To: All Commodity Pool Operators

Attention: Chief Financial Officer

Subject: 1999 Annual Reports for Commodity Pools

The Division of Trading and Markets ("Division") of the Commodity Futures Trading Commission ("Commission") is sending this letter to all registered commodity pool operators ("CPOs") 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 1999 annual financial report.

Last year, Commission staff reviewed more than 1,100 annual reports filed by CPOs for their commodity pools. About 82% of these reports were accepted as filed. That is a significant improvement from the prior year, when 77% of the annual reports were accepted as filed.

In our last letter regarding pool annual reports (February 10, 1999), we described certain recurring deficiencies in prior filings. Both this letter and the February 10, 1999, letter are available at our website at http://www.cftc.gov/tm/mgdfund.htm. Therefore, we will not repeat the items mentioned in our prior letter in detail, but will expand on some of them. In particular, please see Fund of Funds Considerations below for an update on that important topic. Also, many of the deficiencies noted below occur in reports for offshore pools. Accordingly, 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 (they are discussed in detail in last year's letter), please do the following:

· File one copy of the report with 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 report as soon as possible, but no later than the due date. For pools with a December 31, 1999 year-end, the due date is Thursday, March 30, 2000 (unless an extension of time has been granted).

· If the pool is operating under a Rule 4.7 or 4.12 exemption, the rule requires 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).

· Include information concerning net asset values or schedules of participants’ interests where that is required.

· Include a signed oath or affirmation with each and every copy of the report filed with NFA and the Commission. (Binding 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.)

Fund of Funds Considerations

The Division is particularly concerned with the level of disclosure regarding a pool's investments in other investment companies. This one topic accounted for about 75% of the non-compliance letters we sent for 1998 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(a)(2)(iii)(A)(3) and 4.12(b)(2)(iii).) 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 objective is to allow the participant to see the performance of the pool's major assets and the fees associated with these investments. At a minimum, the pool's financial statements should disclose, for each major investee fund:

This disclosure is necessary regardless of whether the investee funds are commodity pools.

Where the pool's investment in an investee fund is greater than or equal to 10% 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 10% investee, disclosure is required for all investees (smaller funds may be aggregated and reported as a single group). The total of the capsule information in the notes to the report 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 10% of the reporting pool's net assets, if the aggregate investment in other funds is at least 20%, 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 explain 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.

In addition to noting the issues discussed in this letter, CPOs and their accountants should be familiar with the AICPA Practice Aid Audits of Futures Commission Merchants, Introducing Brokers, and Commodity Pools. Enclosed as Attachment B is an illustration that satisfies the objectives of fund-of-funds reporting.

If a CPO or its accountant has questions concerning the matters discussed in this letter or the reporting rules, they should contact the staff member identified in Attachment A.

¹ While Regulation 4.2 directs that materials required under Part 4 be filed at the Commission’s Washington office, CPOs are encouraged, and by this letter authorized (pursuant to Regulations 4.12(a) and 140.93(a)(1)), instead to file pool annual reports at the appropriate regional office of the Commission.

ADDRESSES OF CFTC's DIVISION OF TRADING AND MARKETS OFFICES

NFA ADDRESS

National Futures Association

Compliance Department

200 West Madison 16^th Floor

Chicago, IL 60606

Phone: 312-781-1300

ILLUSTRATION - FUND OF FUNDS DISCLOSURES

Note X. Investments

As of December 31, 1999, ABC Fund invested in other funds, none of which were related parties. The Fund's investments are summarized below based on the investment objectives of the specific funds, as described in the disclosure documents for those funds:

The following table summarizes ABC Fund's investments in other funds as of December 31, 1999. 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.