February 1, 2002

To: All Commodity Pool Operators

Attention: Chief Financial Officer

Subject: 2001 Annual Reports for Commodity Pools

This is the fourth annual letter that the Division of Trading and Markets (“Division”) of the 

Commodity Futures Trading Commission (“Commission”) is sending to all registered 

commodity pool operators (“CPOs”) to share the results of the Division’s experience reviewing 

prior years’ annual pool reports. These letters are intended to assist CPOs and their public 

accountants in complying with Part 4 of the Commission’s regulations under the Commodity 

Exchange Act (“CEAct”) in connection with the preparation and filing of a pool’s annual 

financial report. Previous letters (dated January 12, 2001, January 19, 2000, and February 10, 

1999), are available at our website at www.cftc.gov/tm/tmcompliance.htm. 

Because many of the deficiencies noted in this letter occur in reports for offshore pools, it may 

be helpful for you to share this letter with your offshore correspondents and their local auditors.

In order to avoid some of the most common and easily remedied deficiencies, please do the 

following:

• File one copy of the annual report with the National Futures Association (NFA) and two 

copies with the Commission at the regional office in whose jurisdiction the CPO’s 

principal place of business is located (See Attachment A for addresses). 1

• File the annual report as soon as possible, but no later than the due date. For pools with 

a December 31, 2001 year-end, the due date is Monday, April 1, 2002 (unless an 

extension of time has been granted). CPOs operating a fund-of-funds pool should 

review the streamlined procedures described in Regulation 4.22(f)(2) for claiming an 

extension of the due date (this topic is discussed below).

• Include a signed oath or affirmation, as required by Regulation 4.22(h), with each copy 

of the annual report filed with NFA, the Commission and all pool participants. Binding 

 

1

 While Regulation 4.2 directs that materials required under Part 4 be filed at the Commission's Washington office, 

CPOs are strongly encouraged, and by this letter authorized (pursuant to Regulation 4.12(a) and 140.93(a)(1)), 

instead to file pool annual reports at the appropriate regional office of the Commission.
February 1, 2002

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the oath as part of the report package or attaching it to the cover page is a helpful 

practice followed by a number of CPOs. 

• If the pool is operating under the exemptions granted in Regulation 4.7 or Regulation 

4.12, those regulations require that a notation of that fact be made on the cover page of 

the report.

• Report special allocations of partnership equity as required by CFTC Interpretive Letter 

94-3, Special Allocations of Investment Partnership Equity (CCH ¶25943). This 

document is available on the Commission website at www.cftc.gov/tm/94-03.htm.

• Net Asset Value:

o For unitized pools, include information concerning net asset value per outstanding 

participation unit in the pool as of the end of each of the pool’s two preceding years. 

o For non-unitized pools, provide to each participant the total value of that 

participant’s interest or share in the pool as of the end of each of the pool’s two 

preceding fiscal years. Please provide to the Commission and NFA a schedule 

listing each participant’s balances for those years. A code for each participant may 

be used in lieu of the participant’s name. Of course, participants should not receive 

financial information concerning other participants. 

• If the annual report is unaudited (pursuant to the exemption of Rule 4.7):

o The pool operator must make a statement to that effect on the cover page of each 

report and state that a certified audit will be provided on request of a majority of the 

units of participation in the pool who are unaffiliated with the commodity pool 

operator.

o The annual report must nonetheless be presented and computed in accordance with 

generally accepted accounting principles consistently applied.

o The annual report must include appropriate footnote disclosures. 

New Anti-Money Laundering Requirements

The International Money Laundering Act (AML) was enacted on October 26, 2001 as part of the 

USA Patriot Act. The focus of this new legislation is to identify and track entities and funds used 

for illegal purposes. It empowers the Department of the Treasury, in consultation with the 

Commission, to promulgate rules imposing obligations on, among others, CPOs. These 

regulations will likely be proposed and become effective in the coming months.
February 1, 2002

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Applicability of GAAP to Commodity Pools’ Annual Financial Statements

In reviewing prior years’ annual reports, the Division has noted instances where CPOs filed pool 

financial statements that failed to comply with generally accepted accounting principles 

(“GAAP”). Commission rules require that financial statements of pools be presented and 

computed in accordance with GAAP, including disclosing risk concentrations (e.g., market and 

credit risk) and related party transactions, and recognizing the impairment of investment values. 

CPOs exempt from filing certified financial statements for certain pools they operate, such as 

pools qualifying under Regulation 4.7, also must compute and present their financial statements 

in accordance with GAAP. If a commodity pool’s financial statements depart from GAAP, the 

CPO may be required to revise the pool’s financial statements and send the revised statements to 

participants. 

Investment Companies Guide

The recently revised AICPA Audit and Accounting Guide, Audits of Investment Companies

(product number 012365), is effective for annual financial statements issued for fiscal years 

beginning after December 15, 2000. The Guide requires several new accounting and reporting 

standards, including: (1) a schedule of investments for commodity pools (see below), (2) 

disclosure of financial highlights2, and (3) tax information regarding total distributable earnings 

and total distributions. A Summary of New Accounting Standards is included in the front section 

of the Guide. 

On January 16, 2002, the AICPA Accounting Standards staff, assisted by industry experts, 

released questions and answers (Q&A’s), commonly referred to as Technical Practice Aids 

(TPA) on the implementation by private investment companies of certain provisions of the 

Guide. The TPAs relate primarily to the method of disclosing financial statement highlights by 

private investment companies.

The TPAs will be included in the next update of the AICPA Technical Practice Aids, copies of 

which are available through the AICPA order department at (888) 777-7077.

Schedule of Investments Required for Calendar Year 2001 Annual Reports under GAAP

Non-public investment entities have been required to include a schedule of investments as 

specified by AICPA Statement of Position (SOP) 95-2, Financial Reporting by Nonpublic 

Investment Partnerships (the Guide), except for investment partnerships that were commodity 

pools subject to regulation under the CEAct, which were exempted. Recently, that exemption 

was revoked by AICPA SOP 01-1, Amendment to Scope of Statement of Position 95-2, Financial 

Reporting by Nonpublic Investment Partnerships, to Include Commodity Pools. The amended 

SOP 95-2 is effective for commodity pools’ financial statements issued for periods ending after 

December 15, 2001, with earlier application encouraged. Therefore, commodity pools which are 

 

2

 Disclosure of total return required in the financial highlights schedule is computed based on the figures reported in 

that schedule. Although those presentation and computation methods differ from those required in offering 

documents by Regulation 4.35, the methodology set forth in the Guide should be used in financial highlights 

schedules included in annual financial statements. 
February 1, 2002

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subject to regulation by the Commission are required to include as a part of their financial 

statements, for the year ended December 31, 2001, a schedule of investments, as set forth in SOP 

01-1. The Guide provides that investments in the securities of a single issuer should be disclosed 

if they exceed 5 percent of a pool’s net asset value. 

Fund-of-Funds Considerations

The Division continues to be concerned with the level of disclosure regarding a pool’s 

investments in other investment companies. This topic accounted for a substantial portion of the 

non-compliance letters sent for prior years’ annual reports.

Regulation 4.22(c)(5) requires annual reports to include appropriate disclosures and such further 

material information as necessary to make the statements not misleading (similar obligations are 

found in Regulations 4.7(b)(3)(C) and 4.12(b)(2)(iii)(A)). The Division believes that complete 

disclosure to the participants in a commodity pool requires that the pool’s financial statements 

provide them information about other funds to which the pool devotes significant portions of its 

capital (“major investee funds”). The Division has long considered detailed income, fee and 

liquidity information for material investee pools and in total for all investee pools “material 

information,” essential for full disclosure to participants. The objective is to allow the 

participants to see the performance of the pool’s major assets and the fees associated with these 

investments.

Fees reported should include fees paid by the investee pool expressed in dollars. The Division 

recognizes that this information may not be easy to obtain, however, fund-of-funds managers are 

expected to make a good faith effort to obtain the required information. In those unusual cases 

where dollar amounts cannot be obtained and are unknown to the CPO, a statement to that effect 

should be made by the CPO and the percentages used by the investee to calculate fees should be 

reported as illustrated in Appendix B. 

If a pool’s investment in an investee fund is ten percent or more of the pool’s net assets, the 

investee fund is considered a major investee fund. See Regulation 4.10(d)(5). Moreover, once 

there is at least one major investee fund, disclosure for all investee funds is appropriate (smaller 

funds may be aggregated and reported as a single group). The total of the net income or loss for 

each investee fund in the capsule information in the notes to the financial statements should 

agree with the single-line reported on the statement of operations for the investor fund’s 

investment in other funds.

Even if no single investment is ten percent of the reporting pool’s net assets, if the aggregate 

investment in other funds is at least 20 percent, the CPO should strongly consider providing the 

information discussed above with respect to the pool’s investments in other funds, and should be 

prepared to justify a failure to do so. The CPO should exercise discretion in determining the best 

method of presenting this information. While it may not be necessary to provide information on 

each of the individual investee funds, the CPO should find an appropriate method of classifying 

the investments and reporting on each class.
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Enclosed, as Attachment B, is an illustration that satisfies the objectives of fund-of-funds 

reporting. The disclosures in Attachment B should be made regardless of whether the investee 

funds are commodity pools.

There is a degree of overlap between the disclosure required for funds-of-funds and that required 

by SOP 95-2, discussed above. CPOs may combine these disclosures in one schedule or present 

them in separate schedules, depending on which method of presentation will yield greater clarity.

Master-Feeder Structures 

In cases where a pool has invested all, or substantially all, of its net assets in one other pool (such 

as in a master-feeder structure), the investor pool may include either a schedule of investments in 

accordance with SOP 95-2 (see above) or complete financial statements of the investee pool with 

its financial statements. The financial statements of the investee pool should also include 

disclosures described herein for its own investee pools. 

The Division considers the details of the investments carried by the investee pool as material 

information which is required disclosure to pool participants (see Rule 4.22(c)(5)). Accordingly, 

the schedule of investments at the investor pool level should contain the details of the 

investments carried by the investee pool. A schedule of investments at the investor pool level 

which simply lists the name of the investee pool is not sufficient. 

Extended Due Date for Fund-of-Funds Pools

Revisions to Regulation 4.22(f) make it easier for fund-of-fund pools to obtain extensions of 

time for filing their annual reports. The revised rule permits CPOs to file a claim for an 

automatic extension of time to file the pool’s annual report where the pool is invested in other 

collective investment vehicles, and the CPO’s independent accountant cannot obtain the 

information necessary to comply with the rule in a timely manner.

Notices for the first year: The CPO’s first notice claiming the extension must be filed within 90 

days after the end of the pool’s fiscal year (that is, by the normal deadline for filing the annual 

report). This notice must contain the following:

1) The name, main business address, main telephone number and the National Futures 

Association registration identification number of the commodity pool operator, and the 

name and NFA identification number of the commodity pool. 

2) The date by which the Annual Report will be distributed and filed (the “Extended Date”). 

The Extended Date must be no more than 150 calendar days after the end of the pool’s 

fiscal year, that is an extension of up to 60 calendar days. 

3) Representations by the commodity pool operator that:

(A) The pool for which the Annual Report is being prepared has investments in one or 

more collective investment vehicles (the “Investments”);
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(B) The commodity pool operator has been informed by the certified public accountant 

selected to audit the commodity pool’s financial statements that specified information 

establishing the value of the Investments is necessary in order for the accountant to 

render an opinion on the commodity pool’s financial statements. The notice must 

include the name of the accountant; and

(C) The information specified by the accountant cannot be obtained in sufficient time 

for the Annual Report to be prepared, audited, and distributed before the Extended 

Date.

Before claiming the extension, the CPO must analyze the circumstances related to the operation 

of its pool and specify the period for which relief is needed. The CPO is not required to obtain a 

written statement from the independent accountant selected to audit the pool confirming that 

information in the CPO’s notice. As noted above, however, the CPO will be required to name 

the independent accountant who has informed the CPO of the necessity of that information.

Notices for subsequent years: In subsequent years, the requisite representations may be made in 

a statement attached to and filed at the same time as the annual report.

The CPO responsible for the pool’s operation must sign the notice or statement.

The revised regulations are available at the CFTC website 

(www.cftc.gov/foia/fedreg00/foi001226a.htm or .pdf.)

Applicability to Regulation 4.7 Pools. Under Regulation 4.7, CPOs may claim relief from the 

requirement that the exempt pool’s financial statements distributed to pool participants be 

certified by an independent public accountant. Most CPOs operating pools for which relief 

under Regulation 4.7 has been claimed, nonetheless include certified financial statements in their 

annual reports. These CPOs may claim the relief provided in Regulation 4.22(f)(2).

This extension is applicable for fund-of-funds situations only. CPOs requesting extensions 

for other reasons or for whom the automatic extension period is insufficient must follow the 

provisions of 4.22(f)(1) and file those requests with the Commission’s Washington office.

Materials Filed with the Commission’s Eastern Regional Office (New York)

The Commission’s Eastern Regional Office was located at One World Trade Center. When it 

collapsed, all pool documents at that location were lost, including comment letters and replies to 

them. Mail was delayed further due to the postal anthrax contamination. 

The Division can generally obtain duplicate copies of annual reports and correspondence 

initiated by the Commission staff since duplicate copies of such material were typically filed 

with the Commission’s Washington office and with the NFA. However, all pre-September 11 

correspondence from CPOs is irretrievably lost. To assist the Division in rebuilding its files, 

CPOs may re-file any unique correspondence that they might have had with the Eastern Regional 

Office (description of organizations, transactions, etc.) along with their next annual report. 
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Further, in light of difficulties with mail delivery, due to changes in the location of the Office 

and the anthrax issue, the Division requests that any replies sent to the Eastern Regional Office 

between September 1 and December 31, 2001 be re-sent, preferably by E-mail or FAX, to the 

address set forth in Attachment A. 

A few annual reports for 2000 were still pending review. Therefore, you might receive a 

deficiency letter concerning a 2001 annual report for items that were treated similarly in a year 

2000 report. 

Materials Filed with the Commission’s Central Regional Office (Chicago)

The Commission’s Central Regional Office will be moving as of the end of February, 2002. 

Please note the address in Attachment A.

New Pools – Initial Annual Reports

Regulation 4.22(g) provides that (a) a pool’s initial annual report must be filed as of the first 

year-end after it begins operating, and that (b) the pool is considered to begin operations when 

the pool operator first receives funds, securities or other property for the purchase of an interest 

in the pool, even if the pool has not initiated trading. In cases where a pool commences 

operations within 3 months of the end of its fiscal year, the Commission may grant an exemption 

to the requirement to file a certified annual report as of its initial fiscal year-end. As a condition 

to the exemption, the Commission will require the CPO to file an annual report as of the end of 

its second fiscal year-end, which must include an income statement for the period from its 

commencement of operations to the second fiscal year-end. For the full requirements for such an 

exemption, please contact Kevin Walek, Assistant Director, at kwalek@cftc.gov or 202-418-

5463.

Final Annual Reports

When a pool ceases trading, the CPO must file a final report as required by Regulation 4.22 (c). 

The final report should be in the same format and include the same information as the annual 

report, even if the final report is not for a full 12-month period. If the final distribution has not 

been made as of the balance sheet date, a subsequent event note to the financial statements 

should report the date on which all assets were subsequently, or are expected to be, distributed to 

the participants. 

A CPO should clearly state when it intends a report to be its final report. A legend on the cover 

of the report is an effective way to do so.

Conclusion

In addition to noting the issues discussed in this letter, CPOs and their accountants should be 

familiar with the AICPA Audit and Accounting Guide, Audits of Investment Companies and the 

AICPA Practice Aid Audits of Futures Commission Merchants, Introducing Brokers, and 

Commodity Pools.
February 1, 2002

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Additional information applicable to pools, such as exemptive, no-action, or interpretive letters 

from 1995 forward, is available at the Commission’s website, www.cftc.gov/opa/opaletters.htm. 

If you or your accountant have any questions on the foregoing, please feel free to contact the 

appropriate regional Division staff member listed in Attachment A to this letter.

Thank you for your attention to these matters. 

Very truly yours, 

John C. Lawton

Acting Director

Division of Trading and Markets 
February 1, 2002

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ATTACHMENT A

ADDRESSES OF CFTC’s DIVISION OF TRADING AND MARKETS OFFICES

Regional Offices and Contacts Location of CPO’s Principal Office

Eastern Region

Newport Tower, 21ST Floor 

525 Washington Boulevard

Jersey City, NJ 07310-1692

Ronald A. Carletta

Al Goll

Phone: (201) 234-6970/6976

FAX: (201) 234-6994

E-Mail: rcarletta@cftc.gov

 agoll@cftc.gov

(Note: this office is 

scheduled to relocate in 

early Spring 2002, please 

check the CFTC web page 

for our new address and 

telephone numbers)

All states east of the Mississippi 

River, except Illinois, Indiana, 

Michigan, Ohio, and Wisconsin.

Any location outside of the United 

States

Central Region

Through February 27, 2002:

300 South Riverside Plaza

Suite 1600 North

Chicago, IL 60606 

John S. Dixon

Phone: 312-886-3207

FAX: 312-353-3690

E-Mail: jdixon@cftc.gov

Starting March 1, 2002:

525 West Monroe Street

Suite 1100

Chicago, IL 60661

Phone: 312-596-0573/0581

FAX: 312-596-0713

Illinois, Indiana, Michigan, Ohio, and 

Wisconsin

Southwest Region

4900 Main Street

Suite 721

Kansas City, MO 64112 

Ralph L. White

Phone: 816-931-9502

FAX: 816-931-9643

E-Mail: rwhite@cftc.gov

All states west of the Mississippi 

River

NFA ADDRESS

National Futures Association

Compliance Department

200 West Madison 16th Floor 

Chicago, IL 60606

Phone: 312-781-1300

FAX: 312-781-1467

website: nfa.futures.org 
February 1, 2002

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ATTACHMENT B

ILLUSTRATION – FUND – OF – FUNDS DISCLOSURES

Note X. Investments 

As of December 31, 2001, ABC Fund invested in other funds, none of which were related 

parties. 

The following table summarizes ABC Fund’s investments in other funds as of December 31, 

2001. Funds in which ABC Fund invested 10% or more of its net assets are individually 

identified, while smaller investments in three other funds are aggregated. The management 

agreements of the investee funds provide for compensation to the managers in the form of fees 

ranging from 1% to 3% annually of net assets and performance incentive fees ranging from 5% 

to 25% of net profits earned. 

Investment % of ABC’s 

Net Assets

 Fair Value Income

 (Loss)

 Fees

 Mgnt Incentive

 Redemptions

 Permitted

Hejmat Fund Ltd. 11.2 $ 500,000 $145,000 $ 5,200 $ 30,000 Quarterly

Carron Int’l Fund 10.7 475,000 118,000 4,800 24,000 Monthly

Marvelous Fund NV 10.1 450,000 (24,000) 4,500 0 Semi-Annual

Other funds: 10.8 480,485 18,221 5,500 3,500 Monthly-Annually

 Total 42.8% $1,905,485 $257,221 $20,000 $57,500

An alternative illustrative table, for unusual cases, where the fee information cannot be obtained 

is shown below: 

Investment % of ABC’s 

Net Assets

 Fair Value Income

 (Loss)

 Fees

 Mgnt Incentive

 Redemptions

 Permitted 

Hejmat Fund Ltd. 11.2 $ 500,000 $145,000 $ 5,200 $30,000 Quarterly

Marvelous Fund NV 10.1 450,000 (24,000) 4,500 0 Semi-Annual

Other funds: 10.8 480,485 18,221 5,500 3,500 Monthly-Annually

 Subtotal 32.1 1,430,485 139,221 $15,200 $33,500 

Carron Int’l Fund 10.7 475,000 118,000 * * Monthly

 Total 42.8% $1,905,485 $257,221

* = The fund operator is not able to obtain the specific fee amounts for this fund and does not know what those 

amounts are. However, management fees are computed based on 1% per year of net asset balances at the 

beginning of each month; incentive fees are computed based on 20% per year of net income.