DIVISION OF 

TRADING ANO MARKETS 

COMMODITY -FUTURES TRADING COMMISSION 

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

September 29, 1987 

Re: Educational Marketing Clubs 

Dear Dr. 

This is in response to your letter dated August 11, . 1987, as supplem:mted by telephone conversations with Division staff, wherein you sought our 

views on ccmrod.ity pool operator ("CPO") regulation in connection with the 

operation of certain producer marketing clubs ("PM:s") and student marketing 

clubs ("SM::s") (collectively educational marketing clubs ("EM:!s")) by the 

· (" ") 1 including its 

agents and errployees, and any other person whose involvement with any such 

club may bring h.im within the CPO definition - ~· 1 the president of the 

club. !( 

In your letter you represent the following: 

I. Producer Marketing Clubs 

1. "purpose of PM:' s. Agricultural producers traditionally 

use just one type of marketing strategy -- they make cash 

sales of their comocx1i ties and price them on the date of 

delivery. Generally speaking, agricultural producers do not 

use forward cash contracts, futures or optio_ns. In the past, 

1/ Your letter broadly sought relief for the operators of EMcs· conducted by 

other educational organizations and other States. Consistent with 

Division policy in issuing interpretative letters, however, and as the 

staff previously advised you, the position we are taking below is limited 

to those EM:!s with which the specifically is familiar. Thus, · depending on the circumstances, our position may or may not be applicable 

to any other EMC. · 

'I 
Page 2 

the and other interested groups 

have sought to educate producers about marketing by offering 

saninars, short courses, publications, video tapes and canputer 

assisted instruction. While attendance at these programs has 

been good, few participants ever applied the kncwledge they 

had acquired. PM: 1 s are one nethod to bridge the gap between 

the acquisition and the application of carm:xli ty marketing 

knowledge. 2/ 

2. Legislative History. The 1985 Food Security Act authorized a 

pilot program in 40 counties nationwide where groups of 

agricultural producers would be organized, educated, and 

encouraged to use advance marketing techniques with certain 

financial guarantees provided by the government. Furt.hern'ore, 

[Section 206 of] the Futures Trading Act of 1986 directed the 

GAO to conduct a study of fcu::ners' use of advance marketing 

techniques and· the educational programs available to 

them. • • • Finally • • • the 

in alliance with the Land Grant universities and colleges, 

have long used test-plots, dem:>nstration projects, and producer 

\'K.)rkshops as a proven nethod for instructing fanrers about new 

management practices and production technologies. 

It is apparent that Congress is concerned about agricultural 

producers' knOwledge and use of advance marketing teclmiques 

(including futures and options). Furt.h.erm:>re, the 

is specifically charged with providing 

educational programs for fanners and others. ConsE.¥IUently, 

l?M:!s appear to be a legitimate way to address the concerns of 

Congress as expressed in the aforerrentioned legislation. 

3. Historical Background. The 

began to sponsor and/ or support the activities of ~ 1 s in 1984. Similar clubs had been sponsored by the 

extension service and other groups before but this seems to be 

the first organized st~~ide effort. • • • 

4. Fonn of organization of W.C 1 s. PI«: 1 s are organized under a 

variety of fonns. Merrbership is, of course, voluntary and, 

consequently, the by-laws (if any) adopted by the club reflect 

the unique concerns of those individuals willing to associate 

with the club. • • • " 

!:_I In this regard, you explained to staff that as the purpose of W.C:s is to 

pro.rrote interest in the ccmrodi ty futures and options markets in general, 

the clubs are not restricted to trading in agricultural cornrodities. 
Page 3 

Generally speaking, the IM::' s we are familiar with in 

are infm:mal associations of agricultural producers who neet 

for several hours every two weeks. Most clubs were organized 

by a county extension agent in cooperation with one or rore 

camumity leaders but the nernbers determine by majority vote . 

what actions t,he club will take -- ~. , which tl;'ades will be 

placed. 3/ A typical PM: neeting involves one or oore of the 

following activities: . · 

( 1) Education. • • • 

(2) Price Analysis •• . . (3) Marketing Strategy/Execution/Evaluation •. ~· . . 5. Canpensation Structure of the PM:' s. • • • To finance 

ccmoodi ty interest trades, clubs collected an average of 

$80-$100 fran each voting nenber. !/ Most clubs traded only 

in mini-futures contracts and purchased oot-of-the-roney 

put/call options with relatively small premitims. 

~ 

More ooney could have been collected fran each member but that 

would have increased the cost and discouraged participation. 

Increasing membership to rore than 15 appears to be a 

violation of current CF'l'C regulations. 2f However, a $1500 

pool of capital would, at trost, pel:lllit only one or two trades 

to be made sinrultaneously with mini-contracts or the entire 

amount could easily be spent on the premium for just one 

option. Consequently, penni.tting PMC ne:nbership to expand 

beyond 15 persons would increase "pool" funds, pennit a larger 

number of sinrulated marketing actions using futures or options, 

yet would keep individual contributions to the club's "pool" 

small. 

other than the individual contributions to the PW::!' s trading 

account, no additional fees are charged. Occasionally, county 

11 Depending on the structure of any given PMC, the trade may or may not be 

placed by one of the club' s officers. 

!/ As you explained below with respect to Sf!X::s, you also explained to staff 

that a oonetary ccmnitJrent to the PM: would oore likely prorrote "real" 

learning than a hypothetical investment. 

~/ See Rule 4.13(a) (2), 17 C.F.R. §4.13(a) (2) (1987), Which generally 

provides exemption fran CPO registration where a person collects no rrore 

than $200,000 for all of its pools and has no more than 15 participants 

in each of its pools. -
Page 4 

agents may provide educational materials at cost or the PM:! · 

may subscribe to agricultural market newsletters. Most guest 

speakers and other, educational materials are provided at no 

cost to the club. 

Most Io/.C' s cease rreeting at an agreed upon date (usually 

during the spring) • At that time, any funds left in the 

club' s account are distriliuted equally. Occasionally, clubs 

approve a s~ contribution to fund trades but these additional levies are approved only by majority vote. 

6. PMC gperation and Advice. Except for the coordinating 

activities of the county extension agent and/or other comnunity 

leaders, xrost clubs are operated by and for its rrernbers. Most 

clubs make up their cmn minds about what actions, if any, are 

appropriate given the existing market situation and the clubs · simulated marketing strategies. PM:!' s receive education and 

advice frau many sources: the extension service, farm publications, market newsletters, farm organizations, brokers, 

neighbors, feedlot and elevator wanagers, grain rrerchandisers, 

etc. Except for the subscription cost of publications and 

newsletters, no club pays for "advice fran any of these sources. 

7 • Menbership. Merrbership in PM:' s is as diverse as the 

population of m:>st small towns. H<:Mever, because xrost clubs 

are organized to address a particular issue (agricultural 

marketing), three-quarters of the membership seems to be 

full-tilre fru::rrers and ranchers. 

II. Student Trading Clubs &/ 

1. ;purpose. Many degree-granting institutions teach courses in 

agricultural marketing and/or cammodio; futures. A feature 

·ca.mon to m:my of these courses is the "paper" trading 

gal't\\:. • • • 

The problem with "paper" trading is that little, if any, 

"real" learning takes place and the typical student's approach 

to the exercise is to treat it as if it were a grure of chance. 

Since no "real" xroney is involved, the student never has to 

bear responsibility for the, trades and few students take the 

time to investigate market fundarrentals, assess alternative 

§./ In your telephone conversations with staff you explained that you intended 

to develop and to teach this course at • W~ have 

phrased the facts; then, in light of this e..'q)lanation. 
Page 5 

trading strategies, or to relate carcmodi ty trading to comrodi ty 

marketing activities (i.e., hedging ccmrodity sales and 

purchases). -

Ih order to correct the shortccmings of "paper" trading, [you 

propose to] form Student Trading Clubs (STC' s) • These clubs 

would function in much the same manner as Producer Marketing 

Clubs but their activities may differ. For e.xanple, a STC 

conducted as part of a course on ccmnodity futures at 

would likely include a large number of 

agriculture majors. These students would probably concentrate 

on agricultural ccmocxliti~s but rather than trying to simulate 

actual farm marketing situations, they may focus. solely on 

price direction and could just as easily buy and sell ccmoodity 

futures. 7 I In addition, non-agricultural ccmrodities may 

attract' their attention. 

There are several advantages to this method of instruction: 

(1) With only a limited pool of capital to trade, groups of 

students would be assigned to -specific cormodities and encouraged to develop detailed market analysis, to present and 

defend their trading recarmendations, and to conduct ex-post 

evaluations of actual trades. 

( 2) Making decision rreans accepting and living with the 

consequences of those decisions. • • • Although the dollar 

value is small, the psychological impact of club trading 

losses is significant and can be beneficial. 

2. Historical and Legislative Background. To [your] knowledge, 

there are no STC' s operating as part of any college or 

:vocational agricultural curriculum. To the extent that an STC 

serves the educational needs of future fanrers and agribusiness 

managers, then the same congressional mandate that would apply 

to Producer Marketing Clubs should be extended to Student 

Trading Clubs. 

3. Fonn and Organization of the S'l'C. Organization of STC' s would 

probably be under the direction of the class instructor. • • 

but the decision making authority [would] rest with the 

student nernbers. Formal by-laws and procedures (minutes, 

treasurer reports, written trade recOIJlt'endations) [\'lould be] 

recOJ:Tmended. While the students [would] be encouraged to draw 

]_/ As with PM:!s, however, to prcrrote maxirmnn participation SM:!s would not be 

restricted to trading in agricultural canm:xlity interests. 
,, 

Page 6 

on a variety of infornation sources, it is hoped that they 

will develop their cmn analytical skills when assessing 

ccmrodity markets. Obviously,· [I] would take a far m:::>re 

active role in guiding the club's activities than would a 

county extension agent working with a PM:!. 

4. Compepsation of the STC. Manbership [iliuld] be voluntary but 

only contributing rrembers [would be able to] vote on trade 

reccmrendations. Any funds remaining at the end of regular 

scheduled classes [would] be disbursed equally to all contributing members. Few, if any, additional club expenses are 

anticipated. 

5. Membership of the STC. Menbership would be restricted to 

students duly enrolled in the institution. • • • [W]e intend 

to offer it as a 1 hour paninar concurrently offered with a 3 

hours course in carm:x:lity futures. A grade will be assigned 

but other similar seminars could be set up on a credit/no 

credit basis. 

Rule 4.10(d) defines the tenn ca:rm:xlity "pool" to xrean "any invest:nent 

trust, syndicate or similar fonn of enterprise operated for the purpose of 

trading camooity interests" (emphasis added). In explaining this definition, 

the Ccmnission stated: 

Whether a particular entity is operated "for the purpose" of 

trading C<ll'IOOdi ty interests and, thus, is a pool within the scope 

of §4 .10 (d) , depends on an evaluation of all the facts relevant 

to the entity's operation. The Carmission recognizes that in the 

past its staff has issued interpretations of the Part 4 rules. 

Consistent with that practice, the Camd.ssion invites interested 

persons to seek such staff interpretations of §4 .10 (d) and of all 

the other Part 4 rules. 46 Fed. Reg. 26004, 26006 (May 8, 1981). 

The definition of the term "pool" closely follCMs the definition of 

the term "ccmrodity pool operator" contained in Section 2 (a) (1) (A) of the 

Comrodity Exchange Act, as arrended (the "Act"), 7 u.s.c. §2 (1982). · 

Specifically, Section 2 (a) (1) (A) provides in pertinent part: 

The tenn "cc:mrodi ty pool operator" shall xrean any person engaged 

in a business which is of the nature of an invest:nent trust, 

syndicate, or similar fonn of enterprise and who; in connection 

therewith, solicits, accepts, or receives fran others ••• 

property •.• for the purpose of trading in [ccmrodity futures 

contracts], but does not include such persons ••• as the 

Comnission may specify. . • • 

The term "corrrrodity pool operator" was added to the Act by the 

Ccmnodity Futures Trading Carmission Act of 1974, Pub. L. No. 93-463, §202, 
Page 7 

88 Stat. 1389 (1974). The legislative history of this addition indicates 

that it was intended to bring CPOS within the Conmi.ssion Is jurisdiction for 

the purpose of protecting unsophisticated investors fran undesirable managerial and trading practices. '2} 

The Division previously has had occasion to consi&3r whether, in light 

of the foregoing, a particular trading vehicle would be a ccmrodity pool and, 

thus, whether its operator would cane within the CPO definition. Generally 

speaking, the Division found that there would be no pool and no CPO thereof 

where the partlcipants were family mambers or had kna,.m each other for 

several years and where the idea and fonnation of the trading vehicle were 

the products of all persons involved. 9/ Such factors are not present in the 

instant request. -

Certain other factors are, however, present. Specifically, we nqte 

the educational purpose o;f the EM!s and the fact that they will be praroted 

and effectively sponsored by (and the ) . Based 

upon those factors, and in furtherance of the purpose of the CPO definition, 

the Division will not recattrend that the carroission take any enforcement 

action for failure to register as a CPO against the · · , including its agents and employees, the 

president of any EMC and any other person whOse involvement with an EMC \rotlld 

require him to register as a CPO provided the following conditions are met: 

(1) each participant in the EMC receives in writing the statement prescribed 

by Rule 4.13 (b) , to the effect that the organizer of the pool is not 

registered as a CPO and is not subject to Disclosure Document and Annual 

Report requirements; (2) no participant contributes oore than $300 to any 

~, .(3) the EMC has no nore than 50 participants7 (4) the EMC has a specific 

expiration date; (5) the camodity interest trading account of the EMC is 

opened and traded in the narre of the club; and (6) any withdrawal fran the 

account is requested in writing and is signed by two rrembers of the club, of 

which facts the futures camlission merchant can:ying the account nn.:tst be 

informed in writing. 

You should be aware that the "no-action" position expressed in this 

letter does not excuse any person who may claim it fran ccmpliance with any 

otherwise applicable requirerrents contained in the Act or in the Ccmnission' s 

regulations thereunder. For example, each such person remains subject the 

anti-fraud provisions of Section 4£ of the Act, 7 u.s.c. §6£ (1982). 

'E.f See, ~·, Staterrent of Dr. Clayton Yeutter 1 Assistant Secretary of 

Agriculture, House Carmittee on Agriculture Report en the Comrodity 

Futures Trading Com:nission Act of 1974, H.R. Rep. No. 93-975, 93d Cong., 

2d Sess., 79 (1974). 

1/ See, ~. , Division of Trading and Markets Interpretative Letters No. 

86-10 and 86-17, carom. Fut. L. Rep. (car) ~23,016 (April 24, 1986) and 

~23,200 (June 24, 1986), respe<;:tively. 
Page 8 

The position taken in this letter is based on the representations you 

have made to us and is subject to carpliance with certain conditions, as set 

forth above. Any different, changed or emitted facts or conditions might 

re:;ruire us to reach a different conclusion. In this connection, we request 

that you notify us .i.mrediately in the event the EMC programs are not conducted 

as set forth above.