· COMMODITY FUTURES TRADING COMMISSION 

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

(202) 254-8955 

(202) 254-3534 FACSIMILE 

DIVISION OF 

TRADING AND MARKETS 

June 13, 1991 

Re: 

Dear 

This is in response to your letter.dated November 29, 1990, 

as supplemented by telephone conversations with Division staff, 

wherein you seek confirmation of your views concerning the 

availability of Rule 4.12(b) and the commodity pool operator 

("CPO") and associated person ("AP") registration requirements 

applicable in connection with the operation of 

(the "Partnership"). 

Based upon the representations made in your letter, as 

supplemented, we understand the facts to be as follows. The 

Partnership was formed on December 19, 1986. Its sole general 

partner is , a general partnership whose 

general partners are , and ., none of whom is subject to a statutory disqualification under Section 8a(2) or 8a(3) of the Commodity Exchange 

Act (the "Act"), 7 u.s.c. §12a(2) or 12a(3) (1988). The Partnership has 40 limited partners and a current capitalization of 

$59,900,000. Interests in the partnership have been offered and 

sold in private placement transactions exempt from the registration requirements of the Securities Act of 1933. 

With respect to the Partnership's overall trading, your 

letter represents that: 

The Partnership's objective is to 

achieve above-average capital appreciation by 

investing in securities. The Partnership 

utilizes a "multi-style, multi-manager diversification" philosophy of investment and 

operates as a "fund of funds". Assets of the 

Partnership are • • • invested in mutual 

funds (which trade solely in securities) and 

private limited partnerships ("Portfolio 

Partnerships") and with investment managers 

("Portfolio Managers") pursuant to investment 

advisory agreements ("Advisory Accounts"). 
Page 2 

The principal purpose of each Portfolio Partnership, and the authority of each Portfolio 

Manager, is to invest and trade in securities. 

The Partnership now seeks to engage in commodity interest 

trading by allocating its capital to: (1) investments in commodity pools for which a claim of exemption has been filed under 

Rule 4.12(b) 1/ ("Rule 4.12{b) pools"); {2) investments under 

the management of Portfolio Managers contractually bound to a ten 

percent limitation on the amount of the fair market value of the 

Partnership's assets that may be used to establish commodity 

interest trading positions; and (3) limited direct trading of S&P 

500 futures contracts. By your letter you request confirmation 

that the Partnership itself will be able to claim relief under 

Rule 4.12(b) provided that the sum of (1), when multiplied by ten 

percent as is discussed more fully below, (2), when multiplied by 

such ten percent, and (3) will not exceed ten percent of the fair 

market value of the Partnership's assets. · 

As you know, Rule 4.12 (b) provides .certain "substituted compliance" relief from Rules 4.21, 4.22 and 4.23(a) (10) and (a) {11) 

for the CPO of a commodity pool which, among other things 

will not enter into commodity futures and 

commodity options contracts for which the 

aggregate initial margin and premiums exceed 

10 percent of the fair market value of the 

pool's assets, after taking into account 

unrealized profits and unrealized losses on 

any such contracts it has entered into; Provided, however, That in the case of an option 

that is in-the-money at the time of purchase, the in-the-money amount as defined in 

§190.01(x) may be excluded in computing such 

10 percent. 2./ 

1/ Commission rules referred to herein are found at 17 c.F.R. 

Ch . I ( 19 9 0 ) • 

1./ Rule 4.12(b) (2) (i) (C). The rule also requires the pool to 

be offered and sold pursuant to the Securities Act of 1933 

or pursuant to an exemption therefrom; to be generally and 

routinely engaged in the buying and selling of securities 

and securities derived instruments; and to trade commodity interests in a manner solely incidental to its securities 

trading activities. Rules 4.12(b) (2) (i) (A), (B) and (D), 

respectively. 
Page 3 

For the purpose of this letter, this requirement is referred to 

as the "Initial Margin Test." 

In support of your request you note that the Initial Margin 

Test is drafted in terms of the percentage of assets which may be 

committed to initial margin and option premiums, and that neither 

the Test nor any other provision of Rule 4.12(b) distinguishes 

between direct inve~tments in commodity interests and indirect 

investments made through an intermediary--~, a Rule 4.12(b) 

pool. In further support of your request you state: 

Ignoring the regulatory and contractual restrictions on the Portfolio Partnerships and 

Portfolio Managers, respectively, would put 

the Partnership in an anomalous and illogical 

position. For example, if the Partnership's 

only involvement with commodity transactions 

was an investment of 11% of the Partnership's 

assets in a .4.12(b) Pool, the Partnership, 

having only 1.1% of its assets available for 

deposit as initial margin, would not be able 

to avail itself of the relief afforded by 

Section 4.12(b). In contrast, if the Partnership made a 1.1% commitment to commodity 

trading directly, the relief provided by 

Section 4.12(b) would be available to the 

Partnership. In addition, the Partnership, 

by investing 11% of its assets in a 4.12(b) 

Pool, would be required to adhere to more 

rigorous disclosure and reporting requirements than the 4.12(b) Pool in which it invested, even though the 4.12(b) Pool could 

have a much greater percentage of its assets 

committed as initial margin (10% vs. 1.1%) 

than the Partnership. Neither the Act nor 

the Rules contemplate such disparate treatment. 

In response, the Division notes that neither Rule 4.12(b) as 

proposed nor as adopted d/ contemplated the circumstances of 

the instant case and that none of the commenters on the proposed 

rule referred to these circumstances. However, the Division is 

of the view that it would not be inconsistent with the purpose of 

Rule 4.12(b) to address indirect investments through the vehicle 

of Rule 4.12(b) pools in the manner suggested. Accordingly, the 

l/ See 52 Fed. Reg. 19522 (May 26, 1987) and 52 Fed. Reg. 41975 

(November 2, 1987), respectively. 
Page 4 

Division interprets Rule 4.12(b) such that for the purpose of 

meeting the Initial Margin Test, where a pool for which relief is 

being sought under Rule 4.12(b) intends to trade commodity 

interests through investing in a (previously qualified) Rule 

4.12(b) pool, then the (investing) pool may multiply its intended 

investment by ten percent and add that amount to whatever other 

commodity interest trading investments it intends to make (~, 

directly or indirectly under Rule 4.12(b)) in determining whether 

the Initial Margin Test will be met, 

With respect to the instant case, this means that to determine whether it will meet the Initial Margin Test, the Partnership may use the sum of its capital allocated to: (1) investments 

in (other) Rule 4.12(b) pools, multiplied by ten percent; (2) investments under management by Portfolio Managers contractually 

bound to a ten percent limitation on the amount of the fair market value of the Partnership's assets that may be used to establish the Partnership's commodity interest trading positions, 

multiplied by ten percent; and (3) direct trading of commodity interests. i/ 

As noted above, you also request confirmation of your views 

concerning the CPO and AP registration requirements applicable in 

connection with the Partnership's operation. Specifically, in 

connection with the Partnership's trading of commodity interests, 

the Partnership proposes to admit 

, a registered CPO, to serve together with , as a cogeneral partner, of the Partnership and as the register~d CPO of 

the Partnership. It also proposes that ~/ and , two of _ 's three individual general partners, will 

register as APs of . , the third of the individual 

general partners, will not register as an AP of , 2! The 

Partnership's choice of Portfolio Partnerships and Portfolio 

Managers, as well as trading decisions relating to S&P 500 

futures contracts, will be made under the supervision of 

in his capacity as a principal and AP of . not solicit for the Partnership, will not provide commodity 

!/ Of course, and as you acknowledge, to qualify for relief 

under Rule 4.12(b)· both the Partnership and its CPO must 

meet all of the other criteria set forth in the rule. 

~I Commission records indicate that 

listed as a principal of 

currently is 

2/ serves on the Board of Directors of several 

public and private companies and is a Senior Advisor to 

and 

will 
Page 5 

interest trading advice to the Partnership and 

any commodity interest-related activities with 

Partnership or any other person. While 

will not engage in 

respect to the 

and ___ _ 

will solicit investors in the Partnership, 

will not engage in the solicitation of funds for investment· in the Partnership. may from time to time refer 

names of potential investors in the Partnership to and , who, in 

their discretion, may contact such person to 

discuss the possibility of investment in the 

Partnership. Any compensation received by 

will not vary depending upon, or 

otherwise be linked to, the outcome of such 

referrals. 

Further, will not provide commodity interest trading 

advice to the Partnership nor will he engage·in any commodity 

interest-related activities with respect to the Partnership or 

any other person. 

As you note, the Division previously has issued registration 

"no-action" relief such that fewer than all of the general partners of a limited partnership operated as a Rule 4.12(b) pool 

were required to register as a CPO. 11 In the instant case, 

and , as registered APs, will have undergone 

the same fitness and qualifications exams as those required of 

applicants for CPO registration. As you also note, the Division 

has stated that registration as an AP of a CPO is required of a 

perspn who introduces a potjntial investor to a CPO and who is 

compensated as a "finder"~ --i.e., and 

but not 

Accordingly, based upon the representations you have made to 

us, the Division will not recommend that the Commission take any 

enforcement action (1) under Section 4m(1) of the Act, 7 u.s.c 

§6m(l) (1988), for failure to register as a CPO against , or , or (2) under Section 4k(2) of the Act, 

1/ See, ~, Division of Trading and Markets Interpretative 

Letter No. 86-30, [1986-87 Transfer Binder) Comm. Fut. L. 

Rep. (CCH) ~23,415 (December 11, 1986). 

~/ Division of Trading and Markets Interpretative Letter No. 

90-4, [1987-90 Transfer Binder) Comm. Fut. L. Rep. (CCH) ~24,588 (January 13, 1990). 
Page 6 

7 u.s.c. §6k(2) (1988), for failure to register as an AP of a CPO 

against This position is, however, subject to 

the condition that file a Form 8-R and fingerprint 

card with the National Futures Association. 

We note that this letter does not excuse any person subject 

hereto from compliance with any other applicable requirements 

contained in the Act or in the Commission's regulations thereunder. For example, each remains subject to the anti-fraud provisions of Section 4Q of the Act, 7 u.s.c. § 6Q (1988), and to the 

reporting requirements for traders set forth in Parts 15, 18 and 

19 of the Commission's regulations. Moreover, the positions 

which we have taken herein are solely· applicable in connection 

with the operation of the Partnership. 

The views expressed in this letter are based upon the 

representations that have been made to us and are subject to 

strict compliance therewith and with respect to the registration 

no-action position issued to , to compliance with the 

condition stated above. Any different, changed or omitted facts 

or conditions might require us to reach a different conclusion. 

In this connection, we request that you notify us immediately in 

the event that the operations of the Partnership change in any 

way from those as represented to us. Further, this letter 

represents the position of the Division of Trading and Markets 

only. It does not necessarily represent the views of the Commission or any other office or division the ommission. 

Andrea M. 

Director