17 CFR PART 4
Interpretation Regarding Use of Electronic Media by Commodity Pool Operators and Commodity Trading Advisors
AGENCY: Commodity Futures Trading Commission.
ACTION: Interpretation; Solicitation of comment.
SUMMARY: The Commodity Futures Trading Commission (the "Commission" or "CFTC") is publishing its views with respect to the use of electronic media for transmission and delivery of Disclosure Documents, reports and other information by commodity pool operators ("CPOs"), commodity trading advisors ("CTAs"), and associated persons ("APs") thereof, under the Commodity Exchange Act and the Commission's rules promulgated thereunder. This interpretative guidance is intended to assist CPOs, CTAs and their respective APs in using electronic media to comply with their disclosure and reporting obligations, and to encourage continued research, development and use of electronic media for such purposes. The Commission also is announcing a pilot program for the electronic filing of CPO and CTA Disclosure Documents with the Commission. The Commission seeks comment on the issues discussed in this release and any related issues, including other areas as to which the Commission could provide guidance concerning use of electronic media for filing with the Commission or delivery to customers of required reports.
DATES: This interpretation is effective on October 15, 1996. Comments should be received on or before October 15, 1996.
ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary of the Commission, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In addition, comments may be sent by facsimile transmission to facsimile number (202) 418-5521, or by electronic mail to secretary@cftc.gov.
FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief Counsel, Gary L. Goldsholle, Attorney/Advisor, Christopher W. Cummings, Attorney/Advisor, or Tina Paraskevas Shea, Attorney/Advisor, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington D.C. 20581. Telephone number: (202) 418-5450. Facsimile number: (202) 418-5536. Electronic mail: trading-markets@cftc.gov
SUPPLEMENTARY INFORMATION:
I. Background
By this release, the Commission is publishing its views with respect to the use of electronic(1) media by CPOs, CTAs and their respective APs,(2) for transmission and delivery of Disclosure Documents, reports and other information in a manner consistent with the Commodity Exchange Act (the "CEA" or "Act")(3) and the Commission's regulations promulgated thereunder.(4)
The Expanding Electronic Marketplace. In recent years, personal computers have gained widespread entry into the mass market.(5) Advances in personal computers and related electronic media technology have enabled large sectors of the general population to use computers to access the Internet, proprietary on-line services, and multi-media applications such as those stored on CD-ROMs. The use of personal computers to access the Internet and proprietary on-line services has been growing at a spectacular rate.(6) This trend appears likely to continue or even accelerate.(7)
The growing use of electronic media is significantly affecting the financial services industry. Specifically, it has caused many changes in the way industry participants gather, store, and communicate information. Electronic media enable private investors as well as market professionals to enjoy ready access to "real-time" trade data and financial news. Similarly, industry professionals and private investors can now quickly perform complex analyses of trade and market data. Both private investors and market professionals use electronic mail and message boards to communicate and disseminate information.
Within the financial services industry, a wide range of businesses, both large and small, have established a presence on the World Wide Web and on the Internet. For instance, many securities brokerage houses now allow customers to place trades and to review account information over the Internet.(8) Many mutual fund companies have established sites on the World Wide Web or on proprietary on-line services. These sites allow potential investors to download prospectuses, transfer investments among multiple mutual funds, and complete subscription applications without having to wait for such materials to arrive by postal mail.(9)
The futures industry has similarly been affected by developments in electronic media. Many CTAs (including publishers of market newsletters), CPOs, FCMs and IBs have established a presence on the Internet, generally by operating or otherwise being listed on the World Wide Web. Use of the World Wide Web and the Internet appears to be an increasingly important component of the business strategies of futures professionals. For the most part, these registrants currently are using electronic media to supplement their traditional paper-based activities. However, many registrants have expressed strong interest in using electronic media to comply with various requirements of the Act and Commission regulations. In particular, registrants have indicated that they are interested in electronically providing Disclosure Documents, obtaining acknowledgments of receipt of Disclosure Documents, compiling indices of CTA and CPO performance and Disclosure Documents, and filing Disclosure Documents and other materials with the Commission. The rapid technological advances in computers and growth of electronic media have brought the regulatory issues raised by these developments to the forefront of the Commission's agenda.(10)
Electronic media, most dramatically the Internet and the World Wide Web, present regulators with a complex of issues that differ significantly from those presented by traditional paper-based or telephonic activities. The Internet allows users to reach millions of people at very low cost, permitting real-time, simultaneous communication by large numbers of persons, with varying degrees of anonymity. Communications over the Internet can combine text, audio and video. Another unique characteristic of the Internet is that information posted thereon can be updated or changed instantaneously, and Internet sites can be created and eliminated virtually at will. The Internet also is geographically unconstrained; a party using the Internet can be located anywhere, even internationally.(11) As the Internet's popularity has grown, so too has the volume of information that can be readily accessed via so-called "search engines." Finally, Internet sites can be connected to other sites through hyperlinks, which enable users to move readily from place to place within a website or to a new website.
A number of federal agencies, including the Securities and Exchange Commission ("SEC"), have begun to formally address regulatory issues presented by activities involving the Internet. In October 1995, the SEC issued an interpretative release addressing electronic delivery of documents such as prospectuses, annual reports to shareholders, and proxy solicitation materials by issuers, third parties (such as persons making tender offers or soliciting proxies) and persons acting on their behalf. In that release, the SEC set forth its views on the requirements and standards to be met by securities issuers and mutual funds using electronic media to deliver such documents to persons who consent to such delivery.(12) In a subsequent release dated May 15, 1996, the SEC extended its guidance with respect to electronic media to broker-dealers, transfer agents, investment advisers and persons acting on their behalf.(13) In these releases, the SEC articulated its view that in most instances, "the use of electronic media should be at least an equal alternative to the use of paper-based media."(14)
In addition, the SEC has indicated that, subject to certain conditions, Spring Street Brewing Co. ("Spring Street") may operate Wit-Trade, an on-line bulletin board-based trading system on the World Wide Web that allows individuals to buy and sell shares of Spring Street stock over the Internet. Spring Street had voluntarily suspended trading on Wit-Trade on March 20, 1996, apparently due to concern that the system, as then structured, did not satisfy SEC requirements.(15) However, in a March 22, 1996, letter to Spring Street, the SEC's Divisions of Corporation Finance and Market Regulation expressed support for securities market innovations such as Wit-Trade, which they described as "an innovative mechanism that has the potential to provide [Spring Street] shareholders with greater liquidity in their investments."(16) However, to ensure protection of public investors, the SEC also imposed several conditions upon Wit-Trade's resumption of trading. In order to continue its on-line trading system, Wit-Trade, which is not a registered broker-dealer, was required to use an independent agent to handle investor funds, to supplement the information provided about Spring Street on the World Wide Web in order to highlight the risks inherent in investing in illiquid and speculative securities and to provide on the website a transaction history, including price and volume data, to facilitate informed investment decisions. Finally, the SEC stated that Spring Street was required to maintain and deliver an offering circular in accordance with Regulation A.(17)
Regulatory programs to address new commercial uses of the Internet and World Wide Web have been accompanied by law enforcement actions to address apparent abuses involving the use of such media. The Federal Trade Commission ("FTC") has brought several enforcement actions involving fraud on the Internet. On May 29, 1996, the FTC announced that it had obtained a federal court order against Fortuna Alliance, L.L.C., temporarily halting an alleged pyramid scheme advertised over the Internet that had taken in over $6 million.(18) On June 12, 1996, the FTC obtained a preliminary injunction, keeping in effect the identical provisions of the temporary restraining order. The FTC has also established an electronic forum intended to develop a set of voluntary principles applicable to the use of consumer information in electronic media generally.(19) This electronic forum is presently soliciting comment from all sources, including consumers, industry representatives, and privacy advocates.
NASD Regulation, Inc. ("NASDR"), the self-regulatory organization responsible for oversight of securities firms and professionals and over-the-counter securities trading, recently issued a Notice to Members addressing supervisory and other obligations related to the use of electronic media.(20) In that notice, NASDR explained that electronic communications are subject to the same approval, recordkeeping, and filing requirements as communications by other means and emphasized that all communications by its members with the public remain subject to the antifraud provisions of the federal securities laws. Further, it explained that members must comply with the NASD's suitability rule, disclose material adverse facts to customers, and implement appropriate supervisory procedures to ensure that their associated persons do not misuse electronic communications or engage in misconduct while on-line. NASDR also solicited comment from members concerning their use of electronic media and whether there is a need for "prophylactic regulatory measures."(21)
Regulatory Implications of New Electronic Media. Like its sister agencies, the CFTC has been alert to the potential regulatory and law enforcement implications of the Internet and electronic media generally. For example, like businesses and other government agencies, the Commission is using electronic media to increase public awareness of and access to its services. The Commission initiated its website on the World Wide Web on October 10, 1995. The Commission now regularly provides information on its website concerning a broad range of topics, including enforcement actions, opinions and orders, commitments of traders reports, interpretative letters, press releases, sanctions in effect and reparations proceedings (including the necessary forms to institute reparations claims).(22)
In addition to its World Wide Web site, the Commission has undertaken a variety of initiatives relating to the application of technology and electronic media to regulated futures activities. The Commission recently concluded five market automation briefings, soliciting input from four exchanges and from the brokerage community, through representatives of the Futures Industry Association.(23) In these briefings, the exchanges described the current status and planned improvements to clearing, order-routing, trade tracking, surveillance and automation systems. The brokerage representatives identified technological enhancements, including electronic transaction confirmations and recordkeeping capacity, relevant to the continuing efficiency and competitiveness of United States futures markets.
To date, the Commission has facilitated the use of electronic media by providing relief from or interpretations of regulatory requirements in a variety of contexts. Recently, the Division of Trading and Markets issued a "no-action" letter and a related advisory allowing FCMs to use facsimile transmissions to send daily confirmation statements to certain institutional customers in fulfillment of their obligations under Commission Rule 1.33(b).(24) The Division of Trading and Markets also has issued an advisory concerning the attestation of financial reports filed electronically with a self-regulatory organiza-tion.(25) Pursuant to Advisory 28-96, FCMs and IBs who file financial reports electronically with a self-regulatory organiza-tion that operates a program for electronic filing approved by the Commission, such as the Chicago Board of Trade ("CBT") or the Chicago Mercantile Exchange ("CME"), may use a personal identification number ("PIN") in lieu of a signature, which will be deemed to be the equivalent of a manual signature for purposes of attestation under Commission Rule 1.10(d)(4).(26) The PIN, therefore, will constitute a representation by the user that the information contained in the financial report is true, correct and complete. The Division of Trading and Markets also is encouraging the CME and the CBT to license the electronic filing system developed jointly by these exchanges, and currently used by their members to file financial reports electronically, at reasonable cost to other markets and is evaluating whether to require electronic filing for all but certified financial statements. The Division of Trading and Markets also has encouraged the use of electronic media to achieve greater efficiency by allowing firms to directly enter certain registration filings in connection with the National Futures Association ("NFA") direct entry program.(27)
The Commission's Division of Enforcement ("DOE") is actively monitoring activity on the Internet and proprietary on-line services. The DOE investigates and prosecutes violations of the CEA by persons who use electronic media, as well as any other media, to accomplish such violations. For instance, the Commission recently brought an action in the United States District Court for the Southern District of Florida against certain persons alleging fraud in connection with the solicitation and receipt of funds for the purchase and use of computer-generated trading systems.(28) The complaint alleges that the defendants in that case marketed the systems in national newspapers and on the Prodigy on-line service Money Talk Bulletin Board. On October 16, 1995, the District Court issued an ex parte order freezing defendants' assets. On October 25, 1995, the defendants, without admitting or denying the allegations, consented to the entry of an Order of Preliminary Injunction which, among other things, prohibited them from acting as CTAs without benefit of registration.
In addition, the DOE will shortly introduce a section of the Commission's website through which members of the public can provide it with information regarding possible violations of the CEA occurring on the Internet or elsewhere. This section will be an important part of the DOE's and the Commission's surveillance and information gathering activities over the Internet.
The Commission's Office of Information Resources Management ("OIRM") performs ongoing assessments of the opportunities offered by the use of new technology to streamline or otherwise improve the effectiveness of the Commission's programs. For example, in addition to implementing and maintaining the Commission's website, OIRM has recently provided a firewall-protected connection between the Commission's internal network and the Internet. This connection provides all Commission staff with Internet electronic mail addresses, thereby enabling them to receive industry inquiries electronically and to respond to such inquiries more rapidly. It also provides select Commission staff with full web-browsing capabilities to facilitate surveillance and other information gathering activities.
In sum, the Commission supports the use of new technologies to enhance efficiency and competitiveness and believes that electronic media can provide an effective alternative to traditional paper-based media. The Commission encourages industry participants to consult with the Commission as they develop and refine electronic media applications in order to assure that transitions to electronic media occur efficiently and without loss of regulatory protections.
The Commission is issuing this release to provide guidance concerning a range of issues presented by existing and contemplated uses of electronic media by the managed futures industry. The release addresses: the applicability of the CEA and Commission regulations to the use of electronic media, including registration duties and other regulatory requirements applicable to persons who use electronic media to provide commodity trading advice or to solicit managed futures accounts or pool participations; the criteria and requirements applicable to CPOs and CTAs seeking to use electronic media for the delivery of Disclosure Documents, reports and other information; and a mechanism whereby CPOs and CTAs may use electronic media to file Disclosure Documents with the Commission. The Commission invites comment on each of these topics, and any related issues of interest to futures professionals or other market users.
II. Applicability of the Commodity Exchange Act and Regulations Thereunder
to Use of Electronic Media: Registration and Other Requirements for Commodity
Trading Advisors and Commodity Pool Operators
The advent of electronic media, such as the Internet,
as common modes of commercial communication has given rise to numerous questions
concerning the applicability of existing regulatory structures to these
media. Although this release is principally directed toward the use of electronic
media by managed futures professionals, the Commission also wishes to emphasize
that, as a general matter, the nature and effect of a person's conduct,
not the medium of communication chosen, determine the applicability of the
Commission's regulatory framework. Consequently, persons using electronic
media are subject to the same statutory and regulatory requirements under
the Commission's regulatory framework as persons employing other modes of
communication.
This conclusion follows from the breadth of the mandates codified in the CEA, as well as their express terms. The definition of CPO, for example, includes "any person engaged in a business that is of the nature of an investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts or receives from others funds, securities or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in any commodity for future delivery on or subject to the rules of any contract market. . . ."(29) Similarly, the CTA definition includes "any person who . . . for compensation or profit, engages in the business of advising others, either directly or through publications, writings or electronic media, as to the value of or the advisability of trading in any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market. . . ."(30) Section 4l of the Act confirms the national public interest in the activities of CTAs and CPOs whose advice to and arrangements with clients "take place and are negotiated and performed by the use of the mails and other means and instrumentalities of interstate commerce."(31) More generally, Section 18 of the Act directs the Commission to establish and maintain, "as part of its ongoing operations," research and information programs to determine, inter alia, "the feasibility of trading by computer, and the expanded use of modern information system technology, electronic data processing, and modern communication systems by commodity exchanges, boards of trade, and by the Commission itself for purposes of improving, strengthening, facilitating, or regulating futures trading operations."(32)
However, although Congress's intent that the Act should encompass and accommodate new technologies is clear, market participants may nevertheless benefit from guidance as to the manner in which the Act and Commission rules apply in specific contexts. This release is intended to facilitate the use of electronic information and communications systems by Commission registrants in conducting their businesses and in making required filings with the Commission. In particular, this release is intended to facilitate the use of electronic communication systems by clarifying the manner in which Commission rules, generally written to address either oral or hardcopy written communications, may be translated into the context of electronic media.
As a threshold matter, the Commission wishes to emphasize the registration duties of persons using electronic media to engage in activity subject to the Act and Commission regulations. The Act's registration requirements for commodity professionals are a cornerstone of the regulatory framework enacted by Congress. Determinations as to whether a person must register, and in what capacity, require an evaluation of all of the "circumstances surrounding such person's commodity-related activities."(33) Section 4m(1) of the Act makes it unlawful for any CTA or CPO, unless excluded or exempted from registration, "to make use of the mails or any instrumentality of interstate commerce in connection with his business as such commodity trading advisor or commodity pool operator"(34) without being registered under the Act. Thus, the Act requires the registration of persons who use any instrumentality of interstate commerce, including electronic media, in connection with their business as a CTA or CPO.
A. Commodity Trading Advisory Activities
1. Trading Advice Communicated Electronically
The Act defines the term "commodity trading advisor" to include, subject to specified exclusions, any person who: "(i) for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in" futures contracts, commodity options, or leverage transactions; or "(ii) for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in clause (i)."(35) Thus, subject to certain statutory exclusions, any persons who for compensation or profit engage in the business of advising others concerning trading in futures or commodity options or of issuing analyses or reports concerning such trading, are deemed CTAs under the Act.
A threshold requirement of the CTA definition is that the trading advisory activity be undertaken for "compensation or profit." This does not, however, require that "the 'compensation or profit' flow directly from the person or persons advised . . . . [i]t is sufficient that the compensation or profit is to result wholly or in part from the furnishing of the services specified in section [1a(5)]."(36) Accordingly, this requirement has been interpreted by Commission staff to include direct or indirect forms of compensation or profit received by a CTA, including the attraction of new customers or maintenance of a customer base.(37)
The term "commodity trading advice" has been interpreted expansively and includes particularized trading advice that recommends specific transactions or trading methodologies as well as advice concerning the "value of or advisability" of trading in futures or commodity options. Consequently, one who advises others concerning the value of using futures generally, without providing specific trading recommendations, nonetheless is providing commodity trading advice. Further, persons may provide commodity trading advice even though they "are neither directly or indirectly involved in the solicitation of funds or trades or the trading of accounts."(38) For example, Commission staff have found that a publication that includes general information on trading in commodity interests, detailed information on price forecasting and specific advice on market conditions that signal when persons should trade in the futures markets provides trading advice.(39) Commodity trading advice may include information already contained in the public domain(40) and is not limited to trading "recommendations."(41)
In applying the CTA definition, the Commission has recognized that commodity trading advice may be provided through all forms of communication, including electronic media. This conclusion is compelled by the Act's express terms; as noted by Commission staff, "[i]n distinguishing between trading advice offered directly or through publications, writings or electronic media, [the statutory CTA definition] is clearly intended to reach 'impersonal,' indirect forms of trading advice and explicitly recognizes that commodity trading advice may be given in forms other than personalized trading advice."(42)
Commission staff have applied the CTA definition to "persons who make commodity interest trading advice available to the public through mass media, such as newsletters, telephone hotlines or electronic devices including computer software, rather than through direct communication with individual persons."(43) Staff letters have applied the CTA definition to, for example, designers and distributors of computer software programs that generated commodity trading recommendations or strategies;(44) a professor who received compensation for applying research and periodically updating a computer model used for trading commodity interests;(45) the distributor of software that analyzed a United States dollar index;(46) and the licensor of a computer software program who had developed and licensed to more than fifty licensees various computerized trading systems that allowed the licensees to input data setting the parameters of futures transactions.(47) These staff positions are consistent with applications of the CTA definition to other impersonal or indirect forms of communication, such as newsletters and other print media(48) and telephone hotlines.(49)
The Commission wishes to make clear that the nature and scope of regulation of trading advisory activity under the CEA depends upon the type of activity in which the advisor engages. For example, persons who provide commodity trading advice but do so in a manner that is solely incidental to the conduct of certain businesses or professions, such as banking, news publishing or news reporting, are wholly excluded from the definition of a CTA. Persons who provide commodity trading advice but do not qualify for a statutory exclusion from the CTA definition due to the fact that their trading advice is not incidental to the conduct of their business or profession as, e.g., a publisher, are required to register as CTAs and maintain specified records; however, unless they are managing customer accounts, they are not subject to the requirement to deliver a Disclosure Document. Finally, persons who manage customer accounts, i.e., direct or guide accounts,(50) are required to register with the CFTC, deliver a Disclosure Document to each prospective customer at or before the time at which he solicits such customer, obtain a signed acknowledgment of receipt of the Disclosure Document from the customer and maintain specified books and records. Persons who solicit managed accounts for a CTA must be registered as an AP of the CTA and provide the required Disclosure Document at the time of or prior to solicitation of the customer. The Commission provides guidance on a case-by-case basis concerning the application of these requirements to particular business activities or arrangements.
a. Exclusions from the CTA Definition
The CEA provides an exclusion from the CTA definition for banks and trust companies (and their employees), news reporters, columnists and editors, lawyers, accountants and teachers, floor brokers or FCMs, publishers or producers of print or electronic data of general and regular dissemination (and their employees), contract markets, and "such other persons not within the intent of this paragraph as the Commission may specify by rule, regulation, or order."(51) These exclusions apply only if the furnishing of such services by the specified persons "is solely incidental to the conduct of their business or profession."(52)
(1) Publisher or Producer of Electronic Data of General and Regular Dissemination
The CEA's express exclusion from the CTA definition for publishers and producers of print or electronic media applies only if two criteria are met.(53) First, a person must be "the publisher or producer of any print or electronic data of general and regular dissemination." (emphasis added). Second, "the furnishing of such services . . . [must be] solely incidental to the conduct of their business or profession." As construed by CFTC staff, the phrase "general and regular dissemination" applies to publications whose "primary purpose [is] to disseminate news and other items appealing to the interest of all segments of the business and financial community."(54) In contrast, "if a publication concentrates on disseminating analyses, reports or recommendations bearing on a narrow area of interest, such as . . . commodity futures trading," the staff has construed the publication not to be "a bona fide business or financial publication of general and regular circulation" for purposes of the statutory exclusion from the CTA definition.(55)
(2) Solely Incidental
In defining "solely incidental," the Commission does not rely on a specific numerical standard or percentage of revenues or business but, rather, considers the nature of the overall business and the factual context in which the advisory services are rendered.(56) Thus, "a planned or periodic expression of views as to the advisability of trading in commodity futures made by an FCM may be solely incidental to its business[,] while the same advice rendered by a publisher or bank may not."(57) Generally, if a publication has a specialized focus upon futures transactions or is largely devoted to futures trading, the commodity trading advice furnished therein will not be considered to be solely incidental to the conduct of the publisher's business.(58) Conversely, if a publication covers a broad range of topics and futures are not its predominant focus, the commodity trading advice provided therein may be "solely incidental" to the conduct of the publisher's business. For example, Commission staff have found that "reprinting" by an electronic information service of, among other things, specific trading recommendations was solely incidental to its broader business as an electronic information and communications service, a general computer library whose files included a "broad range of many different types of information."(59) However, advice furnished in a financial publication (and related telephone newsline service) that was substantially focused on metals futures, was not solely incidental to that entity's publishing business, but in the words of the Commission, was "the very point of that business."(60) Similarly, where a newsletter devoted a substantial number of issues to analyses of the futures markets and specific trading recommendations, Commission staff found such advice to be "fundamental," rather than solely incidental, to the company's business.(61)
b. Exemption from Registration for Persons Who Furnish Trading Advice to Fifteen or Fewer Persons and Who Do Not Hold Themselves Out as CTAs
Section 4m(1) of the CEA provides an exemption from registration for CTAs who during the preceding twelve months have not furnished trading advice to more than fifteen persons and who do not "hold [themselves] out generally to the public as a commodity trading advisor."(62) A CTA who identifies himself as a CTA or otherwise refers to his advisory services or history on a public electronic forum such as portions of the Internet or a proprietary on-line service may not avail himself of the exemption under Section 4m(1). Such conduct constitutes "holding out" to the public as a CTA.(63) This view is consistent with the SEC's views concerning the ineligibility of offerings posted on the Internet for the Regulation D safe harbor from registration. As stated by the SEC, "[t]he placing of the offering materials on the Internet would not be consistent with the prohibition against general solicitation or advertising in Rule 502(c) of Regulation D."(64)
2. Directories and Compilations
In addition to using electronic media to communicate specific commodity trading advice, market participants may engage in activities that implicate registration duties and other CFTC requirements by operating sites on the World Wide Web that compile information about other registrants or futures-related subjects. For example, many locations on the Internet provide central repositories for, directories of, or mechanisms to access information compiled from multiple sources. Persons who compile and reprint information, whether electronically or on paper media, may be subject to the Commission's registration requirements notwithstanding the fact that they did not originally prepare the information disseminated. The terms "advising" and "issues or promulgates" are not limited to the author of such materials but include the "dissemination of another's views to third persons."(65)
Compilations of information may range from listings of performance data for all publicly offered commodity pools, comparable to newspaper listings of mutual fund returns, to narrowly focused descriptions of the trading strategies and history of a single CTA. In determining whether such compilations constitute either advice as to "the value of or the advisability of trading" futures or commodity options or "analyses or reports" concerning such trading, as well as the applicability of various statutory exclusions, the Commission considers all of the relevant facts and circumstances. However, to facilitate use of the Internet by commodity professionals, the Commission wishes to clarify the status of certain types of publications of futures-related data.
Publications that compile trading results for commodity pools selected on an objective, neutral basis, e.g., all commodity pools of a certain size or geographic location, could be viewed as providing "reports or analyses" concerning futures transactions and thus as within the CTA definition. To the extent that such compilations are presented by a publisher of print or electronic media of "general and regular dissemination" in a manner solely incidental to that business, the publisher would qualify for the statutory exclusion from the CTA definition. The publisher of a newspaper of general circulation could therefore publish, in a manner incidental to that business, the performance results for all commodity pools or for all publicly traded commodity pools without registration as a CTA or compliance with the statutory and regulatory requirements applicable thereto.
If a compilation of performance data for publicly offered pools were published by a firm that does not qualify as a publisher of data of general and regular dissemination, e.g., a business devoted exclusively or primarily to operating Internet sites providing data concerning CTAs and CPOs, the statutory "publisher" exclusion would not apply. However, the Commission believes that provided such data are developed using objective, neutral criteria, such as size or geographical location, and presented as such by a bona fide news organization for the purpose of providing current market data, registration as a CTA should not be required.(66) Similarly, an unbiased compilation of all registered CTAs in a given location, clearly described as such and without any express or implied evaluation or suggestions as to the quality of the services such persons provide, may be viewed as equivalent to the telephone "yellow pages" directory, and would not implicate the Commission's registration requirements. However, compilations of selected CTAs, or of CTAs who pay a fee for inclusion in a list, may not be neutrally developed compilations and may, in effect, promote the services of selected CTAs. If the provider of this information is compensated for or receives profit from such activities, absent the applicability of a specific exclusion, that person is required to register as a CTA.(67) Moreover, even absent such compensation, the presenter of such data may be soliciting discretionary accounts on behalf of one or more CTAs and thus required to register as an AP of such CTA, or as a CTA.
Compilations presented on electronic media may contain actual descriptive data or simply a collection of hyperlinks. Hyperlinks, a prominent feature of the World Wide Web, enable a user to connect from one location or document to another, a facility without apparent analogy in paper-based media. Hyperlinks consist of an address or phrase which, when activated by a click of the mouse, connects the user to another location on the Internet. The Commission's website, for example, has hyperlinks to a number of World Wide Web sites, including each of the United States contract markets. Internet directories such as Yahoo and Magellan are basically organized collections of hyperlinks. Hyperlinks, although fundamentally a connective mechanism between websites, nonetheless can be used in such a manner as to communicate advice about the value of or advisability of trading in commodity interests, e.g., by labeling, describing, or otherwise introducing the hyperlinked sites. This would be the case, for example, where the operator of a website provides editorial comment about the hyperlinks or provides a list of hyperlinks that represent a pre-selected, defined category of persons or services, whose attributes or qualifications are thereby highlighted.(68) In such a case, the person providing the hyperlinks would be required to register as a CTA.
However, hyperlinks can also be used in a manner that would not require a person to register as a CTA. For example, the Commission believes that merely providing a list of hyperlinks that is the equivalent of a telephone directory or other broad-based source of "locational" data, without more, would not make one a CTA because hyperlinks in this context do not necessarily speak "as to the value of or the advisability of trading in" commodity interests. Similarly, a website that contains a search or query function that allows visitors to construct searches to obtain data responsive to certain criteria they select would not be considered to be providing trading advice, provided that the website merely provides the "data library" and the search vehicle for the viewer's use.(69)
3. Applicability of Antifraud Provisions
Persons using electronic media are subject to the same statutory and regulatory requirements under the CEA, including the statutory and regulatory antifraud prohibitions and related rules pertaining to CTAs and CPOs, as those using other media. These include the antifraud provisions of the CEA, including Section 4o,(70) as well as the provisions of Commission Rule 4.41. Rule 4.41 prohibits CPOs, CTAs, or any principals thereof from advertising in a manner which employs any fraudulent device or involves any transaction or course of business which operates as a fraud or deceit upon any pool participant or client or prospective participant or client. Rule 4.41 also bars the presentation of any hypothetical or simulated performance data unless it is "prominently" accompanied by a prescribed cautionary statement.(71) Both the statutory antifraud provisions and Rule 4.41 apply to CTAs, CPOs, and their principals, regardless of whether they are exempt from registration under the CEA.(72) Rule 4.41 expressly applies to "any publication, distribution or broadcast of any report, letter, circular, memorandum, publication, writing, advertisement or other literature or advice, including the texts of standardized oral presentations and of radio, television, seminar or similar mass media presentations."(73) The requirements of Rule 4.41 thus apply fully to electronic media such as the Internet.
The Commission also notes that capabilities peculiar to the Internet, such as anonymity and the ability to operate through aliases (e.g., electronic mail addresses, user names), that obscure a person's true identity or business affiliation may be exploited in a manner that operates as a fraud. For example, the use of "testimonials" purportedly from third parties but actually created by the CTA or CPO that is the subject of the "testimonial" would constitute a fraudulent practice under statutory antifraud provisions and Rule 4.41.
The following examples are illustrative of the requirements discussed above.
(1)(General Internet Directory Not a CTA) Company XYZ operates
a website that provides a directory of hyperlinks to the World Wide Web.
XYZ has broad listings under such topics as Arts, Business and Economy,
Computer and Internet, Education, Entertainment, Government, Health, News,
Recreation and Sports, Reference, Regional, Science, Social Science and
Society and Culture. Within the Business and Economy section is a subsection
covering Futures and Options. Among the hyperlinks in the Futures and Options
sections are those of a number of CTAs. XYZ does not charge CTAs for listings
in its directory; XYZ's revenues are derived solely from advertising on
its homepage. XYZ does not exercise any discretion as to the inclusion
of any CTA on its directory, and any CTA requesting inclusion will be included;
these facts are prominently disclosed. XYZ provides no information about
the content of the CTA sites to which hyperlinks are provided. XYZ qualifies
for the exclusion from the definition of a CTA for a producer or publisher
of information of general and regular dissemination since its homepage
provides information across all subject matters and the information provided
by such links is solely incidental to its business, which is to provide
an index of the World Wide Web.
(2)(Recommending or Evaluating CTAs) Company XYZ operates
a website that contains a list of hyperlinks to CTAs described as the "Ten
Best CTAs for 1996." Each of the ten CTAs featured on XYZ's homepage
is required to pay XYZ a fixed fee. In this scenario, XYZ is a CTA and
is required to register as such. By making evaluative representations about
the featured CTAs, XYZ is providing advice about the value of or advisability
of trading in commodity interests. Since XYZ receives a fee from each of
the ten featured CTAs, the compensation element of the CTA definition is
satisfied. Absent the availability of an exclusion from the CTA definition,
XYZ must register as a CTA.
(3)In the same factual scenario as in Example (2), XYZ does not receive
a fee from each of the listed CTAs, but instead receives revenues from
various advertisers on its website. In this case too, XYZ is required to
register as a CTA. The profit or compensation element of the CTA definition
includes fees received from advertisers and need not flow directly from
the person or persons advised or from the featured CTAs.
(4)(Disclaimers) Same facts as Example
(2) above, except that XYZ also provides a disclaimer on its website that
states "All materials and information provided with respect to the
CTAs contained herein are not intended as commodity trading advice and
we make no specific recommendations with respect to which CTA best suits
your investment needs. The information is intended to enhance your futures
investment decisions, not make them for you." Again, XYZ would be
required to register as a CTA. XYZ has provided trading advice and cannot
by disclaimer alter the reasonably anticipatable effects of the information
provided or the consequent registration requirements under the Act.
(5) (Providing Leads)
WXY is in the business of generating leads and mailing lists for third
party vendors who are engaged in various businesses. For a monthly fee,
WXY's lead generating services are open to all businesses who wish to obtain
mailing lists to solicit customers. WXY's website on the World Wide Web
allows site visitors to "sign up" to receive information on products
and services that are of particular interest to the site visitors by allowing
the site visitors to click on various listed categories (e.g., "Click
here if you would like to receive information on computers; Click here
if you would like to receive information on insurance products").
One of the categories allows site visitors to click on a particular location
if they are interested in receiving commodity trading and investment information.
Site visitors are asked to register in a guest book which requests their
name, electronic mail address, street address, income and other information.
WXY forwards to various CTAs
the names of and other information concerning the persons who requested
information on commodity trading and investments. By engaging in such activities,
WXY would be operating as a "finder" since its purpose would
be to seek clients on behalf of Commission registrants. WXY must therefore
register as an AP of the CTAs to whom it furnishes customer names, or as
a CTA.
(6)(Electronic
Mail to Specific Address May Not Defeat 4m(1) Exemption) John Doe,
a school teacher who studies the stock and futures markets for his own
financial benefit and trades futures contracts for his own account, discusses
his trades with his college roommate and friend, George, and two other
friends whom he has known for twenty years. The three friends ask John
to furnish commodity trading advice to them and John agrees to act as their
CTA. John is not registered with the Commission in any capacity, has not
previously furnished commodity trading advice to any other persons, and
has not held himself out generally to the public as a CTA. John and his
three friends all have computers and electronic mail addresses and all
four persons use electronic mail on a regular basis to communicate with
one another. John's three friends agree that John may provide them with
commodity trading advice and other information relating to their commodity
accounts through electronic mail to their electronic mail addresses to
which only they have access. John's use of an individual electronic mail
address for purposes of communicating commodity-related information to
his three friends would not in this case defeat a potential Section 4m(1)
exemption from CTA registration because the electronic mail communication
in this instance is personal and direct and is limited to electronic correspondence
with those three individuals.
(7)(Placing Performance Data on a Generally Accessible Internet
Site Would Be Inconsistent With 4m(1) Exemption) Same facts as above
except John also operates a website and he posts the performance data of
his friends' trading accounts on his website. By placing the performance
data on a public electronic forum that can be readily accessed by others,
John would be holding himself out as a CTA and thus would not satisfy one
of the criteria of the Section 4m(1) exemption from CTA registration.
(8)(Providing Telephone
Directory For CTAs Does Not Require Registration as CTA) XYZ operates
a website that contains a directory which it represents to be a list of
each registered CTA, containing the name, address, and telephone number
for each CTA. Although XYZ may receive compensation from advertisers on
its website, XYZ is not required to register as a CTA. In this case, the
limited information provided on each CTA does not constitute commodity
trading advice. Further, by providing a complete directory of all registered
CTAs, and representing it as such, XYZ is making clear that it is not promoting
or recommending any particular CTA but, rather, is providing a directory
which interested persons can use to contact CTAs of their choice. Further,
as XYZ provides an equivalent level of data for each registered CTA, it
does not implicitly recommend or favor one CTA over another.
(9)(Providing Biographical and Descriptive Information on Selected
CTAs In a Manner That Implies Evaluation or Recommendation Requires Registration
as CTA) XYZ operates a website that contains a directory listing each
registered CTA, containing the name, address, and telephone number for
each CTA. Additionally, for certain CTAs, XYZ provides information concerning
the types of trading programs they utilize and certain performance data.
XYZ does not charge visitors to its website for access to this information
but is compensated by CTAs for displaying advertisements at the top of
certain web pages. Under these circumstances, XYZ must register as a CTA.
Presentation of a compilation of biographical and descriptive data on certain
CTAs has the effect, whether intended or otherwise, of promoting, recommending,
or marketing the services provided by such CTAs. This conclusion is not
affected by the fact that XYZ provides very basic biographical data on
all CTAs, since XYZ has plainly distinguished among CTAs and highlighted
certain CTAs for specialized attention. Moreover, XYZ is compensated for
providing this information. As a result, absent the applicability of a
specific exclusion, XYZ is required to register as a CTA.
(10)(Compensation or Profit Includes
Offer of Free Services for a Limited Time) RST has created a new daily
"e-zine" on the World Wide Web that is principally devoted to
commodity trading advice provided by RST and promotion of RST's advisory
services. To promote this new e-zine, RST is offering free trial subscriptions
for a limited time, e.g., ninety days. After this initial trial period,
users must pay RST's rate of $20 per week. RST is required to register
as a CTA. Even though RST is offering free subscriptions to all persons
during its start-up period, it is nonetheless operating the "e-zine"
and providing commodity trading advice for compensation or profit. As discussed
above, the "compensation or profit" element of the CTA definition
includes the attraction of new customers.
(11)(Gratuitous Leads, Discussions in Chat Rooms)
Sally Smith, an accountant, frequently interacts with other persons via
a financial investment "chat room" on a major on-line service.
During the course of these interactions, she advises other persons in the
chat room concerning a recent investment she made in a commodity pool.
She informs others in the chat room that she is exceptionally pleased with
the returns on her investment and that she believes that the CPO is an
excellent investment manager. In support of her remarks, she also provides
the pool's performance data. Neither the CPO, its principals or anyone
involved in the pool's operation is affiliated with Sally Smith or her
employer. She does not receive any compensation or other consideration
for her participation in the chat room, from the CPO, others in the chat
room, the site provider, or otherwise, whether directly or indirectly.
Sally Smith would not be required to register with the Commission as her
chat room activity and the information that she is providing is strictly
gratuitous.
(12)(Compensated
Leads, Discussions in Chat Rooms) If in the same factual scenario as
above in Example (11), Sally Smith is compensated by the CPO for soliciting
members from the chat room, then Sally Smith would be required to register
as an AP of the CPO.
(13)(Use
of Aliases, if Undisclosed, May be Fraudulent) In the same factual
scenario as Example (11), Dave Doe, the CPO for the "Futures Pool,"
is also in the chat room. Unlike Sally Smith, Dave Doe does not use his
real name when communicating with others in chat rooms; he uses the alias
"HonestMan." Under this alias, Dave Doe tells others in the chat
room that he has heard that the "Futures Pool" is an ideal pool
for first time investors because it offers excellent performance and low
fees. In response to an inquiry from someone in the chat room, "HonestMan"
also states that "he has never heard of anyone losing money who invested
in the Futures Pool," which he knows to be untrue. Dave Doe is in
violation of the antifraud provisions of Section 4o of the CEA and Commission
Rule 4.41. Additionally, Dave Doe has violated Commission Rule 4.21(a)
because he has solicited prospective pool participants for the "Futures
Pool" but has not delivered its Disclosure Document.
(14)(Hypothetical Performance Must
Be Accompanied By Cautionary Statement of Rule 4.41(b)) LMN is a registered
CTA who operates a website. LMN's website contains a table of contents.
One of the items listed is a hyperlink to "Hypothetical Performance."
On the Hypothetical Performance section of its website, which can be accessed
only after a person has received a copy of LMN's Disclosure Document, LMN
demonstrates that based upon hypothetical performance results, its trading
program yields an annualized return of in excess of 60 percent. LMN does
not provide any statements about the significance of hypothetical performance.
LMN only states, in bold faced type, that "Past Performance is No
Guarantee of Futures Results" and "Futures Trading Entails Substantial
Risk and May Not be for Everyone." LMN is in violation of Commission
Rule 4.41(b), which requires that hypothetical or simulated performance
be accompanied by the legend set forth in Rule 4.41(b)(i) or prescribed
by the NFA pursuant to 4.41(b)(ii). In order to comply with Rule 4.41(b),
LMN is required to post either the CFTC's or NFA's legend regarding hypothetical
performance on the same webpage as, and presented so as to "prominently"
accompany, the presentation of the hypothetical performance. LMN also may
be in violation of the antifraud provisions of Section 4o the CEA.
(15)(Editing Unfavorable
Comments from Guestbook May Violate Rule 4.41) ABC is a CTA who maintains
as part of its website an interactive guestbook on which individuals post
comments or questions concerning ABC's trading system. ABC, which operates
the website, has the ability to edit the comments received. ABC's website
description of the guestbook implies that any person can post comments
on the guestbook, both favorable or unfavorable. If ABC then edits any
unfavorable comments he receives without indicating this fact to visitors,
ABC may violate Rule 4.41. ABC also may be in violation of the antifraud
provisions of Section 4o the CEA.
Issued in Washington, D.C. on August 8, 1996, by the Commission.
Jean A. Webb,
Secretary of the Commission
1. For purposes of this release, the term "electronic" media refers to media such as audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, bulletin boards, Internet World Wide Web sites and computer networks (e.g., local area networks and commercial on-line services) used to provide documents and information required by or otherwise affected by the Commodity Exchange Act and the regulations promulgated thereunder.
2. The Commission is not addressing the use of electronic media by other Commission registrants, such as futures commission merchants ("FCMs") and introducing brokers ("IBs") at this time but has such issues under review.
4. Commission rules are found at 17 CFR Ch. I (1996). The rules governing the obligations of CPOs and CTAs, including rules relating to disclosure and reporting, recordkeeping and advertising, are found at 17 CFR Part 4 (1996).
5. Current estimates are that between thirty-five and thirty-nine percent of households in the United States possess a computer. G. Christian Hill, "Tally of Homes With PCs Increased 16% Last Year," Wall Street Journal, May 21, 1996, at B10; "Too Good to Last," Economist, March 23, 1996, at 62.
6. The actual number of Internet users in the United States above age 16 is the focus of debate and has been estimated between 16.4 and 22.0 million, as of August 1995. Peter H. Lewis, "New Estimates in Old Debate on Internet Use," New York Times, April 17, 1996, at D1.
7. Daniel Akst, "Postcard from Cyberspace: Proof of Skyrocketing Net Growth," Los Angeles Times, February 28, 1996, at D4. The trend towards Internet usage appears to be so strong that certain participants in the computer industry are developing "network computers," low cost computers whose primary purpose will be to connect to the Internet. Don Clark, "Oracle Chief to Unveil: 'Info Appliances,' But Will Consumers Want to Buy Them?" Wall Street Journal, May 16, 1996, at B1.
8. Estimates of the number of on-line brokerage accounts indicate rapid growth. According to one source, there were 412,000 on-line accounts in 1994, and the number is expected to surpass 1.3 million by 1998. Greg Miller and Tom Petruno, "For Investors, the Internet has Promise, Perils," Los Angeles Times, June 4, 1996, at A1, A6.
9. "Mutual Funds in Cyberspace," The Investment Lawyer, Vol. 2, No. 10, November 1995.
10. As Acting Chairman John E. Tull noted in March
14, 1996, in testimony before the Subcommittee on Agriculture, Rural Development,
Food and Drug Administration and Related Agencies of the House Committee
on Appropriations:
the
Commission is actively working to address market participants' interest
in using new technologies to increase their efficiency and competitiveness.
These efforts include: consulting with industry representatives concerning
current and prospective uses of the Internet for communicating with the
public and with other futures professionals; creating a program for monitoring
solicitation activity on the Internet; and developing mechanisms for electronic
filing of reports and other ways to facilitate innovative uses of computer
technology in a manner consistent with customer protection.
11. The Commission recognizes that the worldwide availability of material placed on the Internet presents important issues concerning the scope of the regulatory and enforcement jurisdiction of individual nations. For example, solicitation materials posted on the Internet by CPOs and CTAs registered with the Commission and acting in compliance with Commission rules may be accessed by persons in foreign jurisdictions under whose laws such a solicitation may not be lawful. The International Organization of Securities Commissions ("IOSCO"), an international association of securities and futures regulatory and self-regulatory organizations, has several initiatives underway to address these issues. In particular, IOSCO is examining a number of issues, including the enforcement and other regulatory challenges for securities and futures regulators presented by the increasing use of public computer networks. The Commission invites comment from interested persons as to how the issues created by application of multiple jurisdictions' laws to an international mode of communication such as the Internet should be resolved.
12. 60 FR 53458 (October 13, 1995). In a companion release, the SEC proposed technical revisions to certain of its rules in light of the interpretations proffered in the interpretative release. 60 FR 53468 (October 13, 1995). Much of the guidance provided in the SEC interpretative release took the form of fifty-one examples of particular uses of electronic media by securities professionals.
13. 61 FR 24644 (May 15, 1996).
14. 60 FR at 53459. On January 7, 1996, the North American Securities Administrators Association, Inc. adopted a resolution concerning offerings of securities over the Internet. In general, this resolution encouraged states to exempt certain offerings over the Internet from registration provisions and to take appropriate steps to allow such offers and sales to occur subject to specified conditions.
15. See Rob Wells, "SEC Allows Brewer to Trade Stock on Internet," Washington Times, March 26, 1996, at 5B. The developer of Spring Street Brewing Co. has created Wit Capital Corporation to act as agent in the public offering of securities through the Internet and to create an electronic marketplace for the shares of such companies. "Brewer That Began IPOs on Web Plans On-Line Exchange," The Washington Post, April 3, 1996, at G1.
16. Spring Street Brewing Co., SEC No-Action Letter, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) 77,201 (April 17, 1996).
17. 17 CFR 230.251 et seq. (1996). Regulation A is
an exemption from registration available to issuers that are neither Securities
Exchange Act of 1934 reporting companies or investment companies and permits
interstate offerings of up to $5 million during any twelve month period,
including up to $1.5 million in non-issuer resales. An offering pursuant
to Regulation A requires that the issuer file an "offering circular"
with the SEC.
The SEC also noted that its regulatory authority over Wit-Trade extends
to some categories of Wit-Trade's users. Specifically, the SEC cautioned
that Spring Street should inform users of the system that if they post quotations
simultaneously on both the Buyer and Seller Bulletin Boards, they may be
considered a "dealer" and required to register as such and comply
with the requirements applicable to broker-dealers under the federal securities
laws. The SEC also stated that any transactions facilitated through Wit-Trade
would be subject to the antifraud provisions of the federal securities laws.
Further, by letter dated June 21, 1996, the SEC's Divisions of Market Regulation, Investment Management and Corporation Finance granted approval to Real Goods Trading Corp. ("RGTC"), permitting it to operate a bulletin board system on the World Wide Web whereby persons may post notices regarding purchases or sales of RGTC stock in light of representations that, inter alia, RGTC will not receive any compensation for creating or maintaining the system and that it will not receive, transfer or hold any funds or securities in connection with its operation of the system. Real Goods Trading Corp., 1996 SEC No-Act. Lexis 566 (June 24, 1996); Jeffrey Taylor, "SEC to Allow Firm to Run Market For Its Own Shares on the Internet," Wall Street Journal, June 27, 1996, at B12.
18. FTC v. Fortuna Alliance, L.L.C., Civ. Docket 96-CV-799, W.D. Wa. 1996.
19. See FTC's website at http://www.ftc.gov/ftc/privacy.htm.
20. NASD Notice to Members 96-50, July 1996. In a previous notice, NASDR provided guidance to its members concerning the regulatory implications of certain conduct occurring over various electronic media, including the World Wide Web, "bulletin boards," electronic mail, "chat rooms," and hyperlinked sites. "Ask the Analyst About Electronic Communications," NASD Regulatory & Compliance Alert, April 1996.
21. NASD Notice to Members 96-50, July 1996.
22. The address of the site is http://www.cftc.gov. It is visited by thousands of users each month.
23. Advisory No. 25-96 (May 13, 1996); "Market Automation Examined," [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) Report Letter No. 528 at 5 (June 7, 1996).
24. Advisory No. 22-96, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,679 (May 2, 1996). Throughout this Interpretation the Commission refers to various staff interpretative letters and advisories. These letters and advisories represent interpretations by the Commission's staff and do not necessarily represent interpretations by the Commission. The Commission intends to issue a separate Federal Register release addressing electronic communications and disclosures by FCMs and IBs. Prior to the issuance of such a release, the Commission's Division of Trading and Markets will continue to resolve issues in this area on a case-by-case basis.
25. Advisory No. 28-96, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,711 (May 28, 1996).
26. The Commission approved rules of the CME and CBT permitting electronic filing of financial reports prior to issuing this advisory. See CME Rule 970 (approved by the Commission on September 27, 1993); CBT Capital Rule 311, Appendix 4B (approved by the Commission on September 21, 1993). The Commission expects to propose its own rules on this subject in the near future.
27. 57 FR 60799 (December 22, 1992).
28. CFTC v. Maseri, et al., Case No. 95-6970-Civ-Davis (S.D. Fla. 1995).
29. 7 U.S.C. 1a(4) (emphasis added).
30. 7 U.S.C. 1a(5)(A) (emphasis added). The definition of the term "commodity trading advisor" was amended by the Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat. 2204 in order to refer expressly to "electronic media." Similarly, the exclusions from the CTA definition for newspaper reporters and publishers were amended to add "electronic media" to the exclusion for print media.
31. 7 U.S.C. 6l (emphasis added).
32. 7 U.S.C. 22 (emphasis added).
33. 48 FR 35248, 35253 n.27 (August 3, 1983).
36. CFTC Interpretative Letter No. 75-11, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,098, at 20,763 n.6 (Office of the General Counsel, Trading and Markets, September 15, 1975).
37. CFTC Interpretative Letter No. 76-10, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,157 (Office of the General Counsel, April 22, 1976); CFTC Interpretative Letter No. 75-6, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,093 (Office of the General Counsel, Trading and Markets, August 13, 1975). For example, Commission staff have found the "compensation or profit" requirement of the CTA definition satisfied where a CTA's customers receive commission rebates from an FCM that are then credited toward payment of the CTA's commodity information service subscription fees. Division of Trading and Markets Interpretative Letter No. 95-51, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,420 (May 1, 1995).
38. Division of Trading and Markets Interpretative Letter No. 96-56, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,761 (July 8, 1996).
40. Unpublished letter from Andrea M. Corcoran, Director, Division of Trading and Markets, dated March 14, 1990 ("even assuming that information contained in the [publication] is available elsewhere in the public domain, it is our opinion that the CTA definition includes an enterprise which is devoted to compiling advice, reports or analyses of others with respect to futures markets and to publishing such data in a book such as the [publication] on a regular basis").
41. Unpublished letter from Susan C. Ervin, Deputy Director/Chief Counsel, Division of Trading and Markets, dated March 14, 1989 (noting that the absence of interpretative or analytical information does not exclude a person from the definition of a CTA). "The plain terms of the statute indicate . . . that Congress intended to cover all types of analyses and reports . . . , not just those that advise, interpret or make recommendations." CFTC Interpretative Letter No. 76-25, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,239 (Office of the General Counsel, December 6, 1976). Thus, a person may provide commodity trading advice despite neither analyzing nor making any predictions or representations about the information provided.
42. Division of Trading and Markets Interpretative Letter No. 95-101, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)
26,565 (November 21, 1995). The Commission has recently filed complaints addressing certain forms of alleged CTA activity conducted by means of electronic media. For example, the Commission and the Attorney General for the State of Florida jointly filed a complaint, which was later amended to include a new defendant, in CFTC v. JDI Limited Inc. d/b/a Future Vision, Case No. 95-6221-Civ-Gonzalez (S.D. Fla.), charging defendants with, inter alia, acting as unregistered CTAs and violating the antifraud provisions of the Act in the marketing, sale and support of a computerized trading program. Similarly, the Commission's complaint in In the Matter of R&W Technical Services, Ltd., CFTC Docket No. 96-3, alleged that the respondents had marketed and sold a computerized futures trading system generating trading signals for transactions in various financial futures contracts without being registered as CTAs. The complaint also charged the parties with violations of antifraud provisions of the Act by falsely advertising money-back guarantees and hypothetical profits in magazines, telephone solicitations and written promotional materials. The Commission expresses no opinion on the merits or ultimate outcome of these cases.
43. Division of Trading and Markets Interpretative Letter No. 95-68, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)
26,498 (August 10, 1995).
45. Division of Trading and Markets Interpretative Letter No. 94-51, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,115 (May 10, 1994).
46. Division of Trading and Markets Interpretative Letter No. 93-27, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,704 (April 2, 1993).
47. Division of Trading and Markets Interpretative Letter No. 84-9, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,092 (March 1 and April 6, 1984).
48. Division of Trading and Markets Interpretative Letter No. 93-18, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH)
25,694 (February 23, 1993) (publications issued on a monthly or bimonthly basis which contained analyses and advice concerning trading commodity interests, including gold, silver and platinum contracts required registration as a CTA); CFTC Interpretative Letter No. 75-3, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,090 (Office of the General Counsel, Trading and Markets, July 31, 1975) (publisher of newsletter focusing on cash commodity markets and that occasionally prints advice concerning the use of agricultural futures for hedging purposes is a CTA); Division of Trading and Markets Interpretative Letter No. 94-29, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,020 (March 15, 1994) (responding to general questions regarding newsletter publications and CTA registration and concluding that publisher of newsletter offering market advice is not a CTA only if advice is solely incidental to the publisher's business).
49. Division of Trading and Markets Interpretative Letter No. 93-43, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,734 (May 19, 1993) (requiring CTA registration of IB using a "900 line" that provided prerecorded trade recommendations as well as research, market and trade ideas); see also CFTC v. Ehrenberg, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) 21,640, at 26,429 (E.D. Ill. 1982) (party who advertised services as pork belly trading specialist in commodities magazine and gave commodity trading advice over telephone for a fee was required to register as CTA).
50. Commission staff have stated that it is not necessary for a person to have a power of attorney in order to be "directing" or "guiding" accounts. See, e.g., Division of Trading and Markets Interpretative Letter No. 86-15, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 23,165(July 22, 1986) ("[i]t should be noted that, although the CTA has no power of attorney over the account, he does have the power to control the client's trades").
51. 7 U.S.C. 1a(5)(B). For instance, Commission Rule 4.14 exempts from CTA registration various categories of persons, including certain dealers, processors, brokers or sellers in the cash market for commodities; a registered AP who provides trading advice solely in connection with his employment as an AP; registered CPOs who provide trading advice solely to pools for which they are registered; persons who are exempt from CPO registration who provide trading advice solely to pools for which they are exempt from registration; and certain persons who are registered as investment advisers under the Investment Advisers Act of 1940 or are excluded from the definition of the term "investment adviser." 17 CFR 4.14.
52. 7 U.S.C. 1a(5)(C). Pursuant to statutory amendments adopted in 1982, the Act also provides that the Commission may, "by rule or regulation, include within the term [CTA] any person advising as to the value of commodities or issuing reports or analyses concerning commodities if the Commission determines that the rule or regulation will effectuate the purposes of this paragraph." 7 U.S.C. 1a(5)(D).
53. 7 U.S.C. 1a(5) provides in pertinent part:
(B) Subject to subparagraph (C), the term "commodity trading advisor"
does not include --
* * *
(iv) the publisher or producer of any print or electronic data of general
and regular dissemination, including its employees;
* * *
(C) INCIDENTAL SERVICES -- Subparagraph (B) shall apply only if the furnishing of such services by persons referred to in subparagraph (B) is solely incidental to the conduct of their business or profession.
54. Division of Trading and Markets Interpretative Letter No. 76-1, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,135 (February 26, 1976) (emphasis added).
56. In the Matter of Armstrong, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,657 (February 8, 1993), rev'd on other grounds sub nom., Armstrong v. Commodity Futures Trading Commission, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,914 (December 21, 1993) [hereinafter Armstrong]; see also 52 FR 41975, 41978 (November 2, 1987) (discussing "solely incidental" as used in Commission Rule 4.6).
57. Division of Trading and Markets Interpretative Letter No. 76-1, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,135 (February 26, 1976).
58. Armstrong; CFTC Interpretative Letter No 75-4, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,091 (Office of the General Counsel, Trading and Markets, August 11, 1975).
59. Division of Trading and Markets Interpretative Letter No. 83-3, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) 21,842, at 27,538 (May 25, 1983) (describing the computer information and communications service as "computer library and information distribution business").
61. CFTC Interpretative Letter No. 75-4, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,091, (Office of the General Counsel, Trading and Markets, August 11, 1975). The United States Supreme Court's interpretation of the term "investment adviser" in SEC v. Lowe, 472 U.S. 181 (1985), as used in the Investment Advisers Act of 1940 ("IAA"), does not mandate a different result. In Lowe, after reviewing the language and legislative history of the IAA, the Court held that Congress had excluded publishers of generalized securities advice from the definition of investment adviser. Although a "facial parallel" exists between the Section 1a(5)(B)(iv) of the CEA and Section 203(c) of the IAA (the exclusion for "the publisher of a bona fide newspaper, magazine or business of financial publication of general and regular circulation"), unlike the investment adviser definition of the IAA, the CTA definition in Section 1a(5)(C) of the CEA limits the exclusions in Section 1a(5)(B), including the publishers' exclusion of Section 1a(5)(B)(iv), to cases where "the furnishing of such services by the foregoing persons is solely incidental to the conduct of their business or profession." Armstrong, at 40,149. Consequently, as the Commission noted in Armstrong, "[g]iven this clear distinction between Congress' exclusionary language in [the IAA and the CEA, the Commission is] not persuaded that the holding in Lowe mandates a broad construction of the exclusion from the definition of CTA for certain publishers." Id.
63. See examples infra, at the conclusion of this section. Likewise, a CPO who advertises a pool on the Internet, e.g., by identifying himself as a CPO of a pool, may not obtain an exemption from registration relief under Commission Rule 4.13(a)(1), inasmuch as such advertising plainly negates one of the required elements of the exemption. Commission Rule 4.13(a)(1) provides an exemption from registration for a CPO if, among other things, "it does not receive any compensation, directly or indirectly, for operating the pool, except reimbursement for ordinary administrative expenses of operating the pool;" "[i]t operates only one pool at a time;" and "[n]either the person nor any other person involved with the pool does any advertising in connection with the pool . . . ." 17 CFR 4.13(a)(1) (emphasis added).
64. 60 FR at 53464. SEC Rule 502(c) prohibits "any form of general solicitation or general advertising" and applies to Regulation D offerings pursuant to SEC Rules 505 and 506. 17 CFR 230.502(c). Thus, CPOs who use electronic media in a manner inconsistent with Regulation D may not obtain relief pursuant to Commission Rule 4.8, which is available only with respect to offerings pursuant to SEC Rules 505 and 506. 17 CFR 4.8.
65. CFTC Interpretative Letter No. 76-24, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,234 (Office of the General Counsel, August 17, 1976).
66. The Commission stresses, however, that providing even objective market or performance history data in the context of a publication that has the purpose or effect of providing or marketing trading advisory services would require CTA registration. Thus, a newsletter published to communicate the trading advice of a particular CTA or to promote a CTA "hotline" service and also including performance data for commodity pools would implicate the CTA definition, notwithstanding that such performance data are objectively developed, because the publication is predominantly one designed to provide trading advice. Thus, whether a particular presentation constitutes trading advice depends upon the facts and circumstances in which the presentation is made and the representations, express or implied, made concerning the content of the presentation.
67. As noted above, compensation in this context does not require that payment be received for the communication in question. Rather, if the provider of such data profits from presenting it, even indirectly, such as by promoting its own services, the statutory "compensation or profit" standard is satisfied.
68. In this case, the hyperlink communicates the views of the website operator as to the quality of the services addressed or referred to at the hyperlinked site.
69. This analysis would apply without regard to the criteria selected by the viewer, which could, for example, call for all pools with rates of return above a specified threshold or for presentation of pools in order of rates of return (e.g., high-to-low). However, a website that contained this search feature, but also contained evaluative or mathematical services (e.g., for the calculation of relative rates of return or volatility of returns) would, however, indicate a different result.
70. 7 U.S.C. 6o provides that no CPO, CTA, or any associated persons thereof, may use "any means or instrumentality of interstate commerce, directly or indirectly -- (A) to employ any device, scheme or artifice to defraud any participant or client or prospective client; or (B) to engage in any transaction, practice or course of business which operates as a fraud or deceit upon any participant or prospective client or participant."
71. 17 CFR 4.41(b); In re Armstrong, [Current Transfer Binder] Comm. Fut. L. Rep (CCH) 26,332 (CFTC March 10, 1995), aff'd sub nom. Armstrong v. CFTC, No. 95-3161 (3d Cir. January 19, 1996), cert. denied, 64 U.S.L.W. 3821 (June 10, 1996). Commission Rule 4.41(b) requires that hypothetical or simulated performance data be accompanied either by the statement specified in Rule 4.41(b)(1) or a comparable statement promulgated by a registered futures association. The NFA's cautionary statement can be found in NFA Rule 2-29.
72. See 7 U.S.C. 6o; 17 CFR 4.41(c)(2).