U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5495 

Facsimile: (202) 418-5547 

tsmith@cftc.gov

Division of Clearing and 

Intermediary Oversight

Thomas J. Smith 

Chief Accountant 

CFTC letter No. 06-04 

August 29, 2005 

Exemption 

Division of Clearing and Intermediary Oversight

 

Re: Regulation 4.35 – Request for Exemptive Relief Regarding Commodity Trading 

Advisor Past Performance Disclosure Requirements 

Dear : 

 This is in response to your letter dated March 28, 2005, to the Division of Clearing and 

Intermediary Oversight (“Division") of the Commodity Futures Trading Commission 

("Commission"), as supplemented by telephone conversations with Division staff. By your 

correspondence, you requested, on behalf of “X”, relief from the requirements of Rule 4.35 

regarding composite presentation of the past performance of trading principals of a commodity 

trading advisor (“CTA”). 

 X is a registered CTA under the Commodity Exchange Act ("Act").1 X offers a trading 

program to its clients and maintains a performance record for its trading on behalf of its clients. 

In addition, one of X’s principals, “Y”, has discretionary authority over approximately 40 

customer accounts in his capacity as an AP of a futures commission merchant (“FCM”) that is 

not affiliated with X (“Y Accounts”). While there are similarities with respect to the types of 

futures markets traded between the X trading program and the trading conducted in the Y 

Accounts, the actual trading conducted in the Y Accounts and positions established are different 

from X’s program. In addition, the trading results among the Y Accounts often differ 

significantly from each other due to factors such as sizes of the accounts and customization of 

the trading strategies – for example, customers may participate in different markets, have 

different risk tolerances, or customers may enter some trades for the accounts themselves. 

 Commission Rule 4.35(b) requires that a CTA include in its disclosure document the past 

performance of accounts directed by the CTA and its trading principals for the prior five years 

and the current year to date. Rule 4.35(a)(3) states that accounts that differ materially with 

respect to rates of return may not be presented on a composite basis. The disclosure document 

that X filed with the National Futures Association (“NFA”) included past performance 

information for X’s trading program and included a single composite capsule presenting the 

performance of the Y Accounts. NFA, however, noted in a 2004 examination of X certain 

material differences among the rates of return for the Y Accounts and, pursuant to Rule 

4.35(a)(3), the Y Accounts could not be presented in a single composite capsule. Absent relief 

 

1

 7 U.S.C. §6m(1) (2000). 
Page 2 

thereunder, X would be required to disclose the performance of the Y Accounts in separate 

performance capsules. 

 X has requested relief from the requirement of Rule 4.35(a)(3) to present separate or noncomposite performance for the Y Accounts. Presenting the performance in additional separate 

performance capsules, perhaps as many as one capsule per account, would result in numerous 

performance capsules, overwhelming prospective clients with excessive amounts of data on 

accounts and a trading program that bears little, if any, relationship to X’s trading program. In 

order to provide more meaningful disclosure to prospective X clients, the Division believes that 

an expansion of the capsule format of Rule 4.35(a)(1) that includes the range of data for each 

capsule element would allow the performance of the Y Accounts to be presented in a single 

capsule while providing adequate information about the varying results experienced by the 

accounts. 

 

 Based upon the foregoing, the Division believes that granting conditioned relief would 

not be contrary to the public interest or the purposes of Rule 4.35. Accordingly, by the authority 

delegated under Rule 140.93(a)(1), the Division exempts X from the specific requirements of 

Rule 4.35(a)(1) and (3) to disclose performance information separately for each of the Y 

Accounts, on the condition that X’s disclosure document presents the performance of the Y 

Accounts in a format, which may be a narrative, that includes the following information: 

• An explanation of the fact that Y trades the accounts as an employee of an FCM; 

• The number of Y Accounts; 

• The aggregate assets in the Y Accounts; 

• The range of sizes of the Y Accounts; 

• The date when Y began trading the Y Accounts; 

• A description of the customized nature of the trading done for the Y Accounts, and any 

other factors that result in differences among the accounts, as well as an explanation of 

the similarities and differences between the trading for these accounts and the X trading 

program(s); 

• The worst monthly percentage drawdown of any of the Y Accounts, for the most recent 

five calendar years and current year to date, and the month and year of such drawdown; 

• The worst peak-to-valley percentage drawdown of any of the Y Accounts, for the most 

recent five calendar years and current year to date, and the months and year(s) of such 

drawdown; 

• The range of returns for the Y Accounts, which may be presented either based on the 

lifetime returns of all the accounts, or on an annual basis; and 

• The number of accounts closed with profits, and the number of accounts closed with 

losses, for the most recent five calendar years and current year to date, for the Y 

Accounts. 

 

 This letter, and the relief granted herein, is based upon the representations that have been 

made to the Division and are subject to compliance with the conditions set forth above. Any 

different, changed, or omitted facts or conditions might render the exemption void. You must 

notify the Division immediately in the event that the operations or activities of X change in any 

material way from those represented to us. 
Page 3 

 This letter exempts X solely from the requirements of Rule 4.35(a)(3) with respect to the 

performance of the Y Accounts. It does not excuse X from compliance with any other aspect of 

the Commission’s disclosure requirements, nor does it excuse X from compliance with any other 

applicable requirements contained in the Act or the Commission’s regulations issued thereunder. 

 If you have any questions concerning this correspondence, please contact Eileen R. 

Chotiner at (202) 418-5467. 

 Very truly yours, 

 Thomas J. Smith 

 Chief Accountant 

cc: Regina Thoele 

 Vice-President, Compliance 

 National Futures Association