue
to provide access to the Disclosure Document for a period of nine
months to allow repeated access to the Disclosure Document used at the
time of solicitation. The requirement that Disclosure Documents be
maintained at a CPO's or CTA's website for a period of nine months was
designed to coincide with the maximum effective period of a Disclosure
Document. However, NFA commented that the Commission's proposal would
require CPOs and CTAs to maintain multiple versions of their Disclosure
Documents on their websites and that this would have the potential to
confuse prospective investors. The Commission agrees with this comment
and, to avoid the potential confusion described by NFA, adopts NFA's
recommendation that CPOs and CTAs be required to maintain only the most
current version of their Disclosure Documents on their websites.\36\
The informed consent required for electronic delivery of a Disclosure
Document provides that a CPO or CTA furnish a hardcopy Disclosure
Document to a prospective investor at any time. Consequently,
individuals who may have visited a website earlier and who wish to
receive a prior version of a Disclosure Document may contact the CPO or
CTA, who must provide the previous version of the Disclosure Document,
either in hardcopy (or electronic form if the individual consents).
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\36\ Additionally, this prevents any potential confusion that
could result in prospective investors being solicited through use of
an out-of-date Disclosure Document. See Rules 4.26(a)(2) and
4.36(b). Rules 4.24(d)(4) and 4.34(d)(2) state that a Disclosure
Document must contain the date on which the CPO or CTA first intends
to use the document, and Rules 4.26(a)(1) and 4.36(a)(1) require
that all information must be current as of that date (although
performance information may be current as of a date up to three
months prior thereto).
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C. Term Sheets
Rule 4.21(a) provides that a CPO soliciting a prospective pool
participant who is an accredited investor, as defined in 17 CFR
230.501(a), may provide the prospective participant with a notice of
intended offering and statement of the terms of the intended offering,
i.e., a ``term sheet,'' prior to delivery of a Disclosure Document.
This is an exception to the general prohibition against solicitation of
prospective pool participants unless a Disclosure Document has been
given previously or is given contemporaneously. In the Initial Release,
the Commission stated that a CPO may not satisfy the requirements of
Rule 4.21(a) by electronically posting a ``term sheet'' because ``[i]n
posting a term sheet on a public electronic forum, a CPO is soliciting
all persons who are able to access such term sheet, many of whom may
not be `accredited investors.' Consequently, unless a CPO restricts
access to its term sheet to `accredited investors' only, a CPO must
also provide a copy of its Disclosure Document in accordance with the
criteria set forth herein in order to comply with the requirements of
Rule 4.21(a).'' \37\ In its comment letter, MFA agreed that, ``where
the registrant is able to restrict access to the term sheet when it is
distributed electronically in the same manner as he restricts access to
paper-based versions of the term sheet, he should be permitted to use
term sheets distributed electronically.'' Thus, term sheets may be used
electronically in accordance with Rule 4.21(a) provided that access to
such term sheets is restricted to persons who the CPO reasonably
believes to be accredited investors.\38\ For example, a CPO might
present on its website a series of questions to determine whether an
individual is an accredited investor and restrict access to its term
sheet to those persons who, based upon the responses to such questions,
it reasonably believes are accredited investors. Similarly, if a CPO
requires the use of a password to
[[Page 39112]]
access its term sheet and restricts such passwords to persons it
reasonably believes to be accredited investors based upon information
available to it, such CPO also would be in compliance with Rule
4.21.\39\
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\37\ 61 FR at 42159 n.92.
\38\ See also IPONET, 1996 SEC No-Act. LEXIS 642 (July 26,
1996).
\39\ In the Initial Release, the Commission noted that the SEC
has taken the position that placing offering materials on the
Internet would not be consistent with the prohibition against
general solicitation or advertising in Rule 502(c) of Regulation D
unless the prospective accredited investor purchasers who are
permitted to access the offering materials have been otherwise
located without a general solicitation. 60 FR at 53463-64. For
example, the SEC has approved the use of a password protected page
of a website that is accessible only to persons previously
identified as qualified accredited investors as not involving any
form of ``general solicitation'' or ``general advertising'' within
the meaning of Rule 502(c) of Regulation D provided that the process
whereby accredited investors are identified is generic in nature and
does not reference any specific transactions. See IPONET, supra note
38.
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D. Review of Websites
The Commission also received a comment that NFA should offer to
review the content of websites much in the way as it reviews
promotional materials. Pursuant to NFA Compliance Rule 2-29 and the
related Interpretive Notice dated May 1, 1989,\40\ as a service to its
members, NFA will review promotional material prior to its first
use.\41\ To the extent that CPOs and CTAs favor a voluntary prior
review process for electronic media, they may propose this to NFA
directly.
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\40\ National Futures Association Manual, Vol. 3, No. 2, (Jan.
1, 1997) at para. 9009.
\41\ Registrants have the options to file promotional material
unless otherwise required to do so by rule or directive.
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IV. Maintenance of Records
A substantial number of the comments received in response to the
Initial Release concerned the application of the Commission's
recordkeeping requirements in the context of electronic media. Rule
4.23, with respect to CPOs, and Rule 4.33, with respect to CTAs,
specify books and records that must be maintained by CPOs and CTAs in
accordance with Rule 1.31. These records include the acknowledgments
required by Rules 4.21(b) and 4.31(b), as well as the original or a
copy of each report, letter, circular, memorandum, publication,
writing, advertisement or other literature or advice distributed by
CPOs and CTAs. Rule 1.31, requires among other things, that records be
retained for a period of five years and be readily accessible during
the first two years of the five-year period. Rule 1.31(b) provides that
copies may be retained on microfilm, microfiche, or optical disk but
must be maintained in accordance with the standards set forth in Rule
1.31(c) and (d).\42\
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\42\ Rule 1.31(d) states, among other things, that all records
preserved on optical media pursuant to Rule 1.31(b) must be
preserved on non-rewritable, write once read many (``WORM'') media.
In addition, the technology must have write-verify capabilities that
continuously and automatically verify the quality and accuracy of
the information stored and automically correct quality and accuracy
defects. Rule 1.31(d)(1) states that an optical storage system must:
(i) use removable disks; (ii) serialize the disks; (iii) time-date
all files of information placed on the disks, reflecting the
computer run time of the file of information and using a permanent
and non-erasable time-date; and (iv) write files in ASCII or EBCDIC
format. As the Commission has noted, the ASCII and EBCDIC formats
``generally do not allow storage of paper records or electronic
images, such as webpages, since such records or images are normally
not written in ASCII or EBCDIC format. Therefore, these records
would be required to be retained in hard[]copy form.'' 61 FR at
42162.
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To facilitate CPOs' and CTAs' use of electronic media when possible
and to avoid imposing duplicative or inconsistent requirements on
registrants who may also be registered with the SEC, the Commission
hereby permits a CPO or CTA, whether or not registered with the SEC, to
use guidelines set forth by the SEC in its recent rulemaking in
connection with recordkeeping requirements for broker-dealers.\43\
Accordingly, a CPO or CTA may maintain required records pursuant to
Commission Rule 1.31 or as allowed by SEC regulations.\44\ For that
purpose, in the case of CPOs and CTAs, the designated examining
authority would be considered to be the NFA.
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\43\ SEC Release No. 34-38245, 62 FR 6469 (February 12, 1997).
The SEC amended its Rule 17a-4(f) to provide for the production or
reproduction of records by means of electronic storage media, with
the limited exception of those records required for penny stocks.
Rather than specify particular electronic storage media, the SEC
provided that the particular medium chosen must meet certain
criteria:
(A) Preserve the records exclusively in a non-rewrit[]able, non-
erasable format;
(B) Verify automatically the quality and accuracy of the storage
media recording process;
(C) Serialize the original and, if applicable, duplicate units
of storage media, and time-date for the required period of retention
the information placed on such electronic storage media; and
(D) Have the capacity to readily download indexes and records
preserved on the electronic storage media to any medium acceptable
under [Rule 17a-4(f)] as required by the [SEC] or the [SROs] or
which the member, broker, or dealer is a member.
17 CFR Sec. 240.17a-4(f)(ii) (1997). If a broker-dealer chooses
to use electronic storage media, it must notify its designated
examining authority prior to using such media and, if the broker-
dealer uses media other than optical disk technology or CD-ROM, it
must provide notice of at least 90 days. The SEC also set forth,
among other things, the following requirements: maintenance of
duplicates of records, which can be stored on any medium satisfying
the above criteria; organizing and indexing of both original and
duplicate records; an audit system that can record both the entry
and modification of records; a third-party download provider, whose
name is provided to the SRO and who agrees to promptly furnish to
the SEC and SRO(s) information necessary to access and download
records; and, where a broker-dealer uses an outside service bureau
to preserve records, an escrow agent who keeps a current copy of the
information necessary to access and download records.
\44\ A substantial number of Commission registrants are also
registered with the SEC. As of March 31, 1997, 113 of 236 futures
commission merchants (``FCM'') were registered with the SEC as
broker-dealers. Therefore, the Commission has attempted, where
possible, to coordinate its regulatory efforts with SEC
requirements. For instance, Rule 1.10(h) permits an FCM to file
reports concerning its financial condition by submitting a copy of
its Financial and Operational Combined Uniform Single report filed
with the SEC in lieu of the Commission's Form 1-FR-FCM, and Rules
1.14 and 1.15, the Commission's risk assessment rules, attempt to
avoid duplication of similar SEC rules with regard to recordkeeping
and reporting.
In the Commission's recent advisory (62 Fed. Reg. 31507 (June
10, 1997) permitting FCMs to deliver confirmations, purchase and
sale statements and monthly statements electronically, it also
stated that they may comply with recordkeeping requirements by
following either Commission Rule 1.31 or the SEC's guidance as set
forth in Release No. 34-38245.
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Concerning the storage and maintenance of records of electronic
communications, the Commission understands that it may be difficult or
impossible as a technical matter to store certain data in exactly the
format in which it is transmitted to customers. However, the CPO or CTA
must be able to store and maintain required records in order that, upon
request of any representative of the Commission or the United States
Department of Justice, the CPO or CTA can reproduce the recorded
materials in substantially the same form \45\ and containing the same
information as was transmitted to customers.
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\45\ For example, registrant logos may be deleted.
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V. Illustrative Examples
(1) Disclosure Document Must be Readily Accessible and Delivery of
Risk Disclosure Statement May be Sufficient to Obtain Informed Consent.
ABC is a registered CTA who operates a site on the World Wide Web. The
first page of ABC's website sets forth the risk disclosure statement
followed by ``yes'' or ``no'' lines which can be clicked upon for
viewers to confirm that they have read the statement and wish to
continue or do not wish to continue. After ``clicking'' to continue,
the user is hyperlinked to a document containing recent performance
data as well as a prominent hyperlink to the Disclosure Document.
Access to the Disclosure Document is comparably accessible as was
access to the page displaying the performance data. In this case, ABC
has complied with the requirements of Rule 4.31(a).
[[Page 39113]]
(2) Disclosure Document Must be Comparably Accessible as Other
Promotional Material. ABC is a registered CTA who operates a site on
the World Wide Web. The first page of ABC's website sets forth the risk
disclosure statement with a section for individuals to indicate by
clicking on the appropriate statement that they have read the statement
and wish to continue. After ``clicking'' to continue, the user is
hyperlinked to a document containing recent performance data as well as
a prominent hyperlink to the Disclosure Document. For some users,
clicking on the Disclosure Document hyperlink brings up instructions
and hyperlinks concerning how to download the required software viewer
to access the Disclosure Document. By contrast, accessing the
performance data on the website does not require the use of the same
viewer. In this case, ABC has not complied with Rule 4.21(a). The
Disclosure Document is not as accessible as promotional material.
Although some users may have the viewer already installed on their web
browser, others may not. Requiring users to use specialized software to
view the Disclosure Document but not the promotional material does not
satisfy the requirement that the Disclosure Document be comparably
accessible as the promotional material. The Disclosure Document must be
as readily accessible as performance data and other promotional
material.
(3) Informed Consent Necessary to Deliver Monthly Account
Statements at World Wide Web Site. XYZ is a registered CPO who operates
a site on the World Wide Web. XYZ plans to offer its pool participants
the choice of receiving monthly account statements by electronic media
or by postal mail. In a letter to pool participants, XYZ informs its
investors that it plans to post its monthly account statements on its
World Wide Web site and that persons who wish to receive monthly
account statements electronically may elect to do so. In its letter,
XYZ explains that the monthly account statements will be hyperlinked to
its website. The letter also explains that pool participants electing
to receive disclosures solely by electronic media may revoke their
election at any time and request that any monthly account statement be
sent to them in hardcopy. At the bottom of the letter is a form for
pool participants to complete and mail or fax back to XYZ indicating
that they consent to delivery of monthly account statements by
electronic media. Pool participants who do not complete the form will
continue to receive monthly account statements in hardcopy. XYZ has
complied with the requirements for informed consent to deliver monthly
account statements.
(4) Informed Consent Necessary to Deliver Monthly Account
Statements Through Electronic Mail. RST is a registered CPO who
operates a site on the World Wide Web. RST's website complies with all
Commission requirements with respect to delivery of a concise risk
disclosure statement and Disclosure Document. In order to provide RST's
pool participants with access to monthly account statements faster and
at less expense, RST has decided to use electronic mail to deliver
monthly account statements to those pool participants interested in
receiving such statements in this manner. On its website is a section
devoted to providing information on how pool participants may receive
monthly account statements by electronic mail. In addition to
requesting the pool participant's electronic mail address, the section
explains: (1) that RST is required to deliver monthly account
statements; (2) the pool participant's right to elect to receive such
statements either in hardcopy or electronic form; (3) that electronic
account statements will be delivered as a part of an electronic mail
message; (4) that there is no charge for electronic delivery of account
statements; and (5) that pool participants' election to receive monthly
account statements by electronic mail may be revoked at any time and
that RST would then resume delivery of hardcopy statements. At the
conclusion of these disclosures is an electronic form for pool
participants to complete if they are interested in receiving monthly
account statements in this manner. RST has complied with the
requirement to obtain informed consent to delivery monthly account
statements.
(5) Modifications to Disclosure Document. ABC is a registered CTA
who operates a site on the World Wide Web. ABC posts its Disclosure
Document on its website in a manner consistent with the requirements
for obtaining informed consent. Because of the additional flexibility
that electronic media provide, ABC updates the performance data on a
monthly basis. For example, by the 5th day of every month, ABC's
Disclosure Document performance data is current as of the month that
just expired. ABC is not required to keep prior months' Disclosure
Documents on its website even though prospective managed account
customers may have viewed them without obtaining a copy. If a
prospective client wishes to see a Disclosure Document as of a date
several months ago, ABC must furnish that Disclosure Document to the
prospective client, either in hardcopy or by electronic media if the
prospective client consents. Based upon the modifications made in this
Release, CTAs (or CPOs) are no longer required to maintain each
Disclosure Document posted on the website for a period of nine months.
VI. Final Rules
Rule 4.1--Requirements as to form. Commission Rule 4.1(a) sets
forth the form requirements for documents distributed pursuant to Part
4 and requires generally that documents be clear and legible, paginated
and fastened in secure manner and that information required to be
``prominently'' disclosed must be in capital letters and in boldface
type. Rule 4.1, which was adopted by the Commission in 1981, was
designed to address hardcopy documents. The proposed amendments to Rule
4.1 issued by the Commission on August 19, 1996, were designed to
reflect the reality that many documents today are presented in
electronic media. Proposed Rule 4.1 was designed to make clear that
documents may be distributed by electronic media. To this end, proposed
Rule 4.1(c)(1) would have required that for documents distributed
through an electronic medium, ``all required information must be
presented in a format readily communicated to the recipient'' and that
for this purpose ``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.'' \46\ Proposed Rule 4.1(c)(2) also
would have applied to electronic media the requirement of existing Rule
4.1(b) that information required to be ``prominently'' disclosed be
displayed in capital letters and boldface type by requiring that such
information be presented in a manner that is reasonably calculated to
draw it to the recipient's attention. Proposed Rule 4.1(c)(3) would
have required that a complete paper version of a document be provided
to a recipient upon request. Finally,
[[Page 39114]]
proposed Rule 4.1(d) required that if any graphic, image or audio
material that is included with or that accompanies the Disclosure
Document delivered to a recipient cannot be filed with the Commission
in the form in which delivered to the recipient, the CPO or CTA must
provide a fair and accurate narrative description, tabular
representation or transcript of the omitted material in the version
filed with the Commission.
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\46\ Additionally, the Commission stated in the preamble to the
August 27, 1996 Federal Register release that ``[e]lectronically
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.'' 61 FR at 44010.
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The only comment received concerning these proposed amendments to
Rule 4.1 was from a CTA who noted that requiring the use of a single
file containing the Disclosure Document was unnecessarily restrictive
and may not be advantageous since CTAs could link several sections of
the Disclosure Document to a table of contents and thus accelerate the
download time as compared to the time required for a single file. The
Commission agrees that Rule 4.1(c)(1) need not specify whether a
document is contained in a single or multiple files. Although the
Commission believes that delivery procedures typically will result in
delivery of the Disclosure Document in a single file, the Commission
does not believe that it is necessary to specify such procedures by
rule nor does the Commission wish to restrict the flexibility of CPOs
or CTAs to devise alternative methods of delivery so long as such
delivery ``readily communicates'' the information to the required
recipient.\47\
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\47\ Of course, where multiple files must be downloaded by the
recipient in order to view the entire Disclosure Document, the CPO
or CTA must make this fact clear.
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As adopted, Rule 4.1(c)(2) clarifies that, where use of capital
letters and bold-face type is required by Commission rules, this type
of presentation would also be required in the context of electronic
presentations. However, where the use of capital letters and bold-face
type would not in the context of electronic media achieve the purpose
of highlighting and emphasizing specified information, another method
reasonably calculated to draw attention to the specified information
should be used. Rule 4.1(c)(3), as adopted, clarifies that the paper
version that must be made available to recipients of electronically-
transmitted documents upon request must comply with applicable paper-
based Part 4 rules. Based upon the Commission's further consideration
of proposed Rule 4.1, section (d) is being adopted as proposed.
Rules 4.21 and 4.31--Required delivery of pool Disclosure Document
and Required delivery of Disclosure Document to prospective clients.
Rules 4.21(b) and 4.31(b) establish the requirement that CPOs and CTAs
obtain a signed and dated acknowledgment of receipt of the Disclosure
Document before accepting any funds from a prospective pool participant
or client. As proposed, Rules 4.21(b) and 4.31(b) would have been
modified to permit CPOs and CTAs to obtain acknowledgments
electronically in a form approved by the Commission. Proposed Rules
4.21 and 4.31 provided that, ``[w]here 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.''
The proposed rules also would have required that the CPO and CTA retain
the acknowledgment in accordance with Rules 4.23 and 4.33,
respectively, either in hardcopy or in another form approved by the
Commission.
The Commission did not receive any comments addressing the proposed
amendments to Rules 4.23 and 4.33. While the Commission did receive
comments concerning the requirements for and use of electronic
acknowledgments, these comments were addressed in section II, supra,
and Rules 4.21(b) and 4.31(b) have been modified in conformity with the
analysis set forth above. Specifically, final Rules 4.21(b) and 4.31(b)
have been modified to permit alternative methods of electronic
verification so long as the performance criteria enunciated in section
II are satisfied. As discussed above, use of a PIN or other unique
identifier to confirm the identity of the person acknowledging receipt
provides an acceptable method of obtaining electronic acknowledgments
of receipt. This modification responds to the concerns of commenters
that PINs might be considered the exclusive means of complying with
Rules 4.21(b) and 4.31(b) with respect to electronic media. As
discussed above, to facilitate use of electronic media, CPOs and CTAs
may maintain required records either pursuant to Commission Rule 1.31
or as permitted by SEC regulations.
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 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.\48\ The Commission previously determined that
registered CPOs are not small entities for the purpose of the RFA.\49\
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.\50\
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\48\ 47 FR 18618-21 (April 30, 1982).
\49\ 47 FR 18619-20.
\50\ 47 FR 18618, 18620.
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The amendments adopted herein do not impose any new burdens upon
CPOs or CTAs. Rather, these amendments facilitate the use of electronic
media to meet existing requirements, and they clarify the application
of existing regulations to the use of such media. Consequently, the
Commission believes that the adoption of these rule amendments will in
many cases reduce the burden of compliance by CPOs and CTAs. Moreover,
CPOs and CTAs are free to continue using paper documents.
In certifying pursuant to section 3(a) of the of the RFA that the
proposed revisions would not have a significant economic impact on a
substantial number of small entities, the Commission invited comments
from any CPOs and CTAs who believed that the proposed revisions, if
adopted, would have a significant impact on their activities. No such
comments were received on the revisions adopted herein.
Accordingly, pursuant to Rule 3(a) of the RFA, the Chairperson, on
behalf of the Commission, certifies that the action taken herein will
not have a significant impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995, Pub. L. 104-13 (May 13, 1995),
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 this rule has 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.
[[Page 39115]]
Copies of the OMB approved information collection package
associated with this rule may be obtained from: Desk Officer, CFTC,
Office of Management and Budget, Room 10202, NEOB Washington DC 20503,
(202) 395-7340.
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 amends 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 amended by adding 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 paragraphs (a) of this section shall mean
that required information must be presented in a format that is readily
communicated to the recipient. For purposes of this paragraph (c),
information is readily communicated to the recipient if it is
accessible to the ordinary user 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 capital letters and boldface
type or, as warranted in the context, another 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 that complies with the
applicable provisions of this part 4 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 4.21 paragraph (b) is to be revised to read as follows:
Subpart B--Commodity Pool Operators
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 that use a unique identifier to confirm the identity of the
recipient of such Disclosure Document, 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.
Subpart C--Commodity Trading Advisors
4. Section 4.31 paragraph (b) is 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 that use a unique identifier to confirm the identity
of the recipient of such Disclosure Document, 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.
Issued in Washington, DC on July 15, 1997, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-19147 Filed 7-21-97; 8:45 am]
BILLING CODE 6351-01-P
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