Exhibit 99.01
STATEMENT OF THE COMMISSION REGARDING DISCLOSURE BY ISSUERS
OF INTERESTS IN PUBLICLY OFFERED COMMODITY POOLS
SECURITIES AND EXCHANGE COMMISSION
Release Nos. 33-6815; 34-26508 [S7-1-89]; 17 CFR Parts 231 AND 241
February 1, 1989
TEXT:
ACTION: Interpretation and Request for Comment
SUMMARY: The Securities and Exchange Commission ("Commission") is
publishing this release and request for comments regarding disclosure by issuers
of interests in publicly offered commodity pools simultaneously with an
interpretive statement and request for comments by the Commodity Futures Trading
Commission ("CFTC"). In this statement, the Commission, to the extent
applicable, incorporates by reference the views expressed by the CFTC in its
interpretive statement, and reminds issuers of interests in publicly offered
pools of their disclosure obligations under the federal securities laws. In
addition, the Commission is requesting comment on several matters related to the
presentation of prior performance by commodity pool operators and commodity
trading advisors, and the presentation of fees, commissions and expenses to be
incurred by the typical professionally managed commodity pool. The companion
statements reflect a continuing effort on behalf of the CFTC and the Commission
to maintain consistent coordinated requirements for publicly offered commodity
pools.
DATE: Comments should be received on or before [60 days after
publication in FR]
ADDRESS: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Comment letters should refer to File No. S7-1-89. All
comment letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549.
FOR FURTHER INFORMATION CONTACT: John C. Roycroft, Assistant Director,
or Daniel W. Rumsey, Attorney, at (202) 272-7628, Division of Corporation
Finance, Securities and Exchange Commission, 450 Fifth Street, Washington, D.C.
20549
SUPPLEMENTARY INFORMATION: The Commission today is reminding issuers of
interests in publicly offered commodity pools registered under the Securities
Act of 1933 ("Securities Act") n1 or the Securities Exchange Act of 1934
("Exchange Act") n2 of their disclosure obligations under those Acts. In
connection herewith, and to the extent applicable, the Commission incorporates
by reference the views expressed by the CFTC regarding the disclosure
requirements under the Commodity Exchange Act ("CEA") n3 and CFTC regulations.
n4 The CFTC's views are set forth in an interpretive statement and request for
comments being published simultaneously herewith.
n1 15 U.S.C. @ 77a et seq.
n2 15 U.S.C. @ 78a et seq.
n3 7 U.S.C. @ 1 et seq.
n4 E.g., 17 CFR Part 4.
The views expressed in this interpretive statement should be considered
in connection with a registrant's obligation to disclose, in registration
statements and other filings with the Commission, material information to
investors that is necessary to make the required disclosure not misleading. n5
In addition, the Commission is requesting comment on several matters related to
the presentation of prior performance by commodity pool operators and commodity
trading advisors, and the presentation of fees, commissions and expenses to be
incurred by the typical professionally managed commodity pool.
n5 See Securities Act Section 17(a), 15 U.S.C. @ 77q(a); Securities Act
Rule 408, 17 CFR @ 230.408; Exchange Act Section 10(b), 15 U.S.C. @ 78j(b);
Exchange Act Rule 10b-5, 17 CFR @ 240.10b-5; Exchange Act Rule 12b-20, 17 CFR @
240.12b-20. See also Basic Inc. v. Levinson, 108 S. Ct. 978 (1988).
Registrants also are reminded of their obligation to present
information in a clear, concise and understandable manner. Securities Act Rule
421(b), 17 CFR @ 230.421(b). Cf. Gould v. American-Hawaiian Steamship Co., 535
F. 2d 761 (3d Cir. 1976); Kohn v. American Metal Climax, Inc., 322 F. Supp. 1331
(E.D. Pa. 1970).
I. BACKGROUND
Issuers of interests in commodity pools must comply with applicable
registration, disclosure, antifraud and other requirements of the federal
securities laws. n6 In view of the CFTC's jurisdiction over commodity interest
trading, commodity pool offerings also must comply with the regulations
promulgated by the CFTC regarding commodity pool operators and commodity trading
advisors and their associated persons as particularly set forth in the CFTC's
interpretive statement. Accordingly, where interests in a commodity pool are
registered with the Commission, the disclosure document provided to investors
must comply with the disclosure and other requirements of both the federal
commodity and securities laws. n7
n6 See Securities Act Section 2(1), 15 U.S.C. @ 77b(1); Exchange Act
Section 3(a)(10), 15 U.S.C. @ 78c(a)(10).
n7 See, e.g., Securities Act Section 10(a)(3), 15 U.S.C. 77j(a)(3),
which specifies the information required to be in a prospectus used in
connection with a registered offering of securities.
2
The Commission's staff has historically referred to the CFTC's
requirements as a starting place in formulating its own disclosure standards
applicable to offerings of commodity pools registered with the Commission. The
companion statements reflect a continuing effort on behalf of the CFTC and the
Commission to maintain consistent coordinated requirements for publicly offered
commodity pools. Registrants should nevertheless independently review their
disclosure responsibilities and potential liabilities under both the federal
commodity and securities laws in the offer and sale of these securities.
Certain recently published studies suggest that the actual performance
of publicly held commodity pools was significantly lower than the performance
disclosed in the prior performance tables included in commodity pool disclosure
documents. n8 While the findings and issues raised in these studies are
currently being reviewed by the staff of the CFTC, the Commission believes that
it should provide guidance to issuers of publicly offered commodity pools at
this time. Although the positions expressed in this release and the CFTC's
interpretive statement currently reflect the respective agencies' views
regarding appropriate disclosure in commodity pool disclosure documents, the
Commission is interested in receiving views on the interpretive positions
expressed in those statements. Commentators may wish to make the same submission
to both agencies. The Commission expects to consult with the CFTC concerning the
comments received in response to their respective statements with a view towards
determining whether further action is necessary or appropriate.
n8 See Elton, Gruber & Rentzler, New Public Offerings, Information and
Investor Rationality: The Case of Publicly Offered Funds, 62 J. Bus. 1-15
(January, 1989). The authors hypothesized that the findings of the study were at
least in part due to the following factors: 1) public commodity pools have
larger transaction costs and management fees than private commodity accounts; 2)
only trading advisers with recent successful track records are likely to go
public; and 3) trading advisers can select the period of time for disclosing
their prior performance, resulting in an upward bias in performance results. See
also Edwards & Ma, Commodity Pool Performance: Is the Information Contained in
Pool Prospectuses Useful? Working Paper Series No. 16, Center for the Study of
Futures Markets, Columbia Business School (January, 1988).
II. DISCLOSURE OF PRIOR PERFORMANCE TABLES
Section 4.21 of the CFTC's regulations requires that the disclosure
document provided to prospective investors include, among other things,
information with respect to the actual performance of previously operated
commodity pools and trading accounts of the commodity pool operator, the
commodity trading advisor, and their respective principals (the "performance
history"). n9 In this connection, the CFTC's rules require that the disclosure
document include performance history for at least the lesser of three years or
the life of the commodity pool or trading account. n10 Beyond the required three
years, registrants have discretion, subject to the risk of liability under the
antifraud provisions of the federal commodity n11 and securities laws, n12 to
present performance history for any additional time periods. Where performance
history is provided in excess of three years, however, the additional
performance data should not be selected in such a way so as to misrepresent the
overall performance history of the commodity pool operator or commodity trading
advisor. Thus, where performance history for periods greater than the required
three years is presented, the additional performance history should not
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differ materially from the commodity pool operator's or commodity trading
advisor's overall historical performance. n13
n9 CFTC Regulation @ 4.21, 17 CFR @ 4.21.
n10 CFTC Regulation @@ 4.21(a)(4) and (a)(5), 17 CFR @@ 4.21(a)(4),
(a)(5).
n11 Section 4o of the Commodity Exchange Act, 7 U.S.C. @ 6o.
n12 See, e.g., Securities Act Section 17(a), 15 U.S.C. @ 77q(a);
Exchange Act Section 10(b), 15 U.S.C. @ 78j(b), and Exchange Act Rule 10b-5, 17
CFR @ 240.10b-5.
n13 Registrants should be prepared to provide the Commission or its
staff with information concerning the presentation of additional performance
history. See Securities Act Rule 418, 17 CFR @ 230.418.
Comment is requested as to whether the presentation of prior
performance data beyond the required three years is useful to investors in
making their investment decision. If so, further comment is requested as to
whether registrants should be required to present the entire performance history
of the commodity pool operator and commodity trading advisor, or alternatively,
whether registrants should be required to present performance history for some
period greater than three years, such as five, seven or ten years where such
performance data is available. n14 In addressing these issues, commentators
should discuss specifically those factors that would cause a presentation
covering more than three years to be useful or relevant to an investment
decision in the currently offered commodity pool. The Commission also requests
comment as to whether any presentation of prior performance is useful to
investors in view of the general nonpredictability of trading results.
n14 The Commission notes that the CFTC currently requires that
registrants maintain all commodity pool and trading account records for at least
five years. CFTC Regulation @@ 4.23 and 1.31, 17 CFR @@ 4.23 and 1.31.
The CFTC's regulations require that the prior performance of the
commodity pool operator and trading advisor be presented on at least a quarterly
basis. n15 In the Commission's view, performance disclosure on a monthly basis
is generally more appropriate, particularly when such monthly performance is
volatile. Moreover, to facilitate investor review and analysis of the prior
performance presentations, a registrant, to the extent practicable, should
present the prior performance tables for the commodity pool operator and the
commodity trading advisor on a consistent periodic basis.
n15 CFTC Regulation @@ 4.21(a)(4)(ii) and (5)(ii), 17 CFR @@
4.21(a)(4)(ii) and (5)(ii).
The CFTC's regulations permit prior performance disclosure on an
individual or composite basis. n16 Where a composite presentation is elected,
separately captioned composites of previously traded public pools of the
commodity pool operator and commodity trading advisor may be necessary to
prevent the prospectus from being misleading, where the differences between the
prior public pools' and private accounts' performance are material and
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are not otherwise clearly and concisely disclosed and explained in the text.
Comment is requested as to whether there should be a separate presentation of
prior public pools of the commodity pool operator and commodity trading advisor
under all circumstances or whether an explanation of such differences in the
text would be sufficient.
n16 CFTC Regulation @@ 4.21(a)(4)(iv) and (5)(iii), 17 CFR @@
4.21(a)(4)(iv) and (5)(iii).
To enable an investor to evaluate prior performance presentations, the
prior performance tables should be accompanied by appropriate textual disclosure
regarding any material differences in investment objectives or structures
between the commodity pools or trading accounts displayed in the prior
performance tables and the commodity pool being registered. For example,
specific disclosure should be considered where the margin-to-equity ratio of
historical commodity pools or trading accounts is materially different from the
margin-to-equity ratio permitted in the currently offered commodity pool, or
where there are material differences in money management strategies. Similarly,
to the extent an investor's understanding of the performance history would be
enhanced by an explanation of significant factors that may have contributed to a
materially favorable or unfavorable result during any quarterly or monthly
measuring period, registrants should consider appropriate narrative disclosure.
Such discussion could address, by way of example, the extent to which such prior
performance was attributable to: 1) a particular successful or unsuccessful
position or series of positions in one or a limited number of commodities, or
was broadly based; 2) the movements of the commodity markets generally as
measured by a broad based commonly used industry index; or 3) any material
change in investment strategy or objectives. Commentators are requested to
discuss any other factors that may be relevant to an understanding of the
information contained in the prior performance tables.
III. DISCLOSURE OF FEES, COMMISSION AND EXPENSES
Consistent with the Commission's view, the practice is to supplement
the prior performance disclosure for publicly offered commodity pools with a pro
forma presentation of the performance history reflecting the brokerage
commissions, incentive and management fees that would have been incurred if the
commodity pools and trading accounts presented in the prior performance tables
were subject to the same fees, and expenses as the commodity pool being
registered instead of those fees and expenses actually paid by the commodity
pools and trading accounts presented. When included, the pro forma presentation
should disclose the actual and pro forma net return achieved by the commodity
pool operator and commodity trading advisor for the last three years. Comment is
requested as to whether this presentation and any other pro forma presentation
based on the actual prior results may cause investors to place undue reliance on
prior performance results as an accurate indicator of future performance.
Registrants also should include, in addition to a narrative
description, a tabular presentation located in the forepart of the prospectus
that details the brokerage commissions, incentive, management and transactional
fees, as well as any other expenses attributable to the commodity pool that will
be paid directly or indirectly by investors. n17 If any affiliate of the
commodity pool operator will receive compensation in connection with the
operation of the commodity pool, such affiliation and the amount of compensation
should be clearly disclosed.
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n17 See also Regulation S-K, Item 501, 17 CFR @ 229.501, which requires
the disclosure of the net proceeds to the issuer after deducting selling
commissions; and Instruction 5 thereto, which requires footnote disclosure
regarding other expenses of issuance and distribution, including organizational
costs. 17 CFR @ 229.501, Instruction 5.
In order to facilitate analysis of the fees, brokerage commissions and
other expenses to be charged to the commodity pool, registrants should consider
additional disclosure regarding how much each unit's net asset value would have
to increase in the first year, for the redemption value per unit, net of
expenses attributable to the commodity pool, to equal the purchase price paid by
investors for such unit, as well as a calculation of the redemption value per
unit estimated prior to the commencement of operations. Comments are requested
as to whether alternative disclosures would better enable prospective investors
to assess the impact on their investment of the expenses to be charged to the
commodity pool.
IV. CONCLUSION
While this release and the interpretive statement published
simultaneously herewith by the CFTC represent the views of the respective
agencies as to the preparation and disclosure of material information concerning
commodity pools, nothing in the statements should be construed to alleviate the
requirement of registrants to comply with all applicable disclosure requirements
under the Securities Act, the Exchange Act, and the CEA. n18 Attention also is
directed to the antifraud provisions under both the Securities Act and the
Exchange Act, which apply not only to statements made in filings with the
Commission, but also to those made outside Commission filings. n19 Registrants
also are reminded of the disclosure obligations promulgated by the CFTC.
n18 Registrants are specifically reminded of their obligation to
include, in annual and quarterly reports filed under the Exchange Act, an
analysis of the financial condition and results of operation for the commodity
pool. See Item 303 of Regulation S-K, 17 CFR @ 229.303.
n19 See supra note 12.
List of Subjects in Parts 231 and 241
Reporting and Record Keeping Requirements, Securities.
Parts 231 and 241 of Title 17, Chapter II of the Code of Federal
Regulations are amended by adding this Release No. 33-6815, and 34-26508
(February 1, 1989) to the list of interpretive releases By the Commission.
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