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9023 - COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
(Board of Directors, August 24, 1995; revised July 24, 2000)
NFA Compliance Rule 2-13 requires, in pertinent part, that each Member CPO which delivers a disclosure document under the CFTC Regulation 4.21 must include in the disclosure document a break-even analysis which includes a tabular presentation of fees and expenses. The break-even analysis must be presented in the manner prescribed by NFA's Board of Directors. The purpose of this requirement is to ensure not only that customers will be clearly informed as to the nature and amount of fees and expenses that will be incurred, but that customers will also be made aware of the impact of those fees and expenses on the potential profitability of their investments. NFA's Board of Directors has adopted the following guidelines which must be adhered to by NFA Member CPOs when preparing the break-even analysis required by Compliance Rule 2-13:
- If fees are likely to be affected by the size of the offering, then an assumed amount of total funds raised should be stated. The document should also state what the break-even point would be if the minimum or maximum proceeds were raised.
- If there are redemption fees, they must be clearly shown and considered part of the total cost and reflected in the break-even analysis.
- Incentive fees should be stated as a percentage of profits, and the method by which profits are calculated should be described.
- All management, brokerage and other fees should reflect actual experience or contractual charges, if known. If not known, they should be based on good faith estimates. If, for example, CTAs publish their estimated number of round turns/ $1,000,000 then those published estimates should be used for estimating brokerage costs. If this is an on-going fund or if there is evidence supporting other numbers, then the other numbers should be used and explained.
- If pool participants are to receive some or all of the interest income generated by the pool, the expected interest income should be deducted from the expenses which must be covered by trading profits to return the customer to the level of his initial investment. The estimate of that interest income must include the assumed interest rate, and that rate must reflect current cash market information. If any interest income is to be paid to the pool operator, or to anyone other than the pool participants, that fact and an estimate of the amount must also be clearly disclosed.
To calculate the break-even point a CPO must first determine the amounts of all fees and expenses, exclusive of incentive fees, that are anticipated to be incurred by the pool during the first year of the investment. The total of these fees and expenses less the amount of interest income expected to be earned by the pool represents the gross trading profits before incentive fees (preliminary gross trading profits) that would be necessary for the pool to retain its initial Net Asset Value per unit at the end of the first year. In some situations the CPO must then calculate the additional trading profit that would be necessary to overcome the incentive fees that would be incurred. This situation will arise whenever the pool expects to incur expenses which would not be deducted from the CTA's net performance in calculating the CTA's incentive fee. That amount can be computed by first determining the incentive fees that would be incurred if the preliminary gross trading profits described above were achieved and then dividing that amount by (1- incentive fee rate); (e.g., if the incentive fee is 25 percent, the denominator would be 1- .25, or .75). A sample break-even presentation is shown below:
|Selling Price per Unit (1)
|Syndication and Selling Expense (1)
|General Partner's Management Fee (2)
|Fund Operating Expenses (3)
|Trading Advisor's and Trading
Manager's Management Fees (4)
|Trading Advisor's and Trading Manager's
Incentive Fees on Trading Profits (5)
|Brokerage Commissions and Trading Fees (6)
|Less Interest Income (7)
|Amount of Trading Income Required for
the Fund's Net Asset Value per Unit
(Redemption Value) at the End of
One Year to Equal the Selling Price per Unit
|Percentage of Initial Selling Price per Unit
(1) Investors will initially purchase units at $1,000. After the commencement of trading, units will be purchased at the Fund's month-end Net Asset Value per unit. A five percent syndication and selling charge will be deducted from each subscription to reimburse the Fund, the General Partner and/or the Clearing Broker for the syndication and selling expenses incurred on behalf of the Fund.
(2) Except as set forth in these explanatory notes, the illustration is predicated on the specific rates or fees contracted by the Fund with the General Partner, the Trading Manager, the Trading Advisor, and the Clearing Broker, as described in "Fees, Compensation and Expenses."
(3) The Fund's actual accounting, auditing, legal and other operating expenses will be borne by the Fund. These expenses are expected to amount to approximately 2.05 percent of the Fund's Net Asset Value.
(4) The Fund's Trading Advisor will be paid a monthly management fee of 1/12 of two percent of Allocated Net Assets. The fund's Trading Manager will be paid a monthly management fee of 1/12 of one percent of allocated Net Assets.
(5) The Trading Advisor and Trading Manager will receive incentive fees of 20 percent and five percent, respectively, of Trading Profits exclusive of interest income. The $17.17 of incentive fees shown above is equal to 25 percent of the net of total trading income of $135.17, minus $38 of brokerage commissions and trading fees and $28.50 of management fees.
(6) Brokerage commissions and trading fees are estimated at four percent of Net Asset Value.
(7) The Fund will earn interest on margin deposits with its Clearing Broker. Based on current interest rates, interest income is estimated at three percent of Net Asset Value.
The above break-even analysis is a sample and the fees and expenses included in it may vary from those charged by other commodity pools. The analysis included in an actual disclosure document must include all of the fees and expenses of any type which affect the break-even point of that investment.