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March 12, 1999
NFA Compliance Rule 2-35:Guidelines for Filing Two-Part Disclosure Documents for Commodity Pools
On October 26, 1998, the Commodity Futures Trading Commission (CFTC) approved NFA Compliance Rule 2-35(a)-(c) and the related interpretive notice regarding two-part disclosure documents for commodity pools. This rule will become effective on April 30, 1999 and will apply to all CPO disclosure documents received on April 30, 1999 or later. A copy of the new rule and the interpretive notice are attached. This Notice to Members provides guidance on how NFA and the CFTC will implement the rule. As a reminder, NFA is responsible for the initial review of CPO disclosure documents for private commodity pools. The CFTC is responsible for the initial review of disclosure documents for public pools (pools required to register their securities under the Securities Act of 1933).
Rule 2-35 requires that both private and public pool disclosure documents be prepared using plain English principles. NFA will apply these plain English principles consistently with the SEC's Plain English Rule for public company and mutual fund prospectuses. Unlike the SEC's Plain English Rule, however, which applies only to certain parts of the prospectus, NFA's rule requires that the entire document be prepared using plain English. Although Rule 2-35 does not apply to CTA disclosure documents, NFA encourages CTAs to use plain English principles when drafting their disclosure documents. The SEC's "A Plain English Handbook" offers practical tips on creating plain English documents. You can obtain a copy of this handbook from NFA's Information Center 1-800-621-3570, the Office of Investor Education and Assistance at the Securities and Exchange Commission, 450 5th Street, N.W., Washington, DC 20549, or by visiting the SEC's website at http://www.sec.gov/news/handbook.htm.
Rule 2-35 limits the information that may be included in a disclosure document to most of the information required by the CFTC's Part 4 Rules. Public pool disclosure documents may also include any other information that the SEC or state securities regulators require to be included. Although NFA intends to work with the SEC to limit the information required, public pools should include all information currently required by the SEC until further notice. Public pools must also prepare a Statement of Additional Information ("SAI"), which contains any other disclosures required under the securities laws or other information that the pool wishes to provide to current or prospective participants. Public pools must provide the SAI to prospective clients prior to accepting or receiving any funds.
The information that private pools can include in their disclosure documents is also limited to the information required by the CFTC's Part 4 Rules. Private pools are not required to prepare an SAI unless they want to provide additional information to their current or prospective participants. If a private pool prepares an SAI, the CPO may either bind it with the disclosure document (as long as the disclosure document comes first) or provide it separately upon the request of a prospective client.
All new disclosure documents received on April 30, 1999 or later must be prepared in accordance with Rule 2-35. Although NFA encourages CPOs to revise existing documents as soon as possible, existing documents will generally not need to be revised to comply with the new rule until December 31, 2000. For example, if a CPO updates a document to simply revise performance information or make minimal edits to the existing text, the CPO will not be required to revise the entire document until December 31, 2000. If however, the CPO makes substantial changes to the existing text, the CPO should revise the entire document to comply with Rule 2-35. If a CPO submits a substantially changed document without revising it to comply with Rule 2-35, NFA or the CFTC may require the CPO to do so before using the document.
The filing and review procedures for disclosure documents remain the same. All documents must be filed with both NFA and the CFTC. NFA encourages electronic filing with NFA at firstname.lastname@example.org and with the CFTC at email@example.com. Otherwise, one copy of the disclosure document and any SAI must be filed with NFA and two copies with the CFTC. As with current rules, both the disclosure document and SAI, and any updated documents, must be submitted to NFA and the CFTC prior to distributing the documents to the public.
If you have any questions regarding this notice, or Rule 2-35, please feel free to contact NFA's Information Center at 1-800-621-3570 or any member of NFA's Disclosure Document Review Team.