DIVISION OF 

TRADING AND MARKETS 

COMMODITY FUTURES TRADING COMMISSION 

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

October 1, 1986 

Re: Request for relief from regulation as a comn:xhty trading advisor 

Dear Mr. 

This is in response to your letter dated June 18, 1986, as supplerrented by telephone conversations with Division staff held on July 24, 1986 

and August 1, 1986, wherein you requested our opinion that "A" and certain of 

its wholly owned subsidiaries (the "Subsidiaries") would not be subject to 

regulation as a "ccmrodi ty trading advisor" ( "Cl~") , as that te:r:m is defined 

in Section 2 (a) (1) (A) of the Corrrrodity Exchange Act (the "Act"), 7 u.s.c. §2 

(1982), if they provide conmJdity interest trading advice under the 

circumstances described below. 1/ 

Basc'<l upon the representations made in your letter, as supplemented, 

we unders·tand the facts applicable to "A" in general to be as follows: 

"A" is a mutual insurance ca:npany organized under 

State law. . . . It is licensed to do insurance business 

in every state, Puerto Rico, the Virgin Islands ru1d 

canada. . . . 'l'he core business of an insurance company 

such as "A" has for many years been the issuance of life 

insurance and rumuity contracts and the administration 

and managerrent of pension plans. In many facets of this 

business "A" performs i.nvestrrent managerrent services. 

"A" is registered as an investnent adviser with the 

Securities and Exchange Conrnission ("SEC") under the 

Investrrent Advisers Act of 1940 •• 

. !/ With respect to those subsidiaries not subject to your request, we note 

in particular that your letter excludes "B, " which is registered as a 

futures conrnission rrerchant ("FClvi") under the Act. In this regard, you 

concluded that the firm's commodity interest advisory services are 

"solely incidental" to the conduct of its business as an FCM and, thus, 

that it qualifies for the exclusion from the CTA definition in Section 

2 (a) (1) (A) of the Act. For the purpose of this letter it has not been 

necessary for us to independently confirm your conclusion. 
Page 2 

"A"' s investrrent management activities are many and 

varied [and] include management of the securities 

portfolios which comprise certain of its separate 

accounts. . . . "A" also manages securities portfolios 

as investrnent adviser to a number of independent mutual 

funds y and to certain e.roployee benefit plans the assets 

of which are held in trust. 

A..c. you are aware, in connection with its recent consideration of 

mnendmP.nts to the Act, the House of Represent .. ""'.ti ves Corrrni ttee on Agriculture 

considered a proposal by the life insurance industry to exclude certain 

persons fran the CTA definition. As the Corrmi ttee Report states: 

Representatives of the life insurance industry have 

proposed tlk~t tne definition of "commodity trading advisor" in the Act be ~nded to exclude any investment 

adviser registered with the Semrrities and Exchange 

Carmission under the Investment Advisers Act of 1940 

whose advice concen1ing corrm::rlit~,7 h~t.Prests is solely 

in connection with the manngement of inFtitutional 

securities portfolio [ s] . The life insurance indust-ry 

urged that such an e~clusion is necessary to avoid 

duplicative and inappropriate :r0)ulation, and to put 

irstitutional investroPDt advisers such as insurance 

companies on a par Hith banks and trust ccropanies, 

which are already excluded fran the definition of 

commodity trading advisor if their commodity advisory 

activities are solely incidental to the conduct of 

thei:r business as banks and trust companies. Other 

witnesses supported the insurance companies' proposal. 

ri.R. Rep. No. 624, 99th Cong., 2d Sess. 46-47 (1986). 

The Cc:rnrnittee Report then noted the COil.lllission' s objections to the 

breadth of the proposal. It further noted the Carrrnission' s questioning of 

the need for a statutory amendment to the CTA definition in light of e~isting 

autho:rity in Section 2 (a) (1) (A) of the Act, 'l_/ and the Corrmission' s prior 

2/ "B" also serves as the distributor of rrost of those mutual funds. In 

this regard, the Corrmission has stated that the activities in which such 

persons typically engage would not make such persons subject to 

regulation as a copnodity pool operator ("CPO"). See 50 Fed. Reg. 15868 

at 15871 (April 23, 1985). ---

ll Section 2(a) (1) (A) provides the Commission with authority to exclude or 

P..Xernpt frc:rn the CTA definition "such [other] persons not within the 

intent of this definition as the Ccmni.ssion may specify by rule, 

regulation, or order." 
Page 3 

responsiveness and stated preparedness to insurance companies regarding some 

of the problems that would have been addressed by the proposed amendment. 

In light of the foregoing, the Committee declined to adopt the proposed amendment. Instead, the Committee urged the Commission to issue 

regulations in this regard. As the Committee Report states: 

The Committee believPs that any insurance company 

subject to regulation by Sta.te insurance departn:'ents 

(including any wholly awned subsidiary or employee 

thereof) , provided its commodity advisory activities 

are solely incidental to the conduct of the business of 

the insurance company as such, generally is not within 

the intent of the definition of the term "corrrroC.i ty 

trading [advisor]." The Cammittee similarly believes 

that any person who is excluded fran thP definition of 

the tenn "cc:mnodity pool operator" by Corwlission Rule 

4.5 [, 17 C.F.R. §4.5 (1986) ,) should be excluded from 

the commodity trading advisor. definition, provided its 

cc:mnodity advisory activities are solely incidental to 

its operation of those trading vehi~les for which Rule 

4.5 provides relief. Relatedly, where the advisor 

n.dvises nn entity that is excluded from registrn.tion as 

a commodity pool under Rule 4.5 or is a Rule 4.5 

qualifying entity and such advisor is subjPct to 

appropriate regulation unde:r the Invesboont Advisers 

Act, th:"lt advisor should ordinarily be exempted frcm 

ccmrodity trading advisor registration if its cc:mnodity 

advice is solely incidental to its business of 

providing sec~ities advice to such entity and the 

advisor is not otherwise holding itseJf out as a 

corrm:di ty trading advisor. Therefore, the Comni ttee 

urges the Commission to exercise its n.uthority to adopt 

regulations in regard to these matters. 

The Committee understands that rulernaking addressing thesP concerns may take some time for the Commission to develop and promulgate. Individual requests 

for exclusions or exemptions, consist:ent with the al:x:>ve 

guidelines, however, should be processed by the Conmission as eh~itiously as practicable. The Commission's 

experience with individual cases should facilitate the 

fonnulation of rrore general rulPJ:Uaking. Id. at 
Page 4 

47-48. 4/ 

In light of the language in the House Cc:mnittee Report and with 

respect to the pc>.rticular activities set forth below, our opinions with 

respect to relief from regulation as a erA for "A" and the Subsidiaries are 

as follows: 

E.'{clusion from the definition of the term "ccmrodity trading advisor." 

'lA" 's Insurance Business. 

Your letter explains that life insurance companies such as "A" are in 

the business of issuing contra~ts or policies with different insurance and 

investment features which, from an investment standpoint, can be divided into 

two classes: general a.ccount contracts and separate account contract.s. \'7i th 

respect to the former class of contract, your letter explains that the 

insurer promises benefits based on a guaranteed :minimum or discretiona.Y'y 

excess ~ate of return c>~d that the promise is backed by the insurance campc>ny' s general corporate assets. As your letter notes, the Division 

4/ The Committee Report also provides:. 

Should the Commission dete1~ne that registration as a 

comrroc1ity trading advisor is required, the Comuittee 

e;xpects that the Commission will use its existing 

authority to consider other appropriate relief. In 

this regard, the Corrrni ttee is aware that the Commission 

has exercised its authority to limit, by exemption, 

those employees of otherwise regulated entities who 

must register as an associated person of a commodity 

trading advisor. The Committee further understands 

that the Cc:mnission has coordinated its activities with 

the Securities and Exchange Corrmission to eliminate 

duplicative requirenents, for example, bv deeming in 

appropriate cases compliance with SEC disclosure, 

recordkeeping, and reporting requi.-r.eroents as sufficient. 

compliance with the Cc:mnission's corresponding commodity pool operator requirP..ments. The Ccmnittee intends 

that the Commission will continue to provide this and 

such other relief as m:.1.y be appropriate to applicants 

for registration as a carunodity trading advisor or in 

any other registration category. 

On the other hand, the Cc:mni ttee dops not expect the 

Commission to grant exempted commodity trading advisors 

any relief from the antifraud provisions of section 4o 

of the Act. Id. -
Page 5 

previously has indicated that in providing commodity interest trading advice 

for the purpose of hedging liabilities to its general account contract 

holders an insurance company would not appear to come within the erA 

definition in Section 2 (a) (1) (A) of the Act. 5/ With respect to the latter 

class of contract your letter explains: -

Under separate account contracts, the values under 

the contract vary according to the investment experience of a segregated portfolio of assets established 

and held by the insurer under state law. . . . The 

separate accounts have been established to hold assets 

underlying "A"'s variable contracts, including group 

pension and ammi ty contracts, individual variable 

annuity contracts, and individual variable life insurance contracts. [Those contracts, which may be issued 

by a subsidiary insurance ca:npa.ny, consist of "single 

custOII)2r accounts" and "ccmning led accounts. " 61] All 

of the single custorrer accounts and certain of-the 

carming led accounts are exempt from registration under 

the Investrrent CorrpaEy Act of 1940 pursuant to Section 

3(c) (11) thereof. . . . The other commingled accounts, 

representing the assets underlying variable contracts 

issued to individuals and certain small benefit plans, 

are registered with u1e SEC as investrrent companies 

under the Invesbrent Conpany Act of 1940. The assets 

5/ Division of 'l'rading and Markets Interpretative Letter No. 85-16, 

[1984-1986 Transfer Binder] Ccmll. Fut. L. Rep. (CCH) ~[22, 737 (August 15, 

1985). Specifically, in that letter the Division reasoned u1at the 

i11sura.nce company would not be engaged "in the business of advising 

others" but, rau1er, would be providing corrmodi ty interest trading advice 

to itself. 

§_/ Your letter further explains u1at the variable life contracts and sorne 

variable annuity contracts are issued by certain Subsidiaries and are 

funded by separate accow1ts of those companies. 'l'llose accow1ts, which 

are registered as w1i t investrrent trusts under the Investrrent Cornpany Act 

of 1940, in turn invest in a series rrn.1tual fund which is advised by "A." 

In light of the fact that the shares of that fund are available only to 

separate account custorners of "A" and its affiliatc.-'Cl insurance companies, 

and as you have requested, the opinion provided below with respect to C'l'A. 

regulation also would be applicable to "A" in the event one or oore 

series of the mutual fund traded conm:xlity interests. See Division of 

Trading and ~.larkets Interpretative Letter No. 86-18, Corrrn. Fut. L. Rep. 

(CCH) S[23,201 (July 23, 1986). In this regard, we note that like the 

mutual fund at issue in that letter, you have represented that any such 

series of the instant fund will comply with Rule 4.5 in the event it 

trades commodlty interests. 
Page 6 

of all these accounts are invested either in portfolios 

of securities or in shares of registered investment 

cornpanies I1B.llagE...'Cl by "A" which are sold only to 

separate accounts of "A" and its subsidiaries to fund 

variable contracts. "A" may use futures and related 

options incidental to the ITBJ1agement of the securities 

portfolios held in certain of its single custorrer and 

commingled separute accounts. 21 

In light of the foregoing, you have represented that in providing 

conm:xlity interest trading advice "A"' s activities would be "solely 

incidental to the conduct of the business of the insurance company as such" 

in issuing and administering sepurate account contracts. In this regard, we 

note that such advice would be provided to persons to whom "A" (or a subsidiary insurance company) bas issued a variable insurance contract and, thus, 

with whom "A" (or a subsidiary insurance company) has established a relationship through the 1ssuance of that contract. 8/ Accordingly, based upon your 

representations, and in the spirit of the House Comnittee Report, it is our 

opinion that in providing cormodity interest trading advice as set forth 

above "A" would not care within the spirit and intent of the definition of 

the term "corrm:>dity trading advisor" in Section 2 (a) (1) (A) of the Act. '}_/ 

7 I ve caution that for the pm-pose of this letter we have not rnade any 

independent finding on, but rather are presuming as correct, your 

representations that any commodity interest trading advice to be providE...'Cl 

by 11 1-~." and the Subsidiaries to the trading vehicles discussed herein will 

be "incidental" to their providing securities advice. In this regard, 

the Division previously found the similar "incidental" requirement of 

Rule 4.5(c) (2) (i) to be absent where--

8/ 

9/ 

[T]he trading of commodity interests is essential --

not incidental -- to the conduct of the operation of 

[the trading vehicle at issue]. Sirnply stated, the 

trading strategy of [the trading vehicle] is so 

dependent on the use of connroity interests that, 

absent tl1at use, that strategy could not be pursued. 

Division of Trading and Markets Interpretative Letter 

No. 85-10 [1984-1986 'rransfer Binder] Comm. Fut. L. 

Rep. (CCH) <][22, 730 at: 31,069 (July 22, 1985). 

See n.12, infra. 

Based upon the language of the House Comni ttee Report, and as your letter 

urges, another basis upon which to find that "A" is excluded fran the CTA 

definition in connection with the foregoing activities is that it is a 

"person who is excluded from the definition of the term 'COIIIIDdi.ty pool 

operator' by Conmission Rule 4.5" -- i.e._, a State-regulated insurance 

(Footnote continued) 
Page 7 

This opll1lon is, however, subject to compliance with certain conditions set 

forth at the conclusion of this letter. 

nell 

Your letter explains that "C, " a Subsidiary, is a trust company 

organized pursuant to the State Banking Code. Its Collective Einployee 

Benefit Trust, a conron trust fund for employee benefit plans, has several 

subaccounts, each with a separate invesbrent objective. Currently, one of 

the Subsidiaries 10/ serves as tl1e investrrent adviser to one of the subaccounts and "A" serves as invesbrent adviser to the other subaccounts. "C" 

may li1 the future establish other such accounts which ma.y be advised by "A" 

or other Subsidiaries pursuant to investrrent advisory contracts with "C. 11 

Specifically, those contracts will provide that --

11A11 or the subsidiary bas the discretion to make 

purchases and sales of securities and, wbere appropriate, futures, subject to the supervision of the Board 

of Directors of 11C. II Ho.vever, under all such 

COntraCtS 1 11C11 iS reSf.JOilSi.ble for the exclUSiVe 

management and control of all assets held under the 

collective employee benefit trust. 

(Footnote continued) 

canpany, and "its connooity advisOr)' activities are solely incidental to 

the operation of those trading vehicles for which Rule 4. 5 provides 

relief" -- i.e., a separate account of such an insurance company. Such a 

finding presumes compliance witl1 Rule 4.5 ru1d the Division's lilterpretations thereunder. §ee, ~' Division of Trading and Jvlarkets Interpretative Letter No. 86-SA, [1984-1986 Trru1sfer Binder] Camm. Fut. L. 

Rep. (CCH) <.1.:22,990 (November 6, 1985), wherein we stated that the subject 

insurance campru1y would not have to file a Notice of Eligibility to claim 

the exclusion from the "pool" definition available under Rule 

4. 5 (a) (4) (i), (ii) or (iii) li1 connection with the operation of 

single-customer separate accounts each of which was funded by such Rule 

4.5(a) (4) "non-pools." 

This alternate basis for relief would not, however, be applicable to "A" 

in coru1ection with providillg commodity interest trading advice to the 

series fund, discussed at note 6, supra. This is because under Rules 

4. 5 (a) (1) ru1d (b) (1), respectively, the fund would be roth the "eligible 

person" and "qualifying entity." "A," as the fund's illvestrrent adviser, 

then, would not be the fund's CPO. See 50 Fed. Reg. 15868 at 15871. 

10/ As is noted below, each Subsidiary is (or will be) registered as an 

investment adviser under the Invesbrent Advisers Act of 1940. 
Page 8 

As your letter notes, Rules 4.5(a) (3) and (b) (3) provide an exclusion 

fran the CPO defi11ition for a trust corrpany subject to regulation as such 

under State law with respect to 1ts management of "any trust, custodial 

account or other serJarate unit of investment for which it is acting as a 

fiduciary and for which it is vE::st.ed with invest:rrBnt authority." In light of 

the fact that "C" remains "responsible for the exclusive I\1ai1a.gement and 

control" of all assets held under the trust, we agree with your assertion 

that it is, therefore, entitled to file a Notice of Eligibility pursuant to 

Rule 4.5 in the event it should decide to use futures in connection with the 

nanag~~nt of the securities portfolios held in such accounts. 

He further note that, in light of its responsibilities, "C" would 

appear to be a person who is eligible for exclusion fran the CPO definition 

under Rule 4. 5 whose "corrm:x1ity advisory activities are solely incidental to 

its operation of those trading vehicles for which Rule 4.5 provides relief. 11 

Accordingly, based upon your representations, and in the spirit of the House 

Ccmn:Lttee Report, it is our opinion that in providing comrodity interest 

tradin':J' advice as set forth above "C" would not COI'!E within the spirit and 

intent of the definition of the ternt "conm:xlity trading advisor" set forth in 

SectioH 2 (a) (1) (A) of the Act. 11/ This opinion similarly is subject to 

conq?liance with the conditions set forth below. 

Exemption fran registration as a CI'A. 

With respect to other activities in which "A" and the Subsidiaries 

engage, and for which relief from regulation as a Cl'A is being sought under 

the House Comnittee Her:ort language, your letter explains them as follo.vs: 

11/ 

"A" 's Non-Separate Account Pension Advisory Business 

In addition to the pension plan assets which "A" 

me:mages through its separate account business, "A" also 

manages certain pension plan securities portfolios 

pursuant to an investrrent advisory contract between "A" 

and each plan. These portfolios are held by a bank 

trustee or custodian. "A" may wish to use futures 

incidental to the management of such securities 

portfolios. . . • 

Section 2(a) (1) (A) also provides an exclusion from the CI'A definition for 

any bank or trust corrpany, provided that the fmnishing of camodity 

interest advisory services is solely incidental to the conduct of its 

business. He interpreted this "solely incidental" proviso in Division of 

Trading and Markets Interpretative letter No. 86-23, to be reprinted in 

Comm. Fut. L. Rep. (OCH) (June 16, 1986) and 83-2 [1982-1984 'rransfer 

Binder] Comm. Fut. L. Rep. (CCH) ~21,788 (~Erch 18, 1983). 
Page 9 

"A" 1 s Mutual Ftmd Advisory Bus.iness 

In addition to its insurance business, "A" serves 

as the .investrrent adviser to a number of independent 

mutual funds with a broad variety of invesbrent 

objectives. The funds are registered with the SEC 

under the Investment Ca~y Act of 1940. . . . [C]ertain of these funds have, or my develop, invesbrent 

policies which permit the use of futures in connection 

with the managerrent of the fund 1 s portfolio of securities. . .. 12/ 

"D" 

In 1984, as part of a reorganization of its investnent function, "A" established "D" as a wholly o.vned 

subsidiary and transferred to "D" many or ITDst or "A" 1 s 

investrrent personnel. 13/ Like "A," "D" is also 

registered with the SEC -as an invesbrent adviser 

12/ ~~ previously acknowledged the potential for relief from registration as 

a C1~ with respect to such rnutual fund advisory bus.iness in Division of 

Trading and !-:larkets Interpretative Letter lb. 86-18, supra n. 6. 

Specifically, we stated: 

'I'he Division is aware that certa.in State-regulated 

insurance companies (or a wholly-awned subsidiary 

thereof) have established and serve as the registered 

investment adviser to a mutual fund complex into which 

persons who are not policyholders of the .insurance 

company and who have no other relationship with the 

carpany my invest. \~ do not believe that .in providing commodity interest trading advice to such a 

mutual fund the activities of the insurance canpany 

\\Duld be "solely incidental" to the conduct of the 

.insurance company as such. I€pending on the circumstances, however, relief from Cl'A regulation my be 

appropriate -- ~' through relief from CTA registration based upon the language, and pursuant to the 

terms and conditions of, the House Corrrni ttee Report. 

P. 32,531, n.6. 

~/ In your July 24, 1986 telephone conversation you further explained that 

this reorganization was designed to help irrprove the accountability of 

.invesbrent advisory personnel and to help attract qualified portfolio 

IIB.nagers and additional clients. 
Page 10 

ptrrsuant to the Investment Advisers Act of 1940. 

Pursuant to service agreerrents between "A" and "D," "D" 

furnishes such services, including advice concerning 

financial future:::: and related options, as "A" may 

rRqUire in managing its separate accounts and in 

performing its obligations under its investment 

advisory contracts with it.s mutual fund and pension 

clients. "A" continues to have responsibility for all 

investrrent advisory services undertaken by it in its 

investrrent advisory agreerrents and supervises "D" 's 

provision of services .... 

In addition . . . "D" also manages the securities 

portfolios of certain pension plans pursuant to investment advisory agreements between "D" and such pension 

plans. "D" may P.xpand its advisory services to other 

entities and may find it advantageous to use futures 

incidenta.l to the management of the securities portfolios of such entities .... 

other "A" Investment Subsidiaries 

"A" has several other wholly owned subsidiaries 

which a.re registered [or are in the process of 

registering] as investment advisers with the SEC il1 

connection with their rnanagernent of securities port-· 

folios. . . . While none of these subsidiaries 

currently uses futtrres in the management of client 

securities portfolios, they may in the future do so. 

In connection with the instant request-your letter represents that 

with respect to the foregoing trading vehicles the use of conmodi ty interests 

by "A" or any Subsidiary ~dill be solely incidental to the managerrent. of those 

tradjng vehicles' securities portfolios. Your letter further represents that 

each such trading vehicle will be either a "non-pool" under Rule 

4.5(a) (4) (i), (ii) or (iii) or a qualifying entity under Rule 4.5(b) which is 

operated L'IJ compliance with the requirements of Rule 4. 5 (c) . 

Unlike the activities in which "A" engages with respect to its 

il1surance business and for which we believe "A" should be excluded fran the 

CTA definition in Section 2(a) (1) (A) of the Act, the other. activities in 

which "A" and the Subsidiaries engage with respect to their other businesses 

do not appear to depend on the issuance of an insurance contract -- ~~, a 

variable contract such as a group pension or annuity contract -- for a 

relationship betv;reen "A" or a Subsidiary and an advisee to exist. Thus, we 

do not believe these other activities are "solely incidental to the conduct 

of tl1e business of the insurance company as such" and we are unable to 

conclude that "A" and the Subsidiaries similarly should be P..xcluded fran the 

CTA definition with respect thereto. 
Page 1J 

We do, however, he lieve that certain relief from CTA regulation is 

appropriate, subject to compliance with the conditions set forth below and 

based upon the representations you have made to us. In particular, we note 

your repn~sentations that: (1) "A" and the Subsidiaries are (or will be) 

registered as an investment adviser tUlder the Investment Advisers Act of 

1940; (2) the]' v7ill provide commodity interest trading advice solely to 

trading vehicles that are Rule 4 • 5 qualifying entities or for which Rule 4 • 5 

provides an exclusion fran the "pool" definition; and (3) such advice vlill be 

solely incidental to the business of providing securities advice to any such 

e~.tity. Accordingly, based upon yotrr representations, and in the spirit of 

the House Conmittee Report, the Division will not recc:mnend that the 

Corrmission take any enforcement action against "A" or any of its wholly owned 

subsidiaries named above if an~' such person fails to register as a CTA under 

the Act in connection with providing commodity interest trading advice as set 

forth above. 14/ Further in the e.pirit of the House Cc:mnittee Report, the 

Division willnot reccmnend that the Conmission take any enforcement action 

against any associated person of "A" or a Subsidiary if it fails to register 

as such. 15/ 

Specifically, the opm1ons and "no-action" positions we have issued 

herein are subject to cc:rnpliance v7ith the follov1ing conditions: (1) "A" and 

the Subsidiaries will act in a manneJ: "sole 1 y incidental" to the conduct of 

the business of the insurance company \vith respect to the exclusion from the 

CTA definition which has been issued herein; (2) neither "A" nor any 

Subsidiary will ·otherwise "hold itself out" as a CTA with respect to those 

activities for which a "no-action" position fran CTA registration has been 

issued herein; (3) with respect to any position based upon the fact that. 

ccxrrnodi ty interest trading advice will be provided to a Rule 4. 5 "qualifying 

entity, " t1w.t such entity will carpl y with Rule 4. 5, and in particular, will 

14/ Prior to t.be issuance of the House Ccmnittee Report, the Division 

previously had taken a "no··action" position with respect to CTA 

registration based upon, among other things, the fact that a registered 

investment adviser sought to provide commodity interest trading advice to 

only ~ registered investment company that lw.d filed a Notice of 

Eligibility under Rule 4.5. Division of Trading and Markets 

Interpretative Letter No. 85-21, [1984-1986 Transfer Binder] Camm. Fut. 

L. Rep. (CCH) SI22,795 (November 8, 1985). In light of the fact that, and 

in accordance with the House Ccmnittee Report, the "no-action" position 

we have taken above would be applicable where " 1 A 1 serves as the 

investment adviser to a number of independent mutual funds" which will be 

"managed so as to comply with the requireroonts of Rule 4. 5," our prior 

position on this issue effectively has been rendered obsolete. 

15/ See Section 4k(3) of the Act, 7 u.s.c. §6k(3) (1982) and Rule 3.16, 17 

C.F .R. §3 .16 (1986) • 
Page 12 

file (where necessary) a Notice of Eligibility; and (4) "A" and the 

Subsidiaries will con~ly with whatever r~1lations the Commission may adopt 

to irnple..ment the foregoing House Ccmni ttee Report. Moreover, the relief 'ltle 

have issued herein is strictly limited to the facts as 1~epresented above. 

As for the second condition in particular -- i.e., that neither "A" 

nor any Subsidiary vJill othen1ise hold itself out ae.acrA 'IIlith respect to 

those activities for which a "no-action" position fran erA registr2.tion has 

been issued herein -- we believe that fu;.ther discussion is necessary and 

appropriate to ensure compliance 'IIlith that condition. 16/ In this regard, 

you asserted that "A" or any Subsidiary "should, however, be allowed to 

describe to existing and potential clients the limited commodities advice it 

may provide in accordance with the terms of this letter and how it believes 

that such advice may be used to benefit its clients" -- which, you noted, 

v.Duld parallel the disclosures the Ccmnission hc=ts said would be appropriate 

for the purpose of the "marketing" representation under Rule 4. 5. See 50 

Fed. Reg. 15868 at 15879. We furtncr note that in discussing this 

representation the Commission stated tbat it --

intends the tenn "marketing" to include oral, written 

and electronic prarotional materials and that an entity 

v.Duld be "m:-rrketing participations" in a manner inconsistent with the required representation if it was 

actively prcrroted as "a hybrid -- ~' a securities 

and a corrm::Xii ties --· trading vehicle or as an investment vehicle in which canmdi ty futures and options 

trading '~as particularly significant and critical to 

the growth of its assets, as opposed to being incidental to protecting those assets against a decline in 

value." Id. 

Thus, the marketing materials to be used should state, with respect to 

txansactions in ccmrodit.y interests, only that strategies consistent with 

eligibility status under Rule 4 . 5 may be used.. These strategies may, of 

course, be described in the marketing materials. Further in this regard, we 

believe that "A" or a. Subsidiary: (1) should market its ability to manage an 

actual or prospective client's securities portfolio, not a commodity interest 

16/ This is not intended to be an all inclusive discussion but, rather, an 

attempt to identify act.ivities which we believe would be consistent -- or 

inconsistent --with the "holding out" condition of the House Ccmnittee 

Report. As we gain more e>.-perience in this area, we expect to identify 

other such acti vi. ties. Moreover, we expect t.hclt the Ccmnission will 

construe the "holojng out" issue when it proposes rules based upon the 

House Ccmni ttee Report language. 
Page 13 

trading vehicle; and (2) should not represent that it has any unique 

expertise or ability in providing cormodity interest trading advice. 17/ 

You should be aware that this letter does not excuse "A" or any 

Subsidiary from compliance with any otherwise applicable r~irements contained in the Act or in the Ccrnmission' s regula.tions thereunder. For example, each remains subject to the antifraud provisions of Section 4b of the 

Act, 7 u.s.c. §6b (1982), and the reporting requirements for traders set 

forth in Parts 15, 18 and 19 of the Comnission's regulations, 17 C.F.R. Parts 

15, 18 and 19 (1986) . 2-£/ 

'I'he relief issued herein is based upon the representations that you 

have made to us, as stated above. Any different, changed or omitted facts or 

conditions might require us to reach different conclusions. In this connection, we r80J.est that you notify us imnediatel y in the event the operations 

and activities of "A" or any Subsidiary change in any way from that as 

represented to us. Moreover, we note that the Futures Trading Act of 1986, 

to which the above-quoted House Comni ttee Report language relates, has not 

yet been enacted into law. Should a different approach to the treatment of 

insurance companies as erAs ultimately be reached by Congress, we request 

that you seek further guid.ance from the Division at that time. Finally, this 

position is that of the Division of Trading and Markets and does not 

17/ The Securities and Exchange Corrrnission recently had occasion to consider 

the parameters of a "marketing" criterion in connection with the adoption 

of Rule 151, which establishes a "safe harbor" for certain forms of 

annuity contracts such that those contracts will not be deemed to be 

subject to the Federal seCQrities laws. See 51 Fed. Reg. 20254 (June 4, 

1986) . With respect to that criterion tna1:--Commission stated: 

[T]he manner in which a contract is primarily marketed 

is a significant factor which must be considered. 

In [a prior case, SEC v. United Benefit Life Ins. Co., 

387 U.S. 202, (1967);] the insurer advertised its 

product by "emphasizing the possibility of invest:rr€nt 

return 2~d the experience of United's management in 

professional investing. " The Suprere C'..ourt found this 

activity to be highly relevant in concluding that the 

contract does not fall -v1ithin the [exclusion for 

certain insurance contracts fran the provisions] of the 

Securities Act of 1933. Id. at 20260. 

18/ In addition, "A," the Subsidiaries, and the associated persons thereof 

remain subject to the antifraud provisions of Section 4o of the Act, 7 

u.s.c. §6o (1982), with respect to those activities discussed above for 

which we have concluded that a "no-action" position from erA registration 

-- and not a total e~clusion from the CTA definition -- is appropriate. 
Page 14 

necessarily represent the views of the Ccmnission or any other office or 

division of tne Commission. 

If you have any questions about the positions adopted in this letter, 

please feel free to contact me or Barbara R. Stern, the Division's Assistcmt 

Chief Counsel, at 202/254-8955. 

Very truly yours, 

Andrea M. Corcoran 

Director