Dear 

COMMODITY FUTURES TRADING COMMISSION 

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

November 20, 1985 

Re: CPO No-Action Postion 

------

This is in response to your letter dated October 11, 1985, in which 

you request on behalf of the Fund that the Division not recommend that the 

Commission take any enforcement action against the Fund if it fails to 

register as a comm::xiity pool operator ("CPO") in connection with the trading 

of commodity interests by the different investment funds it operates. 

From the representations made in your letter, we understand the facts 

concerning the Fund in general to be as follows: 

The Fund is a non-profit membership corporation. 

Its members are exclusively non-profit educational 

organizations. The powers of the Fund are vested in a 

Board of Trustees selected by member institutions that, 

in turn, retains a management staff. 

The Fund is organized under legislation enacted by 

the State of New York. The legislative charter 

authorizes the creation of a company to provide a means 

for inter-institutional cooperation among educational 

organizations in management of financial resources. 

The purpose of the legislation, and the Fund, is to 

help educational organizations defray, at least in 

part, rapidly increasing educational costs by improved 

endowment management. 

To encourage creation of an organization under the 

legislative charter, the Ford Foundation made a 

substantial grant in the early 1970s to pay the 

administrative, operating and management costs of the 

Fund during its start up phase. This grant paid all of 

the organizational expenses and also served to defray a 

portion of the operating expenses of the Fund for the 

first three years. Thereafter the Fund has operated on 

a self-sustaining but non-profit basis, with membe:rs 
Page 2 

paying a pro rata share of expenses in proportion to 

their investments. 

Although the Fund has grown substantially, it is 

naw, as it has always been, a non-profit membership 

corporation owned, operated and controlled exclusively 

by participating member colleges. The Fund naw has six 

different investment funds each of which is managed by 

several independent investment advisory firms or banks, 

as follaws: 

The Fund for Short Term Investments with :rrore than 

500 members and assets of approximately $2.0 

billion. 

The Fund for Equity Investments with approximately 

200 members and assets of approximately $500 

million. 

The Fund for Equity Income Investments with about 

50 members and assets of about $175 million. 

The Fund for Bond Investment with over 100 members 

and assets of over $200 million. 

The Fund for International Investments with 

approximately 40 members and assets of about $200 

million. 

The Fund for Global Bond Investments that was 

established on July 1, 1985 and is just getting 

started. 

Prior to the filing of your "no-action" request, the President of the 

Fund sent us the organization's Rules. In particular, Rule 1. 3 provides: 

Only Funds which are exclusively the property of a 

n~r institution for its educational, charitable or 

scientific purposes may be deposited ..•. 

In this regard, we note that prior to joining the Fund an educational 

institution receives a copy of the organization's Rules which explain, among 

other things, the follawing: expenses, distributions, withdrawals and 

investment policies. In addition, the Rules require each member to receive 

audited annual reports with respect to each investment fund and quarterly 

reports which generally include lists of the asse·ts of the funds. 

The F\md naw also is interested in having these investment funds trade 

corrrrodity interests. In this regard, your letter explains that, as in the 

case of all Fund activities, carrrodi ty interest trading strategies will be 
Page 3 

designed and implemented only for members wishing to use them. Your letter 

also provides examples of possible trading strategies, including the 

following: 

[An] asset allocation strategy, in which the Fund 

[would] use futures contracts to reduce or increase 

exposure of portfolios of securities to m:Jvements in 

the prices of stocks or bonds. In the asset allocation 

program, the rna jori ty of the assets would be invested 

in long positions in stocks or bonds. The underlying 

positions would remain relatively constant with futures 

contracts being used to vary the market exposure within 

an overall limit of 100% • 

. . • [I]n connection with the establishment of a 

new South Africa Free Fund [,] . . . Value Line Futures 

would be sold and S&P futures bought simultaneously to 

hedge out the extra market risk of holding a portfolio 

of stocks in companies with relatively smaller 

capitalization . 

. . . [S]elling Treasury bill futures to hedge a 

long position in m:Jney market securities, or selling 

Treasury bond futures to hedge a bond portfolio against 

interest rate rises. 

In support of your request, you note that such comrodity interest 

trading would be subject to certain restrictions. Specifically, your letter 

represents: 

The Fund proposes only to use futures contracts in 

ways incidental to the management of the long positions 

of ccmnon stocks, bonds and m:Jney market securities in 

the investment funds now managed by it and in other 

investment funds it may manage in the future. The Fund 

will not use futures contracts for leverage but only to 

adjust risks associated with ~~isting investments in an 

amount that will never be greater than the value of 

those investments. The Fund will not conmit nnre than 

five percent of any fund under its supervision 

(including any pool in which funds may be invested for 

asset allocation) to initial margin on futures 

contracts and premiums on ccmnodity option contracts. 

You also assert that as a membership organization controlled by, and 

solely responsive to requests for assistance in endowment management from, 

its trembers, the Fund is not a person intended to be regulated as a CPO under 

the Canmodity Exchange Act, as amended (the "Act"). In support of this 

assertion, you provide the following information concerning the Federal tax 

status of the Fund: 
Page 4 

On November 3, 1970, the Internal Revenue Service 

issued a ruling that the Fund was exempt from Federal 

inC<JITe tax under Section 501 (c) (3) of the Internal 

Revenue Code (the "Code"). One basis for the ruling 

was that administrative costs of the Fund were provided 

by the grant fran the Ford Foundation. To assure 

continued eligibility as a Section 501(c) (3) 

organization after grant funds were exhausted, members 

of the Fund sought and obtained legislation enacted on 

Jm1e 8, 1974 (Public Law 93-310), adding to the Code a 

new Section 501(f). 

Section 501(f) provides that an organization 

organized and operated solely for collective investment 

of the funds contributed thereto by each of its members 

and to collect income therefrom and turn over the 

entire amount, less ehrpenses, to such members will be 

"treated as an organization organized and operated 

exclusively for charitable purposes." The provision 

limits the membership of such a tax exempt organization 

to non-profit, educational institutions and to tax 

exempt organizations administering investment funds for 

publicly supported colleges and universities. The 

Senate Report on the legislation, S. Rep. 93-888, makes 

clear that Congress intended that 501 (f) was to cover 

organizations formed and controlled by investing 

educational institutions themselves but that Section 

501(f) is not available to any organization formed to 

furnish investment services by private interests --

such as a private brokerage company or an investment 

advisory company -- even though such organizations 

might make their services available exclusively to 

educational organizations. ]:_/ 

Preliminarily, we note that you also have sought a similar "no-action" 

position if the Fund fails to register as a cornrodity trading advisor ("erA") 

in connection with the trading of comm:::xlity interes·ts by these funds. The 

term "comrodity trading advisor" is defined in Section 2 (a) (1) (A) of the Act, 

7 u.s.c. §2 (1982), to mean --

[A]ny person who, for compensation or profit, engages 

in the business of advising others . . • as to the 

1/ Moreover, by letter dated August 12, 1985, the Fund's president indicated 

that although nore than ten years has passed since the enactment of 

Section 501 (f) , he is illlaWare of any other group of colleges which has 

formed a non-profit investment organization similar to that of the Fund. 
Page 5 

value of or the advisability of trading in [ccmnodity 

interests]. 

Consistent with the Fund' s prior operating practices, however, it appears 

that "independent investment advisory firms" will be providing such advice to 

the funds and that they, but not the Fund, would be acting as a erA. In this 

regard, we note that at page 8 of your letter you represent that the Fund --

will, in all cases, obtain confirmation that outside 

advisors who engage in futures trading for its various 

funds are registered as commodity trading advisors. 

Accordingly, we believe it UIIDecessary to pass upon this additional 

"no-action" request. 

The term "cc:mncx.lity pool operator" is defined in Section 2 (a) (1) (A) of 

the Act, 7 u.s.c. §2 (1982) to mean --

any 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, securities, or 

property • . . for the purpose of trading in any 

commodity for future delivery on or subject to the 

rules of any contract market, but does not include such 

person not within the intent of this definition as the 

Ccmmission may specify. . . . 

Section 4m(1) of the Act, 7 U.S.C. §6rn(1) (1982), generally requires each 

person who comes within the statutory definition to register with the 

Commission as a CPO. 2/ 

Pursuant to its authority under the Act, the Corrrnission has adopted 

rules which provide relief from regulation as a CPO for certain persons. In 

particular, Rule 4. 5 makes an exclusion from the definition of the term 

"commodity pool operator" available to the persons specified in the rule. 50 

Fed. Reg. 15868 (April 23, 1985). The Fund is not, however, arrong the 

persons so specified -- ~, it is not a registered investment company. ll 

~/ Part 4 of the Commission's regulations, 17 C.F.R. Part 4 (1985), 

prescribes operational, disclosure, reporting and recordkeeping 

requirements for registered CPOs. See Rules 4. 20-4. 23. 

3/ In fact, and as you explain at page 6 of your letter, the Fund --

has available to it the exemption from [regisb~ation as 

(Footnote continued) 
Page 6 

See Rule 4. 5 (a) . Moreover, it appears that the investrrent funds the Fund 

operates would rreet sane, but not all, of the operating criteria specified in 

the rule. See Rule 4.5(c) (2). il 

(Footnote continued) 

an investrrent company] provided by Section 3 (c) (10) of 

the Investrrent Company Act of 1940 for any company 

organized or operated exclusively for . . • educational 

. . . purposes, no part of the net earnings of which 

enures to the benefit of any private shareholder or 

individual. 

il For eY.ample, based upon your representations concerning restrictions on 

commodity interest trading (quoted above), it appears that those funds 

would meet the require.rrent in Rule 4. 5 (c) (2) (ii) that they --

[w]ill not enter into commodity futures and commodity 

options contracts for which the aggregate initial 

margin and premiums exceed 5 percent of the entity 1 s 

assets. 

Based upon your representations and explanations concerning trading 

strategies, however, with respect to the first two strategies -- i.e. , 

asset allocation and arbitrage between two different stock index futures 

contracts -- it does not appear that in eveDJ case those funds would 

meet the require.ment in Rule 4. 5 (c) (2) (i) that they --

[w]ill use commodity futures or commodity options 

contracts solely for bona fide hedging purposes within 

the rreaning and intent of §1. 3 (z) (1) ~ [or] in the 

alternative, with respect to [certain] long positions 

. . • which • • • would not come within the rreaning 

and intent of §1.3(z) (1), as a substitute for 

compliance with this paragraph (c) (2) (i) a qualifying 

entity may represent that the underlying cornrodit.y 

value of such contract at all times will not exceed 

the sum of: [certain specified item..s]. [Emphasis 

added.] 

In this regard, we wish to emphasize that we are passing solely upon 

whether· these trading strategies rreet the requirements of Rule 

4.5 (c) (2) (i), not whether they are prudent or appropriate. As the 

Corrmission explained when it adopted Rule 4. 5: 

[T] he Comnission 1 s intent in adopting the §4. 5 

criteria is to distinguish when certain entities 

should be treated as commodity pools and their 

(Footnote continued) 
Page 7 

Notwithstanding the fact that the Fund appears to be outside the scope 

of Rule 4. 5, we believe that relief fran regulation as a CPO should be 

provided to it. This belief is based upon, among others, the representations 

that the Fund: (1) is a non-profit membership corporation, whose members are 

exclusively non-profit educational organizations within the meaning of 

Section 501 (f) of the Internal Revenue Code; (2) is "controlled by, and 

solely responsive to requests for assistance in endowment management from," 

those members; (3) will conrnit no rrore than five percent of any fund it 

operates to initial margin for futures contracts and premiums on commodity 

option contracts; (4) will use commodity interests for any such fund in a 

manner incidental to the operation of such fund's cash portfolio; and (5) 

"will, in all cases, obtain confinnation that outside advisors who engage in 

futures trading for its various funds are registered as cammodi ty trading 

advisors. " Accordingly, based upon the representations made to us, the 

Division will not recommend that the Commission take any enforcement action 

against the Fund if it fails to register as a CPO in connection with the 

trading of commodity interests by the differe;nt investment funds it operates. 

We note that this "no-action" position does not excuse the Fund from 

compliance with any other applicable requirements contained in the Act or in 

the Conrnission' s regulations thereunder. For example, the Fund remains 

subject to the anti-fraud provisions of Section 4o of the Act, 7 u.s.c. §6o 

(1982), and to the reporting requirements for traders set forth in Parts 1'5, 

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

(1985). 

This letter is based upon the information that has been provided to 

us. Any different, changed or emitted facts or conditions might require us 

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

(Footnote continued) 

operators as CPOs ~- and not to establish what should 

be regarded as prudent trading strategies. 50 Fed. 

Reg. 15868 at 15876. 

5/ For example, if the Fund were to market an investment fund it operates as 

a commodity pool or as a trading vehicle in which commodity interest 

trading was not incidental to a cash portfolio, the position taken by 

this letter would no longer obtain. See 50 Fed. Reg. 15868 at 15879. 

See also, Division of Trading and Markets Interpretative Letters 85-13 

and 85-15, 2 Catm. Fut. L. Rep. (CCH) CJI22, 734 (August 2, 1985) and 

CJI22,736 (August 8, 1985), respectively. 
Page 8 

notify us immediately in the event that the Fund's operations, including the 

restrictions on carrm::xiity interest trading, change in any way fran that as 

represented to us. 

Very truly yours, 

Andrea M. Corcoran 

Director