Advertising by Commodity Pool Operators, Commodity Trading Advisors, and the Principals Thereof, 49387-49391 [E6-13946]
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Federal Register / Vol. 71, No. 163 / Wednesday, August 23, 2006 / Proposed Rules
Determination if Pitch Trim Control Wheel
Moves
PART 39—AIRWORTHINESS
DIRECTIVES
1. The authority citation for part 39
continues to read as follows:
Authority: 49 U.S.C. 106(g), 40113, 44701.
§ 39.13
[Amended]
Determination if Servomotor Moves
2. The Federal Aviation
Administration (FAA) amends § 39.13
by adding the following new
airworthiness directive (AD):
Airbus: Docket No. FAA–2006–25670;
Directorate Identifier 2006–NM–027–AD.
Comments Due Date
(a) The FAA must receive comments on
this AD action by September 22, 2006.
Affected ADs
(b) None.
Applicability
(c) This AD applies to all Airbus Model
A300 airplanes; certificated in any category;
except the following airplanes:
(1) Model A300 B4–220, A300 B4–203, and
A300 B2–203 airplanes in a forward facing
crew cockpit certified configuration;
(2) Model A300 B4–601, B4–603, B4–620,
and B4–622 airplanes;
(3) Model A300 B4–605R and B4–622R
airplanes;
(4) Model A300 F4–605R and F4–622R
airplanes; and
(5) Airbus Model A300 C4–605R Variant F
airplanes.
Unsafe Condition
(d) This AD results from a report of a
sudden nose-up movement after
disengagement of the autopilot in cruise. We
are issuing this AD to ensure that the
flightcrew is aware of the procedures for
resetting the trim and pitch trim levers after
each landing and to prevent failure of the
servomotors of the pitch trim systems during
flight. Failure of the servomotors of the pitch
trim systems could result in uncommanded
nose up movement of the control surface of
the pitch trim systems after disengagement of
the autopilot in cruise.
Compliance
(e) You are responsible for having the
actions required by this AD performed within
the compliance times specified, unless the
actions have already been done.
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Revision of Airplane Flight Manual (AFM)
(f) Within 14 days after the effective date
of this AD, revise the Normal Procedures
section of the Airbus A300 AFM to include
the information in Airbus A300 Temporary
Revision (TR) 4.03.00/04, Issue 02, dated
November 18, 2003, as specified in the TR.
Note 1: This may be done by inserting a
copy of TR 4.03.00/04, Issue 02, in the AFM.
When the TR has been included in the
general revisions of the AFM, the general
revisions may be inserted in the AFM,
provided the relevant information in the
general revision is identical to that in the TR.
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(g) Following accomplishment of the AFM
revision required by paragraph (f) of this AD:
After each landing and before shutting down
the engines, do the AFM procedures
specified in Airbus A300 TR 4.03.00/04,
Issue 02, dated November 18, 2003.
(h) Before further flight after any
movement reported in accordance with
paragraph (g) of this AD, determine which
servomotor moves the pitch trim control
wheel, and do applicable other specified
actions in accordance with Airbus TR No.
22–001, dated April 11, 2003, of Chapter 22–
23–00 of Airbus A300 Fault Isolation
Manual.
Note 2: Airbus TR No. 22–001 contains a
typographical error. The TR incorrectly refers
to ‘‘MM 22–23–39’’ as the appropriate source
of service information for replacing the pitch
trim actuator; the correct reference is ‘‘MM
22–23–29.’’
Optional Replacement of the Pitch Trim
Servomotors
(i) Replace the pitch trim servomotors in
the attachment area of the horizontal and
vertical stabilizers with new servomotors, in
accordance with the Accomplishment
Instructions of Airbus Service Bulletin A300–
22–0119, dated May 13, 2005.
Note 3: Airbus Service Bulletin A300–22–
0119, dated May 13, 2005, refers to Thales
Service Bulletin V1AM–22–005, Revision 01,
dated July 27, 2005, as an additional source
of service information for doing the
replacement.
Repetitive Preventative Maintenance Tasks
(j) Within 12,000 flight hours after
replacing one or both servomotors in
accordance with paragraph (h) or (i) of this
AD, or within 6 months after the effective
date of this AD, whichever occurs later, do
the preventative maintenance task of the
pitch trim servomotor(s), in accordance with
the Accomplishment Instructions of Airbus
Service Bulletin A300–22–0120, dated May
13, 2005. Repeat the preventative
maintenance task thereafter at intervals not to
exceed 12,000 flight hours.
Note 4: Airbus Service Bulletin A300–22–
0120, dated May 13, 2005, refers to Thales
Service Bulletin V1AM–22–006, Revision 01,
dated July 26, 2005, as an additional source
of service information for doing the
preventative maintenance task.
Removal of AFM Revision
(k) After accomplishing the actions
specified in paragraph (i) and the initial task
in paragraph (j) of this AD, the AFM revision
required by paragraph (f) of this AD may be
removed, and the requirements of paragraphs
(g) and (h) of this AD are no longer required.
No Reporting
(l) Although Airbus Service Bulletin A300–
22–0120 specifies to submit certain
information to the manufacturer, this AD
does not include that a requirement.
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49387
Alternative Methods of Compliance
(AMOCs)
(m)(1) The Manager, International Branch,
ANM–116, Transport Airplane Directorate,
FAA, has the authority to approve AMOCs
for this AD, if requested in accordance with
the procedures found in 14 CFR 39.19.
(2) Before using any AMOC approved in
accordance with § 39.19 on any airplane to
which the AMOC applies, notify the
appropriate principal inspector in the FAA
Flight Standards Certificate Holding District
Office.
Related Information
(n) French airworthiness directives F–
2003–291 R1, issued July 6, 2005, and F–
2005–109, issued July 6, 2005, also addresses
the subject of this AD.
Issued in Renton, Washington, on August
15, 2006.
Kalene C. Yanamura,
Acting Manager, Transport Airplane
Directorate, Aircraft Certification Service.
[FR Doc. E6–13964 Filed 8–22–06; 8:45 am]
BILLING CODE 4910–13–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 4
RIN 3038–AC35
Advertising by Commodity Pool
Operators, Commodity Trading
Advisors, and the Principals Thereof
Commodity Futures Trading
Commission.
ACTION: Proposed rules.
AGENCY:
SUMMARY: The Commodity Futures
Trading Commission (Commission or
CFTC) is proposing to amend Regulation
4.41, which governs advertising by
commodity pool operators (CPOs),
commodity trading advisors (CTAs) and
the principals thereof, (1) To restrict the
use of testimonials, (2) to clarify the
required placement of the prescribed
simulated or hypothetical performance
disclaimer, and (3) to include within the
regulation’s coverage advertisement
through electronic media (Proposal).
This action is in furtherance of the
Commission’s longstanding position
that CPOs, CTAs, and their principals
may not advertise in a false, deceptive
or misleading manner.
DATES: Comments must be received on
or before September 22, 2006.
ADDRESSES: Comments on the Proposal
should be sent to Eileen Donovan,
Acting Secretary, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW.,
Washington, DC 20581. Comments may
be sent by facsimile transmission to
(202) 418–5528, or by e-mail to
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Federal Register / Vol. 71, No. 163 / Wednesday, August 23, 2006 / Proposed Rules
secretary@cftc.gov. Reference should be
made to ‘‘Advertising by Commodity
Pool Operators, Commodity Trading
Advisors, and the Principals Thereof.’’
Comments may also be submitted by
connecting to the Federal eRulemaking
Portal at https://www.regulations.gov and
following the comment submission
instructions.
FOR FURTHER INFORMATION CONTACT:
Barbara S. Gold, Associate Director, or
Peter B. Sanchez, Staff Attorney,
Division of Clearing and Intermediary
Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581, telephone number: (202) 418–
5450 or (202) 418–5237, respectively;
facsimile number: (202) 418–5528; and
electronic mail: bgold@cftc.gov or
psanchez@cftc.gov, respectively.
SUPPLEMENTARY INFORMATION:
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I. Background
Part 4 of the Commission’s regulations
governs the operations and activities of
CPOs and CTAs.1 In particular,
Regulation 4.41 pertains to advertising
by CPOs, CTAs, and the principals 2
thereof, an issue first addressed by the
Commission over 25 years ago. The
Commission originally proposed that
CPOs, CTAs, and their principals could
not advertise their actual past
performance results in a format other
than that which the CPO or CTA was
required to use in its Disclosure
Document,3 and that the presentation of
simulated or hypothetical performance
of a CPO, CTA, or the principals thereof
would be prohibited.4 In response to the
comments received and its further
deliberations on these proposals, the
Commission adopted less restrictive
advertising regulations.5
With respect to the presentation of
actual past performance, the
Commission explained that it had
adopted in Regulation 4.41(a) ‘‘a rule
that leaves to the discretion of the [CPO,
CTA, or principal] advertising
performance results—whether actual,
simulated or hypothetical—the format
1 17 CFR Part 4 (2006). The Commodity Exchange
Act (Act) and the Commission’s regulations issued
thereunder may be accessed through the
Commission’s Web site, at https://www.cftc.gov/
cftc.cftclawreg.htm.
2 The definition of the term ‘‘principal’’ is set
forth in Regulation 4.10(e)(1), which crossreferences the definition of the term in Regulation
3.1(a). An example of a principal of a CPO
organized as a corporation would be the
corporation’s chief executive officer.
3 Regulations 4.21–4.26 and 4.31–4.26
respectively concern the Disclosure Document that
registered CPOs and CTAs must prepare, deliver,
and file.
4 45 FR 51600 (Aug. 4, 1980).
5 46 FR 26004 (May 8, 1981).
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of that presentation, so long as that
format is not false, misleading or
deceptive.’’ 6 As for the presentation of
simulated or hypothetical performance
results, the Commission explained that
it had adopted in Regulation 4.41(b) ‘‘a
rule that allows the presentation of
those results, provided that the
presentation is accompanied by the
statement prescribed in the rule
(emphasis supplied),’’ whose purpose
was ‘‘to alert prospective customers to
the limitations inherent in simulated
and hypothetical past performance
results.’’ 7 The Commission also noted
the scope of new Regulation 4.41—that
it applied to both oral and written
communications and regardless of
whether a CPO or a CTA was exempt
from registration under the Act.8
Based on its experience with the
operation of Regulation 4.41 over the
course of the past 25 years, the
Commission today is proposing certain
amendments as described below.
II. The Proposal
A. Presentation of Actual Past
Performance: Proposed Addition of
Regulation 4.41(a)(3)
The Commission is proposing to add
a new paragraph (a)(3) to Regulation
4.41, which would address the use of
testimonials by a CPO, CTA, or a
principal thereof. Proposed Regulation
4.41(a)(3) would require advertisements
that refer to a testimonial to
prominently disclose that the
testimonial may not be representative of
the experience of other clients; that the
testimonial is no guarantee of future
performance or success; and, if more
than a nominal sum is paid, the fact that
6 While acknowledging that it was not possible to
identify every advertisement that was prohibited by
new Regulation 4.41, the Commission nonetheless
gave notice in the Federal Register release
announcing the adoption of the rule that it would
consider the following, non-exclusive list of
advertisements, to be prohibited:
(1) References only to successful trades, if during
the same time period, trades which were
unsuccessful were also recommended or executed;
(2) references to the results during a specific time
period, if the results claimed were not fairly
representative of results achieved for comparable
periods; (3) suggestions, assurances or claims of
profit potential that do not also fairly present the
possibility of loss; (4) statements of opinions or
predictions which are not clearly labeled as such
or which have no reasonable basis in fact; and (5)
failure to disclose whether, and to what extent, fees,
commissions and other expenses are reflected in the
past performance results. Id. at 26012.
7 Id.
8 Section 4m(1) of the Act, 7 U.S.C. 6m(1) (2000),
generally requires the registration of CPOs and
CTAs. Regulation 4.13 provides an exemption from
CPO registration for certain persons, and Sections
4m(1) and 4m(3) and Regulation 4.14 provide an
exemption from CTA registration for certain other
persons.
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it is a paid testimonial.9 The
9 The Commission has modeled this proposal
upon NASD Rule 2210(d)(2), which sets similar
limits on the use of testimonials in advertisements
and other marketing materials applicable to NASD
members, as follows:
(2) Standards Applicable to Advertisements and
Sales Literature
(A) Advertisements or sales literature providing
any testimonial concerning the investment advice
or investment performance of a member or its
products must prominently disclose the following:
(i) The fact that the testimonial may not be
representative of the experience of other clients.
(ii) The fact that the testimonial is no guarantee
of future performance or success.
(iii) If more than a nominal sum is paid, the fact
that it is a paid testimonial.
The potential of testimonials to mislead
customers has been recognized by other Federal
regulatory agencies. The Securities and Exchange
Commission (SEC) has promulgated a rule that
declares any use of testimonials in advertising by
investment advisers to be ‘‘a fraudulent, deceptive
or manipulative act, practice or course of business
within the meaning of the [Investment Advisers]
Act [of 1940] (15 U.S.C. 80b–6(4))’’. 17 CFR
275.206(4)–1(a)(1). In its release promulgating the
rule, the SEC found that ‘‘such advertisements are
misleading; by their very nature they emphasize the
comments and activities favorable to the investment
adviser and ignore those which are unfavorable.’’ 26
FR 10548, 10549 (November 9, 1961).
Testimonials also are subject to the Federal Trade
Commission’s (FTC) Guides Concerning Use of
Endorsements and Testimonials in Advertising,
which are not limited to a specific industry. 16 CFR
255, https://www.ftc.gov/bcp/guides.endorse.htm.
The FTC Guides provide, for example, that:
An advertisement employing an endorsement
reflecting the experience of an individual or a group
of consumers on a central or key attribute of the
product or service will be interpreted as
representing that the endorser’s experience is
representative of what consumers will generally
achieve with the advertised product in actual, albeit
variable, conditions of use. Therefore, unless the
advertiser possesses and relies upon adequate
substantiation for this representation, the
advertisement should either clearly and
conspicuously disclose what the generally expected
performance would be in the depicted
circumstances or clearly and conspicuously
disclose the limited applicability of the endorser’s
experience to what consumers may generally expect
to achieve. See 16 CFR 255.2(a).
The FTC Guides are an administrative
interpretation of section 5 of the Federal Trade
Commission Act, 15 U.S.C. 45(a), which prohibits
‘‘unfair or deceptive acts or practices in or affecting
commerce.’’ See Porter & Dietsch, Inc. v. Federal
Trade Comm’n, 605 F.2d 294, 303 (7th Cir. 1979)
(sustaining FTC’s finding that advertisements were
deceptive where the typical experiences of
consumers did not parallel the experiences reported
in testimonials); Federal Trade Comm’n v. Ken
Roberts Company, 276 F.3d 583 (DC Cir.
2001)(FTC’s authority to investigate deceptive
advertising extended to, among other things,
testimonials used by seller of courses in
commodities and securities investing and was not
clearly preempted by overlapping authority of
CFTC or SEC). Standards for establishing unlawful
deception under the Federal Trade Commission Act
are broadly similar to those for establishing
unlawful deception by commodity trading advisors
and commodity pool operators under the
Commodity Exchange Act. Compare Federal Trade
Comm’n v. Tashman, 318 F.3d 1273, 1275–77 (11th
Cir. 2003) (unsupported earnings claims by
business opportunity firm were material misleading
representations that violated Federal Trade
Commission Act) with CFTC v. Heffernan, 245 F.
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Commission believes that
advertisements that do not contain this
information may provide potential CPO
and CTA customers with a misleading
assessment about the quality of services
being offered or the motivation of the
person providing the testimonial—and,
thus, violate the Commission’s intent
that these advertisements not be ‘‘false,
misleading or deceptive.’’
B. Simulated or Hypothetical
Performance Presentation: Proposed
Amendments to Regulation 4.41(b)
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Regulation 4.41(b)(1) requires that
simulated or hypothetical performance
results ‘‘be accompanied by’’ a
prescribed statement,10 and Regulation
4.41(b)(2) requires that this statement be
‘‘prominently disclosed’’ if that
performance is presented other than
orally. Nonetheless, the Commission has
encountered numerous instances where
persons were not adequately identifying
their trading results as simulated or
hypothetical,11 or were not
appropriately locating the disclaimer,12
and thus were not providing those
results as the Commission had
contemplated—i.e., in a manner
intended ‘‘to alert prospective
customers to the limitations inherent in
simulated and hypothetical past
performance results.’’ The Commission
therefore is proposing to amend
Regulation 4.41(b)(1) to clarify the
meaning of the term ‘‘accompanied by,’’
especially in light of the popularity of
electronic means of communication that
were not in existence 25 years ago when
Supp. 2d 1276, 1290–91, 1294–96 (S.D.Ga.
2003)(unsupported earnings claims by commodity
trading advisor were material misleading
representations that violated Commodity Exchange
Act if they were made with scienter or had an
impact on prospective customers).
10 This statement may be the text contained in
Regulation 4.41(b)(1)(i) or it may be a statement
prescribed by a registered futures association
pursuant to Section 17(j) of the Act, 7 U.S.C. 21(j).
In this regard, the National Futures Association
(NFA) has adopted a Risk Disclosure Statement, the
text of which is contained in NFA Compliance Rule
2–29(c) and may be accessed at https://
www.nfa.futures.org/nfaManual/
manualCompliance.asp#2-29.
11 See, e.g., CFTC v. R&W Technical Servs. Ltd.,
205 F.3d 165 (5th Cir. 2000) (hypothetical trading
results presented as real trading results); CFTC v.
Skorupskas, 605 F. Supp. 923, 933 (E.D. Mich.
1985) (performance tables not based on real or
actual trading).
12 See, e.g., CFTC v. Vartuli, 228 F.3d 94 (2d Cir.
2000) (disclaimer appears on a separate page from
the hypothetical trading results); Heffernan at 1286,
1296–1297, 1299 (disclaimer on a webpage, but not
included in the original advertisement containing
the hypothetical performance); In re Martin,
[1999—2000 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ¶ 28,239 (CFTC Sept. 6, 2000) (hypothetical
performance results on a Web page, but disclaimer
on a separate page accessible by hyperlink).
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the Commission adopted Regulation
4.41.
Specifically, the Commission is
proposing to amend Regulation
4.41(b)(1)(i) by including in the
prescribed disclaimer references to
‘‘these results’’ when discussing the
simulated or hypothetical performance
results being presented.13 Additionally,
the Commission is proposing to amend
Regulation 4.41(b)(2) by adding to the
existing requirement that the prescribed
disclaimer must be prominently
disclosed, the requirement that the
prescribed disclaimer also must be ‘‘in
immediate proximity to the simulated or
hypothetical performance being
presented.’’ 14
C. The Scope of Regulation 4.41:
Proposed Amendment to Regulation
4.41(c)(1)
As originally adopted by Congress in
1974, the term ‘‘commodity trading
advisor’’ included any person who
provided commodity interest trading
advice ‘‘either directly or through
publications or writings.’’ 15 With the
subsequent advent of electronic media
and the increasing use of such media by
CTAs, in 1982 Congress amended the
CTA definition to include any person
providing commodity interest trading
advice ‘‘either directly or through
publications, writings or electronic
media’’ (emphasis supplied).16 In turn,
the Commission amended the definition
of the term ‘‘commodity trading
advisor’’ in Regulation 1.3(bb) to
conform to the statutory amendment.17
CPOs, like CTAs, typically solicit
customers based on their performance
results. The Commission accordingly is
proposing to amend Regulation
4.41(c)(1) in order to clarify that
advertisements by ‘‘electronic media, or
13 The Commission also is proposing a few nonsubstantive changes to the prescribed disclaimer.
The text of Regulation 4.41(b)(1)(i) would thus read
as follows:
‘‘These results are based on hypothetical or
simulated performance results that have certain
inherent limitations. Unlike the results shown in an
actual performance record, these results do not
represent actual trading. Also, because these trades
have not actually been executed, these results may
have under- or over-compensated for the impact, if
any, of certain market factors, such as lack of
liquidity. Hypothetical or simulated trading
programs in general are also subject to the fact that
they are designed with the benefit of hindsight. No
representation is being made that any account will
or is likely to achieve profits or losses similar to
these being shown.’’
14 See, e.g. supra note 12 for situations in which
the required disclaimer was not in immediate
proximity to the hypothetical performance.
15 Pub. L. 93–463, 88 Stat. 1389, Sec. 202 (Oct. 23,
1974).
16 Pub. L. 947–444, 96 Stat. 2294, Sec. 201 (Jan.
11, 1983).
17 48 FR 35248 (Aug. 3, 1983).
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49389
otherwise, including information
provided via internet or e-mail’’ are
within the scope of Regulation 4.41.
In this regard, the Commission
emphasizes that it interprets Regulation
4.41 in its current form as applying to
the presentation of past performance
results by CPOs, CTAs, and their
principals made through electronic
media. The Proposal is intended to
make this interpretation explicit.
The Commission believes that the
Proposal is fully consistent with the
First Amendment. False, deceptive or
misleading commercial speech—even
of, for example, those CTAs that provide
advice on a non-personalized basis—is
not protected by the First
Amendment.18 Moreover, even where
commercial speech is only potentially
misleading, the government can use
disclosure requirements to make sure
that the public is not, in fact, misled.19
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 20 requires that agencies, in
proposing rules, consider the impact of
those rules on small businesses. The
Commission has previously established
certain definitions of ‘‘small entities’’ to
be used by the Commission in
evaluating the impact of its rules on
such entities in accordance with the
RFA.21
With respect to CTAs, the
Commission has previously stated that
it would evaluate within the context of
a particular rule proposal whether all or
some affected CTAs would be
considered to be small entities and, if
so, the economic impact on them of the
proposal.22 Moreover, the Commission
stated that CPOs would be considered
small entities if they are exempt from
registration by virtue of Regulation
4.13(a).23 The Commission does not
believe that the proposed amendments
to Regulation 4.41 would have a
significant impact on affected CTAs,
CPOs, and their principals. This is
because the only burden that would be
imposed by the Proposal would be the
obligation to comply with the antifraud
provisions of Section 4o of the Act
18 Indeed, the Commission may constitutionally
prohibit the dissemination of commercial speech
that is ‘‘false, deceptive, or misleading.’’ Zauderer
v. Office of Disciplinary Counsel, 471 U.S. 626, 638
(1985).
19 See, e.g. Pearson v. Shalala, 164 F.3d 650 (D.C.
Cir. 1999) (disclosure can be required to cure
possibility of misleading public that would not just
justify prohibition).
20 5 U.S.C. 601 et seq.
21 47 FR 18618 (April 30, 1982).
22 Id. at 18620.
23 Id.
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when presenting the past performance
of CTAs, CPOs, and their principal—
whether by way of actual or
hypothetical performance or through the
use of testimonials. Assuming arguendo,
however, that compliance with Section
4o would constitute a significant
burden, the burden is neither new nor
additional, because the proposed
revisions to Regulation 4.41 are
consistent with the Commission’s
longstanding interpretation of Section
4o as applicable to all advertisements by
CTAs, CPOs, and their principals,
including advertisements that are
viewed electronically, and that such
advertisements must not be false or
misleading.
Accordingly, the Chairman, on behalf
of the Commission, certifies pursuant to
Section 605(b) of the RFA 24 that the
Proposal will not have a significant
economic impact on a substantial
number of small entities. However, the
Commission invites the public to
comment on this finding.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) imposes certain requirements on
Federal agencies (including the
Commission) in connection with their
conducting or sponsoring any collection
of information as defined by the PRA.
The Proposal does not require a new
collection of information on the part of
any entities. Accordingly, for purposes
of the PRA, the Commission certifies
that the proposed rule amendments, if
promulgated in final form, would not
impose any new reporting or
recordkeeping requirements.
C. Cost-Benefit Analysis
Section 15(a) of the Act 25 requires the
Commission to consider the costs and
benefits of its action before issuing a
new regulation under the Act. By its
terms, Section 15(a) does not require the
Commission to quantify the costs and
benefits of a new regulation or to
determine whether the benefits of the
proposed regulation outweigh its costs.
Rather, Section 15(a) simply requires
the Commission to ‘‘consider the costs
and benefits’’ of its action.
Section 15(a) further specifies that
costs and benefits must be evaluated in
light of five broad areas of market and
public concern: protection of market
participants and the public; efficiency,
competitiveness, and financial integrity
of futures markets; price discovery;
sound risk management practices; and
other public interest considerations.
Accordingly, the Commission could in
24 5
25 7
U.S.C. 605(b).
U.S.C. 19(a).
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its discretion give greater weight to any
one of the five enumerated areas and
could in its discretion determine that,
notwithstanding its costs, a particular
rule was necessary or appropriate to
protect the public interest or to
effectuate any of the provisions or to
accomplish any of the purposes of the
Act.
The Commission is considering the
costs and benefits of this rule in light of
the specific provisions of Section 15(a)
of the Act as follows:
1. Protection of Market Participants and
the Public
Because the Proposal discusses the
use of testimonials and the placement of
the prescribed hypothetical disclaimer,
and specifically includes advertisement
via electronic media by CPOs, CTAs,
and their principals, the Proposal
should enhance the Commission’s
ability to protect market participants
and the public.
2. Efficiency and Competition
The Proposal should have no effect,
from the standpoint of imposing costs or
creating benefits, on efficiency or
competition.
3. Financial Integrity of Futures Markets
and Price Discovery
The Proposal should have no effect,
from the standpoint of imposing costs or
creating benefits, on the financial
integrity or price discovery function of
the commodity futures and option
markets.
4. Sound Risk Management Practices
The Proposal should have no effect,
from the standpoint of imposing costs or
creating benefits, on the available range
of sound risk management alternatives.
5. Other Public Interest Considerations
The Proposal should have no effect,
from the standpoint of imposing costs
on, and may create public interest
benefits to, consumers as a result of
their having more honest information.
After considering these factors, the
Commission has determined to propose
the amendments to Regulation 4.41
discussed above. The Commission
invites public comment on its
application of the cost-benefit provision.
Commenters also are invited to submit
any data that they may have quantifying
the costs and benefits of the Proposal
with their comment letters.
List of Subjects in 17 CFR Part 1
Advertising, Brokers, Commodity
futures, Commodity pool operators,
Commodity trading advisors, Consumer
protection, Reporting and recordkeeping
requirements.
PO 00000
Frm 00006
Fmt 4702
Sfmt 4702
For the reasons presented above, the
Commission proposes to amend 17 CFR
part 1 as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o,
6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1,
16, 16a, 19, 21, 23 and 24, as amended by
the Commodity Futures Modernization Act of
2000, Appendix E of Pub. L. 106–554, 114
Stat. 2763 (2000).
2. Section 4.41 is amended by
removing ‘‘or’’ at the end of paragraph
(a)(1), removing the period and adding
a semi-colon and ‘‘or’’ at the end of
paragraph (a)(2), adding new paragraph
(a)(3), and revising paragraphs (b)(1)(i),
(b)(2) and (c)(1) to read as follows:
§ 4.41 Advertising by commodity pool
operators, commodity trading advisors, and
the principals thereof.
(a) * * *
(3) Refers to any testimonial, unless
the advertisement or sales literature
providing the testimonial prominently
discloses:
(i) That the testimonial may not be
representative of the experience of other
clients;
(ii) That the testimonial is no
guarantee of future performance or
success; and
(iii) If, more than a nominal sum is
paid, the fact that it is a paid
testimonial.
(b) * * *
(1) * * *
(i) The following statement: ‘‘These
results are based on hypothetical or
simulated performance results that have
certain inherent limitations. Unlike the
results shown in an actual performance
record, these results do not represent
actual trading. Also, because these
trades have not actually been executed,
these results may have under-or overcompensated for the impact, if any, of
certain market factors, such as lack of
liquidity. Hypothetical or simulated
trading programs in general are also
subject to the fact that they are designed
with the benefit of hindsight. No
representation is being made that any
account will or is likely to achieve
profits or losses similar to these being
shown’’; or
*
*
*
*
*
(2) If the presentation of such
simulated or hypothetical performance
is other than oral, the prescribed
statement must be prominently
disclosed and in immediate proximity
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Federal Register / Vol. 71, No. 163 / Wednesday, August 23, 2006 / Proposed Rules
to the simulated or hypothetical
performance being presented.
(c) * * *
(1) To any publication, distribution or
broadcast of any report, letter, circular,
memorandum, publication, writing,
advertisement or other literature or
advice, whether by electronic media or
otherwise, including information
provided via internet or e-mail, the texts
of standardized oral presentations and
of radio, television, seminar or similar
mass media presentations, and
*
*
*
*
*
Issued in Washington, DC, on August 17,
2006, by the Commission.
Eileen Donovan.
Acting Secretary of the Commission.
[FR Doc. E6–13946 Filed 8–22–06; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF HOMELAND
SECURITY
DEPARTMENT OF THE TREASURY
Bureau of Customs and Border
Protection
19 CFR Parts 103, 178, and 181
[USCBP–2006–0090]
RIN 1505–AB58
NAFTA: Merchandise Processing Fee
Exemption and Technical Corrections
Customs and Border Protection,
Department of Homeland Security;
Department of the Treasury.
ACTION: Notice of proposed rulemaking.
sroberts on PROD1PC70 with PROPOSALS
AGENCY:
SUMMARY: The current regulations in
title 19 of the Code of Federal
Regulations allow CBP to collect a
merchandise processing fee (MPF) on
imported shipments to recoup
administrative expenses. However,
‘‘originating merchandise’’ that qualifies
to be marked as goods of Canada or of
Mexico under the NAFTA are exempted
from this fee. CBP is proposing to
amend the regulations to clarify that an
importer is subject to the same
declaration requirement that is
established for claiming NAFTA duty
preference in order to claim the
exemption of the MPF for goods that
meet a NAFTA rule of origin even when
the goods are unconditionally free.
In addition, CBP is proposing to make
several technical corrections. CBP is
proposing to amend the regulations to
clarify that a Certificate of Origin is not
required for a commercial importation
for which the total value of originating
goods does not exceed $2,500. CBP is
VerDate Aug<31>2005
15:59 Aug 22, 2006
Jkt 208001
also proposing to remedy two incorrect
addresses and an incorrect Code of
Federal Regulations citation.
DATES: Comments must be received on
or before October 23, 2006.
ADDRESSES: You may submit comments,
identified by docket number, by one of
the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments
via docket number USCBP–2006–0090.
• Mail: Trade and Commercial
Regulations Branch, Office of
Regulations and Rulings, Bureau of
Customs and Border Protection, 1300
Pennsylvania Avenue, NW., (Mint
Annex), Washington, DC 20229.
Instructions: All submissions received
must include the agency name and
docket number for this rulemaking. All
comments received will be posted
without change to https://
www.regulations.gov, including any
personal information provided. For
detailed instructions on submitting
comments and additional information
on the rulemaking process, see the
‘‘Public Participation’’ heading of the
SUPPLEMENTARY INFORMATION section of
this document.
Docket: For access to the docket to
read background documents or
comments received, go to https://
www.regulations.gov. Submitted
comments may also be inspected during
regular business days between the hours
of 9 a.m. and 4:30 p.m. at the Office of
Regulations and Rulings, Bureau of
Customs and Border Protection, 799 9th
Street, NW., 5th Floor, Washington, DC.
Arrangements to inspect submitted
comments should be made in advance
by calling Joseph Clark at (202) 572–
8768.
FOR FURTHER INFORMATION CONTACT: Seth
Mazze, Trade Agreements Branch,
Office of Field Operations, (202) 344–
2634.
SUPPLEMENTARY INFORMATION:
Public Participation
Interested persons are invited to
participate in this rulemaking by
submitting written data, views, or
arguments on all aspects of the
proposed rule. CBP also invites
comments that relate to the economic,
environmental, or federalism effects that
might result from this proposed rule.
Comments that will provide the most
assistance to CBP in developing these
procedures will reference a specific
portion of the proposed rule, explain the
reason for any recommended change,
and include data, information, or
authority that support such
recommended change.
PO 00000
Frm 00007
Fmt 4702
Sfmt 4702
49391
Background
On December 17, 1992, the United
States, Canada, and Mexico entered into
the North American Free Trade
Agreement (NAFTA). Among the stated
objectives of the NAFTA is the
elimination of barriers to trade in, and
the facilitation of the cross-border
movement of, goods and services
between the territories of the countries.
The provisions of the NAFTA were
adopted by the United States with the
enactment of the North American Free
Trade Agreement Implementation Act
(‘‘the Act,’’ 19 U.S.C. 3301–3473). On
September 6, 1995, Customs published
Treasury Decision (T.D.) 95–68 (North
American Free Trade Agreement) in the
Federal Register (60 FR 46334),
adopting amendments to the regulations
in title 19 of the Code of Federal
Regulations (CFR) to implement
Customs-related aspects of the NAFTA.
The final rule went into effect on
October 1, 1995. Sections 403(1) and
411 of the Homeland Security Act of
2002 (Pub. L. 107–296) transferred the
United States Customs Service and
certain of its functions from the
Department of the Treasury to the
Department of Homeland Security;
pursuant to section 1502 of the Act, the
President renamed the ‘‘Customs
Service’’ as the ‘‘Bureau of Customs and
Border Protection,’’ also referred to as
the ‘‘CBP.’’
Merchandise Processing Fee (MPF)
Exemption
As a means of recouping
administrative expenses for the
processing of imported shipments, CBP
charges a merchandise processing fee
(MPF), as provided for in 19 U.S.C. 58c.
However, under 19 U.S.C. 58c(b)(10)(B),
for goods qualifying under the rules of
origin set out in 19 U.S.C. 3332, the fee
may not be charged with respect to
goods that qualify to be marked as goods
of Canada or of Mexico (pursuant to
Annex 311 of the NAFTA). In order to
claim a NAFTA duty preference, an
importer must make a declaration. The
same declaration is used to claim the
MPF exemption. That is, the importer
must place the appropriate special
program indicator (e.g., ‘‘CA’’ for goods
of Canada and ‘‘MX’’ for goods of
Mexico) opposite the good on the entry
form. The proposal in this document
addresses the situation in which an
importer of an originating good has no
duty preference incentive to make the
required NAFTA declarations on the
entry because the Normal Trade
Relations rate of duty on the good is free
(i.e., the good is unconditionally duty
free). Accordingly, CBP is proposing to
E:\FR\FM\23AUP1.SGM
23AUP1
]]>Agencies
[Federal Register Volume 71, Number 163 (Wednesday, August 23, 2006)]
[Proposed Rules]
[Pages 49387-49391]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13946]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AC35
Advertising by Commodity Pool Operators, Commodity Trading
Advisors, and the Principals Thereof
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing to amend Regulation 4.41, which governs advertising by
commodity pool operators (CPOs), commodity trading advisors (CTAs) and
the principals thereof, (1) To restrict the use of testimonials, (2) to
clarify the required placement of the prescribed simulated or
hypothetical performance disclaimer, and (3) to include within the
regulation's coverage advertisement through electronic media
(Proposal). This action is in furtherance of the Commission's
longstanding position that CPOs, CTAs, and their principals may not
advertise in a false, deceptive or misleading manner.
DATES: Comments must be received on or before September 22, 2006.
ADDRESSES: Comments on the Proposal should be sent to Eileen Donovan,
Acting Secretary, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be
sent by facsimile transmission to (202) 418-5528, or by e-mail to
[[Page 49388]]
secretary@cftc.gov. Reference should be made to ``Advertising by
Commodity Pool Operators, Commodity Trading Advisors, and the
Principals Thereof.'' Comments may also be submitted by connecting to
the Federal eRulemaking Portal at https://www.regulations.gov and
following the comment submission instructions.
FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,
or Peter B. Sanchez, Staff Attorney, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581,
telephone number: (202) 418-5450 or (202) 418-5237, respectively;
facsimile number: (202) 418-5528; and electronic mail: bgold@cftc.gov
or psanchez@cftc.gov, respectively.
SUPPLEMENTARY INFORMATION:
I. Background
Part 4 of the Commission's regulations governs the operations and
activities of CPOs and CTAs.\1\ In particular, Regulation 4.41 pertains
to advertising by CPOs, CTAs, and the principals \2\ thereof, an issue
first addressed by the Commission over 25 years ago. The Commission
originally proposed that CPOs, CTAs, and their principals could not
advertise their actual past performance results in a format other than
that which the CPO or CTA was required to use in its Disclosure
Document,\3\ and that the presentation of simulated or hypothetical
performance of a CPO, CTA, or the principals thereof would be
prohibited.\4\ In response to the comments received and its further
deliberations on these proposals, the Commission adopted less
restrictive advertising regulations.\5\
---------------------------------------------------------------------------
\1\ 17 CFR Part 4 (2006). The Commodity Exchange Act (Act) and
the Commission's regulations issued thereunder may be accessed
through the Commission's Web site, at https://www.cftc.gov/
cftc.cftclawreg.htm.
\2\ The definition of the term ``principal'' is set forth in
Regulation 4.10(e)(1), which cross-references the definition of the
term in Regulation 3.1(a). An example of a principal of a CPO
organized as a corporation would be the corporation's chief
executive officer.
\3\ Regulations 4.21-4.26 and 4.31-4.26 respectively concern the
Disclosure Document that registered CPOs and CTAs must prepare,
deliver, and file.
\4\ 45 FR 51600 (Aug. 4, 1980).
\5\ 46 FR 26004 (May 8, 1981).
---------------------------------------------------------------------------
With respect to the presentation of actual past performance, the
Commission explained that it had adopted in Regulation 4.41(a) ``a rule
that leaves to the discretion of the [CPO, CTA, or principal]
advertising performance results--whether actual, simulated or
hypothetical--the format of that presentation, so long as that format
is not false, misleading or deceptive.'' \6\ As for the presentation of
simulated or hypothetical performance results, the Commission explained
that it had adopted in Regulation 4.41(b) ``a rule that allows the
presentation of those results, provided that the presentation is
accompanied by the statement prescribed in the rule (emphasis
supplied),'' whose purpose was ``to alert prospective customers to the
limitations inherent in simulated and hypothetical past performance
results.'' \7\ The Commission also noted the scope of new Regulation
4.41--that it applied to both oral and written communications and
regardless of whether a CPO or a CTA was exempt from registration under
the Act.\8\
---------------------------------------------------------------------------
\6\ While acknowledging that it was not possible to identify
every advertisement that was prohibited by new Regulation 4.41, the
Commission nonetheless gave notice in the Federal Register release
announcing the adoption of the rule that it would consider the
following, non-exclusive list of advertisements, to be prohibited:
(1) References only to successful trades, if during the same
time period, trades which were unsuccessful were also recommended or
executed; (2) references to the results during a specific time
period, if the results claimed were not fairly representative of
results achieved for comparable periods; (3) suggestions, assurances
or claims of profit potential that do not also fairly present the
possibility of loss; (4) statements of opinions or predictions which
are not clearly labeled as such or which have no reasonable basis in
fact; and (5) failure to disclose whether, and to what extent, fees,
commissions and other expenses are reflected in the past performance
results. Id. at 26012.
\7\ Id.
\8\ Section 4m(1) of the Act, 7 U.S.C. 6m(1) (2000), generally
requires the registration of CPOs and CTAs. Regulation 4.13 provides
an exemption from CPO registration for certain persons, and Sections
4m(1) and 4m(3) and Regulation 4.14 provide an exemption from CTA
registration for certain other persons.
---------------------------------------------------------------------------
Based on its experience with the operation of Regulation 4.41 over
the course of the past 25 years, the Commission today is proposing
certain amendments as described below.
II. The Proposal
A. Presentation of Actual Past Performance: Proposed Addition of
Regulation 4.41(a)(3)
The Commission is proposing to add a new paragraph (a)(3) to
Regulation 4.41, which would address the use of testimonials by a CPO,
CTA, or a principal thereof. Proposed Regulation 4.41(a)(3) would
require advertisements that refer to a testimonial to prominently
disclose that the testimonial may not be representative of the
experience of other clients; that the testimonial is no guarantee of
future performance or success; and, if more than a nominal sum is paid,
the fact that it is a paid testimonial.\9\ The
[[Page 49389]]
Commission believes that advertisements that do not contain this
information may provide potential CPO and CTA customers with a
misleading assessment about the quality of services being offered or
the motivation of the person providing the testimonial--and, thus,
violate the Commission's intent that these advertisements not be
``false, misleading or deceptive.''
---------------------------------------------------------------------------
\9\ The Commission has modeled this proposal upon NASD Rule
2210(d)(2), which sets similar limits on the use of testimonials in
advertisements and other marketing materials applicable to NASD
members, as follows:
(2) Standards Applicable to Advertisements and Sales Literature
(A) Advertisements or sales literature providing any testimonial
concerning the investment advice or investment performance of a
member or its products must prominently disclose the following:
(i) The fact that the testimonial may not be representative of
the experience of other clients.
(ii) The fact that the testimonial is no guarantee of future
performance or success.
(iii) If more than a nominal sum is paid, the fact that it is a
paid testimonial.
The potential of testimonials to mislead customers has been
recognized by other Federal regulatory agencies. The Securities and
Exchange Commission (SEC) has promulgated a rule that declares any
use of testimonials in advertising by investment advisers to be ``a
fraudulent, deceptive or manipulative act, practice or course of
business within the meaning of the [Investment Advisers] Act [of
1940] (15 U.S.C. 80b-6(4))''. 17 CFR 275.206(4)-1(a)(1). In its
release promulgating the rule, the SEC found that ``such
advertisements are misleading; by their very nature they emphasize
the comments and activities favorable to the investment adviser and
ignore those which are unfavorable.'' 26 FR 10548, 10549 (November
9, 1961).
Testimonials also are subject to the Federal Trade Commission's
(FTC) Guides Concerning Use of Endorsements and Testimonials in
Advertising, which are not limited to a specific industry. 16 CFR
255, https://www.ftc.gov/bcp/guides.endorse.htm. The FTC Guides
provide, for example, that:
An advertisement employing an endorsement reflecting the
experience of an individual or a group of consumers on a central or
key attribute of the product or service will be interpreted as
representing that the endorser's experience is representative of
what consumers will generally achieve with the advertised product in
actual, albeit variable, conditions of use. Therefore, unless the
advertiser possesses and relies upon adequate substantiation for
this representation, the advertisement should either clearly and
conspicuously disclose what the generally expected performance would
be in the depicted circumstances or clearly and conspicuously
disclose the limited applicability of the endorser's experience to
what consumers may generally expect to achieve. See 16 CFR 255.2(a).
The FTC Guides are an administrative interpretation of section 5
of the Federal Trade Commission Act, 15 U.S.C. 45(a), which
prohibits ``unfair or deceptive acts or practices in or affecting
commerce.'' See Porter & Dietsch, Inc. v. Federal Trade Comm'n, 605
F.2d 294, 303 (7th Cir. 1979) (sustaining FTC's finding that
advertisements were deceptive where the typical experiences of
consumers did not parallel the experiences reported in
testimonials); Federal Trade Comm'n v. Ken Roberts Company, 276 F.3d
583 (DC Cir. 2001)(FTC's authority to investigate deceptive
advertising extended to, among other things, testimonials used by
seller of courses in commodities and securities investing and was
not clearly preempted by overlapping authority of CFTC or SEC).
Standards for establishing unlawful deception under the Federal
Trade Commission Act are broadly similar to those for establishing
unlawful deception by commodity trading advisors and commodity pool
operators under the Commodity Exchange Act. Compare Federal Trade
Comm'n v. Tashman, 318 F.3d 1273, 1275-77 (11th Cir. 2003)
(unsupported earnings claims by business opportunity firm were
material misleading representations that violated Federal Trade
Commission Act) with CFTC v. Heffernan, 245 F. Supp. 2d 1276, 1290-
91, 1294-96 (S.D.Ga. 2003)(unsupported earnings claims by commodity
trading advisor were material misleading representations that
violated Commodity Exchange Act if they were made with scienter or
had an impact on prospective customers).
---------------------------------------------------------------------------
B. Simulated or Hypothetical Performance Presentation: Proposed
Amendments to Regulation 4.41(b)
Regulation 4.41(b)(1) requires that simulated or hypothetical
performance results ``be accompanied by'' a prescribed statement,\10\
and Regulation 4.41(b)(2) requires that this statement be ``prominently
disclosed'' if that performance is presented other than orally.
Nonetheless, the Commission has encountered numerous instances where
persons were not adequately identifying their trading results as
simulated or hypothetical,\11\ or were not appropriately locating the
disclaimer,\12\ and thus were not providing those results as the
Commission had contemplated--i.e., in a manner intended ``to alert
prospective customers to the limitations inherent in simulated and
hypothetical past performance results.'' The Commission therefore is
proposing to amend Regulation 4.41(b)(1) to clarify the meaning of the
term ``accompanied by,'' especially in light of the popularity of
electronic means of communication that were not in existence 25 years
ago when the Commission adopted Regulation 4.41.
---------------------------------------------------------------------------
\10\ This statement may be the text contained in Regulation
4.41(b)(1)(i) or it may be a statement prescribed by a registered
futures association pursuant to Section 17(j) of the Act, 7 U.S.C.
21(j). In this regard, the National Futures Association (NFA) has
adopted a Risk Disclosure Statement, the text of which is contained
in NFA Compliance Rule 2-29(c) and may be accessed at https://
www.nfa.futures.org/nfaManual/manualCompliance.asp#2-29.
\11\ See, e.g., CFTC v. R&W Technical Servs. Ltd., 205 F.3d 165
(5th Cir. 2000) (hypothetical trading results presented as real
trading results); CFTC v. Skorupskas, 605 F. Supp. 923, 933 (E.D.
Mich. 1985) (performance tables not based on real or actual
trading).
\12\ See, e.g., CFTC v. Vartuli, 228 F.3d 94 (2d Cir. 2000)
(disclaimer appears on a separate page from the hypothetical trading
results); Heffernan at 1286, 1296-1297, 1299 (disclaimer on a
webpage, but not included in the original advertisement containing
the hypothetical performance); In re Martin, [1999--2000 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ] 28,239 (CFTC Sept. 6, 2000)
(hypothetical performance results on a Web page, but disclaimer on a
separate page accessible by hyperlink).
---------------------------------------------------------------------------
Specifically, the Commission is proposing to amend Regulation
4.41(b)(1)(i) by including in the prescribed disclaimer references to
``these results'' when discussing the simulated or hypothetical
performance results being presented.\13\ Additionally, the Commission
is proposing to amend Regulation 4.41(b)(2) by adding to the existing
requirement that the prescribed disclaimer must be prominently
disclosed, the requirement that the prescribed disclaimer also must be
``in immediate proximity to the simulated or hypothetical performance
being presented.'' \14\
---------------------------------------------------------------------------
\13\ The Commission also is proposing a few non-substantive
changes to the prescribed disclaimer. The text of Regulation
4.41(b)(1)(i) would thus read as follows:
``These results are based on hypothetical or simulated
performance results that have certain inherent limitations. Unlike
the results shown in an actual performance record, these results do
not represent actual trading. Also, because these trades have not
actually been executed, these results may have under- or over-
compensated for the impact, if any, of certain market factors, such
as lack of liquidity. Hypothetical or simulated trading programs in
general are also subject to the fact that they are designed with the
benefit of hindsight. No representation is being made that any
account will or is likely to achieve profits or losses similar to
these being shown.''
\14\ See, e.g. supra note 12 for situations in which the
required disclaimer was not in immediate proximity to the
hypothetical performance.
---------------------------------------------------------------------------
C. The Scope of Regulation 4.41: Proposed Amendment to Regulation
4.41(c)(1)
As originally adopted by Congress in 1974, the term ``commodity
trading advisor'' included any person who provided commodity interest
trading advice ``either directly or through publications or writings.''
\15\ With the subsequent advent of electronic media and the increasing
use of such media by CTAs, in 1982 Congress amended the CTA definition
to include any person providing commodity interest trading advice
``either directly or through publications, writings or electronic
media'' (emphasis supplied).\16\ In turn, the Commission amended the
definition of the term ``commodity trading advisor'' in Regulation
1.3(bb) to conform to the statutory amendment.\17\ CPOs, like CTAs,
typically solicit customers based on their performance results. The
Commission accordingly is proposing to amend Regulation 4.41(c)(1) in
order to clarify that advertisements by ``electronic media, or
otherwise, including information provided via internet or e-mail'' are
within the scope of Regulation 4.41.
---------------------------------------------------------------------------
\15\ Pub. L. 93-463, 88 Stat. 1389, Sec. 202 (Oct. 23, 1974).
\16\ Pub. L. 947-444, 96 Stat. 2294, Sec. 201 (Jan. 11, 1983).
\17\ 48 FR 35248 (Aug. 3, 1983).
---------------------------------------------------------------------------
In this regard, the Commission emphasizes that it interprets
Regulation 4.41 in its current form as applying to the presentation of
past performance results by CPOs, CTAs, and their principals made
through electronic media. The Proposal is intended to make this
interpretation explicit.
The Commission believes that the Proposal is fully consistent with
the First Amendment. False, deceptive or misleading commercial speech--
even of, for example, those CTAs that provide advice on a non-
personalized basis--is not protected by the First Amendment.\18\
Moreover, even where commercial speech is only potentially misleading,
the government can use disclosure requirements to make sure that the
public is not, in fact, misled.\19\
---------------------------------------------------------------------------
\18\ Indeed, the Commission may constitutionally prohibit the
dissemination of commercial speech that is ``false, deceptive, or
misleading.'' Zauderer v. Office of Disciplinary Counsel, 471 U.S.
626, 638 (1985).
\19\ See, e.g. Pearson v. Shalala, 164 F.3d 650 (D.C. Cir. 1999)
(disclosure can be required to cure possibility of misleading public
that would not just justify prohibition).
---------------------------------------------------------------------------
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \20\ requires that agencies,
in proposing rules, consider the impact of those rules on small
businesses. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on such entities in accordance with
the RFA.\21\
---------------------------------------------------------------------------
\20\ 5 U.S.C. 601 et seq.
\21\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------
With respect to CTAs, the Commission has previously stated that it
would evaluate within the context of a particular rule proposal whether
all or some affected CTAs would be considered to be small entities and,
if so, the economic impact on them of the proposal.\22\ Moreover, the
Commission stated that CPOs would be considered small entities if they
are exempt from registration by virtue of Regulation 4.13(a).\23\ The
Commission does not believe that the proposed amendments to Regulation
4.41 would have a significant impact on affected CTAs, CPOs, and their
principals. This is because the only burden that would be imposed by
the Proposal would be the obligation to comply with the antifraud
provisions of Section 4o of the Act
[[Page 49390]]
when presenting the past performance of CTAs, CPOs, and their
principal--whether by way of actual or hypothetical performance or
through the use of testimonials. Assuming arguendo, however, that
compliance with Section 4o would constitute a significant burden, the
burden is neither new nor additional, because the proposed revisions to
Regulation 4.41 are consistent with the Commission's longstanding
interpretation of Section 4o as applicable to all advertisements by
CTAs, CPOs, and their principals, including advertisements that are
viewed electronically, and that such advertisements must not be false
or misleading.
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\22\ Id. at 18620.
\23\ Id.
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Accordingly, the Chairman, on behalf of the Commission, certifies
pursuant to Section 605(b) of the RFA \24\ that the Proposal will not
have a significant economic impact on a substantial number of small
entities. However, the Commission invites the public to comment on this
finding.
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\24\ 5 U.S.C. 605(b).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The Proposal does not require a new
collection of information on the part of any entities. Accordingly, for
purposes of the PRA, the Commission certifies that the proposed rule
amendments, if promulgated in final form, would not impose any new
reporting or recordkeeping requirements.
C. Cost-Benefit Analysis
Section 15(a) of the Act \25\ requires the Commission to consider
the costs and benefits of its action before issuing a new regulation
under the Act. By its terms, Section 15(a) does not require the
Commission to quantify the costs and benefits of a new regulation or to
determine whether the benefits of the proposed regulation outweigh its
costs. Rather, Section 15(a) simply requires the Commission to
``consider the costs and benefits'' of its action.
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\25\ 7 U.S.C. 19(a).
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Section 15(a) further specifies that costs and benefits must be
evaluated in light of five broad areas of market and public concern:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
The Commission is considering the costs and benefits of this rule
in light of the specific provisions of Section 15(a) of the Act as
follows:
1. Protection of Market Participants and the Public
Because the Proposal discusses the use of testimonials and the
placement of the prescribed hypothetical disclaimer, and specifically
includes advertisement via electronic media by CPOs, CTAs, and their
principals, the Proposal should enhance the Commission's ability to
protect market participants and the public.
2. Efficiency and Competition
The Proposal should have no effect, from the standpoint of imposing
costs or creating benefits, on efficiency or competition.
3. Financial Integrity of Futures Markets and Price Discovery
The Proposal should have no effect, from the standpoint of imposing
costs or creating benefits, on the financial integrity or price
discovery function of the commodity futures and option markets.
4. Sound Risk Management Practices
The Proposal should have no effect, from the standpoint of imposing
costs or creating benefits, on the available range of sound risk
management alternatives.
5. Other Public Interest Considerations
The Proposal should have no effect, from the standpoint of imposing
costs on, and may create public interest benefits to, consumers as a
result of their having more honest information.
After considering these factors, the Commission has determined to
propose the amendments to Regulation 4.41 discussed above. The
Commission invites public comment on its application of the cost-
benefit provision. Commenters also are invited to submit any data that
they may have quantifying the costs and benefits of the Proposal with
their comment letters.
List of Subjects in 17 CFR Part 1
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Reporting and
recordkeeping requirements.
For the reasons presented above, the Commission proposes to amend
17 CFR part 1 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23 and 24, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).
2. Section 4.41 is amended by removing ``or'' at the end of
paragraph (a)(1), removing the period and adding a semi-colon and
``or'' at the end of paragraph (a)(2), adding new paragraph (a)(3), and
revising paragraphs (b)(1)(i), (b)(2) and (c)(1) to read as follows:
Sec. 4.41 Advertising by commodity pool operators, commodity trading
advisors, and the principals thereof.
(a) * * *
(3) Refers to any testimonial, unless the advertisement or sales
literature providing the testimonial prominently discloses:
(i) That the testimonial may not be representative of the
experience of other clients;
(ii) That the testimonial is no guarantee of future performance or
success; and
(iii) If, more than a nominal sum is paid, the fact that it is a
paid testimonial.
(b) * * *
(1) * * *
(i) The following statement: ``These results are based on
hypothetical or simulated performance results that have certain
inherent limitations. Unlike the results shown in an actual performance
record, these results do not represent actual trading. Also, because
these trades have not actually been executed, these results may have
under-or over-compensated for the impact, if any, of certain market
factors, such as lack of liquidity. Hypothetical or simulated trading
programs in general are also subject to the fact that they are designed
with the benefit of hindsight. No representation is being made that any
account will or is likely to achieve profits or losses similar to these
being shown''; or
* * * * *
(2) If the presentation of such simulated or hypothetical
performance is other than oral, the prescribed statement must be
prominently disclosed and in immediate proximity
[[Page 49391]]
to the simulated or hypothetical performance being presented.
(c) * * *
(1) To any publication, distribution or broadcast of any report,
letter, circular, memorandum, publication, writing, advertisement or
other literature or advice, whether by electronic media or otherwise,
including information provided via internet or e-mail, the texts of
standardized oral presentations and of radio, television, seminar or
similar mass media presentations, and
* * * * *
Issued in Washington, DC, on August 17, 2006, by the Commission.
Eileen Donovan.
Acting Secretary of the Commission.
[FR Doc. E6-13946 Filed 8-22-06; 8:45 am]
BILLING CODE 6351-01-P
