Web rule spinning begins.

Some predict by the year 2000 more than 150 million people world wide will use the Internet. Trading advisors are bound to catch on. But now the CFTC has released its rules for the Web, which could cause fewer traders to make the cyberspace leap.

The at-your-fingertips convenience of

the World Wide Web that allowed investors to gather performance data and traders to post materials on the Internet now may be considerably less convenient. The Commodity Futures Trading Commission's (CFTC) new Internet usage guidelines make the Web seem less like a mosaic of sleek superhighways and more like a spider's sticky twine.

In August the CFTC released its interpretation on the use of electronic media by commodity trading advisors (CTAs) and commodity pool operators (CPOs), which is the CFTC's first attempt to lay the groundwork for regulatory compliance on the Web.

Of course, while the CFTC's main objective is to catch unscrupulous Web site operators who prey on vulnerable investors, agency officials figured while they were on the topic, they might as well inform advisors on all the Web rules.

The interpretation focuses on three main topics: 1) the use of disclosure documents on the Internet, 2) requirements for CFTC registration and 3) filing disclosure documents electronically. All three topics have inspired emotional responses from the industry.

Disclosure requirements have brought strong disagreement. Most complaints result from the CFTC's instructions on how and when the actual delivery of a disclosure document should occur on the Web.

The CFTC requires Web users to access a disclosure document before linking to any other portion of the site -- be it performance data, biographical information, etc. Once the user accesses the disclosure document, he or she must acknowledge it has been read, for instance by clicking "okay," before proceeding. Although technically feasible, users and operators call this impractical.

If the requirement remains unchanged, comparing performance of various traders means drudging through 20 disclosure documents before getting to the meat: hardly the instant information desired by Net users.

Beyond being impractical, many traders argue the requirement does not comply with the CFTC's objective to keep consistency between what transpires in electronic media and the paper world.

"We don't send someone the print version of a delivery document and sit down with them at the investor's desk and make sure they read and sign it," says Aladin Abughazahleh, president of LAMP Technologies, in Dallas, Texas, who operates TraderScan, an online information service on trading advisors.

This concern about consistency echoes through the industry -- and is certain to be a hot topic between the CFTC and the Managed Futures Association (MFA). Paula Pierce, counsel for Commodities Corp. in Princeton, N.J., who is helping the MFA write its CFTC comment letter on the interpretation, says, "[Typically] you ship [the disclosure document] in the mail and hold on to your cover letter that says `Here is my disclosure document and solicitation materials.' You don't deposit yourself at the doorstep of the potential investor when it arrives or sit down with him and say `Here, flip through the pages and read this now.'"

Nor does the advisor have control over what the potential investor does with the disclosure document once it arrives in his or her possession, she adds. The advisor hopes the investor reads it, but in reality it could be thrown in the trash.

The MFA proposes that instead of requiring the disclosure document to be viewed immediately, rather, insert a disclaimer explaining it is available on the Web site and should be read and signed before allowing an advisor to manage an account, Pierce says.

Tom Basso, president of Trendstat Capital Management Inc., a CTA in Scottsdale, Ariz., says "the more workable answer in technology terms is to make available the disclosure document, the performance data and anything else that is legally appropriate on the Web site. However, we should let the user decide what he or she wants to look at first, second and third.

"We would be forcing a great productivity improvement and an efficient transmission of data into the stone ages," he says, adding the current requirement is "absurd."

But while the CFTC's execution plan for electronic delivery is heavily refuted, support is strong for making disclosure documents available on Web sites.

One Atlanta CTA, John Fortune, of Fortune Management Group, already includes his disclosure document on his Web site. "It's logical that any time you try to solicit business, you have to have your disclosure document out there," he says.

Peter Schmidt, a CTA in Hillsboro, Ore., agrees. "The disclosure document is a necessary part of the Web site," he says. "And if you can't put your disclosure document up, you might as well not put anything up."

Of course, it is well known by both Web site operators and the CFTC that with a few quick strokes of the keyboard, users can reach the end of the disclosure document and acknowledge they have looked at it without reading a single word. Andrea Corcoran, director of the CFTC's Division of Trading and Markets says the CFTC's intent behind the disclosure requirement was "to make an attempt at achieving in this medium what the regulator wants people to do, which is read the warning on the label before they read how great the trading program is."

But another complaint is that the CFTC is too specific on how advisors can receive electronic signatures for disclosure documents. The interpretation states the CFTC only will permit the use of a personal identification number (PIN) to represent a signature for signing a disclosure document. However, industry players note that other methods exist, such as using encryption or exchanging electronic "keys." Because the general concept of confirming and signing a document through electronic means is still in its infancy, advisors balk at the CFTC mandating a single method, which could be outdated in a matter of months in the rapidly developing high-tech world.

Blanket registration Meanwhile, sparks also are flying regarding the interpretation requirements for CTA registration, which many believe expands the definition of a CTA. In general terms, the interpretation says that if someone is advising others for compensation or profit, he must be a registered CTA. This broad interpretation seemingly applies to those who not only trade client money, but to newsletters, system vendors and even some publications.

Arthur F. Bell Jr., managing partner of Arthur F. Bell Jr. & Assoc., is one who believes the interpretation tries to expand the registration definition beyond what is appropriate. To do this properly, changes should be made to the rule-making processes, not by simply rewriting the definition, he says.

To demonstrate the extreme, Bell says that if applied to print media as well as electronic media, the interpretation could arguably include libraries.

He says because a library carries publications, just like the one you're reading, which covers the futures industry, it may have to register. While Bell agrees this probably would not be applied to the conventional print media, if the library went online and made this information available to the public electronically, it may be a different case.

"The CFTC could say that's giving advice -- identifying traders, providing information in ranking order, thereby the host to the library would have to register," he says. "That is stretching it too far."

General media -- at this point -- seems exempt. For example, the CFTC will not require print media such as the Wall Street Journal, which covers a broad range of topics, to register as a CTA even if it runs a story on plummeting grain futures.

The CFTC says that in most instances when a publication falls under the registration realm, it has gone further than simply writing about the futures industry. For example, a newsletter might have to register if it explicitly states when to buy or sell a commodity, or provides a hotline that gives trading advice.

Overall, many agree that even though the CFTC lists specific examples of when registration should occur (see "To be or not to be a CTA"), it leaves plenty of room for debate. But the question is: What is it about registering that makes people upset?

TO BE OR NOT TO BE A CTA

Action                           Required to register?

General Internet directory                No

Recommending or                           Yes
evaluating CTAs

Receiving revenue from                    Yes
advertisers on its Web site

Recommending or evaluating                Yes
CTAs and providing
disclaimers

Providing leads                           Yes

Electronic mail to a                      No
specific address

Placing performance data on               Yes
a generally accessible
Internet site

Providing telephone                       No
directories for CTAs

Providing biographical                    Yes
descriptive information
on selected CTAs

Action                        Explanation

General Internet directory    Qualities for the exclusion from the
                              definition of a CTA for a producer or
                              publisher of information of general
                              and regular dissemination since its
                              home page 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.

Recommending or               The CTA is providing advice about the
evaluating CTAs               value or advisability of trading in
                              commodity interests. Because the
                              company receives a fee from each of
                              the featured CTAs, the compensation
                              element of the CTA definition is
                              satisfied.

Receiving revenue from        The profit or compensation element of
advertisers on its Web site   the CTA definition includes fees
                              received from advertisers and need
                              not flow directly from the person
                              or persons advised or from the
                              the featured CTAs.

Recommending or evaluating    The company has provided trading
CTAs and providing            advice and cannot by disclaimer alter
disclaimers                   the reasonably anticipatable effects
                              of the information provided or the
                              consequent registration requirements
                              under the Commodity Exchange Act.

Providing leads               The company 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, the company would be
                              operating as a "finder" because its
                              purpose would be to seek clients on
                              behalf of Commission registrants. The
                              company must therefore register as an
                              AP of the CTAs to whom it furnishes
                              customer names, or as a CTA.

Electronic mail to a         If electronic mail communication is
specific address             personal and direct, and is limited
                             to electronic correspondence between
                             friends that have agreed to allow the
                             person to provide commodity trading
                             advice and other information relating
                             to commodity accounts, the person
                             providing the advice may be exempt
                             from registering.

Placing performance          If the person provides commodity
data on a generally          trading advice by a electronic mail
accessible Internet site     communication and also operates a Web
                             site where he poster performance data
                             for trading accounts, he would then be
                             holding himself out as a CTA and be
                             required to register.

Providing telephone          By providing a complete directory of
directories for CTAs         all registered CTAs, and representing
                             it as such, the company is making it
                             clear that it is not promoting nor
                             recommending any particular CTA but
                             rather is providing a directory that
                             registered persons can use to contact
                             CTAs of their choice. Further, as the
                             company provides an equivalent level
                             of data for each registered CTA, it
                             does not implicitly recommend or favor
                             one CTA over another.

Providing biographical       A company operates a Web site that
descriptive information      contains a directory listing of each
on selected CTAs             registered CTA, containing the name,
                             address and telephone number for each
                             CTA. Additionally, for certain CTAs,
                             the company provides information
                             concerning the types of trading
                             programs they utilize and certain
                             performance data. The company does not
                             change visitors to its Web site for
                             access to this information but is
                             compensated by CTAs for displaying
                             advertisements at the top of certain
                             Web pages. Under these circumstances,
                             the company must register as a CTA.

The chart only summarizes a portion of the Interpretation Regarding the Use of Electronic Media. The full text can be found at http://www.cftc.gov/tm/aug7ver.htm.

"You have to be doing something more than providing newsletter-type, even commodities-related newsletter-type advice as a business, to evoke all the performance disclosure requirements, and it is these disclosure requirements that people find burdensome," Corcoran says.

Also burdensome to the registrant who does not manage money: paying annual fees, taking the Series III exam and completing the ethics course.

Bell offers a compromise to this dilemma -- a new "information registration" class. He suggests some registrants be exempt from certain requirements, such as Series III exams. He says it could apply to those who simply post data on the Internet but do not earn a profit from giving advice.

However, a handful of industry members blatantly oppose any type of registration. Frank Taucher, editor of the Super Trader Almanac, believes his first amendment right will be violated if he has to register.

"Small publications, regardless of their value or their ideas and context, might be excluded from the marketplace by [the CFTC] oppressing them with their registration assaults," he says.

Other newsletter writers have promised to bring a class action lawsuit against the CFTC, not only for the Web rules but the registration rules in general. And many industry groups, including the MFA and Futures Industry Association (FIA), see little relationship to the registration issue and the other topics covered in the interpretation. Because of this, both groups have expressed that the registration issue should have been treated separately.

FCM black hole Most obvious in the 48-page interpretation is that it fails to address the FCM community. To remedy this, the FIA plans to comment to the CFTC on its Internet concerns, hoping those issues will be addressed simultaneously to CTAs and CPOs. Meanwhile, the CFTC says it will discuss electronic media concerns with the FCM and IB communities before releasing another interpretation.

Nevertheless, the consensus is that the CFTC is not out to raise the numbers of registrants for the sake of more paperwork. With registration, the Web site operator becomes subject to the antifraud provisions of the Commodity Exchange Act, giving the CFTC grounds to nab anyone disobeying the rules.

And the CFTC already is using statutes on the books to halt abusers. In early September, before the date for activation of the interpretation, the CFTC stopped Steven Jay Marks of Ocala, Fla., and Spencer Brown of Fort Worth, Texas, from providing commodity trading advice or managing funds on the Web until they registered with the CFTC. Marks posted trading advice on the Internet between May and June 1996, and offered trial memberships and paid subscriptions to an electronic newsletter containing market updates and trading recommendations. Meanwhile, Brown managed futures trading accounts through an Internet home page.

With regulators beginning to govern the Web, the question arises whether rules and regulations could stifle the number of industry members setting up their own sites or contributing to others.

"I wouldn't want to spend a lot of money to create a cumbersome Web site that forces people to read disclosure documents and a whole bunch of legalese just to show them a performance graph," Basso says. "They are never going to get there."

J. Adam Hewison, president of Investment News Online (INO), says potential investors are interested in performance, and hindering their reach to this information does not make sense.

"If you [put] up a huge disclosure document before you can get to where you want, it defeats the whole purpose," he says. "The Internet is supposed to be a way that CTAs can market to the world and increase business on exchanges."

Some have gone as far as ceasing their participation on the Web. Richard Jaycobs, president of the FIA information technology division and director of business development for CTA Computer Trading Corp., removed its data from two Web sites.

"From a legal standpoint, this is what we had to do to limit our liability. I did it the day I read the interpretation," he says.

Despite this "fear" factor, Jaycobs praises the CFTC for its progress. "It's terrific that they say the Internet is acceptable," he says. "This is an incredibly positive impact for the industry, even if [the CFTC] doesn't get it right the first time."

The comment period was set to end Oct. 15, the same date the interpretation becomes effective. So by the time you read this, it could be too late to do anything. While many sources suggest changes will be made, the interpretation may have to stand as is until the issues raised can be sorted out.

Once the basics for Internet regulation are covered, the next undertaking for the CFTC will be global regulatory cooperation. As John Tull, former acting CFTC chairman, explained in a speech at the international futures and options meeting in Burgenstock, Switzerland, in September, the Internet raises a challenge for preventing fraud because of its vast number of users and their ability to visit any site worldwide without being detected. One question being grappled with is if the Web permits a non-U.S. "passive" site to be accessed by "active" customers from anywhere, such as the United States, who will have regulatory jurisdiction over misconduct by the operator of the passive sight? And while today the answer would probably be the home-domiciled regulators of the "passive" site operator, groups such as the International Organization of Securities Commissions have begun to study how international rules and regulations will be interpreted to sort out these questions.

Because CTAs often rely on the Internet for international business communication, solving this enigma is a pressing concern.

"If [U.S. regulators] control the Internet, they control the American participants of the Internet," says Gunter Kaiserauer, a CTA at Toni Financial in North Hollywood, Calif. "They cannot stop a guy in England from putting out whatever he wants to. Then how are we going to compete with them? [Non-U.S. CTAs] can say one thing about their business and [U.S. CTAs] have to say other things."

INTERNET FRENZY

                    Agriculture,
                    forestry &
Division              fishing      Mining    Construction

# of companies
in each division
for study                2           2            6

# of companies
with Web sites
in Aug. 1995             1           0            0

# of companies
with Web sites
in Dec 1995              1           0            1

% of increase
in four months           0           0            0

                                    Transportation,
                                     communication,
                                     electric, gas &    Wholesale
Division            Manufacturing   sanitary services     trade

# of companies
in each division
for study                207                78              27

# of companies
with Web sites
in Aug. 1995              66                24               3

# of companies
with Web sites
in Dec 1995               85                36               4

% of increase
in four months            78%               66%             75%

                               Finance,
                    Retail    insurance,
Division             trade   real estate   Services   administration

# of companies
in each division
for study             60          97          21             0

# of companies
with Web sites
in Aug. 1995           7          22           4             0

# of companies
with Web sites
in Dec 1995           17          35           8             0

% of increase
in four months        41%         63%         50%            0

Division            TOTAL

# of companies
in each division
for study            500

# of companies
with Web sites
in Aug. 1995         127

# of companies
with Web sites
in Dec 1995          187

% of increase
in four months        68%

The American Society of Information Science conducted two studies four months apart, which showed high growth in the use of the Web by the financial services industry.

Source: American Society of Information Science

RELATED ARTICLE: CTA DEFINED

The Commodity Exchange 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 leveraged 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)." 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 deemed CTAs under the Act.

RELATED ARTICLE: DISCLOSURE DOC GONE WIRED

Even though trading stocks and banking through the Internet is a daily occurrence, for a long time filing disclosure documents via the Web was only a nebulous idea. But now a CFTC pilot program, which started Oct. 15, has given it life.

Leaving behind paper and numerous headaches, advisors can send their disclosure documents as an attachment to an e-mail addressed to the CFTC. Receipt of the document also is acknowledged through e-mail. And to speed processing time, the CFTC sends its suggestions for changes electronically and receives the updated version from advisors online as well.

Support for the new filing is rampant. Craig Harris, a CTA for Harris Capital Management, in Boca Raton, Fla., applauds the idea.

"When I was doing my original disclosure document, I probably had 10 phone calls back and forth with the CFTC and probably 10 or 15 faxes and several delays in the interim," he says. "As long as the CFTC is responsive, it should be a lot more efficient."

Smaller CTAs may reap the most benefits. Because they often write their own documents, as opposed to having attorneys prepare them, instructions from the CFTC are plentiful. With electronic filing, the changes can be returned quickly.

The program, which may become permanent, is open to any CTAs or CPOs who are members of the NFA. The CFTC's move follows the Securities Exchange Commission, which last October approved electronic filing for annual reports, prospectuses, proxy materials and other documents. The CFTC states in the interpretation that it will consider other electronic filings in the future, such as annual reports to commodity pool participants and notices of claims of exemption. Instructions on how to file electronically are included in the CFTC interpretation, which can be accessed on the Internet at www.cftc.gov/tm/aug7ver.htm.