U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5430 

Facsimile: (202) 418-5536

 

Division of Clearing and 

Intermediary Oversight

Thomas J. Smith 

Associate Deputy Director 

and Chief Accountant 

To: All Commodity Pool Operators 

Attention: Chief Financial Officer 

Subject: CFTC Observations on Annual Reports for Commodity Pools 

Date: January 24, 2005 

The Division of Clearing and Intermediary Oversight (“DCIO” or “Division”) of the 

Commodity Futures Trading Commission (“CFTC” or “Commission”) is issuing this letter to 

assist commodity pool operators (“CPOs”) and public accountants with the preparation and filing 

of annual financial reports required under the Commodity Exchange Act (“Act”) and 

Commission regulations.1

 This letter highlights several accounting and reporting topics, lists 

recent registration and other regulatory changes affecting CPOs and commodity trading advisors 

(“CTAs”), and notes common deficiencies observed in prior years’ annual reports. CPOs, 

including those that operate in non-U.S. jurisdictions, are encouraged to provide this letter to 

their public accountants and others that assist in the preparation of commodity pool annual 

financial statements. Similar letters issued by the Division in prior years are available in the 

Compliance Information section of the CFTC Web site. 

I. Accounting and Reporting Topics 

A) Applicability of GAAP to Commodity Pool Annual Financial Statements 

CPOs and public accountants should be familiar with the Commission’s regulations in 

preparing and filing commodity pool annual financial statements, particularly the financial 

reporting requirements of Rules 4.22(c), (d) and (e). CPOs and public accountants also should 

be familiar with the interpretative letters issued by DCIO staff that impact commodity pool 

financial reporting requirements. One such letter is CFTC Interpretative Letter 94-3, Special 

Allocations of Investment Partnership Equity, which addresses how a CPO should report a 

special allocation of partnership equity to the general partner of an investment partnership in the 

financial statements of a commodity pool. Staff letters that provide written guidance concerning 

the Act and the Commission’s regulations in the form of responses to requests for exemption, noaction and interpretation, including DCIO staff letters, from 1995 forward are available at the 

Commission’s Web site. 

 

1

 The Act is codified at 7 U.S.C. 1 et seq. (2004). The Commission’s rules are found in Title 17 of the Code of 

Federal Regulations. 
Commission rules require that commodity pool annual financial statements be prepared 

in accordance with U.S. generally accepted accounting principles (“GAAP”), applied on a 

consistent basis,2

 including disclosing risk concentrations (e.g., market and credit risk) and 

related party transactions, and ensuring all investments are reported at fair value. Accordingly, 

CPOs and public accountants should be familiar with the requirements for commodity pool 

financial statements that have been issued by the American Institute of Certified Public 

Accountants (“AICPA”). 

 

GAAP also requires that all significant accounting policies followed by an enterprise be 

disclosed in the notes to its financial statements (Accounting Principles Board Opinion 22). For 

commodity pools, one of the most significant, if not the most significant, accounting policy is 

how fair values of investments are determined. Accordingly, CPOs are reminded that such 

disclosures are required and should quantify values arrived at by the valuation methods specified 

in the AICPA Audit and Accounting Guide, Audits of Investment Companies, paragraphs 2.28 

through 2.39. 

The requirement that commodity pool annual financial statements be prepared in 

accordance with GAAP is applicable to pools that are required to distribute annual certified 

financial statements to pool participants, as well as to certain pools that, while required to 

distribute annual financial statements to pool participants, are permitted by Commission Rule 4.7 

to elect to distribute unaudited financial statements. In reviewing prior years’ audited and 

unaudited annual financial statements, instances were noted where CPOs filed pool financial 

statements that failed to comply with GAAP. If a commodity pool’s annual financial statements 

do not fully comply with GAAP, the CPO may be required to revise the pool’s financial 

statements and distribute the revised statements to the participants and refile a copy with the 

National Futures Association (“NFA”). 

B) Non-U.S. GAAP Reporting 

Division staff has provided limited relief to CPOs of offshore pools to prepare and to 

present pool financial statements in accordance with International, United Kingdom or Irish 

accounting standards. In each case, the Division’s relief was conditioned upon the offshore 

pools following certain key elements of U.S. GAAP standards, including: 1) determining fair 

values of investments as required using the valuation methods specified in the AICPA Audit and 

Accounting Guide, Audits of Investment Companies, 2) reporting of both realized and unrealized 

gains and losses through the statement of operations, 3) preparing a condensed schedule of 

investments,3

 and 4) reporting special allocations of partnership equity in accordance with CFTC 

Interpretative Letter 94-3. 

CPOs that operate offshore pools and would like to request relief from the U.S. GAAP 

requirement may contact Ronald Carletta, Supervisory Auditor, or Al Goll, Auditor, at the phone 

numbers or addresses listed in Appendix A, for further information. 

 

2

 See Commission Rules 4.22(d), 4.12(b)(2)(iii)(B), and 4.7(b)(3)(ii). 3

 As required by AICPA Statement of Position (“SOP”) 95-2, subsequently amended by SOP 01-1 and SOP 03-4. 

2
C) Reporting of Investments in Futures Contracts in the Condensed Schedule of 

Investments 

 AICPA SOP 03-044

 specifies how commodity pools should report futures contracts in 

the condensed schedule of investments. SOP 03-4 requires a commodity pool to disclose the 

number of contracts, range of expiration dates, and cumulative unrealized gains (or losses) on 

open futures contracts of a particular underlying (such as wheat, cotton, specified equity index, 

or U.S. Treasury Bonds), regardless of exchange, delivery location, or delivery date, if the 

cumulative unrealized gains (or losses) on the open futures contracts exceed five percent of the 

pool’s net assets. SOP 03-4 further provides that a CPO may not net long and short positions in 

futures contracts based upon the same underlying in determining whether the cumulative 

unrealized gains (or losses) of the open futures contracts exceed five percent of the pool’s net 

assets. SOP 03-4 also requires a commodity pool, among other things: 

• To disclose in the condensed schedule of investments the range of expiration or maturity 

dates and fair values of derivative instruments other than futures contracts based on 

whether the fair value of a specific type of derivative and underlying (for example, equity 

index of a particular stock exchange, U.S. Treasury Bond, natural gas, etc.) exceeds, on a 

gross basis, 5 percent of the pool’s net assets, regardless of counterparty. 

• To disclose the name, investment objective, and redemption restrictions of any 

investment in a nonregistered investment partnership that exceeds five percent of the 

pool’s net asset value. (See Section D, Fund of Funds Disclosures, below for additional 

Part 4 requirements for pools that operate as funds of funds.) 

• To calculate required ratios for average net assets, expenses and net investment income as 

detailed in the SOP. 

D) Fund of Funds Disclosures 

GAAP requires a commodity pool that invests over 5 percent of its net assets in 

nonregistered investment partnerships to disclose certain information about such investments. 

Specifically, SOP 03-4 requires the disclosure of the name and investment objectives of such 

nonregistered investment partnership, as well as any restrictions imposed upon redemptions. By 

requiring such disclosures, GAAP recognizes that a pool’s financial statements should provide 

information about investments in other funds to which the pool devotes significant portions of its 

capital. 

The Division has long believed that CPOs should report amounts of income and fees for 

nonregistered investment partnerships in which they invested significant portions of their capital 

as such information is deemed material for participants to fully comprehend the investment 

strategy of the CPO. Accordingly, CPOs are strongly encouraged to disclose amounts of income

and fees associated with investments in nonregistered investment partnerships that exceed five 

 

4

 AICPA Statement of Position 03-04, Reporting Financial Highlights and Schedule of Investments by

Nonregistered Investment Partnerships: An Amendment to the Audit and Accounting Guide Audits of Investment 

Companies and AICPA Statement of Position 95-2, Financial Reporting by Nonpublic Investment Partnerships.

3
percent of the pool’s net assets. The five percent threshold is consistent with the reporting 

thresholds set forth in SOP 95-2 and SOP 03-4 for nonregistered investment partnerships. See 

Attachment B for an illustration of how such information may be reported. 

E) Master-Feeder Structures 

Paragraph 7.06 of the AICPA Audit and Accounting Guide, Audits of Investment 

Companies, permits nonpublic feeder pools either to follow the disclosure and reporting 

provisions of SOP 95-2 or to present a complete set of master financial statements with each 

feeder financial statement. CPOs that elect to present a complete set of master financial 

statements with each feeder financial statement should bind the two reports together as a single 

document and distribute the bound reports to the participants and file a copy with NFA. If that is 

not possible, an acceptable alternative is to staple the back cover of the feeder annual report to 

the front cover of the master annual report for at least the copy filed with NFA. This would help 

ensure that reports are reviewed as a complete unit. 

F) New Pools – Initial Annual Reports 

A CPO that commences operation of a commodity pool is required to prepare an annual 

report for the pool within 90 days of the pool’s year-end, even if the pool did not operate for a 

full 12-month period. A pool is deemed to commence operations upon the initiation of 

investment activities on behalf of participants, and not solely upon the receipt of participants’ 

contributions. 

The Commission may grant a CPO an exemption from the requirement to prepare a 

certified annual report as of the pool’s initial year-end date in cases where a pool commences 

operations within three months of the end of its fiscal year. The exemption generally is 

conditioned upon the CPO commencing operation of the pool within three months of the end of 

its initial year-end date and the CPO filing with NFA and distributing to pool participants yearend unaudited pool financial statements that are prepared in accordance with U.S. GAAP and 

otherwise complying with Commission rules. The exemption is further conditioned upon the 

CPO filing a certified annual report as of the date of the pool’s second year-end and must include 

an income statement covering the period from the commencement of operations of the pool 

through the date of the pool’s second year-end date. For the full requirements for such an 

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

5463. 

 

G) Final Annual Reports 

Commission Rule 4.22(c) requires a CPO to file with NFA and to distribute to pool 

participants a final annual report whenever a pool ceases trading. This requirement also is 

applicable for pools that have claimed an exemption under Rules 4.7 or 4.12. The final report 

should be in the same format and include the same information as an annual financial report, 

even if the final report is not for a full 12-month period. If the final distribution of pool assets 

has not been made as of the balance sheet date, a subsequent event note to the financial 

statements should disclose the date on which all pool assets were subsequently, or are expected 

4
to be, distributed to the participants. A CPO should clearly state when it intends a report to be a 

final report. A legend on the cover of the report is an effective way to do so. 

The final report is due within 90 calendar days after the end of the pool's fiscal year or 

the permanent cessation of trading, whichever is earlier, but in no event longer than 90 days after 

the assets are distributed to pool participants. 

II. Pool Annual Financial Reports and Registration of CPOs and CTAs

The following contains summaries of certain rules relevant to pool annual reports. 

Please consult the full text of the Commission’s Part 4 rules for more detailed information. 

A) Pool Annual Financial Reports

• NFA Pilot Program permitting electronic filing of pool annual reports with NFA. 

NFA has implemented a voluntary pilot program for pool annual reports for the year 

ending December 31, 2004 that will permit CPOs to file electronically with NFA. NFA’s 

electronic filing system, which uses the Internet-based EasyFile system, has three 

components. First, the CPO must submit a PDF version of the full annual report, 

including the balance sheet, income statement, schedule of investments, footnotes, and 

the independent auditor’s opinion, if applicable. Second, the CPO must directly enter 

approximately 30 key financial balances into a standardized form. These balances will be 

obtained from the balance sheet, income statement and statement of changes in net asset 

value included in the pool’s PDF filing, and the system will also include on-line 

instructions to help CPOs determine which amounts to include in the electronic schedule. 

Third, when the CPO submits the electronic filing, the system prompts the CPO to read 

and agree to an electronic oath or affirmation. This oath or affirmation covers both the 

information included in the PDF annual report and the financial data entered in the 

schedule of key financial balances. 

 

CPOs are required to maintain records indicating where the key financial balances 

reported on the EasyFile schedule appear in the complete annual report. In addition, 

CPOs are required to maintain a manually signed copy of the annual report in their 

records, as specified in Rule 4.22(j)(2), and to provide it to NFA upon request. The 

Commission has provided exemptive relief to CPOs that participate in the pilot program

from the requirement of Rule 4.22(j) that the annual report filed with NFA contain a 

manual signature (CFTC Letter No. 05-01). To use EasyFile, CPOs can go to NFA's 

website, www.nfa.futures.org. Under the Compliance Heading on NFA's Home Page, 

click the Electronic Filings drop-down menu and select EasyFile (Pool filers). 

• Permitting electronic distribution of account statements and annual reports to pool 

participants. CFTC Rule 4.22(h) permits CPOs to distribute periodic account statements 

and annual reports to pool participants by electronic means. Prior to transmission of any 

account statement or annual report to a pool participant by means of electronic media, a 

CPO must disclose to the participant that it intends to distribute these documents 

electronically, absent objection from the participant no later than 10 business days 

5
following receipt of the disclosure. CPOs must maintain a manually signed copy of each 

account statement or report distributed electronically; and, unless they are participating in 

NFA’s pilot program for electronic filing, CPOs must include a manual signature on the 

oath or affirmation that accompanies the annual report filed with NFA. 

B) Effect of Claiming Recent Part 4 Relief on Currently Registered CPOs 

A CPO that withdraws from registration pursuant to relief claimed under Rules 4.13(a)(3) 

or (4) remains subject to the annual report requirement of Rule 4.22(c), as has been the case with 

CPOs that have withdrawn from registration for any other reason. The Commission believes that 

when a CPO leaves direct CFTC oversight, the CPO's pool participants should get all of the 

information they are entitled to under Commission regulations up to that time. Accordingly, 

CPOs generally will not be permitted to withdraw their CFTC registration until they file an 

annual report for the last year for each pool that was operated subject to direct CFTC oversight 

and the annual reports have been reviewed by NFA. 

The relief under Rules 4.13(a)(3) or (4) is available to CPOs on a pool-by-pool basis. A 

registered CPO may claim this relief for its existing pools that meet the criteria for the relief; 

however, the CPO remains subject to the requirement to file final annual reports for these pools 

for the last year that the pools were operated prior to claiming exemption. If a person that is 

eligible for exemption from registration as a CPO under 4.13 does not claim such exemption and 

nonetheless registers as a CPO, the person must comply with all relevant Part 4 rules. This 

includes the filing deadlines for a pool’s annual report. 

III. Common Deficiencies Observed In Prior Years’ Annual Reports 

Each year the Division provides a listing of common deficiencies noted in prior year 

financial reports. Generally, the types of deficiencies have remained relatively consistent over 

the last several years. However, the frequency of the occurrence of the deficiencies has been 

greatly reduced. In order to avoid some of the most common and easily remedied deficiencies, 

CPOs should do the following: 

• File one copy of the annual report with NFA at the address set forth in Attachment A 

below. CPOs are not required to file copies of any such reports with the Commission. 

In addition, applications for extensions of time to distribute annual reports that do not 

exceed 90 days from the due date need be filed only with NFA. 

• Distribute the annual report to the pool participants and file one copy with NFA as 

soon as possible, but no later than the due date. For pools with a December 31, 2004 

year-end, the due date is Thursday, March 31, 2005 (unless an extension of time has 

been requested and granted). CPOs operating a fund of funds pool should review the 

streamlined procedures described in Rule 4.22(f)(2) for claiming an extension of the 

due date. 

6
• Include a signed oath or affirmation, as required by Rule 4.22(h), with each copy of 

the annual report filed with NFA and distributed to all pool participants. Omitting or 

not signing the oath or affirmation continues to be a common deficiency in annual 

financial report filings. Binding the oath as part of the report package or attaching it 

to the cover page is a best practice followed by a number of CPOs. 

• If the pool is operating under the exemptions granted in Rule 4.7 or Rule 4.12, 

include a notation of that fact on the cover page of the report consistent with the 

requirements of those regulations. 

• Report special allocations of partnership equity as required by CFTC Interpretative 

Letter 94-3, Special Allocations of Investment Partnership Equity. 

• 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. For the report filed with NFA, provide 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. 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 the owners of

a majority of the units of participation in the pool who are unaffiliated with the 

CPO. 

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

with GAAP applied on a consistent basis. This includes the requirements of 

AICPA SOP 95-2, as amended by SOPs 01-1 and 03-4, and CFTC Interpretative 

Letter 94-3. 

o The annual report must include all other appropriate footnote disclosures. 

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IV. DCIO and NFA Contact Information 

If a CPO or a public accountant has any questions on the foregoing, please feel free to 

contact the DCIO staff or NFA staff listed in Attachment A to this letter.

 Very truly yours, 

 Thomas J. Smith

 Associate Deputy Director and 

 Chief Accountant 

8
ATTACHMENT A 

ADDRESSES OF CFTC’s DIVISION OF CLEARING 

AND INTERMEDIARY OVERSIGHT OFFICES

Regional Office 

Locations

Contacts Location of CPO’s Principal 

Office

Eastern Region 

140 Broadway, 19th Floor 

New York NY 10005-1146 

FAX: (646)-746-9937 

Ronald A. Carletta 

Phone: (646)-746-9726 

E-Mail: rcarletta@cftc.gov

Al Goll 

Phone: (646)-746-9723 

E-Mail: agoll@cftc.gov

All states east of the Mississippi 

River, except Illinois, Indiana, 

Michigan, Ohio, and Wisconsin. 

Any location outside of the United 

States 

Central Region

525 West Monroe Street 

Suite 1100 

Chicago, IL 60661

Melissa B. Hendrickson 

Phone: 312-596-0661 

FAX: 312-596-0712 

E-Mail: mhendrickson@cftc.gov

Illinois, Indiana, Michigan, Ohio, 

and Wisconsin 

Southwest Region 

Two Emanuel Cleaver II 

Boulevard, Suite 300 

Kansas City, MO 64112

Sandra McCarthy 

Phone: 816-960-7712 

FAX: 816-960-7750 

E-Mail: smccarthy@cftc.gov

All states west of the Mississippi 

River 

NFA ADDRESS 

Patricia Cushing 

Associate Director 

Compliance Department 

National Futures Association 

200 West Madison, 16th Floor 

Chicago, IL 60606 

Phone: 312-658-6747 

E-Mail: pcushing@nfa.futures.org 

FAX: 312-220-9003 

Web site: http://www.nfa.futures.org 

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ATTACHMENT B 

ILLUSTRATION – Condensed Schedule of Investments and Fund of Funds Disclosures 

Condensed Schedule of Investments 

December 31, 2004 

Principal Amount, Shares 

or No. of Contracts Description Fair Value

Expiration

dates 

No. of 

Contracts 

DEBT SECURITIES (41.2%) 

 United States (21.4%) 

 Airlines (2.0%) 

$1,000,000 Flight Airlines Inc 12%, 7/15/07 $1,000,000

 Government (19.4%) 

$3,000,000 US Treasury Bond, 4.50%, 11/15/07 3,031,791 

 US Treasury Bonds, 3.00%-4.75%, 

 1/30/05-7/15/07 

6,686,175

9,717,966

Total United States (cost $15,015,200) 10,717,966

 Mexico (19.8%) 

 Government 

 United Mexican States, 8.625%-

9.125% 3/12/08-12/7/09 

 (cost $10,000,000)

9,922,224

TOTAL DEBT SECURITIES 

(cost $25,015,200)

20,640,190

INTEREST IN INVESTMENT PARTNERSHIP5

 (20.0%)

(cost $8,000,000)

Hejmet Fund Ltd. A Cayman Islands 

company (20% owned)

2,500,000

Carron Int’l. Fund, a Bermuda company 

(25% owned)

2,600,000

Marvelous Fund NV, a Netherlands Antilles 

company (35% owned) (XYZ Hedge Fund LP

owns 6,000 shares, valued at $9,000,000 of Leisure 

Cruises Inc., which is a US Company in the travel 

industry. The partnership’s share of this investment is

valued at $3,150,000 as of December 31, 200x)

2,800,000

Ten other funds 2,100,000

TOTAL INVESTMENT PARTNERSHIPS 10,000,000

TOTAL INVESTMENTS (61.3%) 

(cost $33,015,200)

$30,640,190

FUTURES CONTRACTS (12.5%)

 Financial (5.2%)

 Eurodollar (5.2%) $2,611,825 Feb-Apr 200X 122

 Indices (5.6%) 

 S&P 500 (5.6%) 2,788,000 Mar-May 

200X

89 

 Metals (1.7%) 840,000

TOTAL FUTURES CONTRACTS $6,239,825

FORWARDS (11.5%)

 Argentinean Peso (5.8%) $2,910,000 Oct-Nov 200X 

 Other currencies (5.7%) 2,876,315

TOTAL FORWARDS $5,786,315

 

5

 See Note X. Investments, for additional disclosures on Investment Partnerships

10
Note X. Investments 

As of December 31, 2004, 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, 

2004. Funds in which ABC Fund invested more than 5% 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 

 Mgmt Incentive

Investment

Objective 

Redemptions 

Permitted

Hejmat 

Fund Ltd. 

5.0 $ 2,500,000 $200,000 $ 25,000 $ 30,000 Emerging market Quarterly

Carron

Int’l Fund

5.2 2,600,000 210,000 26,000 42,000 Sector investment Monthly

Marvelous 

Fund NV 

5.6 2,800,000 (30,000) 28,000 0 International 

equity 

Semi-Annual 

Other 

funds: 

4.2 2,100,000 100,000 24,000 25,000 Other Monthly-Annually

 Total 20.0% $10,000,000 $480,000 $103,000 $97,000

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

 Mgmt Incentive 

Investment

Objective 

Redemptions 

Permitted

Hejmat 

Fund Ltd. 

5.0 $ 2,500,000 $200,000 $ 25,000 $ 30,000 Emerging market Quarterly

Carron

Int’l Fund

5.2 2,600,000 210,000 26,000 42,000 Sector investment Monthly

Other 

funds: 

4.2 2,100,000 100,000 24,000 25,000 Other Monthly-Annually

Subtotal 14.4 7,200,000 510,000 $75,000 $97,000

Marvelous 

Fund NV 

5.6 2,800,000 (30,000) * * International 

equity 

Semi-Annual 

 Total 20.0% $10,000,000 $480,000 

* = 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. 

11