Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules 33297

1Commission Rules 4.25(a)(7)(i)(D) and

4.35(a)(6)(i)(D) specify that net performance

represents the change in the net asset value net of

additions, withdrawals, redemptions, fees and

expenses.

2Commission Rules 4.25(a)(7)(i)(A) and

4.35(a)(6)(i)(A). Commission Rule 4.10(b) defines

‘‘net asset value’’ as ‘‘total assets minus total

liabilities, determined in accord with generally

accepted accounting principles, with each position

in a commodity interest accounted for at fair market

value.’’

3CFTC Advisory 87–2 [1986–87 Transfer Binder]

Comm. Fut. L. Rep. (CCH) ¶ 23,624 (June 2, 1987);

CFTC Advisory 93–13, 58 FR 8226 (February 12,

1993).

4 ‘‘Nominal account size’’ is discussed in the next

section.

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Chapter I

Concept Release: Performance Data

and Disclosure for Commodity Trading

Advisors and Commodity Pools

AGENCY: Commodity Futures Trading

Commission.

ACTION: Request for Comments.

SUMMARY: The Commodity Futures

Trading Commission (‘‘CFTC’’ or

‘‘Commission’’) wishes to obtain public

comment regarding possible changes to

regulatory requirements which apply to

the programs offered to the public by

commodity trading advisors (‘‘CTAs’’)

and commodity pool operators

(‘‘CPOs’’). The proposals discussed in

this release originate from two sources.

First, National Futures Association

(‘‘NFA’’) submitted a set of proposals

(the ‘‘NFA Proposal’’) to the

Commission for its approval, which

concern computational and disclosure

matters relating to participating in CTA

programs on a partially-funded basis.

Second, the Commission staff’s

preliminary review of the NFA Proposal

gave rise to a number of additional

related proposals which the

Commission also wishes to consider.

The NFA Proposal is set forth separately

in a section entitled ‘‘NFA Proposal,’’ in

the form in which it was submitted to

the Commission for approval. NFA’s

and the Commission staff’s related

proposals, collectively, fall within the

following categories: (1) improving risk

profile data for clients considering

participation in CTA programs on a

partially-funded basis, (2) providing

CTA client account information to

FCMs for risk management purposes, (3)

improving risk profile data on

commodity pools, (4) providing a

theoretically sound basis of

computation and presentation for rate of

return (‘‘ROR’’) and related risk profile

data, (5) improving the presentation of

historical performance and risk profile

data, and (6) providing periodic

statements of program activity and

results to CTA clients.

All of the proposals, including the

NFA Proposal and the additional

proposals originated by the Commission

staff, are discussed in detail in Part IV

of this release, entitled ‘‘Request for

Comment.’’ At the end of each section,

questions are posed to help focus public

comment on the issues raised. Comment

would also be welcome on any related

issue and need not be limited to the

questions posed in this release.

After considering the comments

received, the Commission may approve

or disapprove the NFA Proposal without

further public notice, may request NFA

to amend its proposal, or may propose

for public comment changes to various

Commission rules, advisories or

interpretations pertaining to

performance reporting and disclosure.

DATE: Comments must be received on or

before August 17, 1998.

ADDRESS: Interested parties should

submit their comments to Jean A. Webb,

Secretary of the Commission,

Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581. Reference should be made

to ‘‘Performance Data and Disclosure for

Commodity Trading Advisors and

Commodity Pools.’’ In addition,

comments may be sent by facsimile

transmission to (202) 418–5221 or by

electronic mail to secretary@cftc.gov.

FOR FURTHER INFORMATION CONTACT:

Paul H. Bjarnason, Jr., Chief Accountant,

(202) 418–5459, electronic mail:

‘‘paulb@cftc.gov;’’ Robert B. Wasserman,

Special Counsel, (202) 418–5092,

electronic mail: ‘‘rwasserman@cftc.gov;’’

Kevin P. Walek, Branch Chief, (202)

418–5463, electronic mail:

‘‘kwalek@cftc.gov;’’ or Eileen R.

Chotiner, Futures Trading Specialist,

(202) 418–5467, electronic mail:

‘‘echotiner@cftc.gov,’’ Division of

Trading and Markets, Commodity

Futures Trading Commission, 1155 21st

Street, N.W., Washington, D.C. 20581.

SUPPLEMENTARY INFORMATION:

I. Background

Past performance information

presented to clients and prospective

clients is a primary marketing tool for

CTA programs and commodity pools.

This type of information appears in

disclosure documents, advertisements,

promotional materials, and in

compendia prepared by third-party

services. Performance information is

also reported either directly to clients to

communicate the results of the CTA’s

trading on behalf of their accounts or in

periodic report to investors in public

and private commodity pools.

The Commission’s aim is that

information provided to clients be

accurate, complete, and understandable.

The Commission believes that

performance data can be useful to

clients as a way of making risk and

return comparisons among investment

alternatives. Performance information

can assist clients in distinguishing one

CTA from another in terms of historical

willingness to undertake risk, fee load,

volatility and longer term results or

facilitating comparisons with other

investment opportunities. However, the

Commission recognizes that requiring

more data does not always result in

better information for clients. It does not

wish to overload clients with excessive

amounts of data, nor does it wish to

burden CTAs and CPOs with excessive

requirements. As noted above, the

Commission and NFA have identified

ways to improve existing regulatory

requirements that apply to CTAs and

CPOs. This release discusses a variety of

issues and requests public comment

thereon.

II. Discussion

A. Rate-of-Return

The Commission’s current

requirements for the presentation of

ROR data are based upon the ‘‘return on

investment’’ (‘‘ROI’’) concept used by

economists, financial analysts and other

professionals throughout the business

world to measure the results of a variety

of investment activities, from real estate

development to internal capital

budgeting to securities or commodities

trading. ROI is used to compare various

types of investments, as well as different

investment managers. However, in all

areas outside of commodities trading,

the divisor used in the calculation of

ROI represents an actual ‘‘investment’’

of tangible assets of the client—that is,

the divisors used are amounts of actual

cash funding that are owned or

borrowed by the investor.

ROR is calculated, in accordance with

Commission regulations, by dividing the

net performance 1 by the beginning net

asset value (‘‘BNAV’’) as of the

beginning of the period.2 Under current

Commission advisories,3 the BNAV

used to calculate the ROR must be based

on a set of ‘‘fully-funded’’ accounts—

accounts for which the ‘‘nominal

account size’’ 4 at the inception of the

trading program is equal to the ‘‘actual
33298 Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules

5CFTC Advisory 93–13 defines actual funds as

‘’the amount of margin-qualifying assets on deposit

in a commodity interest account, generally cash and

marketable securities.’’

6A CPO may only report the performance of a

pool on the basis of actual funds. See Advisory 93–

13, 58 FR at 8229. However, the issues discussed

herein are applicable to CPOs with respect to

disclosure of CTA performance in pool disclosure

documents.

7These factors include the following: (1) the

client must have the same ownership interest in

each account; (2) the funds must be available for

transfer to the client’s trading account; (3) the client

must commit the funds to the CTA’s program under

a written agreement, signed by the FCM, which

permits the FCM to transfer up to a specific amount

to the client’s regulated commodity account at the

direction of the CTA, and (4) the CTA must be able

to demonstrate that the funds committed to his

control were actually deposited in accounts to

which he had access.

8Commission Rules 4.25(a)(4) and 4.35(a)(3).

9Commission Rule 4.10(k) defines ‘‘drawdown’’

as ‘‘losses experienced by a pool or account over a

specified period.’’

10Worst peak-to-valley drawdown is defined in

Commission Rule 4.10(l) as ‘‘the greatest

cumulative percentage decline in month-end net

asset value due to losses sustained by a pool,

account or trading program during any period in

which the initial month-end net asset value is not

equaled or exceeded by a subsequent month-end

net asset value.’’

11The table must also include any additional

notes needed to avoid misleading the reader about

the CTA’s program or the data presented.

Commission Rules 4.24(w) and 4.34(o).

12A written contract would be required under the

NFA Proposal and is required under Advisory 93–

13.

13Advisory 93–13.

14 In practice, there are exceptions to this rule.

For example, in some programs newly-opened

accounts will take up to a few months to be fully

phased into a program. Therefore, an account being

phased in will not always have the full gamut of

positions in it, as compared to the other accounts.

Also, in some programs the smaller accounts may

not be large enough to carry the full range of trades

indicated by a CTA’s program. In such a case, the

CTA may only include the smaller accounts

together with the larger accounts in the composite

and in calculating ROR if it can be demonstrated

that the RORs are materially the same. Advisory 93–

13, 58 FR at 8228.

15October 2, 1997 letter from Daniel J. Roth,

General Counsel, NFA, to Paul H. Bjarnason, Jr.,

Chief Accountant, Division of Trading and Markets,

CFTC.

16Advisory 93–13 describes the use of a fullyfunded subset to compute ROR. The fully-funded

subset is a device to link the nominal account sizes

assigned by the CTA to its clients to tangible

funding.

funds’’ 5 subject to the CTA’s access and

control.6

‘‘Actual funds’’ held pursuant to the

CTA’s trading program are funds

deposited with the client’s FCM either

(1) in an account for which the CTA is

granted discretionary trading authority

or (2) in another account, subject to a

binding agreement permitting the FCM

to transfer funds to the first account at

the direction of the CTA and committed

to the CTA’s trading program, as

demonstrated by factors specified in

Advisory 87–2.7

Commission Rules 4.25 and 4.35

require that the performance of accounts

directed by a CTA be disclosed for the

past five years and the current year to

date. In order to permit performance

data to be disclosed without excessive

detail and repetition, the rules permit

the performance of all reasonably

comparable accounts in each of a CTA’s

programs to be shown on a composite

basis.8 When performance disclosure

requirements were first adopted by the

Commission over 20 years ago, the data

required under the rules provided only

a simple historical perspective on the

profits earned or losses incurred by the

participants in a CTA’s or CPO’s

programs. However, in recent years the

Commission has amplified the

requirements to include data which

provides a clearer focus on volatility, as

opposed to simply displaying profits

and losses. The performance capsules

are now required to include, among

other things, monthly rates of return for

the most recent five calendar years and

the current year-to-date, the worst

monthly percentage drawdown 9 during

that time period, the worst peak-tovalley percentage drawdown 10 for the

time period, and the amount of funds

under management.11

B. Nominal Account Size

The ‘‘nominal account size’’ is an

amount the CTA and the customer have

agreed upon, usually in a written

contract.12 It determines the level of

trading for the client relative to other

accounts in the CTA’s program,

regardless of the level of actual funds.13

This means that customers of a given

CTA who have the same nominal

account size will have the same trades

placed for their accounts. Generally, it

also means that a customer who has

agreed to a nominal account size of

twice that of another customer of the

same CTA will have twice the number

of positions.14 The use of nominal

account sizes simplifies management of

the trading for a multiplicity of

accounts, especially where the desired

level of trading by the clients is not

represented by the actual funding levels,

as explained below.

It is important to point out what

nominal account size does not

represent. It does not represent a

particular number of positions, since

there are times when a CTA may believe

it prudent to stay out of the markets

entirely or, alternatively, to be more

aggressive than usual. It is not a

function of margin requirements, nor is

there any absolute or constant

relationship to margin requirements

arising from the CTA’s trading. While in

a retail context, the nominal account

size is sometimes described as an

amount sufficient to make it unlikely

that any further cash deposits will be

necessary over the course of the client’s

participation in the CTA’s program, the

client may not look to the nominal

account size as a maximum possible

loss, since unexpected losses could

exceed the nominal account size.

Therefore, the nominal account size

does not represent the limit of the

customer’s liability, nor may any CTA

represent that it is an indication of the

maximum likely or possible loss that

may be incurred.

Nominal account sizes are not

comparable from one CTA to the next.

In discussions with representatives of

the industry concerning this issue over

the past ten years, it has become clear

to the Commission staff that there is no

method in common use in the industry

relating the nominal account sizes to the

number of positions traded. Indeed,

NFA has reported that setting such

levels ‘‘is inherently a subjective

process’’ and ‘‘a matter of the CTA’s

judgement.’’ 15

Nominal account size is sometimes

referred to as a ‘‘legally binding’’

amount. While the amount specified

does establish some legally binding

obligations between the customer and

the CTA, these only extend to (1) the

basis of the management fees to be paid

by the customer and (2) the trading level

to be employed by the CTA for this

account relative to other accounts

managed under the same program. the

nominal account size does not represent

an obligation to furnish an amount of

actual funds. The account arrangement

between the CTA and its client may be

terminated by the client at any time

regardless of the amounts deposited in

any account over which the CTA has or

had trading authority. Of course, the

client must settle any debits left in the

account at the FCM as a result of trades

ordered by the CTA before termination.

As indicated above, these debits could

exceed the nominal account size.

The fact that nominal account size

does not represent an actual

investment—or even a comitment—of

tangible funds and the lack of a

commonly accepted method for

determining the nominal account size

have been major factors in the

Commission’s reluctance to permit the

use of the nominal account size in

determining ROR, except as permitted

by Advisory 93–13.16
Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules 33299

17The latter requirement is not unique to

partially-funded accounts, since all accounts

include in a composite must be similar to one

another. The calculation simply established or

proved that the accounts of the fully-funded subset

performed similarly to all of the other accounts.

18While there is generally agreement that past

performance data is not predictive of future

performance, academic studies have shown that it

does some predictive value as to volatility. See

Scott H. Irwin, et al., The Predictability of Managed

Futures Returns, J. Derivatives 20, 23 (Winter 1994).

This is why the Commission has sought to

emphasize the drawndown aspects of ROR, as

opposed to the profitability aspects.

19The full text of NFA Compliance Rules 2–

29(b)(5) and 2–34 and the Interpretive Notice are

attached to this release as Appendix I.

20The Commission notes that approval of the

NFA Proposal by the Commission would, in order

to avoid conflicts between NFA and Commission

rules, require the Commission to rescind its

Advisories 87–2 and 93–13, which are discussed

elsewhere in this release.

C. Evolution of Present Commission

Requirements

As mentioned above, the

Commission’s requirements have

evolved over time in response to

identified problems and issues. One of

the issues which has been at the

forefront of consideration is the socalled ‘’notional funds’’ issue. This

issue pertains to the determination of

the BNAV, which is the amount to be

used as the divisor in the computation

of ROR. The Commission first addressed

this issue in 1987. Consistent with

current Commission rules on the matter,

Advisory 87–2 affirmed that only actual

funds on deposit could be used in

determining BNAV. Its purpose was to

permit inclusion in BNAV of funds

which are not carried at the FCM, but

which can be reached by the FCM to

satisfy a margin call. Advisory 87–2

provided that actual funds for the ROR

calculation could include funds carried

at the FCM or located at other

depositories to which the FCM had

access. This Advisory was needed

because a literal application of the

Commission’s rules resulted in the

exclusion of some funding for accounts

which logically should have been

included. For the successful trader, the

undue minimization of BNAV had the

effect of resulting in unrealistically

magnified RORs. The converse was true

for losses. However, issuing Advisory

87–2 did not solve all of the reporting

issues.

Some clients deposit to the account

managed by a CTA actual funds which

are only a fractional percentage of the

nominal account size. This practice is

referred to as ‘‘notional funding’’ or

‘‘partial funding.’’ As indicated by NFA,

the widespread use of partially-funded

accounts raises the issue of how to

report the performance of these

accounts in a manner which is not

misleading and without creating an

undue number of performance tables.

Prior to 1993, the Commission’s

reporting scheme was entirely based on

‘‘actual funds.’’

Advisory 93–13’s main feature was

the ‘‘fully-funded subset’’ method of

ROR reporting. Under this method, the

RORs presented in the performance

table were not based upon all the

accounts in a CTA’s program. The RORs

were based only upon the fully-funded

accounts—hence, the name ‘‘fullyfunded subset’’ method. The Advisory

provided for a matrix to permit clients

to convert the fully-funded subset RORs

to RORs for various partial funding

levels. To qualify for the method, the

fully-funded accounts must, in the

aggregate, represent at least ten percent

of the total nominal amount of funds

traded by the CTA in the trading

program. The Advisory also requires

that the CTA make certain additional

calculations to ensure that the subset is

representative of the CTA’s program.17

As long as the two tests are met, this

method produces approximately the

same ROR as does a method (such as the

NFA Proposal) that bases BNAV on the

nominal account size.

The Commission has also sought to

highlight the risk of CTA trading

programs and commodity pools. In

August 1995, the Commission enhanced

requirements for the disclosure of the

risk of volatility in all CTA and CPO

programs by adding two new disclosure

requirements—the largest percentage

monthly drawdown and peak-to-valley

drawdown for each program or pool

offered by a CTA or CPO. The

Commission felt that this new

dimension to performance data

provided a valuable heightened focus

upon the risk of commodities trading,

namely the possibility of large

drawdowns of equity—either on a

monthly or continuous basis.18

Since August 1995, the Commission

has received requests to address CTAs

that have difficulty achieving the fullyfunded subset necessary to qualify to

use Advisory 93–13. The interest in this

issue suggests that partially-funded

account programs are becoming more

prevalent. Because of the possibility that

more clients are participating on a

partially-funded basis, the Commission

has become concerned that full-funded

basis data may be irrelevant or

misleading for a growing segment of

clients. Since partially-funded accounts

are more highly leveraged than fullyfunded accounts, they will incur

magnified gains and losses compared to

fully-funded accounts. For example, a

customer who is funding its account at

25% of the nominal account size will

realize gains—and losses—at four times

the rate experienced by a fully-funded

client. A loss of 30% on a fully-funded

basis will result in a loss of 120% of the

investment of a customer which funds

its account at 25% of the nominal level,

wiping out the initial investment and

leaving a deficit to be repaid by the

customer.

The Commission has also noted that

commodity pools are accessing CTA

programs on a partially-funded basis.

Therefore, commodity pools raise

similar concerns because their

disclosure documents contain

information on the pool’s CTAs only on

a fully-funded basis.

III. NFA Proposal

On February 26, 1998, NFA submitted

for Commission approval a change to its

Compliance Rule 2–29(b)(5) that would

require RORs for CTAs to be based on

the nominal account size as described in

proposed NFA Compliance Rule 2–34,

rather than upon the actual funds which

are associated with the CTA’s program,

as presently required by Commission

regulations. Proposed NFA Compliance

Rule 2–34 and a related Interpretive

Notice, both of which were previously

submitted for Commission approval,

specify certain requirements regarding

account documentation and disclosure

for partially-funded accounts, as well as

certain disclosure requirements for

COPs.19 Together, the amendments to

NFA Compliance Rule 2–29(b)(5),

proposed NFA Compliance Rule 2–34,

and the proposed Interpretive Notice

constitute the NFA Proposal.20

The NFA Proposal requires a CTA

who directs a client’s account to enter

into a written agreement with the client

that includes:

(1) The account size which the CTA

will use as the basis for its trading

decisions, i.e., the nominal account size;

(2) The name or description of the

trading program in which the client is

participating;

(3) Whether the client will deposit,

maintain or make accessible the FCM an

amount equal to or less than the

nominal account size; and

(4) How additions, withdrawals, profit

and losses will affect the nominal

account size and the computation of

fees.

The CTA would be required to

provide a copy of this agreement to the

FCM carrying the client’s account. The

CTA would be required to disclose, in

writing, the factors considered by the

CTA in determining any minimum

account size of the trading program in
33300 Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules

21Commission Rule 4.7 provides an exemption

from certain Part 4 requirements with respect to the

operators of commodity pools whose participants

are limited to qualified eligible participants

(‘‘QEPs’’) and with respect to commodity trading

advisors whose clients are qualified eligible clients

(‘‘QECs’’), as those term are defined by the Rule.

22The NFA Proposal would appear to prohibit the

presentation of ROR figures based on any of the

‘‘actual funds’’ methods required in Commission

regulations or permitted in Advisories 87–2 and 93–

13. This language would also appear to prohibit the

presentation of worst month and worst peak-tovalley figures—which are rate-of-return figures—on

a partially-funded basis to prospective investors. As

discussed below, the Commission is requesting

comment on a proposal that CTAs who permit the

use of partial funding levels present such ‘‘worstcase’’ information to potential investors on a

partially-funded, ‘‘as-if’’ basis, in order to highlight

the increased risk imposed by the leveraging that

partial funding represents. The NFA Proposal

would thus proscribe the disclosure of risks which

the Commission proposal would require.

which the client is participating. In

addition, unless a client is a qualified

eligible client as defined in Commission

Rule 4.7,21 the CTA would be required

to disclose the following information in

writing:

(1) An estimated range of the amount

of customer equity generally devoted to

margin requirements or option

premiums, expressed as a percentage of

the nominal account size, and an

explanation of the effect of partially

funding an account at that percentage;

(2) A description of how management

fees will be computed, expressed as a

percentage of the nominal account size,

and an explanation of the effect of

partially funding an account at that

percentage;

(3) An estimated range of the

commissions generally charged to an

account, expressed as a percentage of

the nominal account size, and an

explanation of the effect of partially

funding an account at that percentage;

and

(4) A statement that the greater the

disparity between the nominal account

size and the amount deposited,

maintained with or made available to

the FCM, the greater the likelihood, and

possible size, of margin calls.

The NFA Proposal prohibits the use of

ROR figures in promotional material

unless such figures are calculated in a

manner consistent with that required

under CFTC regulations and are based

on the nominal account size as

described in NFA Compliance Rule 2–

34.22

The NFA Proposal also imposes

disclosure requirements on CPOs who

allocate assets among the pool’s CTAs in

such a way that the total allocations to

its CTAs are greater than the total assets

of the pool. In particular, the CPO must

disclose the following information in

writing to all participants except QEPs,

as defined in Commission Rule 4.7:

(1) A statement of the total amount

allocated to CTAs as a percentage of the

pool’s net assets;

(2) A description of how management

fees charged by the CPO and the CTAs

will be computed, including a statement

of the total amount of management fees

charged to the pool as a percentage of

the pool’s net assets;

(3) An estimated range of the amount

of commissions and transaction fees that

will be charged to the pool in the next

twelve months and an estimate of these

fees as a percentage of the pool’s net

assets; and

(4) A statement that allocating in

excess of the pool’s net assets among

CTAs has the effect of proportionately

magnifying the profits and losses that

may be incurred by the pool.

NFA presents several reasons for its

Proposal. NFA states that basing BNAV

solely on the amount deposited by the

client with the FCM can distort the past

performance results reported to clients.

The accounts of two clients who have

permitted the CTA to base its trade

orders on the same account size during

the same time period, using the same

program, can show very different RORs

based solely on their cash management

strategies. According to NFA, this factor

has nothing to do with the CTA’s

trading decisions. NFA believes that a

CTA’s performance history should

reflect the results of the CTA’s trading

decisions and should not be affected by

the client’s cash management strategies.

NFA further believes that computing

ROR for partially-funded accounts based

on actual funds on deposit overstates

both positive and negative returns in

those accounts. In addition, NFA

believes that the fully-funded subset is

so restrictive that more and more CTAs

have been unable to use it.

NFA also recognizes that there are

valid concerns regarding the

documentation, disclosure, and sales

practice problems that notional funding

can create. According to NFA, however,

these concerns are not computational

issues to be addressed through BNAV

but are separate issues that should be

addressed independently of the ROR

calculation. Therefore, NFA has

proposed using the nominal account

size for calculating BNAV and imposing

the separate requirements, which are set

forth above, to address these compliance

concerns.

IV. Request for Comment

The Commission shares NFA’s

concern for accurate disclosure. In this

connection, the proposals, collectively,

are designed to ease the calculation of

ROR for CTAs and enhance the amount

and quality of data available to

prospective clients of CTAs and

investors in commodity pools. In

considering the issues involved, the

Commission wishes to obtain as much

information as possible and to consider

all relevant options. The sections below

contain discussion and pose questions

regarding several broad topic areas. The

Commission does not wish to limit

comment to the issues and questions set

forth below, and comment is welcome

on any aspect of CTA or commodity

pool ROR reporting, accounting or

disclosure.

A. Disclosure of Risk Profile Data on

CTA Programs for Clients Considering

Participation on a Partially-Funded

Basis

The Commission staff suggests

consideration of expanded disclosure of

historical percentage drawdown data, as

explained below.

Discussion: Presently, drawdown data

is required to be presented for CTA

programs only on a fully-funded basis.

The Commission staff has become

concerned that historical drawdown

data presented only on a fully-funded

basis may mislead investors who are

considering a partially-funded

participation. It is important to convey

to investors, as clearly as possible, that

partially-funded participation in a CTA

program will result in proportionately

greater volatility—and proportionately

greater drawdowns—compared to a

fully-funded participation. Accordingly,

the Commission wishes to explore the

costs and benefits of requiring

drawdown percentage data to be

presented at two or three partial-funding

levels that are representative of those

offered by the CTA (e.g., at the 25%

50%, and 75% levels) in addition to the

fully-funded level. Presenting actual

drawdown data on a partially-funded

basis would illustrate the volatility of

partial funding with a clarity that could

not be achieved in a textual discussion.

A CTA would not be required to present

information for partial funding levels

which are below the minimum offered

by that CTA (e.g., a CTA which does not

accept accounts which are funded at

less than 50% partial funding would not

be required to present information at the

25% level).

Questions:

(1) What would be the costs and

benefits of presenting drawdown figures

geared to two or three partial funding

levels?

(2) What would be the most effective

format for the presentation?
Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules 33301

B. Presentation of Data Concerning

Estimated Margin Ratios

NFA proposes to require CTAs to

disclose, to any client which is not a

QEC under Commission Rule 4.7 and

which partially funds a participation in

a CTA’s program:

An estimated range of the amount of

customer equity generally devoted to margin

requirements or option premiums, expressed

as a percentage of the nominal account size

of the accounts traded by the CTA, and an

explanation of the effect of partially funding

an account at that percentage.

Proposed Rule 2–34(b)(1) (emphasis

added).

Discussion: This ratio, which is to be

presented to partially-funded customers,

is nonetheless a measure of the CTA’s

program on a fully-funded basis, since it

is based upon the nominal account size.

It appears that use of the ratio is

intended to provide a measure or

indicator of the risk of the CTA’s

program. The addition textual

requirement is designed to help clients

understand how partial funding

increases such risk.

The Commission believes any new

required disclosure should be assessed

in light of its clarity, reliability in

achieving its intended purpose, and its

potential for being misunderstood by

investors. If this proposed disclosure

were required, it is possible that

prospective clients will compare CTAs

on the basis of this ratio. This

possibility leads to the following issues

for consideration:

• In determining whether

presentation of the margin ratio should

be required, it is important to consider

whether aggregate margin requirements

are a reliable indicator of risk. It is

unclear that any two portfolios with the

same aggregate margin requirement are

equal as to their level of risk, regardless

of the mix of commodities represented

or the mix of futures, long and short

options comprising the portfolio. The

Commission knows of no academic

studies on the matter, and the staff’s

experience reviewing margin

requirements indicates that there can be

significant differences between margin

requirements relative to the level of risk

on different contracts. For example, the

margin requirements on stock index

futures are generally more conservative

(i.e., higher relative to volatility) than

the margin requirements on energy

products.

• The NFA Proposal’s provision that

the ‘‘estimated’’ range be disclosed

allows the CTA to exceed the upper

limit of the range presented. The

Commission staff is concerned that

disclosure of such a range might create

a misleading expectation of limited

losses.

• It is unclear that a textual

explanation of the risk of partially

funding a CTA program participation,

added to the currently required

disclosures, is likely to attract the

attention of the potential investor.

Questions:

(1) Will disclosure of information

concerning the margin ratio, as

discussed above, be useful to potential

investors? Please give details of how

potential investors will use this

information.

(2) What evidence, in the form of

studies or otherwise, supports the

proposition that margin requirements

are a reliable indicator of the level of

risk?

(3) Does a requirement that CTAs

disclose an ‘‘estimated’’ range of the

amount of customer equity ‘‘generally’’

devoted to margin involve a standard so

inherently discretionary that it creates a

danger of presenting information that is

misleading to potential investors?

(4) Would a requirement that CTAs

commit to an absolute maximum

percentage of customer equity devoted

to margin, beyond which no marginincreasing changes will be made,

provide a more useful disclosure

structure? What would be the

advantages and disadvantages of such a

structure? How should such a structure

be implemented?

(5) Would any other alternative

structures present more useful

information? What would be the

advantages and disadvantages of such

structures?

C. Providing the CTA/Client Agreement

to the FCM

The NFA Proposal calls for the CTA

to provide a copy of the CTA/client

agreement to the FCM carrying the

customer’s account.

Discussion: NFA has indicated that it

believes an FCM would find the

nominal account size useful as a general

indicator of the amount and size of

trading intended to be undertaken in the

account on behalf of the customer. The

FCM could use this information in

making a determination as to whether to

accept this client and, if so, under what

credit terms.

Questions:

(1) Do FCMs consider the client’s

nominal account size useful

information? Do they currently obtain

such information? Would the

imposition of a regulatory requirement

aid them in doing so?

(2) Would a different method of

providing the FCM with information

concerning nominal account sizes be

more efficient? What method (if any) of

communication should be required?

What should the timing and the form of

this communication be?

D. Presentation of Risk Profile Data on

Commodity Pools

The NFA Proposal imposes various

disclosure requirements on CPOs that

allocate assets among a pool’s CTAs in

such a way that the total allocations to

its CTAs are greater than the total assets

of the pool. One of the requirements is

for the CPO to provide a statement of

the total amount of nominal account

sizes allocated to a pool’s CTAs as a

percentage of the pool’s net assets. The

Commission desires to obtain comment

on an alternative method of presenting

a risk profile for a commodity pool

which was developed by its staff.

Discussion: The most readily apparent

use for NFA’s proposed ratio would be

for prospective clients to compare one

commodity pool to another. On initial

consideration, it might seem that the

greater the amount of the nominal

account size compared to pool net

assets, the greater the risk of a pool

would be. But in this connection there

are some issues that should be explored.

Although nominal account sizes may

be useful in the context of an individual

CTA, it does not follow that the ratio

would be a consistent measure for even

a single pool over time. As noted above,

nominal account sizes are not

comparable across CTAs. Therefore, a

ratio based on the aggregate of nominal

account sizes would not lend itself to

making accurate and reliable

comparisons between pools. Moreover,

the ratio of one CTA’s nominal account

size to the others may change over time.

The Commission is interested in

reviewing evidence which contradicts

or supports this preliminary conclusion.

The Commission wishes to explore an

alternative approach to enhancing the

presentation of risk profile data for

pools. This approach is founded on the

precept that the volatility of a pool is a

function of the volatilities of the

investment vehicles (i.e., CTA programs

or investee funds) in which it has

invested. Therefore, the Commission

wishes to consider requiring the

presentation of data disclosing, on a pro

forma basis, the effect of the worst

historical drawdown for each of the

vehicles the pool invested in over the

course of the year. Such a presentation

requirement might be implemented as

follows:

(1) For each investment vehicle selected,

present the worst monthly and worst peakto-valley drawdown percentages on a

leveraged basis for:
33302 Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules

23Commission Rule 4.25(a)(1)(F), (G); Rule

4.25(a)(2)(ii). The time required is ‘‘the most recent

five calendar years and year-to-date.’’ Commission

Rule 4.25(a)(5).

24The Commission anticipates that monthly data

would be made available by some means to

(a) the investment vehicle itself, at the

pool’s leveraged basis (e.g., if the fullyfunded worst drawdown for CTA ‘‘X’’ was 10

percent and the pool funds its participation

in the program of CTA ‘‘X’’ on a 50 percent

basis, the worst drawdown would be

presented as 20 percent); and

(b) the investment vehicle’s historical proforma impact on the pool, as though the

highest percentage of pool assets over the

past year were invested in the investment

vehicle for the full historical period, at the

leverage level of the pool (e.g., if CTA ‘‘X’’

had been allocated 25 percent of the pool’s

net assets, the 20 percent worst monthly

drawdown would be presented as a 5 percent

impact (20% * 25%) upon the pool’s net

assets).

(2) For major investee funds, data on the

investee fund’s major investments would be

required on a ‘‘look-through’’ basis, if they

qualified as material under the selection

criteria discussed below.

(3) Finally, for each investment vehicle,

identify the number of days during the year

that the fund was invested in the vehicle and

whether it is currently so invested.

An example of such a presentation follows:

Investment

Investment (leveraged) Highest

percentage

of fund

Impact on fund

Number of

Worst days held

month

Worst peakto-valleyWorst

month

Worst peakto-valley

CTA X ............................................................................... (20%) (Y%) 25% (5%) (Y *25%) 365

The purpose of the selection criteria

is to select investment vehicles for

which detailed risk profile data must be

provided, i.e., those which expose the

pool to the risk of material loss. It is also

important to limit the number of

vehicles for which information is

presented, to avoid overwhelming the

investor with an excessive volume of

data. Finally, the criteria should

consider the pool’s investments over the

course of a year, rather than on a

particular date, to avoid strategic

behavior aimed at ‘‘cleaning up’’ the

portfolio for a single measurement day.

One example of a selection method

would be the following:

Identify each investment vehicle in which,

at any time during the course of the year, the

actual funds invested by the pool equaled or

exceeded five percent of the pool net assets.

For each such investment vehicle, calculate

an index which is the product of (A) the

greatest amount invested (by notional value)

times (B) the vehicle’s worst monthly

drawdown percentage, times (C) the number

of days during the year that the pool was

invested in this vehicle. Present the data

described above for the investment vehicles

with the top N index values.

Questions:

(1) What evidence supports or

contradicts the proposition that the ratio

between aggregate notional value and

total pool net asset value is a useful

measure of the risk level of a commodity

pool?

(2) Would presentation of leverage

worst drawdown data, as described

above, for a selection of a commodity

pool’s investment vehicles provide

useful information to potential

investors? What would be the

disadvantages of providing such

information? What is the most effective

means of presenting such information?

Should the results of the calculations

described above be presented, or should

different information be presented?

(3) Are the selection criteria described

above useful? Would a different

selection method be more appropriate?

For how many investment vehicles

should the data be presented?

(4) When should this table be

presented: in disclosure documents?

Sales literature? Pool annual reports?

E. Theoretical Soundness of the Basis of

Computation and Presentation for ROR

and Related Risk-Profile Data

The NFA Proposal does not require

CTAs to maintain any fully-funded

accounts to validate their nominal

account sizes. By contrast, current

practice, as described in Advisory 93–

13, requires a fully-funded subset

comprised of fully-funded accounts

accounting for ten percent of the

aggregate nominal account sizes, to

validate the nominal account sizes. The

Commission wishes to explore the

implications of this change.

Discussion: The Commission has

always sought to ensure that the

methodologies it has required or

permitted to be used in the various

reporting schemes under its jurisdiction

are based upon sound economic and

accounting principles. In this

connection, wherever possible, the

Commission adheres to Generally

Accepted Accounting Principles

(‘‘GAAP’’) in CTA, commodity pool, and

FCM financial reporting. The fullyfunded subset method permitted in

Advisory 93–13 is consistent with the

Commission’s historical approach to

standards by requiring that the nominal

account sizes set by the CTA be

validated by the existence of a subset of

accounts that are fully-funded with

actual assets, pursuant to GAAP. This

explicit linkage to actual funds, in

effect, permitted to RORs to have some

basis in traditional financial and

accounting methods. By contrast, the

NFA Proposal, which permits

unrestricted use of the subjectively

established nominal account size, lacks

such an anchor or reference point.

Question:

(1) Should the fully-funded subset

requirement be retained to validate the

nominal account sizes used by the CTA,

or should it be dropped entirely?

(2) Does the fact that many CTAs may

have difficulty in obtaining a fullyfunded subset demonstrate a flaw in the

regulatory methodology, or does it

demonstrate an unrealistic setting of

nominal account sizes? In other words,

if the greatest actual funding level for

any of a given CTA’s accounts was 50%

(e.g., all $1 million nominal accounts

are funded at $500,000 or less), is it not

more accurate to express the nominal

account sizes at 50% of their initial

level?

(3) If the fully-funded subset should

be dropped, what would be the

theoretical basis for the method of

computing ROR, in terms of economic

and financial accounting theory?

(4) How do nominal account sizes

used by CTAs generally fit into the

broader world of financial services, so

that a potential investor might fairly

compare investments in commodity

pools with other potential investments?

F. Changes in the Presentation of

Historical Data

Current regulations require disclosure

of approximately five years of historical

ROR data, presented on a monthly basis,

and presentation on a capsule basis of

the single worst monthly drawdown and

worst peak-to-valley drawdown during

the same period.23 The Commission

wishes to consider the costs and

benefits of requiring a longer time-frame

for disclosing performance data for

CTAs and commodity pools while

reducing the period for which

disclosure of monthly data is necessary

in the basic disclosure documents.24
Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules 33303

potential investors who wish it, such as by mail on

request or by inclusion on the CTA’s website.

25Commission Advisory 96–1 allows, but does

not require, CTAs to present the performance of

offered programs, and CPOs to present the

performance of offered pools, since inception

provided that such performance capsules include,

among other things, worst monthly and peak-tovalley drawdown percentages for both the required

five-year and year-to-date period and since

inception of trading for the program or pool. Comm.

Fut. L. Rep. (CCH) ¶ 26,639 (March 6, 1996).

26For example, recent revisions to the Securities

and Exchange Commission’s (‘‘SEC’’) Form N–1A,

which is used by mutual funds to register their

securities and offer their shares, require that a

fund’s risk/return summary include a bar chart

showing the fund’s annual returns for each of the

last 10 calendar years and a table comparing the

fund’s average annual returns for the last 1-, 5-, and

10-fiscal years to those of a broad-based securities

market index. In order to assist investors in

understanding the variability of a fund’s returns

and the risks of investing in the fund, a fund must

also disclose its best and worst returns for a quarter

during the 10-year (or other) period reflected in the

bar chart. Securities & Exchange Commission,

Registration Form Used by Open-End Management

Investment Companies, 63 FR 13916, 13947–52

(March 23, 1998).

27However, Commission Rule 4.36(c)(1)(i)

specifies that if a CTA knows or should know that

its Disclosure Document is materially inaccurate or

incorporate in any respect, it must distribute

corrected information to its existing clients. 28Commission Rule 1.33.

The focus of the disclosure document

would be to provide key profile

information. The Commission staff has

also suggested that the Commission

consider expanding the number of worst

drawdown months presented, from one

to three or possibly six. The overall

effect of this change would be to reduce

the number of data items presented in

the disclosure document, while

increasing the scope of the information

made available to the investor.

Discussion: In many markets, extreme

market events do not always occur

within a five-year time-frame, which is

the limit of the present requirement.

Often the time interval between market

events is ten years or more. Thus,

limiting the historical presentation

requirements to a five-year period, as

the current regulations do, may permit

some CTAs and commodity pools to

omit their greatest drawdowns from

their historical risk profiles.25 Requiring

data for a longer period will present a

fuller picture to prospective clients.26

Such disclosure is especially important

where notional funding is used, given

the magniification of drawdowns

inherent in partial funding.

The Commission also seeks to strike

a balance between the sometimes

conflicting goals of requiring all data

that would be useful and avoiding the

presentation of a volume of data that is

cumbersome to read and analyze or too

complex or voluminous to be easily

assimilated by the prospective client.

Therefore, the Commission staff has

suggested that the Commission consider

reducing the number of years for which

monthly data is required and presenting

the balance of the information on an

annual basis or on some other summary

basis, as discussed below.

In connection with consideration of

reducing the number of monthly data

items, the Commission staff has

suggested that the Commission consider

requiring more detailed information

concerning the volatility of the CTA’s

program, either by requiring

presentation of an expanded number of

worst drawdown months, e.g., the three

worst months or the six worst months,

or by requiring presentation of the

standard deviation of the monthly

returns. Presently, only disclosure of the

worst single monthly return is required.

Given the unreliability of past

performance data as a predictor of

future performance and the relatively

greater correlation between past and

future volatility, presentation of data

which is more indicative of volatility

seems warranted.

Questions:

(1) What are the costs and benefits of

requiring performance data for a period

greater than the past five years? What

period should be required?

(2) How many years of monthly data

should be required? What would be the

most effective method of presenting

such data? What would be the most

appropriate method of presenting data

for earlier periods (e.g., annual

performance, annual performance plus

footnoted standard deviation of monthly

performance, etc.)?

(3) What data should be presented to

enable investors to measure the

volatility of returns from a CTA’s

program or a commodity pool? How

many months of worst drawdown data

should be required (e.g., one, three, six)?

What would be the most effective format

for the presentation of this data?

G. Keeping Clients Regularly Informed

Regarding CTA Program Status

The Commission seeks to ensure that

clients receive timely and complete

information on the status of their

participation in CTA programs.

Discussion: Commission rules do not

currently require that CTAs provide any

periodic reports to their clients.27

Presently, the only information the

Commission requires to be reported to a

client is that provided to the FCM (e.g.

trade confirmations and monthly

account statements provided to the

CTA’s clients and to the CTA).28

However, this information does not

fully inform the customer as to the

status of its participation in the CTA’s

program. Among the items the customer

may also need are the following: (a)

account fees (e.g., the amount of fees

earned/charged during the period,

payments received from client on

amounts owed during the period both

through charges to the client account at

the FCM and from sources outside the

FCM account, and may balance unpaid

by or credit due to the client at end of

the period); (b) information on the basis

of incentive fee calculations (including

the amount of unrecovered prior losses

carried forward); and (c) the current

nominal account (i.e., amount originally

agreed to, changes during the period

and balance at end of period). It also

may be useful to require the monthly

statement to contain the management

and incentive fee percentages, even

though they are contained in the CTA/

client agreement. This would permit the

clients more easily to verify the amount

charged.

Questions:

(1) Which of the data items discussed

above would be valuable for clients to

receive on a regular basis from CTAs?

Are there any other data items which

should be required? How often should

this information be reported to clients?

Is there a particular format which

should be required?

(2) What would be the costs for CTAs

to report this information to clients on

a regular basis?

(3) On balance, what reporting

requirements, if any, should be

established?

V. Conclusion

The Commission believes that it is

appropriate to examine concerns

regarding ROR computation and other

performance issues which are raised in

connection with the proposals made by

the Commission staff and NFA. The

Commission hopes to develop a

balanced approach to address these

issues that will enable performance data

provided to customers to be as useful

and meaningful as possible, while not

being excessively burdensome to CTAs

and CPOs. To this end, the Commission

requests public comment on the

proposals and the related issues set

forth above.
33304 Federal Register / Vol. 63, No. 117 /Thursday, June 18, 1998 / Proposed Rules

Issued in Washington, D.C. on June 11,

1998 by the Commission.

Jean A. Webb,

Secretary of the Commission.

Concept Release: Performance Data and

Disclosure for Commodity Trading

Advisor and Commodity Pools

Statement of Commissioner John E.

Tull, Jr.

I concur in issuing this Concept

Release, because I believe

wholeheartedly in the practice that a

better informed agency makes smarter,

better decisions in carrying out its

regulatory functions. And as I have

consistently maintained, I believe this

agency should defer to the private sector

and self-regulatory organizations to the

fullest extent possible in fulfilling our

mission to protect the integrity of the

markets and their users.

Therefore, I welcome and endorse this

concept release. I am not entirely

convinced that the rule changes

discussed may not create more

confusion than they would resolve. At

this point I personally believe that using

the notional amount of an account may

be the simplest and most uniform

method of disclosing risk and

performance data. This, after all, is the

objective of the rules under

consideration.

With that in mind, I look forward to

reviewing the comments to this Concept

Release.

John E. Tull, Jr.,

June 11, 1998.

Appendix I—Compliance Rules

* * * * *

RULE 2–29. COMMUNICATIONS WITH THE

PUBLIC AND PROMOTIONAL MATERIAL

* * * * *

(b) Content of Promotional Material.

No Member or Associate shall use any

promotional material which:

* * * * *

(5) includes any specific numerical or

statistical information about the past

performance of any actual accounts

(including rate of return) unless such

information is and can be demonstrated to

NFA to be representative of the actual

performance for the same time period of all

reasonably comparable accounts and, in the

case of rate of return figures, unless such

figures are calculated in a manner consistent

with that required under CFTC Rule

4.25(a)(7)(i)(F) and are based on the nominal

account size (as described in Compliance

Rule 2–34).

* * * * *

RULE 2–34. DIRECTED ACCOUNTS AND

COMMODITY POOLS

(a) At the time a Member CTA enters into

an agreement to direct a client’s account, the

Member CFT must obtain a written

agreement signed by the client (or someone

legally authorized to act on the client’s

behalf) which states:

(1) the account size which the CTA will

use as the basis for its trading decisions, i.e.,

‘‘the nominal account size’’;

(2) the name or description of the trading

program in which the client is participating;

(3) whether the client will deposit,

maintain or make accessible to the FCM an

amount equal to or less than the nominal

account size, i.e., to fully or partially fund

the account; and

(4) how additions, withdrawals, profits and

losses will affect the nominal account size

and the computation of fees.

The Member CTA must provide a copy of

the agreement to the FCM carrying the

account. The Member CTA must also

disclose in writing the factors considered by

the CTA in determining any minimum

account size of the trading program in which

the client is participating.

(b) Unless the client is a qualified eligible

client under CFTC Rule 4.7, any Member

CTA which directs a partially funded

account must provide the following

information in writing to the client:

(1) an estimated range of the amount of

customer equity generally devoted to margin

requirements or options premiums expressed

as a percentage of the nominal account size

and an explanation of the effect of partially

funding an account on that percentage;

(2) a description of how the management

fees will be computed, expressed as a

percentage of the nominal account size and

an explanation of the effect of partially

funding an account on that percentage;

(3) an estimated range of the commissions

generally charged to an account expressed as

a percentage of the nominal account size and

an explanation of the effect of partially

funding an account on that percentage;

(4) a statement that the greater the disparity

between the nominal account size and the

amount deposited, maintained or made

accessible to the FCM, the greater the

likelihood, and possible size of, margin calls.

(c) Unless the pool participants are

qualified eligible participants under CFTC

Rule 4.7, any Member CPO which allocates

assets among the pool’s CTAs in such a way

that the total allocations to its CTAs is greater

than the total assets of the pool must provide

the following information in writing to the

pool participants:

(1) a statement of the total amount

allocated to CTAs as a percentage of the

pool’s net assets;

(2) a description of how management fees

charged by the CPO and the CTAs will be

computed, including a statement of the total

amount of management fees charged to the

pool as a percentage of the pool’s net assets;

(3) an estimated range of the amount of

commissions and transaction fees which will

be charged to the pool in the next twelve

months and an estimate of such fees as a

percentage of the pool’s net assets; and

(4) a statement that allocating in excess of

the pool’s net assets among CTAs has the

effect of proportionately magnifying the

profits and losses which may be incurred by

the pool.

(d) Each CTA Member which directs

accounts and each CPO Member which

allocates assets among CTAs in such a way

that the total committed is greater than the

total assets of the pool shall maintain the

records required by this Rule in the form and

for the period of time required by CFTC Rule

1.31.

(e) Each CTA Member which directs

accounts and each CPO Member to which

this rule applies allocates assets among CTAs

in such a way that the total allocated is

greater than the total assets of the pool shall

establish and enforce adequate procedures to

review all records made pursuant to this Rule

and to supervise the activities of its

Associates in complying with this Rule.

* * * * *

INTERPRETIVE NOTICE NFA COMPLIANCE

RULE 2–34

The Board of Directors recently passed

NFA Compliance Rule 2–34, Documentation

and Disclosure for Partially Funded

Accounts. The Board recognized that certain

customers may, for their own legitimate

business purposes, deposit with the FCMs

carrying their accounts less than the amount

which they have directed the CTA trading

their account to use as the basis for trading

decisions. The Board sought to ensure that in

such situations performance records

accurately reflect trading results, that there is

an adequate audit trail to verify past

performance records and that customers

receive adequate disclosures on the

implications of partially funded accounts.

In the Board’s view, the solicitation of

partially funded accounts, particularly with

less sophisticated customers, raises a number

of compliance issues. Therefore, the Board

wishes to make clear that NFA Compliance

Rule 2–34 does not in any way diminish a

Member’s responsibilities under other NFA

rules, most notably NFA’s sales practice

rules, when dealing with a customer who is

considering a partially funded account.

Specifically, the Member must ensure that

any solicitation present a balanced view of

the risks and benefits of such an arrangement

and disclose all material information.

Furthermore, under NFA Compliance Rule

2–30, the Member must obtain the specified

information regarding its customer’s

experience and financial condition and, in

light of that information, must provide the

customer with an adequate description of the

risks of his investment. As the Board stated

in its Interpretive Notice of that rule, for

some customers the only adequate disclosure

is that futures trading is simply too risky for

that customer. That is particularly true when

retail customers are induced to increase their

leverage further by partially funding a trading

account.

Any Member soliciting unsophisticated

customers to trade with a partially funded

account will bear the burden of

demonstrating that its solicitation was in

compliance with all NFA requirements.

[FR Doc. 98–16075 Filed 6–17–98; 8:45 am]

BILLING CODE 6351–01–M