DIVISION OF 

TRADING AND MARKETS 

COMMODITY FUTURES TRADING COMMISSION 

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

July 1, 1986 

F~: Regulatory Requirements Applicable to Certain Persons 

Involved with Connodity Pools 

Dear .r.Ir.: 

This is in response to your letter dated June 10, 1986, as supplemented by a telephone conversation held with Division staff on June 18, 1986, 

wherein you requested our advice on the regulatory requirements applicable to 

certain persons involved with commodity pools. 

Based upon the representations rra.de in your letter, as supplemented, 

we understand the facts to be as follcws: "A" is registered under the 

Conm:x1ity Exchange Act (the "Act") as a commodity trading advisor ("CTA"). 

"B" is registered under the Act as an introducing broker ("IB") and a 

cornTKxih.y pool operator ("CPO") • 'l:he same two persons own all of the stock 

of each corporation. 

A securities rra.rketer for a group of financial planners (the "Representative") has expressed interest in bringing to "A" one or :rrore "limited 

partnership pools" which independently would qualify the CPO thereof for 

exemption from registration under Rule 4 •. 13 (a) (2), 17 C.F.R. §4.13 (a) (2) 

(1985). J:/ In this regard, the Representative would "find and qualify persons 

ll Rule 4.13(a) (2) provides that a person is exempt from registration as a 

CPO if: 

(i) The total gross capital contributions it receives 

for units of participation in all of the pools that it 

operates or that it intends to operate do not in the 

aggregate exceed $200,000; and 

(ii.) None of the pools operated by it has rrore than J.S 

participants at any time. For purposes of computing_ 

the number of participants [certain persons are 

a'{cluded] . 
Page 2 

or entities interested in serving as 'General Pa1.-tner/CPO'" of one of these 

"fOOls. The Representative also would "introduce" the "CPO" to "B", which 

would serve as the pool's IB and would receive brokerage commissions generated 

therefrom and to "A", which would serve as the pool's erA and would receive 

rnanagenent and incentive fees. The "CPO" would be corrpensated by receiving a 

percentage of the brokerage comnissions and the Representative would receive 

a percentage of those comnissions. 

The term "corrm:xlity pool operator" is defined in Section 2 (a) (1) (A) of 

the Act, 7 u.s.c. §2 (1982), to nean: 

m1y person engaged in a business which is of the nature 

of an investment trust, syndicate or similar form of 

enterprise, and who, in connection therewith, solicits, 

accepts, or receives from others, funds .•. for the 

purpose of trading in [ canrrodi ty interests] . (Ihphasis 

add€.-'Cl. ) 

Section 4m(l) of the Act, 7 u.s.c. §6m(1), requires each person who cones 

within the CPO definition to register as a CPO under the Act. Rules 4.21, 

4.22 m1d 4.23, 17 C.F.R. §§4.21, 4.22 and 4.23 (1985), respectively prescribe 

certain disclosure, reporting m1d recordkeeping requirements for registered 

CPOs. If a person is exempt from registration as a CPO, it is not subject to 

compliance with those rules. In this regard, in adopting Rule 4.13 -- which 

provides for exemption from CPO registration -- the Commission stated: 

The CPO exemptions are being granted because the 

costs of compliance with the Part 4 rules outweigh the 

benefits to be gained from regulating family, club and 

small pools. 44 Fed. Reg. 1918 at 1919 (January 8, 

1979). 2/ 

The instant case is not, however, one where individual CPOs of the 

type contemplated by Rule 4.13 independently and on their own will seek out 

the Representative to assist in soliciting participants to form a pool of the 

type specified in the rule. Rather, the Representative is seeking those 

"CPOs" out to, in turn, solicit for hlin. In this regard, in your telephone 

conversation with Division staff you were unable to offer any support that 

the terms and conditions of each pool offering would be individually developed 

and structured by a "CPO" -- and not a rrere form developed by "A" and the 

Representative, about which staff e:h.pressed concern. Thus, we disagree with 

your assertion that the Representative will be acting on behalf of each 

"CPO." It is the Representative himself who will be "engaged in a 

2/ In connection with proposing arnendrrents to Rule 4.13 the Coniili.ssion 

reaffirmed the purpose of the exemptions available under the rule. See 

45 Fed. Reg. 51600 at 51601 (August 4, 1980). 
Page 3 

business" of the type contemplated by the CPO definition with tbe individual 

"CPOs" acting as his associated persons ( "APs") . 3 I 'Ib the extent that an 

individual "CPO" was not a natural f:,erson, however, it would be required to 

register as an IB. j_/ 

We previously had occasion to render advice with respect to a similar 

sche.rre in Division of Trading and Markets Interpretative letter No. 84-9, 

Corrm. l:!ut. L. Rep. (CCH) ~22,092 (March 1, 1984). In that case, a Licensor, 

who was registered as a CTA, had licensed its computerized trading program to 

various licensees, each of wham similarly was registered as a erA. The terms 

of the licensing agreerrent provided that a licensee could accept all of the 

signals generated by the trading program or exercise its own discretion in 

deciding which signals to accept. The agreerrent did not, however, require a 

licensee to exercise its awn discretion. In fact, in reviewli1g the Disclosure DocUIT'I2nts filed by the Cl'A licensees the Division found that, with 

limited exception, those Documents did not disclose any past performance in 

the management or direction of commodity trading accounts, prior commodity 

related experience or corrm:x:li ty trading for personal accounts. Ivbreover, the 

Licensor also operated a subsidiary, the Service Bureau, which for a fee 

perforrred certain tasks for sorre, but not all of the licensees -- ~' 

receiving the c<:.>nputer signals generated by the program from the Licensor and 

placing the resulting orders on behalf of the licensee with the futures 

corrr:ti.ssion rrerchant. 

On these facts, the Division took the view that the Licensor would be 

a Co-CTA with its licensees for the foll<JV.ling reasons: (1) the Licensor 

would remain continuously involved in the operation of the program; and (2) 

the licensees would depend heavily if not exclusively on the signals generated by the program for the selection of trades. With respect to this second 

factor, the Division noted in particular that the expectation that the 

licensees would rely on the Licensor to direct trading rather than exercise 

their awn discretion would be consistent with the licensees' lack of experience in commodity interest trading. The Division further noted, h<JV.lever, 

that: 

[T] o the extent the licensees contract with the Licensor to receive the trading signals generated by the 

Section 4k(4) of the Act, 7 u.s.c. §6k(4) (1982), generally requires each 

person who canes within the definition of an AP of a CPO to register as 

such under the Act. Thus, although for different reasons, we agree with 

your assertion that the Representative would not be an AP of a CPO 

because he "will not solicit individual investor participat±on or aid in 

the raising of funds from the public. " 

Section 4d of the Act, 7 u.s.c. §6(d) (1982), generally requires each 

person who comes within the IB definition to register as such. 
Page 4 

Licensor and to place orders with an FCN, thereby 

removing themselves from both the order selection and 

order placement processes, the licensees appear to be 

doing nothing more than soliciting customers on behalf 

of the Licensor. In such cases, the Division believes 

that a licensee may be rrore properly registered not as 

a erA but as an [AP] of the Licensor, if an individual, 

or as an [IB], if organized as a corporation, a partnership or other form of association. Id. at 

28,831-32. 

TI1e conclusions reached in that case similarly apply to the instant 

one in light of the fact, as noted above, that there is no evidence that the 

"CPOs" will have any conm:xlities-related experience or that they will exercise any discretion in the formation or operation of their pools. Rather, 

the "CPOs" will n"erely be acting upon the order and direction of the 

Representative. Tilus, and as noted above, we believe that the Representative 

would be acting as a CPO and that those persons that you have denominated as 

"CPOs 11 would be acting as an AP of a CPO (if a natural person) or as an IB 

(if not a natural person) . 

Tile opinions expressed in this letter are based upon the representations that have been made to us and are strictly limited to those representations. Any different, changed or ani tted facts or conditions might require 

us to reach a different conclusion. In this connection, we request that you 

notify us irrmEdiately in the event the Representative's proposed operations 

change in any way fran that as represented to us. 

Very truly yours, 

Andrea 1-'1. Corcoran 

Director 

cc: Daniel A. Driscoll, National Futures Association