the complaint and answer (whether or not formally characterized as such) and such further documents as the Commission may thereafter request, filed in any material legal proceedings to which the contract market is a party or its property or assets is subject.

(b) Every contract market shall submit to the Commission copies of the complaint and answer (whether or not formally characterized as such) and such further documents as the Commission may thereafter request, filed in any material legal proceedings instituted against any officer, director, or other official of the contract market, arising from conduct in such person's capacity as a contract market official and alleging violations of (1) the Act or any rule, regulation, or order thereunder; (2) the constitution, bylaws or rules of the contract market; or (3) the applicable provisions of state law relating to the duties of officers, directors, or other officials of business organizations.

(c) Every contract market shall notify the Commission in writing of any proceedings known to the contract market to be contemplated against the contract market by governmental authorities, other than investigations or enforcement actions which may be instituted by the Commission. To the extent that such information is available, the notification must include the name of the court or agency in which the proceedings may be brought; the anticipated date of the institution of the proceedings; the principal parties (including any officers, directors or other officials of the contract market) which may be bringing or named in the proceedings; a description of the factual and legal basis which may be alleged to underlie the proceedings and the relief which may be sought therein. If proceedings are later instituted against the contract market by governmental authorities, the contract market shall submit to the Commission copies of the complaint and answer (whether or not formally characterized as such) and such further documents as the Commission may thereafter request, filed in such proceedings.

(d) Every contract market shall notify the Commission if any officer, director or other official of the contract market is to be indemnified by the contract market for any amounts paid as settlements or judgments or amounts paid as fines or penalties in any legal proceeding referred to in paragraphs (a), (b), and (c) of this section. The notification must include information regarding the nature and amount of any such indemnification and a brief statement explaining the reasons why the official is to be indemnified for such liabilities.

(e) The documents required by this section shall be mailed to the Commission's headquarters in Washington, D.C. within 10 days after the effective date (February 15, 1977) of this section as to all matters referred to in paragraphs (a), (b), and (c) of this section then pending, within 10 days after the initiation of legal proceedings referred to in paragraphs (a) and (b) of this section, within 10 days after the contract market determines to indemnify a contract market official as provided in paragraph (d) of this section, and within 10 days after the contract market becomes aware of the contemplated proceedings and within 10 days after formal initiation of any contemplated proceedings referred to in paragraph (c) of this section. For purposes of paragraphs (a) and (b) of this section, legal proceedings are not "material" if the only relief sought is a money judgment for less than $15,000.

[42 FR 2629, Jan. 12, 1977]

ed an official seal (the "Seal"), the description of which is as follows:

(a) An American bald eagle in black and white holding the scales of balanced interests over a black and white wheel of commerce and a farmer's plow, also in black and white. These symbols are enclosed with an inner red octagon and a blue outer octagon representing traditional futures contract trading pits. Around the outside of the octagons are the words "Commodity Futures Trading Commission" separated by two stars from the year "1975," the first year of the Commission's existence.

(b) The Seal of the Commodity Futures Trading Commission is illustrated as follows:

(a) The following officials of the Commodity Futures Trading Commission are authorized to affix the Seal to appropriate documents and other materials of the Commission for all purposes including those authorized by 28 U.S.C. 1733(b) (relating to authenticated copies of agency documents used as evidence): The Chairman and all Commissioners, the General Counsel, the Executive Director, the Directors of Divisions, and the Secretariat.

(b) The officials, named in paragraph (a) of this section, except the Secretariat, may redelegate, and authorize redelegation of this authority.

§2.3 Prohibitions against misuse of seal.

(a) Fraudulently or wrongfully affixing or impressing the Seal to or upon any certificate, instrument, document or paper or with knowledge of its fraudulent character, or with wrongful or fraudulent intent, using, buying, procuring, selling or transferring to another any such paper is punishable under Section 1017 of Title 18, United States Code.

(b) Falsely making, forging, counterfeiting, mutilating, or altering the Seal, or knowingly using a fraudulent or altered Seal or possessing any such Seal knowingly is punishable under Section 506 of Title 18, United States Code.

PART 4-COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

4.31 Disclosure to prospective clients. 4.32 Record-keeping.

AUTHORITY: Secs. 2(a)(1), 4b, 4c, 41, 4m, 4n, 40, 8a and 19 of the Commodity Exchange Act, 7 U.S.C. 2 et seq., as amended, 92 Stat. 865 et seq.

SOURCE: 44 FR 1924, Jan. 8, 1979, unless otherwise noted.

Subpart A-Definitions and
Exemptions

§ 4.10 Definitions.

For purposes of this part:

(a) "Commodity interest" means

(1) Any contract for the purchase or sale of a commodity for future delivery; and

agreement

or

(2) Any contract, transaction subject to Commission regulation under sections 4c or 19 of the Act.

(b) "Net asset value" means total assets minus total liabilities, with each position in a commodity interest marked to the market or accounted for at fair market value, in accord with generally accepted accounting principles.

(c) "Participant" means any person that has any direct financial interest in a pool (e.g., a limited partner).

(d) "Pool" means any investment trust, syndicate or similar form of enterprise that trades commodity interests.

(e) "Principal," when referring to a person that is a principal of a particular entity, means any general partner or director or officer (or person performing similar functions) of the entity, or any owner of more than 10 percent of the equity interest of the entity. "Equity interest" means any financial interest that permits the owner thereof to exercise direct or indirect control of the entity in which the interest is held. "Owner" includes not only the holder of record of the equity interest but also any person that has control over the equity interest.

§ 4.11 Exemption from section 4n(3)(B).

The provisions of section 4n(3)(B) of the Act shall not apply to any commodity pool operator or commodity trading advisor that is registered under the Act as such or that is exempt from such registration.

§ 4.12 Exemptions from provisions of Part 4.

The Commission may exempt any person or any class or classes of persons from any provision of this part if it finds that the exemption is not contrary to the public interest and the purposes of the provision from which the exemption is sought. The Commission may grant the exemption subject to such terms and conditions as it may find appropriate.

§ 4.13 Exemption from registration; continued applicability of antifraud and reparations sections.

(a) A person is not required to register with the Commission as a commodity pool operator if—

(1) (i) It does not receive any compensation or other payment, directly or indirectly, for operating the pool, except reimbursement for the ordinary administrative expenses of operating the pool; (ii) it operates only one commodity pool at any time; (iii) it is not otherwise required to register with the Commission and has no business affiliation with any person required to register with the Commission; and (iv) neither the person nor any other person involved with the pool does any advertising in connection with the pool (for purposes of this section, advertising includes the systematic solicitation of prospective participants by the telephone or seminar presentation); or

(2) (i) The net asset value of the pool it operates (or, if it operates more than one pool, the combined net asset values of the pools it operates) does not exceed $50,000 at the beginning of the pool's fiscal year, and (ii) none of the pools operated by it has more than 15 participants (excluding the pool's operator and trading advisor(s)) at any time during the pool's fiscal year.

(b) A person is not required to register with the Commission as a commodity trading advisor if—

(1) It is a dealer, processor, broker, or seller in cash market transactions of any commodity (or product thereof) and the person's commodity trading advice is solely incidental to the conduct of its cash market business;

(2) It is a non-profit, voluntary membership, trade association or farm organization and the person's commodity trading advice is solely incidental to the conduct of its business as such association or organization;

(3) It is registered under the Act as an associated person and the person's commodity trading advice is issued solely in connection with its employment as an associated person; or

(4) It is registered under the Act as a commodity pool operator and the person's commodity trading advice is di

rected solely to, and for the sole use of, the pool or pools for which it has so registered.

(c) For purposes of this section, "cash market transactions" shall not include transactions involving contracts of sale of a commodity for future delivery or transactions subject to Commission regulation under sections 4c or 19 of the Act.

(d) The provisions of sections 40 and 14 of the Act shall apply to any person exempted by this section and it shall continue to be unlawful for that person to violate section 40 of the Act.

Subpart B-Commodity Pool Operators

§ 4.20 [Reserved]

§ 4.21 Disclosure to prospective participants.

(a) No commodity pool operator registered or required to be registered under the Act may, directly or indirectly, solicit, accept or receive funds, securities or other property from any prospective pool participant unless, on or before the date it engages in that activity, the commodity pool operator delivers or causes to be delivered to the prospective participant a Disclosure Document containing the following information:

(1) The name and main business address of the pool's operator and the name of each principal thereof.

(2) The business background, for the five years preceding the date of the Document, of the pool's operator and the pool's commodity trading advisor(s) and of each principal thereof.

(3) Any actual or potential conflict of interest on the part of the operator, commodity trading advisor or futures commission merchant of the pool, or

the principals of those entities, regarding any aspect of the pool.

(4) 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, commodity trading advisor(s), or the principals thereof.

(i)(A) The presentation of actual performance must include prominent disclosure of a table showing for the entire period the monthly or quarterly net asset value of one pool participation unit and the monthly or quarterly sum of the distributions and assessments per unit, if any. If a pool is required by § 4.22(b) to issue Account Statements monthly, the table of net asset values must be on a monthly basis.

(B) The presentation of actual performance must also include prominent disclosure of the annual rate of return (compounded annually) rounded to the nearest tenth of one percent of one pool participation unit for the entire period. The annual rate of return (compounded annually) should be computed on the assumption that all distributions, if any, are reinvested (outside the pool) and all assessments, if any, are discounted at the same rate, i.e., at the annual rate of return (compounded annually) and that all distributions and assessments that are paid during a monthly time period are made at the end of the monthly time period.

(C) The annual rate of return (compounded annually) is calculated by first computing the monthly internal rate of return compounded monthly to the nearest hundredth of one percent and then converting the monthly rate with monthly compounding into an annual rate with annual compounding. The following formula should be used for calculating the monthly internal rate of return compounded monthly ("i"):

Where:

INV=amount of the initial investment (total cost including commissions and fees to the investor for one pool participation unit), cf=the sum of the distribution(s) (positive sign) and assessment(s) (negative sign) made per unit during each monthly time period, NAV=net asset value (less redemption costs, if any) of one pool participation unit at the end of the performance period, and n=the number of monthly time periods.

The following formula should be used to convert the monthly internal rate of return compounded monthly into the annual rate of return (compounded annually) (“R”):

Where:

R=(1+Mo.IRR) 12-1

Mo.IRR=monthly internal rate of return compounded monthly expressed as a decimal.

(ii) If a pool whose actual performance must be disclosed does not have a full three-year record, the actual performance for the entire period of its operation must be disclosed with a prominent statement as follows: “The Commodity Futures Trading Commission requires commodity pool operators to disclose to prospective participants the actual performance record of each of their pools for at least the previous three years. You should note that the annual rate of return (compounded annually) of percent for this pool's participation units is for the pool's entire operating history, a period of only months." If the

pool for which the commodity pool operator is soliciting participants has not commenced commodity interest trading, this fact must be disclosed with a prominent statement as follows: "The Commodity Futures Trading Commission requires commodity pool operators to disclose to prospective pool participants the actual performance record of each of their pools for at least the previous three years. You should note that this pool has not begun trading and does not have any performance history."

(iii) If a pool discloses, in addition, its performance for other time periods, it must prominently present the table of net asset values and the annual rate

of return (compounded annually) in accord with paragraph (a)(4)(i) of this section for each of those periods.

(5) Whether the pool's operator or commodity trading advisor(s), or the principals thereof, have controlled commodity interest accounts of customers other than pools within the twelve months preceding the date of the Document and, if so, whether the performance of those accounts will be made available to the participants. If made available, the performance of commodity interest accounts must include a presentation in the manner described in § 4.21(a)(4).

(6) The extent of any beneficial interest in the pool of the pool's operator or commodity trading advisor(s), or the principals thereof.

(7) A complete description of each kind of expense that has been and is expected to be incurred by the pool, expressed both as a dollar amount and as a percentage of average net asset value for the preceding and current fiscal years, including fees for management, trading advice, legal advice, accounting services and organizational services.

(8) The manner in which the pool will fulfill its margin requirements.

(9) The manner in which pool funds not deposited as margin will be used.

(10) Any restrictions upon the transferability or redeemability of interests in the pool.

(11) The extent to which a participant may be held liable for obligations of the pool in excess of the funds initially contributed by the participant to the pool.

(12) The pool's policies with respect to the payment of distributions from profits or capital and the federal income tax effects of such payments for participants.

(13) Any material administrative, civil or criminal action against the pool's operator, commodity trading advisor(s), or the principals thereof within the five years preceding the date of the Document.

(14) Any commission or other fee that is paid or may be paid, directly or indirectly, by the pool's operator, com

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