DIVISION OF 

TRADING AND MARKETS 

· Re: 

Dear 

COMMODITY FUTURES TRADING COMMISSION 

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

(202) 254-8955 

(202) 254-3534 FACSIMILE 

January 18, 1991 

and 

01-\ 

This is in response to your letter dated August 9, 1990, as 

supplemented by conversations with Division staff, wherein you 

request on behalf of and , registered commodity 

trading advisors ("CTAs"), (1) exemption from Rules 4.31(a)(3) 

and 4.2l(a)(5) 1/ and (2) an interpretation that and 

fall within the purview of Rule 1.46(d)(6)(i). 

Rule 4.31(a)(3) requires aCTA to include in its Disclosure 

Document the actual performance record of all accounts directed 

by the CTA and each of its principals for the three years preceding the date of the Document. Rule 4.21(a)(5) requires a 

commodity pool operator ("CPO") to include in its Disclosure 

Document the actual performance record of all accounts (other 

than the pool for which the Document is being delivered) directed 

by the pool's CTA and each of its principals for the three years 

preceding the date of the Document. The term "principal" is 

defined in Rule 4.10(e) to mean: 

(1) Any person including, but not limited to, 

a sole proprietor, general partner, 

officer or director, or person occupying 

a similar .status or performing similar 

functions, having the power, directly or 

.indirectly, through agreement or otherwise, to exercise a controlling influence 

over the activities of the entity; 

il Commission rules referred to herein are found in 17 C.F.R. 

Ch. I ( 19 9 0) • 
Page 2 

( 2 ) 

( 3 ) 

Any holder or any beneficial owner of 

ten percent or more of the outstanding shares of any class of stock of the 

entity; and 

Any person who has contributed ten percent or more of the capital of the entity. 

Rules 4.21(h) and 4.3l(g) respectively require CPOs and CTAs to 

disclose all material information, even if the information is not 

specifically required by Rules 4.21 and 4.31. 

Rule 1.46 generally requires a futures commission merchant 

to offset long and short commodity futures or options positions 

in a customer account or option customer account. Rule 

1.46(d) (6)(i) provides an exception to this general requirement 

for purchases and sales of commodity futures or option contracts · made in separate accounts owned by one customer provided that, 

among other things, the trading in such accounts is directed by 

two or more persons acting independently, each of which is directing the trading of a separate account. 

Based upon the representations made to us, we understand the 

facts to be as follows. has been registered as a CTA since 

1984. It has over $1.1 billion in managed accounts. The 

trading systems are technical and nondiscretionary in that (1) 

all orders·are computer-generated after the close for execution 

in the next day's market, and (2) absent extraordinary circumstances, no intervention· to modify the computer-generated order 

selection is permitted. became registered as a CTA in 

March 1990. It is owned 10% by , and 

the family as its general partners and 90% by as its 

limited partner. 's trading system, which also is technical and non-discretionary in nature, was developed by Messrs. _ and , who first joined efforts to develop such a system 

in 1985. Mr. , who also is registered as a CTA, managed customer accounts from 1986 to mid-1988. and jointly 

have managed customer accounts since 1988. Accordingly, you conclude that it would not be materially misleading to prospective 

investors if did not disclose 's past performance 

and Mint did not disclose 's past performance. 

The April 1, 

sion for 

participation in 

Statement"): Z/ 

1990 Disclosure Document filed with the Commismakes the following statement about 's 

's affairs (the "Participation 

Zl In this regard, we note that your request was filed with the 

(Footnote Continued) 
Page 3 

and . affiliate] and Messrs. 

wlll have sole management 

over the day-to-day activities of , and will be solely responsible 

for its nondiscretionary, technical trading 

[a 

and 

authority 

program. Although . is a 90% shareholder 

of , none of the principals of 

and none of their principals will be involved 

in the daily operations of and 

will not participate in any of its trading 

activities. Messrs. , and 

will be involved in developing planning initiatives, including marketing plans. 

In lieu of including past performance information for 

the Document makes the following statement (the "Relief Statement"): 

Pursuant to an exemption from disclosure obtained from the Division of Trading and Markets 

of the CFTC, this Disclosure Document does 

not present any performance results achieved 

by , the limited partner of , or of any of its principals. At the request 

of the Division, the following prescribed 

language is provided: 

Pursuant to Part 4 of the CFTC's regulations, 

a principal's performance is required to be 

disclosed. However, has received 

an exemption from this requirement from the 

CFTC on the basis that the non-inclusion of 

's performance would not be materially 

misleading to investors and, additionally, upon the representations of 

and its principals, as the majority owners of , that they will not participate 

directly or indirectly in 's trading 

activities. However, in the event of an investor or a prospective investor request, 

will immediately provide a copy of 

's past performance. 

In further support of your request you note that Messrs. 

and· will serve as 's officers and will be respon-

(Footnote Continued) 

Commission on August 10, 1990. As you know, consistent with 

our prior practice, the positions we are taking below are 

effective as of the date of this letter. 
Page 4 

sible for the daily activities of the CTA. also has 

support staff trained to take over in emergencies. None of 

's principals will serve as 's officers or will be 

involved in day-to-day operations. Moreover, written "Chinese 

wall .. procedures have been put in place to prevent knowledge of 

trading positions of being gained by 's trading 

staff and vice versa. ~/ Finally, you note that by letter dated 

July 24, 1990, the Commission's Division of Economic Analysis 

advised and that it would not recommend enforcement action to the Commission pursuant to Section 4a(1) of the 

Commodity Exchange Act (the "Act,.), 7 u.s.c. §6a(1) (1988), to 

the ·extent that the CTAs together may maintain maximum net positions of twice the speculative position limits contained in Rule 

150.2 outside of the spot month. This decision was based on the 

representations of the two CTAs that they were operated as independent, separately registered entities, with independently devel~ 

oped and operated trading systems, and that they were not, and 

would not be, involved in one another's trading activities. !/ 

It is clear that , as a contributor of 90 percent of 

's capital, is a principal of • Thus, absent 

an exemption, 's past performance would be required to be 

disclosed in 's Disclosure Document pursuant to Rule 

4.3l(a)(3). is not a principal of • However, we 

believe, and you concur, that inasmuch as has contributed 90 

percent of 's capital, would be required to disclose 's past performance in its ( 's) Disclosure 

Document pursuant to Rule 4.31(g). This position ensures that a 

CTA cannot avoid its disclosure obligations by creating subsidiary 

CTAs through which the parent CTA conducts some or all of its 

operations. 

Based upon the representations you have made to us, we 

believe your request for relief from Rule 4.31(a)(3) has merit. 

This relief is based upon, among others, your representations 

that: (1) the and trading programs were separately developed; (2) and its personnel have no role in the 

day-to-day operations of ; (3) has sufficient support personnel such that, in the event of an emergency, 

it would not be necessary to call upon personnel for assistance; and (4) 's Disclosure Document explicitly states 

~/ Attached to your letter were memoranda detailing these procedures and affidavits from each CTA attesting that their 

respective traders will not acquire information on the trading of the other. 

!/ These memoranda and affidavits also were filed in connection 

with the CTAs' request for relief from Section 4a(1). 
Page 5 

that neither nor its principals have any involvement in 

's trading. Accordingly, pursuant to the authority 

delegated by Rule 140.93(a)(l), is hereby exempted 

from the requirement in Rule 4.3l(a)(3) that it include 's 

past performance in its ( 's) Disclosure Document. This 

exemption is, however, subject to the condition that 

may not be marketed to the public in any way as a product or 

as a part of a "family" of products. 

Based upon your representations, we further will not recommend that the Commission take any enforcement action against 

for failure to include 's past performance in its 

( 's) Disclosure Document. This position·is, however, subject 

to the conditions that include in its Disclosure Document 

(1) the Participation Statement and (2) the Relief Statement, 

revised, of course., to make. clear that relief from disclosing 

's past performance has been received by 

You also have asked that we provide relief from Rule 

4.2l(a)(5) to and • However, and as is stated 

above, Rule 4.2l(a)(5) applies to CPOs. and are 

registered as CTAs. Accqrdingly, Rule 4.2l(a)(5) is not directly 

applicable to and but, rather, to a CPO who intends to have either or serve as the CTA of its 

pool. Inasmuch as the information required by Rule 4.2l(a)(5) is 

virtually identical to the information required by Rule 4.3l(a)(3), 

the Division will not recommend that the Commission take enforcement action against a CPO for failure to include in the Disclosure 

Document for the CPO's pool (1) 's past performance where 

will serve as the pool's CTA, or (2) 's past 

performance where will serve as the pool's CTA. This position is, however, subject to the conditions that (1) the CPO include in the Disclosure Document the Participation and Relief 

Statements, revised, as noted above, where is the CTA and 

(2) where will serve as the CTA, the CPO does not market the pool as a fund or as a member of the "family" of funds. 

With respect to your request concerning Rule 1.46(d)(6)(i), 

based upon the representations you have made to us, it appears 

that and will be operated as independent entities 

with independent trading systems and they will not be involved in 

one another's trading activities. Accordingly, we confirm that 

where and each direct trading for a separate 

account of a client, they will satisfy the criteria of the rule 

that "each person directing trading for one of the separate ac-
Page 6 

counts is unaffiliated with and acts independently from each 

other person directi~g trading for a separate account." 2_/ 

The positions taken in this letter do not excuse 

or from compliance with any other applicable requirements 

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

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

19 of the regulations anq to all other provisions of Part 4. 

In addition, as is noted above, in its Disclosure 

Document as filed with the Commission on April 1, 1990, rather 

than disclosing the past performance information required by Rule 

4.31(a) (3), represents that the exemption from that requirement 

which is the subject of this letter has already been obtained. 

In this regard, you should specifically be aware that the positions taken in this letter do not preclude the Commission from 

taking enforcement or other action against or any 

other person involved in this apparent violation. 

The positions taken in this letter are based upon the representations you have made to us and are subject to compliance 

with certain conditions set forth above. Any different, changed 

or omitted facts or conditions might require us to reach a different conclusion. In this regard, we request that you notify us 

immediately in the event that the operations of or 

change in any way from those represented above. Further, 

the "no-action" positions taken herein represent the views of the 

Division of Trading and Markets only. They do not necessarily 

reflect the views of the Commission or any other office or 

division of the Commission. 

2_/ 

Very truly yours, 

e~.~r~b Chief Counsel 

In its July 24, 1990 letter, DEA based relief 

4a(1) of the Act on a finding that 

"independent" as defined in Rule 150.3, which 

relief from Section 4a(l) for certain CPOs. 

from Section 

and were 

provides