COMMODITY FUTURES TRADING COMMISSION 

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

August 15, 1985 

DIVISION OF 

TRADING AND MARKETS 

Dear 

Re: Application of Corrrriission Rule 4. 5 to t-1aster Trusts 

camprised of Single Employer Pension Plans 

This is in response to your letter dated June 25, 1985, in which you 

seek our views concerning the application of Commission rule 4.5, 50 Fed. 

Reg. 15868, 15882 (April 23, 1985), to certain master trusts to which your 

client, "X", provides investment advice. 

Rule 4.5 provides an exclusion from the definition of the term 

"corrmxli ty pool operator" ("CPO") . Specifically, the rule specifies the 

persons who are eligible for that relief, the qualifying entities for which 

they are so eligible and the criteria pursuant to which those qualifying 

entities are required to be operated. That relief is effective upon the 

filing of a notice of eligiblity with the Commission. 

In particular, rule 4. 5 provides: 

(a) Subject to compliance with the provisions of 

this section, the follo.ving persons, and any principal 

or employee thereof, shall be excluded from the 

definition of the term "ccmrodity pool operator" with 

respect to the operation of a qualifying entity 

specified in paragraph (b) of this section: 

* * * 

( 3) A bank, trust company or any other such 

financial depository institution subject to regulation 

by any State or the United States; and 

(4) A trustee or named fiduciary of a pension plan 

that is subject to Title I of the Employee Retirement 

Incorre Security Act of 1974; Provided, ho.vever, That 

for purposes of this §4.5 the follo.ving pension plans 

shall not be construed to be pools: 

(i) A noncontributory plan, whether defined . 

benefit or defined contribution, covered under Title I 

of the Employee Retirement Incane Security Act of 1974; 
Page 2 

(ii) A contributory defined benefit plan covered 

under Title IV of the Employee Retirement Income 

Security Act of 1974; Provided, however, That with 

respect to any such plan to which an employee may 

voluntarily contriliute, no portion of an employee's 

contribution is committed as margin or premiums for 

futures or options contracts; and 

(iii) A plan defined as a governmental plan in 

Section 3(32) of Title I of the Employee Retirement 

Income Security Act of 1974. 

(b) For the purposes of this section, the term 

"qualifying entity" means: 

* * * 

(3) With respect to any person specified in 

paragraph (a) (3), the assets of any trust, custodial 

account or other separate unit of investment for which 

it is acting as a fiduciary and for which it is vested 

with investrrent authority; and 

( 4) With respect to any person specified in 

paragraph (a) (4), and subject to the proviso thereof, a 

pension.plan that is subject to Title I of the Employee 

Retirement Income Security Act of 1974; 

Provided, hooever, That such entity will be operated in 

_the manner specified •••. 

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

to be as folloos: 

"X" is a Carrmxlity Trading Advisor registered pursuant 

· to the [Corrrrodity Exchange Act ("Act'')] and an 

Investment Adviser registered with the Securities and 

Exchange Commission pursuant to the Investment Advisers 

Act of 1940. "X" provides investrrent advice with 

respect to fixed income portfolios of a large nurrber of 

institutional clients. . • • In connection with its 

management of [the] fixed inCOite portfolios [of public 

employee benefit plans,] "X" from time to time utilizes 

the futures and options on futures markets to manage 
Page 3 

portfolio risk and for other hedging and portfolio 

ITEnagement purposes. 1 I Each of the portfolios which 

is managed by "X" limits the futures activities in such 

a manner so that they would fall within the criteria of 

rule 4. 5. . • • MJreover, to the extent that each 

client of "X" might otherwise be deerred a "comrodity 

pool" or "carm:xlity pool operator" under the Act, they 

otherwise comply with all of the criteria set forth for 

exclusion under rule 4.5. 

A number of "X"' s clients are pension plans which 

have been established by single enployers which have 

nn.1ltiple pension plans because of various arrangerrents 

with differing groups of employees or varying employee 

benefit planning considerations. Each of these pension 

plans is subject to Title I of the Employee Retirement 

Income Security Act of 1974. These pension plans, 

which may nurrber in excess of 10 or 15, are administered pursuant to a single master trust with a single 

bank master trustee. MJreover, pursuant to the master 

trust agreement, and each of the constituent pension 

plan relevant dOC\.llrents, the master trustee is required 

to act on direction from an investment committee (or 

other similar named fiduciary) established pursuant to 

the ~dividual pension plan docurrent (and master trust 

agreement} with respect to the investment of plan 

assets, including the retention of Investment 

Adviser/eTAs such as "X". Finally, the master trust 

consists: (1} of individual pension plans which are 

all pension plans described in Sections 4.5 (a} (4} (i} 

and (ii} of the Rule; or (2} plans which fall within 

Sections 4.5(a} (4} (i} and (ii} of the Rule, and other 

pension plans which would otherwise be entitled to the 

exclusion provided pursuant to the Rule. -

Essentially, you seek our confirmation of the follCMing positions set 

forth in your letter: 

(1) The master trustee bank would not be "vested with 

invest:Irent authority" because the master trustee would 

have no authority to act with respect to the invest:Irent 

of plan assets or the retention of Investment 

}:_/ We note, hCMever, that for the purposes of this letter it has not been 

necessary for us to also offer our views -- and therefore this letter 

should not be deerred to imply any finding -- that those ma.nagerrent 

purposes would corre within the scope of "bona fide hedging transactions 

and positions" in rule 1.3(z} (1}, 17 C.F.R. §1.3(z} (1} (1985}. 
Page 4 

Adviser/CTAs except at the specific direction of 

another narred fiduciary. Therefore, the bank trustee 

would not be the appropriate person to file a notice of 

exclusic.1 pursuant to rule 4. 5. • . . 

Essentially, an eligible person as specified in rule 4. 5 is one who 

otherwise would be viewed as the CPO of the qualifying entity -- i.e., the 

person who will be prorroting the "pool" by soliciting, accepting or receiving 

assets from others for the purpose of corrm:xlity interest trading - and who 

will have the authority to hire (and to fire) the "pool's" CTA and to select 

(and to change) the "pool's" FCH. 2/ Thus, the rule cont.errplates that an 

eligible person is that person who -has the primary authority to, anong other 

things, authorize and direct the investment of the assets of a qualifying 

entity, such as a trust account. 

Accordingly, we believe that a bank, trust company or other financial 

depository institution subject to regulation by a State or the United States 

which is required to invest or otherwise manage the assets of individual 

pension plans (including the retention of investment advisers) under a single 

employer multiple pension plan master trust on direction from the trustee or 

named fiduciary of those plans (~, an investment committee established by 

those plans' docun:ents) is not a person who is "vested with investment 

authority" for purposes of rule 4.5 (b) (3). Rather, we believe that for those 

purposes it is the trustee or named fiduciary of those plans which directs 

the investment actions required of the master trustee who should be viewed as 

the person having such investment authority and, accordingly, would be the 

person eligible to file a notice of exclusion under rule 4.5 with respect to 

the master trust . 

. (2) In circumstances where there is a single employer 

multiple pension plan master trust, wherein the master 

bank trustee is not "vested with investment authority," 

one looks to the character of the individual pension 

plans to determine the action required, or not 

. required, under rule 4. 5. 

Where the assets of multiple pension plans are corrmingled under a 

master trust, it is the master trust that is the qualifying entity (i.e., the 

trading vehicle). Accordingly, a determination of whether action is required 

or not required under rule 4. 5 must be based upon an evaluation of the 

structure and trading activities in comrrodity interests of the master trust 

as a single entity. Such ari evaluation would include not only a 

consideration of the characteristics of each pension plan under the trust, 

but also an analysis of how the assets of all such plans are commingled and 

invested, the manner in which gains and losses from trading in camodi ty 

~/ See 49 Fed. Reg. 4778, 4780 (Feb. 8, 1984). 
Page 5 

interests are allocated to each plan and the purposes for which the master 

trust was formed. 

This is because the Corrrission has made clear that even though a rule 

4.5 (a) (4) exclusion from the pool definition may be applicable to an 

individual pension plan, it does not necessarily follo.v that the rule 

4.5 (a) (4) exclusion will be available to a different entity (such as a master 

trust) which commingles such a pension plan's assets with the assets of other 

persons for trading in cammodity interests. Specifically, the Ccmuission has 

stated that the rule 4.5 (a) (4) exclusion from the pool definition in rule 

4.10(d) may not be applicable:'}../ 

where the assets of any such pension plan [i.e. , a plan 

described by rules 4.5(a) (4) (i)-(iii)] are commingled 

with the assets of any other person in trading 

commodity interests and gains and losses are not 

separately accounted for. For example, in the event 

that the assets of two or rrore such plans are 

commingled in a trust account or other type of 

investment vehicle which intends to trade in, among 

other things 1 cammodi ty interests 1 • the Corrmission 1 in 

appropriate cases where that vehicle was not subjec~to 

an effective exclusion under §4 .5 1 would deem the 

operation of such vehicle as the operation of a 

commodity pool and such plans as its pool 

participants. In such event, with respect to such 

vehicle 1 canpliance with the provisions of §4. 5 -- or 

regulation as a CPO -- would be required. (Emphasis 

added.) 

Thus, the ccXrmission has expressed concern that a person who operates a 

trading vehicle which is not subject to an exclusion from the pool definition 

but who solicits or accepts investors' funds for the purpose of trading in 

commodity interests not evade regulatory requirements applicable-to CPOs 

merely by including an otherwise excluded entity in its ccmuingled trading 

vehicle. · 

(3) Where .•. all of the underlying plans are 

excluded from the operation of the rule and the Act by 

virtue of Sections 4.5(a) (4) (i) and (ii) of the rule, 

no notice of exclusion should be required. 

The concerns noted above are not raised where a single employer 

multiple pension plan master trust is canposed solely of pension plans which 

are excluded from the pool definition by Corrmission rules 4.5 (a) (4) (i) and 

ll 50 Fed. Reg. 15868, 15873. 
Page 6 

(ii), gains and losses fran trading comrodity interests are allocated solely 

to those plans and there are no other indicia that would warrant 

characterization as a ccmrodity pool. Under such circumstances, we believe 

that the rationale noted by the Commission for excluding certain individual 

pension plans in rules 4.5 (a) (4) (i) and (ii) fran the pool definition --

i.e., they do not involve the placerrent of investors' funds at risk in 

cc:mn::::x3.ity interest trading 4/ -·- similarly applies and that such a master 

trust itself generally would be excluded fran the pool definition. 

Accordingly, the trustee of such a master trust (or the trustee or 

named fiduciary of the plans comprising that trust) would not be required to 

file a notice of exclusion under rule 4.5 -- or to take any other action --

to claim the exclusion from the pool definition available under the rule. 

(4) Where such a master trust consists of various 

different types of plans, only sarre of which fall 

within the statutory exclusion expressed in Sections 

4.5(a) (4) (i) and (ii) of the rule, a filing should be 

made on behalf of each pension plan which falls outside 

of Sections 4.5(a) (4) (i) and (ii) of the rule. 

Consistent with our views as expressed above, hc:Mever, we believe that 

where a single employer multiple pension plan master trust consists not only 

of plans which are excluded from the pool definition by rules 4.5 (a) (4) (i) 

and (ii) , but also of other pension plans which are not similarly excluded, 

the exclusion from the pool definition generally would not be available to. 

the master trust of those plans trading cOilliDdi ty interests. 5 I In such a 

case, a notice of eligiblity must be filed with respect to t.h8 master trust 

to claim the relief available under rule 4. 5. 

!/ As noted by the Comnission in 50 Fed. Reg. 15873: 

[A] non-contributory plan, i.e., one in which all 

contributions are solely made by an employer, can never 

be a cOilliDdi ty pool, because no funds are solicited 

fran participants and only the employer bears the 

funding responsibility of the plan if there are losses. 

Similarly, defined benefit plans are not likely to be 

carrm:xli ty pools, even if contributions are permitted, 

because such plans normally require the employer to 

cover losses and pennit the employer to benefit fran 

excess earnings not needed to fund the benefit. 

~ See n. 2. This is so even if the other plans were operated pursuant to 

the requisite criteria. 
Page 7 

In v1ew of the necessity to provide you with clarification on the 

application of :rule 4. 5 under the circumstances you have described, and as 

you have requested, the Division will not recommend that the Commission take 

any enforcement action against those of "X" ' s client_ which have been 

operating qualifying entities for which a notice of eligibility is required 

to be filed to claim the relief available under :rule 4.5 provided, and as you 

have represented, that such person files such notice with the Commission 

within fifteen days from the date of this letter. 

This letter solely addresses the application of :rule 4.5 to a 

"directed" master trustee bank of a single errployer multiple pension plan 

master trust. In the event that a master trustee bank (or other person) 

operates the assets of a master trust in such a manner that assets from the 

master trust are commingled in another trading vehicle with the assets of 

other persons or entities and are traded in corrm:x1i ty interests, we believe 

that it would be appropriate to view that other trading vehicle as a separate 

trading vehicle for the purposes of determining the applicability of :rule 

4. 5 . As previously noted, that determination would depend upon the facts of 

each case. 

Moreover, this letter solely addresses the application of rule 4. 5 to 

a single employer multiple pension plan master trust which has been created 

for the administrative convenience of the employer. It does not address the 

case Where a financial depository institution (or such other persons as a 

private brokerage firm or investment advisory company) were to initiate 

formation of a master trust (or other commingled trading vehicle) in order to 

obtain custarrers for its business. 

The opinions we have expressed above are based upon the 

representatipns that you have made to us and on our understanding of those 

representations as set forth above. Any different, changed or omitted facts 

or conditions might require us to reach a different conclusion. 

If you have any questions on this matter, please do not hesitate to 

contact Ba.J:t>ara R. Stern, Esq. , Assistant Chief Counsel, or 

Robert H. Rosenfeld, Esq., Division staff attorney, at (202) 254-8955. 

Very t:rul y yours, 

Andrea M. Corcoran 

Director