DIVISION OF 

TRADING AND MARKETS 

COMMODITY FUTURES TRADING COMMISS!nN 

2033 K STREET, N.W., WASHINGTON·, D.C. 20581 

February 8, 1985 

Re: Regulation as a carm:xli ty pool operator. 

Dear 

This is in response to your letter dated June 28, 1984, Cl:-o; supplE·HBnted 

by your letters dated August 13, 1984, January 7, 1985 and Llanuaxy 30, 198'S 

and by the enclosures with those letters, in which you requested on behalf of 

the 1983 Partnership and the 1984 Partnerships (the "Partnerst.:lp~~") our 

opinion that the Partnerships will not be "pools" as defined in T:<'ule 4.10 (d) , 

17 C.F.R. §4.10(d) (1984). 

From the representations made in yr::.ur June 28, 1924 letter, as supple-:-

rrented, we understand the facts to be as follavs: :80.c'n Partnership is a 

limited partnership forrred under the lawn of the St;dt.:.' of New York to enable 

certain officers and employees of "A" and its subsidiaries (collectively the 

"Employers") to pool their resources to invest. in certain securities. 

Currently, those persons eligible to invest in the Partnerships are: (1) any 

employee of an Employer who in the preceding year rv.:td an incarre from "A" of 

$150,000 in the case of the 1983 Partne:c:;hip and $200,000 in the case of the 

1984 Partnerships; (2) any retired employee who had such incarre in the year 

preceding his retirement; (3) members of such employee's immediate family; 

and ( 4) trusts established for the benefit of such employee and/ or the 

members of his immediate family. l/ 

The General Partner of each Partnership is "B," an indirc:c"i: wholly-c:wned 

subsidiary of "A." Currently, the directors and officers of the c:sneral 

Partner are officers or employees of "C," another indirect wholly-cwned 

subsidiary of "A". '];_/ The General Partner does not, however, receive any 

l/ Among the enclosures with your correspondence were the current Pri v.-Jte 

Placement Memoranda that are being employed to offer units of 

participation in the Partnerships to eligible perRJns. 

'];_/ OUr records indicate that "C" is registered with the Corrmission as a 

futures corrmission rrerchant and that it is a non-clearing member of 

the Chicago Board of Trade. 
Page 2 

fees or compensation for the performance of its duties, 3/ one of which is 

the selection and evaluation of each Partnership's inveSEment manager. !/ 

The 1983 Partnership's primary investment objective is long-term 

capital appreciation, which it seeks to accomplish through investment in a 

variety of equity and debt securities. The 1984 Partnerships' primary 

invesbrent objective is to obtain the maximum pre-tax total rate of return 

available from investing in municipal securities the interest on which is 

exempt from Federal income taxation. Each Partnership also intends to engage 

in certain cornrrodity interest transactions, subject to certain limitations 

thereon. 2_/ As your correspondence represents: 

The Partnerships will not invest in such futures 

contracts and related options for speculation, but only 

as a hedge against changes in the market values of 

[securities] held by the Partnerships and where the 

transactions are appropriate to reduction of risk. A 

Partnership may not enter into futures contracts or 

related options (other than offsetting existing positions) if immediately thereafter the sum of the amount 

of initial margin deposits on outstanding futures 

contracts and premiums paid for related options would 

exceed 5% of the market value of its total assets. 

• • • [A] ll of the futures contracts that they 

enter into will be "bona fide hedging transactions" as 

ll Specifically, Section 6.01(b) of the Limited Partnership Agreement of 

each Partnership provides: 

!/ 

2.1 

Officers and directors of the General Partner 

shall not be entitled to receive any compensation for 

their services, other than reimburserrent for reasonable 

and necessary out-of-pocket expenses incurred during 

the course of conducting Partnership business. 

Horeover, each Partnership' s Merrorandum states that the Employers bear 

"all general overhead expenses, attorneys' fees, accounting fees and 

similar expenses. " 

We note that the 1983 Partnership's Merrorandum and the 1984 Partnerships' 

Merrorandum, at pages 30 and 33 1 respectively, state that any such 

investrrent manager will be unaffiliated with the General Partner 1 and 

any officer or director thereof. 

Specifically, the 1983 Partnership intends to engage in cornrrodity 

interest transactions based on financial instruments and stock indices 

and the 1984 Partnerships intend to engage in cornrrodity interest 

transactions based on United States Treasury obligations and on 

"Municipal Securities • • • if and when [they] become available for 

invesbrent." 
Page 3 

defined in CFI'C regulations. To ensure that their 

futures transactions meet this definition, the Partnerships will enter into them for the purposes and with 

the hedging intent specified in CFTC regulations. The 

Partnerships' futures transactions will be entered into 

for traditional hedging purposes -- that is, futures 

contracts will be sold (or related put options purchased) to protect against a decline in the price of 

securities that the Partnerships CMn. §./ 

Your correspondence also represents that in the event a Partnership engages 

in any long commodity interest transactions, approximately 75% of such 

trar1sactions will be completed. 7/ Finally, your correspondence represents 

that if any Partnership engages In commodity interest trar1sactions in which 

"C" is the futures comnission merchant, "C" "will perform such services at 

its cost." 

As you are aware, on February 2, 1984, the Corcmission issued proposed 

Rule 4. 5 , which would exempt certain otherwise regulated persons from registration as a commodity pool operator ("C:PO") and from the provisions of 

Subpart B of Part 4 of the Commission's regulations. 8/ See 49 Fed. Reg. 

4778 (February 8, 1984), 49 Fed. Reg. 6910-11 (February 2:r;-1984). Based 

upon our review of the representations made in your letter, as supplemented, 

it appears that each Partnership would meet four of the five criteria proposed 

for such exemption inasmuch as each Partnership: (1) will engage in commodity 

interest transactions solely for bona fide hedging purposes; (2) will not 

deposit as initial margin or premiums for its commodity interest transactions 

more than 5% of the market value of its total assets; (3) will not be, and 

has not been, marketed as a cammodity pool or otherwise as a vehicle for 

trading in the camrnodity interest markets; and (4) will disclose in writing 

to its prospective participants the purpose of and the limitations on the 

scope of its com:rodity interest trading. As for the fifth criteria, however, 

the Partnerships are not arrong the entities who may qualify for the proposal -- i.e. , as explained belCJN, they are not registered as investrrent companies 

under the Investrrent Company Act of 1940, 15 U.S.C. §BOa et. seq. (1982) (the 

"1940 Act"). 

§_I 

2/ 

'E._ I 

These limitations also are set forth at pages 40-41 of the 1983 

Partnership's Private Placement Memorar1dum arld at pages 47-48 of the 

1984 Partnership's Private Placement Memorandum. 

You also represent that each Memorandum will be revised to disclose 

this restriction. 

Section 4m(1) of the Cammodity Exchange Act, as amended (the "Act"), 7 

U.S.C. §6m(1) (1982) , requires each person who comes within the c:PO 

definition to register as a CPO with the Commission. The provisions 

of Subpart B of Part 4 concern the operational, disclosure, reporting 

and recordkeeping requirements of registered CPOs. See 17 C. F. R. 

§§4.20-4.23 (1984). 
Page 4 

Each Partnership is an "employees' security ccmpany" as that term is 

defined in Section 2 (a) (13) of the 1940 Act. Pursuant to Sections 6 (b) and 

6 (e) of the 1940 Act, 9/ each Partnership has requested and received from the 

Securities and Exchange Comnission (the "SEC") exemption from a substantial 

number of provisions of the 1940 Act -- ~' from the registration require2./ Sections 6 (b) and (e) provide in pertinent part: 

(b) Upon application by an employees' security 

ccmpany, the Carmission shall by order exempt such 

c::orrpany from the provisions of this title and of the 

rules and regulations hereunder, if and to the extent 

that such exemption is consistent with the protection 

of investors. 

(e) If, in connection with any rule, regulation, 

or order under this section . • . the Carmission deems 

it necessary or appropriate in the public interest or 

for the protection of investors that certain specified 

provisions of this title pertaining to registered 

investment companies shall be applicable in respect of 

such company, the provisions so specified shall apply 

to such company, and to other persons in their 

transactions and relations with such company, as though 

such company were a registered investment company. 

Also among the enclosures with your correspondence were copies of the 

Orders of Exemption and the Applications therefor. Each Application 

represents that employees eligible to participate in a Partnership 

ccmprise: 

(a) senior traders at "C" and at "D," a wholly-ONned 

subsidiary of "A," (b) senior analysts and salesmen and 

senior rrernbers of the corporate finance, municipal 

finance and real estate finance departments at "C" and 

(c) executive officers at "A," "C" and "D," department 

heads at "D" and heads of the operations deparb:rents at 

"B." Employees eligible under clause (a) or (b) of the 

preceding sentence make daily investment decisions for 

their respective Errployers in the course of performing 

their duties; employees eligible under clause (c) 

either make such investment decisions or design, 

implement and/or analyze trading or investment 

strategies and activities for their respective 

Errployers. 
Page 5 

rnent in Section 8 -- although not from certain anti-fraud and fiduciary 

provisions. 10/ As a condition of such relief, however, each Partnership was 

required by the SEC to comply with the semi-annual filing requirements of the 

SEC's annual report form, Form N-SAR, for registered investment canpanies. 

Based upon the foregoing, we believe that the instant situation merits 

such relief as proposed Rule 4. 5 would afford. Our belief is based upon, 

among other things, the following factors: (1) the Partnerships satisfy four 

of the five criteria of proposed Rule 4.5; (2) the nature of the persons who 

may become participants in the Partnerships; (3) the General Partner will 

receive no fees or corrpensation for its services; (4) "C" will execute the 

Partnerships' commodity interest transactions at its cost; and (5) the 

Partnerships remain subject to certain fiduciary, anti-fraud and reporting 

requirements under the 1940 Act. 

Accordingly, this Division will not recommend that the Commission take 

any enforcement action against "B11 for failure to register as a CPO or to 

comply with the provisions of Subpart B of Part 4 of the Commission's 

regulations with respect to the Partnerships. 11/ This position is, however, 

subject to the condition that other than being specified as an "eligible 

person" -- i.e. , an investment company re- gistered as such under the 1940 

Act, the General Partner will rreet and comply with the requirements of Rule 

4. 5 as adopted by the Commission or with any other such rule that the 

Commission may adopt to exempt certain otherwise regulated persons from 

regulation as a CPO. 12/ Therefore, this position will cease upon the 

effective date of Rule-4.5 or of such other rule. 

lQ./ 

12/ 

Specifically, you state that the Orders exempt the Partnerships fran 

"each and every provision of the 1940 Act other than Section 9, 

Sections 17 (a) and 17 (d) (subject to certain exceptions) , and Sections 

36 (a), 36 (b) and 37 through 53." The final enclosure with your 

correspondence was a summary of the provisions of these sections. We 

note that, arrong other things, these provisions: prohibit persons who 

have violated the securities laws fran serving as directors or 

officers of a registered company (Section 9); subject directors and 

officers of a registered investment company to suit by the SEC for 

breach of fiduciary duty involving personal misconduct (Section 

36(a)); make conversion or embezzelment of property of a registered 

investment company a Federal crime (Section 37); and render void any 

provision binding any person to waive compliance with the 1940 Act 

(Section 4 7) • 

Inasmuch as proposed Rule 4.5 would provide exemption for a registered 

investment company and any principal or employee thereof, the position 

we are taking herein also would apply to any principal or employee of 

the General Partner -- ~' its officers. 

For example, the rule as adopted may or may not contain the sane 

standards and indicia of bona fide hedging transactions and positions 

(Footnote Continued) 
Page 6 

In this connection, we note that previously we have issued opinions to 

certain registered investment companies that they would not be pools within 

the rreaning and intent of Rule 4.10 (d) based upon representations similar to 

those made with respect to the Partnerships. 13/ HONever, in light of the 

Comnission' s proposal in this area, we believe-that such a "no-action" 

position is the appropriate relief that should be afforded at this time. We 

further note that with respect to such investment companies and the filing of 

certain notices prop::>sed in Rule 4.5, the Comnission has stated: 

[We do] not believe that it should be necessary for the 

recipients of such interpretative letters to, in 

effect, "re-sutmit11 an application for exemption --

i.e., to file an initial notice of eligibility -- in 

the event the prop::> sal is adopted. HONever, to insure 

that these persons (and entities) would be in compliance with the requireirents of the proposed rule, the 

Commission intends to take the p::>sition that such 

persons must file supplemental notices in the event 

that any of the representations they previously had 

made to the Cc:mnission changed or that, to the extent 

that the proposal would require any additional representations, they were not in compliance with them. 

This position would ensure equal treatment of all 

persons claiming exemption under the rule. 49 Fed. 

Reg. 4778 at 4782-83. 

We believe, and intend to recom:rend, that the Corrrnission should take this 

same position with respect to the Partnerships. 

You should be aware that the position we have taken in this letter 

does not excuse the General Partner fran compliance with any otherwise 

applicable reguireirents contained in the Act or in the Cc:mnission' s regulations thereunder. For example, it remains subject to the anti-fraud provisions of Section 4o of the Act, 7 u.s.c. §6o (1982), and to the reporting 

requireirents for traders set forth in Parts 15, 18 and 19 of the Corrrnission' s 

regulations, 17 C.F.R. Parts 15, 18 and 19 (1984). 

(Footnote Continued) 

contained in the rule as proposed. Moreover, to the extent that the 

rule as adopted is less restrictive than the rule as proposed -- with 

respect to the standards and indicia of bona fide hedging transactions 

and positions or to any other aspect of the proposal -- each 

Partnership would be able to trade commodity interests subject to such 

other restrictions provided, of course, that such trading is conducted 

in accordance with the rule as adopted. 

13/ See Pension Hedge Fund Inc., Ccmn. Fut. L. Rep. (CCH) i21,908 (available 

November 3, 1983); SteinRoe Bond Fund, Inc., Comn. Fut. L. Rep. (CCH) 

i21,906 (available October 21, 1983); Prudential-Bache Option Growth 

Fund, Inc., Cornm. Fut. L. Rep. (CCH) 9[21,905 (available September 13, 

1983). See also Piedrront Incorre Fund, Inc., Ccmn. Fut. L. Rep. (CCH) 

9[21,910 (available November 21, 1983). 
Page 7 

The position we have taken herein is based upon the representations 

that have been made to us. Any different, changed or emitted facts or 

conditions might require us to reach different conclusions. In this connection, we request that you notify us imrediately in the event any 

Partnership's operations and activities change in any way from that as 

represented to us. 

Very truly yours, 

Andrea M. Corcoran 

Director