One of the more important requirements with respect to drafting the CTA and CPO Disclosure Documents is making sure that all appropriate litigation statements are included in the documents. Under CFTC Regulations 4.24 (CPOs) and 4.34 (CTAs) the manager is required to disclose the litigation history of: (i) the management company, (ii) principals of the management company and (iii) the FCM and IB. While (i) and (ii) are generally going to be easy to prepare, getting the litigation history for the FCM and IB will be dependent on the FCM and IB providing the manager or the manager’s attorney with a litigation statement. Some FCMs and IBs do not have a litigation history and a statement to that effect will need to be included in the disclosure documents.
Below we have included more information on this requirement from the NFA Disclosure Document Guide and we have included the text of the CFTC Regulations.
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From the NFA guide to disclosure documents:
Litigation
The Document must disclose any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against the following persons (a concluded action that resulted in adjudication on the merits in favor of such person need not be disclosed):
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• The pool’s FCM and IBs, if any.
With respect to an FCM or an IB, an action is material if:
• The action would be required to be disclosed in the notes to the FCM’s or IB’s financial statements prepared pursuant to generally accepted accounting principles;
• The action was brought by the Commission (unless the action was concluded, did not result in civil monetary penalties exceeding $50,000, and did not involve allegations of fraud or other willful misconduct); or
• The action was brought by any other federal or state regulatory agency, a non-United States regulatory agency or a self-regulatory organization and involved allegations of fraud or other willful misconduct.
Where a matter is material, its description must include a recital of the nature of the action, the parties involved, the allegations or findings, the status of the action and the size of any fine or settlement.
Source: pages 34 and 35 of the disclosure document guide.
CFTC Regulation 4.24(l)
Litigation.
(1) Subject to the provisions of §4.24(l)(2), any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against any of the following persons; Provided, however, that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:
(i) The commodity pool operator, the pool’s trading manager, if any, the pool’s major commodity trading advisors, and the operators of the pool’s major investee pools;
(ii) Any principal of the foregoing; and
(iii) The pool’s futures commission merchants and introducing brokers, if any.
CFTC Regulation 4.34(k)
Litigation.
(1) Subject to the provisions of §4.34(k)(2), any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against any of the following persons; Provided, however, that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:
(i) The commodity trading advisor and any principal thereof:
(ii) Any futures commission merchant with which the client will be required to maintain its commodity interest account; and
(iii) Any introducing broker through which the client will be required to introduce its account to the futures commission merchant.
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Cole-Frieman & Mallon LLP provides comprehensive hedge fund start up and regulatory support for commodity pool operators. Bart Mallon, Esq. can be reached directly at 415-868-5345.