Dear 

COMMODITY FUTURES TRADING COMMISSION 

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

November 8, 1985 

This is in response to your letter dated September 4, 1985, whereby 

you requested on behalf of your client, the Ccrnpany, that the Division not 

recommend that the Commission take any enforcement action against the Company 

if it fails to register as a comm:xlity trading advisor ("erA") in connection 

with providing advice to the Fund, a registered investment company formed by 

the Campany, which has filed a notice of eligibility for exclusion from the 

definition of the term "ccmnodity pool operator" ("CPO") pursuant to Rule 

4.5, 50 Fed. Reg. 15868 (April 23, 1985). 

Based upon the representations you made in your letter, we understand 

the facts to be as follows: 

' 

The Fund's investment strategy will primarily 

involve investments in U.S. Government securities, 

including U.S. Treasury securities and certain 

m:>rtgage-backed securities. It is a fundamental policy 

of the Fund that at least 65% of its total assets will 

be invested in U.S. Goverrnuent securities and it is 

expected that under normal market conditions at least 

80% of the Fund's total assets will be invested in U.S. 

Government securities. The Fund's proposed 

transactions in the commodity futures and options 

markets, •.• will be collateral to its investments in 

U.S. Government securities .... ]) 

The eampany, a registered investment adviser ["IA"] 

and one of the nation's largest financial institutions, 

provides a broad range of financial products and 

services through a nationwide distribution network. 

The Company, and its subsidiaries and affiliates, 

currently manage assets of approximately $24 billion. 

The Ccrnpany will select and review the Fund' s 

investments, and employees of the Company will make the 

):_/ In this regard, the notice of eligibility filed by the Fund contained the 

representations on operating criteria specified by Rule 4. 5 (c) (2) . 
Page 2 

actual trading decisions for the Fund. The Fund will 

pay the Caupany a m:::>nthl y fee for these advisory 

services based upon the net assets of the Fund under 

mmagerrent. . . . An affiliate of the Cc:mpany which is 

a registered broker-dealer will solicit investments in 

the Fund through its network of registered 

representatives. 

Based upon the foregoing facts, you concluded, and we agree, that if 

the Company directs the Fund's trading in commodity interests, it will came 

within the definition of the tenn "cc:m:rodity trading advisor" set forth in 

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

(1982). 2/ In support of the requested "no-action" position, however, you 

argued, arrong other things, that in the instant situation the Cc:mpany canes 

within the spirit, if not the letter, of Rule 4.14(a) (5), 17 C.F.R. 

§4.14(a) (5) (1985). That rule provides exemption from registration as aCTA 

for any person who is exempt from registration as a CPO and whose trading 

advice is directed solely to, and for the sole use of, the pool or pools for 

which it is so exempt. In furtherance of that argurrent, in our telephone 

conversation you noted that two of the six members of the Fund' s Board of 

Directors hold senior positions with the Company. ~/ Moreover, in a 

telephone conversation with Division staff, your associate explained that 

!:._/ Section 2 (a) (1) (A) provides in pertinent part that a CTA is --

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

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

value of or the advisability of trading in [commodity 

interests] .•.. 

You further have represented that the Company provides advice on 

commodity interest trading to a wholly-awned subsidiary of the Company, 

for use in connection with the mmagerrent of its general account. We 

similarly agree with your conclusion that the Company should not be 

viewed as a CTA for those purposes. This is because, in that situation, 

the Company in effect is providing advice to itself -- and not to 

"others" as contemplated by the statutory definition. Cf. Rules 

4.5 (a) (2) and (b) (2), which makes an exclusion from the "CPO definition 

available for State-regulated insurance companies in connection with 

their operation of certain separate accounts. 

' 

Those members are "A" and "B", who respectively hold the positions of 

Senior Vice President Investments and Executive Vice President - Finance 

with the Company. 
Page 3 

those two members are the senior personnel who will supervise those of the 

Canpany 1 s employees who will be involved in cc:mrodi ty interest trading. ~ 

You also made the argument that: 

The objectives which prompted the Commission to 

adopt Rule 4.5 [--i.e., avoidance of duplicative 

regulation] provide a persuasive basis for the Division 

to take a no-action position with respect to 

registration as a commodity trading advisor by the 

Company. The Canpany is also subject to extensive 

regulation under ongoing regulatory schemes, both as an 

insurance company and as a registered investment 

adviser. The Company will furnish hedging advice to a 

single registered investment campany which itself 

qualifies for exclusion under Rule 4. 5. Thus, the 

nature and extent of the Campany 1 s cc:mrodi ty trading 

advisory activities is limited and these activities are 

merely one aspect of the broad range of financial 

services and products offered by the Company and its 

subsidiaries and affiliates. [Emphasis added.] 2f 

The Division notes that rule 4.14(a) (5) applies solely to persons who 

are exempt from registration as a CPO. Rule 4.14 (a) (5) thus does not 

expressly apply to persons who are excluded from the definition of CPO by 

rule 4. 5 or to persons \vhose non-CPO status is premised upon the fact that 

the entities under their control are excluded from the definition of "pool" 

il 

~/ 

Specifically, your associate explained that "A" and "B" will have the 

ultimate supervisory responsibility over "C", who will be responsible for 

developing the overall strategies to be employed in cormection with 

directing the Fund 1 s commodity interest trading. "C", in turn, will 

supervise those employees responsible for the implementation and timing 

of those strategies. 

Cf. 49 Fed. Reg. 4778 at 4785 (February 8, 1984), wherejn the Commission 

indicated that it --

' 

is considering adopting a rule that would exempt from 

registration as a erA a person who is registered as an 

IA and who was forrred for the sole purpose of and whose 

sole business is to provide investment advice to a 

person and an entity who have qualified for exemption 

under proposed §4 • 5 . [Ernphas is added. ] 

To date, the Commission has not taken any action on that proposal. See 

50 Fed. Reg. 15868 at 15869. 
Page 4 

under rule 4.5(a) (4). Clearly, the mere fact that an entity is not a 

ccmrodity pool does not mean that its adviser is not a erA. 

Nonetheless, rule 4.14(a) (5) does reflect a general Commission intent 

to eliminate any unnecessary costs and burdens of regulation. 6/ Consistent 

with that intent, the Division believes that adoption of a no-'action position 

with respect to a person's CTA registration would be appropriate under other 

circumstances not specified in rule 4.14 (a) where the costs and burdens of 

CTA registration would appear to outweigh any regulatory benefit -- ~~ in 

the instant situation. Furthernore, adoption of such a position in this 

situation would be consistent with the general policy of rule 4.5, which 

essentially reflects a Congressional and Corrrnission intent to avoid, where 

appropriate, unnecessary and duplicative CPO regulation for certain 

"otherwise regulated" persons. ']) 

Accordingly, based upon the foregoing, the Division will not recarnnend 

that the Commission take any enforcement action against the Company if it 

fails to register as a CTA in connection with providing advice on ccmrodity 

interest trading to the Fund. This position is, however, subject to 

ccmpliance with the following two conditions: ( 1) upon the request of a duly 

authorized Commission representative, the Company must provide access to the 

books and records it keeps and maintains in connection with directing the 

~ The practical effect of rule 4.14(a) (5) is to exempt from CTA 

registration persons who operate and advise essentially family 1 club and 

small, unsolicited camm::>dity pools, as specified in rule 4.13, 17 C.F.R. 

§4.13 (1985). Cf. 44 Fed. Reg. 1918 at 1919 (January 8, 1979), wherein 

the Carrmission stated that those exemptions were adopted because "the 

costs of ccmpliance with the Part 4 rules outweigh the benefits to be 

gained from regulating family, club and small pools." 

7/ S. Rep. No. 384, 97th Cong., 2d Sess. 79-80 (1982), which directed the 

Cornnission to adopt rule 4. 5, explains in pertinent part: 

[S]ince virtually all of the persons or entities to 

which this exception would apply are regulated by other 

Federal or State agencies, it is reasonable to take 

them out of this regulatory mechanism •.•. 

Therefore 1 while the Catroission should retain 

discretion in this area 1 the Catroi ttee believes that, 

unless otherwise inappropriate, exemption by rule 1 

regulation or order from [CPO] registration and related 

requirements . . • should generally be granted to these 

classes of entity. (Emphasis added.) 
Page 5 

Fund's ccmnodity interest trading; 8/ and (2) the Canpany must agree to 

canply with whatever rule the Ccmnission may adopt to exempt from 

registration as a CTA -- or to require registration as a CTA -- persons who 

are registered as an IA and who provide advice on ccmrodi ty interest trading 

to registered investment canpanies who have claimed exclusion from the CPO 

definition pursuant to Rule 4.5. Moreover, this position is strictly limited 

to the facts of this case. In the event the Canpany provided advice on 

commodity interest trading to one or more other registered investment 

canpanies, this position would no longer obtain. 

Alternatively, you requested that we confinn that the Canpany would be 

exempt from registration as a CTA pursuant to Section 4m ( 1) of the Act, 7 

U.S.C. §6rn(1) (1982), which provides in pertinent part that the requirement 

to register as a CTA does not apply to any CTA --

who, during the course of the preceding twelve months, 

has not furnished commodity trading advice to more than 

fifteen persons and who does not hold himself out 

generally to the public as a commodity trading advisor. 

In support of that request, you contended, among other things, that 

the Fund should be viewed as one person for purposes of Section 4m ( 1) . In 

response, we note, however, that the Court of Appeals for the Ninth Circuit 

has held that a person who furnishes trading advice to a futures commission 

rrerchant which "incorporate[s] that advice directly into actual transactions" 

for its discretionary account customers who number more than fifteen people 

is thus furnishing trading advice to more than fifteen people. CFTC v. 

Savage, 611 F .2d 270, 281 (9th Cir. 1979). 2._/ Moreover, it appears that by 

~/ We expect that those books and records would be in the nature of those 

required of registered CTAs by Rule 4.32, 17 C.F .R. §4 .32 (1985). 

Cf. Section 203(b) (3) of the Investment Advisers Act of 1940, 15 U.S.C. 

§80b-3 (b) (3) (1982), which explicitly makes a similar exemption from 

registration under that act unavailable to an IA to any registered 

1 investment company, and the legislative history of that Section which 

provides: 

\ 

The Commission's authority to oversee the activities of 

investment advisers should not depend (as it now does) 

on whether they, offer their services to the public 

directly or through the medium of an investment 

ca:npany. The shareholders of investrnent canpanies 

should have tl1e same protections now provided for 

clients of investment advisers who obtain investment 

advice on an individual basis. H.R. Rep. No. 91-1382, 

(Footnote continued) 
Page 6 

solicitations to members of the public made through the Fund's marketing 

materials -- ~, its prospectus, the canpany specifically will "hold itself 

out" as providing advice on camodi ty interest trading and, thus, as acting 

as a Cl'A. Accordingly, we are granting the "no-action" position on separate 

grounds, as indicated above. 

We note that this letter does not excuse the Cc:mpany frcm canpliance 

with any other applicable requiren:ents contained in the Act or in the 

Corrrnission's regulations thereunder. For example, it would remain subject to 

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

to the reporting requirerrents for traders set forth in Parts 15:- 18 and 19 

(1985) • 

This letter is based upon the representations made to us and is 

subject to canpliance with the two conditions stated above. Any different, 

changed or omitted facts might require us to reach a different conclusion. 

In this connection, we request that you notify us irrmediately in the event 

that the Ccmpany's CTA activities change in any way from that as represented 

to us. 

(Footnote continued) 

Very truly yours, 

Andrea M. Corcoran 

Director 

39-40 (1970), reprinted in E'ed. Sec. L. Rep. (CCH) 

~56,227, p.44,071.