Annual Report Required of Commodity Pool Operators

DIVISION OF TRADING AND MARKETS

FINANCIAL AND SEGREGATION INTERPRETATION NO. 6

Annual Report Required of Commodity Pool Operators

Under §4.22(c) of the Commission's regulations, 17 C.F.R. §4.22(c)(1979), each commodity pool operator ("CPO") registered or required to be registered under the Commodity Exchange Act, as amended ("Act"), must distribute an Annual Report containing specified information to each participant in each commodity pool it operates, and to the Commission at its Washington, D.C. office, within 60 days after the end of the pool's fiscal year. Regulation 4.22(d), 17 C.F.R. §4.22(d)(1979), requires that the Annual Report be certified by an independent public accountant unless (i) the pool did not have more than 15 participants (excluding the pool's operator and trading advisor(s)) at any time during the pool's fiscal year, or (ii) the average of the pool's net asset values required to be reported to participants under §§4.22(a) and 4.22(b), 17 C.F.R. §§4.22(a) and 4.22(b)(1979), did not exceed $50,000 during the first half of the pool's fiscal year.

The Division has received several inquiries on the provisions of §§4.22(c) and 4.22(d) and on the Commission's policy with respect to disclosing to the public the information contained in the Annual Reports filed with it. Judging from those inquiries, the Division believes that certain clarifications of those regulations and an explanation of that policy are necessary. The following discussion addresses those inquiries.

1. Actual performance information to be included in the Annual Report. Regulation 4.22(c)(1) provides that the Annual Report must contain the information required by §4.21(a)(4), 17 C.F.R. §421(a)(4)(1979). Regulation 4.21(a)(4) states that in its Disclosure Document a CPO must disclose the actual performance for the preceding three years of the pool and each pool operated or advised within the twelve months preceding the date of the Document by the pool's operator, trading advisor(s), or the principals thereof. The Division has been asked whether these two regulations should be interpreted to require that the Annual Report contain the actual performance information for each pool specified in §4.21(a)(4) or to require that the Annual Report contain actual performance information only for the pool it covers.

When the Commission adopted Part 4 of its regulations, it stated that the purpose of the Disclosure Document is to inform prospective pool participants "about the material facts regarding the pool before they commit their funds." 44 Fed. Reg. 1920 (January 8, 1979). Since, as the Commission further stated, the purpose of the Annual Report is to "provide participants with the information necessary to assess the overall trading performance and financial condition of the pool," a CPO must disclose, in the format specified in §4.21(a)(4), only the past performance of the pool for which the Annual Report is being distributed. Id. at 1922 (emphasis added).

2. Presentation of Account Statement information in the Annual Report. Regulation 4.22(c)(1) provides that the Annual Report must also contain the information required by §4.22(a). Under §4.22(a), each CPO registered or required to be registercd under the Act must distribute to each participant in each pool it operates an Account Statement for that pool containing specified information. A CPO must distribute an Account Statement on a monthly or quarterly basis, depending on the amount of the net assets of the pool.

Certain of the information that a CPO must include in the Account Statements for its pool is also, however, specifically required to be included in the Annual Report for that pool. For example, under §4.22(a), in the Account Statement a CPO must include, among other things, the amount of management fees, advisory fees and brokerage commissions for the pool. Under §4.22(f), 17 C.F.R. §4.22(f)(1979), in the Statement of Income (Loss) in the Annual Report a CPO similarly must itemize, among other things, the amount of management fees, advisory fees and brokerage commissions for the pool.

The Division interprets §4.22(c)(1) to require that a CPO need disclose separately in the Annual Report for its pool only that Account Statement information which is not otherwise required to be included in the Annual Report. This information should be presented in chart or schedule form, or in a footnote to the required financial statements, on an annualized basis.

Regulation 4.22(c)(1) further provides that the Annual Report must contain the changes in the information required by §4.22(a) from the end of the pool's prior fiscal year. The Division interprets this provision to mean that the Annual Report must include for the pool's past two fiscal years, on an annual basis and in comparative form, only those changes in Account Statement information not otherwise required to be included in the Annual Report. Under this interpretation, the changes in such Account Statement information must be reported on an annual basis; in the Annual Report it therefore would be unnecessary for a CPO to comply with the requirements in §§4.22(c)(1) and 4.22(a)(5) to report changes in Account Statement information on a monthly or quarterly basis.

3. Certification of information in the Annual Report. Subject to the exceptions discussed above, §4.22(d) requires that the Annual Report must be certified by an independent public accountant. The Division has received several inquiries concerning what information in the Annual Report must be certified. The independent public accountant need only certify the financial statements contained in the Annual Report pursuant to §§4.22(c)(2), 4.22(c)(3), 4.22(c)(4) and 4.22(f).1

4. Public Availability of the Annual Report. Several persons have asked whether the Commission intends to make the information contained in Annual Reports available to the public. Subject to the exceptions discussed below, it is the Commission's general policy to make each report filed with it available to the public.2 The Division will recommend to the Commission that this policy be followed with respect to information contained in Annual Reports.

Under the Act the Commission is prohibited from publicly disclosing certain information. Section 8(a) of the Act, 7 U.S.C. §12, as amended, Pub.L. 95-405, §16, 92 Stat. 873 (1978), states that except as specifically authorized by the Act, the Commission "may not publish data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers."3 And, under §145.5, 17 C.F.R. §145.5 (1979), the Commission may refuse to publicly disclose the "nonpublic" matters specified therein. In particular, §145.5(c) provides that the Commission may "decline to publish or make available to any person" matters specifically exempted form disclosure by the Act.4

The Division has been advised that certain information required to be included in the Annual Report under §4.22(f) comes within the scope of section 8(a) of the Act and §145.5. Regulation 4.22(c)(3) requires the CPO to include a Statement of Income (Loss) in the Annual Report for its pool. Regulation 4.22(f) specifies that the Statement of Income (Loss) must itemize brokerage commissions, management fees, advisory fees, incentive fees, interest income and expense, realized net gain or loss from each commodity interest and unrealized net gain or loss on commodity interest positions open at the end of the pool's fiscal year. The Division has been advised that data and information on realized and unrealized net gain or loss might "separately disclose ... business transactions or market positions." The Act does not specifically authorize the Commission to disclose that information. Therefore, the Division will recommend to the Commission that it generally treat as nonpublic those portions of the Statement of Income (Loss) contained in an Annual Report that itemize realized net gain or loss from each commodity interest and unrealized net gain or loss on commodity interest positions open at the end of the pool's fiscal year. The Division does not, however, intend to recommend to the Commission that it generally treat as nonpublic any other information contained in the Annual Report, including any other information contained in the Statement of Income (Loss).5

If a CPO believes there is any information in the Annual Report for its pool that the Commission should not publicly disclose, the CPO should petition the Commission for confidential treatment of that information. The procedures for making that petition and for determining its merits are specified in § 145.9, 17 C.F.R. §145.9 (1979).6

The statements made in this interpretation are not rules or interpretations of the Commodity Futures Trading Commission, nor are they published as bearing the Commission's official approval; they represent interpretations and practices followed by the Division of Trading and Markets in administering the financial and segregation requirements of the Commodity Exchange Act, as amended, and of the regulations thereunder.

FOR FURTHER INFORMATION CONTACT: Daniel A. Driscoll, Chief Accountant, Office of the Chief Accountant, or Barbara R. Stern, Attorney, Office of the Chief Counsel, Division of Trading and Markets, Commodity Futures Trading Commission, 2033 K Street N.W., Washington, D.C. 20581. Telephone: (202) 254-8955.

Issued in Washington, D.C. on February 8, 1980, by the Division of Trading and Markets.

JOHN L. MANLEY

DIRECTOR

DIVISION OF TRADING AND MARKETS

TMINT-06

¹ Readers should note the requirement in §4.22(c)(3) that the Annual Report must contain Statements of Income (Loss), Changes in Financial Position, and Changes in Ownership Equity, for the period between (i) the later of: (A) The date of the most recent Statement of Financial Condition delivered to the Commission pursuant to §4.22(c), (B) January 1, 1979 or (C) the date of the formation of the pool, and (ii) the close of the pool's fiscal year, together with Statements of Income (Loss), Changes in Financial Position, and Changes in Ownership Equity for the corresponding period of the previous fiscal year.

² The procedure for requesting reports filed with the Commission is specified in §145.7, 17 C.F.R. §145.7(1979).

³ Section 16 of the Act, 7 U.S.C. §20 (1976), also prohibits the Commission from disclosing such data and information in market reports furnished to the public under that section. Section 16 is not, however, applicable to the instant question because the reports to which it refers are investigations of such conditions as supply, demand and prices in the markets for "goods, articles, services, rights, and interests which are the subject of futures contracts."

⁴ Similarly, the Commission's regulations under the Government in the Sunshine Act, 5 U.S.C. § 552b (1976) prohibit disclosure of matters specifically exempted from disclosure by statute. See §147.3(b)(3), 17 C.F.R. § 147.3(b)(3)(1979).

⁵ Regulation §145.5 states that while the Commission may treat certain matters as nonpublic, "any reasonably segregable portions of a record shall be provided to a person who has requested the record after deletion of the portions which are considered nonpublic under this section."

⁶ This same procedure should be followed in requesting confidential treatment of a Disclosure Document filed with the Commission under §4.21, 17 C.F.R. §4.21 (1979), or § 4.31, 17 C.F.R. § 4.31 (1979).

Readers should be aware that the Commission has amended § 145.9(b)(1), effective February 19, 1980. See 45 Fed. Reg. 3757 (January 17, 1980). The amended rule requires that a petition for confidential treatment be filed with the Director of the Office of Public Information and that a copy of the petition be filed with the division or office of the Commission to which the information subject to the petition has been submitted.