Dear 

87-8 

November 9, 1987 

Re: CPO Registration No-Action Position Where 

Investors Have 20-Year History 

This is in response to your letter dated September 25, 1987, as 

supplerrented by your telephone conversation with Division staff held on 

October 20, 1987, wherein you requested confinnation that the Division will 

not recommend that the Commission take any enforcement action for failure to 

register as a carm:xlity pool operator ("CPO") against the General Partners of 

the Partnership. 1/ 

Based upon the representations made in your letter, as supplerrented, 

we understand the facts to be as follows: 

Although the Partnership was formed on 

January 22, 1987, it may cla:im an indirect 

affiliation with two corporations no longer 

in existence. "X" was formed in the early 

1900s to engage in the wholesale distribution 

of certain products •.•• "X' s" assets were 

sold in 1966 to an unrelated campany, for 

cash and stock. However, the cash and stock 

1/ Alternatively, you requested an opinion that the Partnership would not be 

deeired to be a carm:xlity "pool" within the meaning and intent of Rule 

4.10(d), 17 C.F.R. §4.10(d) (1987). Among other reasons, because the 

Partnership is not a registered inves"t:Irent canpany we are unable to 

provide such an opinion. See Rule 4.5, 17 C.F.R. §4.5 (1987); see also 

n. 4, infra. -- ----
Page 2 

received in the transaction were not distributed to "X's" shareholders, but rather were 

left in the company, which was renamed "Y". 

In 1968 "Y" changed its state of 

incorporation to Delaware by :rrerging into 

"Z", a corporation for:rred for that purpose. 

Neither "Y" nor "Z" ever sold additional 

shares of its stock. Shareholders in "Z" 

were in all instances for:rrer shareholders of 

"X" or the successors-in-interest to for:rrer 

shareholders of "X". ]:_/ 

During its existence, "Z" invested the 

proceeds of the sale of "X" in stocks, bonds, 

and other securities • . • • 'lb assist it in 

these transactions, "z" engaged a registered 

investirent advisor • • • • At no t.iire during 

their respective existence did "Y" or "Z" 

ever engage in the purchase or sale of 

carm:xli ties, the trading of carm:xli ty options, or the purchase or sale of ccrrm:xli. ty 

futures contracts. 

In 1986, in response to adverse tax law 

changes contained in the Tax Refonn Act of 

1986, "z 's" directors recarm:mded and the 

shareholders approved a dissolution of the 

corporation. At the request of a number of 

major shareholders of "Z", the directors of 

"Z" agreed to fonn a limited partnership 

which 'WOuld be engaged in essentially the 

same investJ.rent activities as "z" . For:rrer 

shareholders of "Z" were encouraged, though 

not required, to invest the liquidation 

proceeds (after deducting approximately 20% 

for federal inc:are taxes) in this partnership. 

"Z" was dissolved on December 30, 1986, 

and a private place:rrent of limited partnership interests in the Partnership was can-

:rrenced in January 1987 •• 

OUt of approximately $15.5 million 

distributed arrong the 44 for:rrer shareholders 

]:_/ In your telephone conversation you explained that the tenn 

"successors-in-interest" refers to the heirs of the for:rrer shareholders. 
Page 3 

of 11Z11 at liquidation, 12 fonrer shareholders 

chose to invest approximately $6.7 million in 

the Partnership. In addition, two other 

investors who were not fonrer shareholders 

chose to invest in the Partnership. The 

first of these is a stockbroker with E.F. 

Hutton, the company which had handled m:my of 

the trades for 11 Z 11 during its existence. 

This person's li1vestrnent amounted to $6,000. 

'Ihe other investor is [your] minor son • • • , 

whose invest:rrent amounted to $8,000. Each of 

the Partnership's six general partners is a 

fonrer director of "z 11 • Furthenrore, the 

investment advisor for the Partnership's 

Grcwth Fund • • • is the investment advisor 

which had been used by 11 z 11 • 

'Ihe only major operational differences 

between the Partnership and 11 Z 11 reflect the 

general partners' decision to use this 

opportunity to correct same problems which 

had plagued "Z". Easily the most significant 

of these problems was a dispute over whether 

the corporation's assets should be invested 

to yield current income or for capital 

appreciation. 'Ihe Partnership sought to 

address this conflict by creating two funds, 

an Income Fund whose twin purposes were 

preservation of capital and maintenance of a 

high but consistent level of current income, 

and a Growth Fund whose purpose was capital 

appreciation. Each limited partner was 

offered the opportunity to allocate his 

investment between these Funds and to reallocate his investment at the end of each 

calendar year. 

Your letter further explains that, consistent with the Partnership's 

investment philosophy, neither fund ever conterrplated trading in camodity 

interests. In fact, your letter notes several provisions in the Partnership's Agreement which specifically prohibit such trading. 

'Ihe instant request arose, then, out of the need to protect the Income 

Fund -- which had been invested in tax-exerrpt municipal bonds -- fran a 

decline in value. As your letter states: 

Accordingly, in August 1987, the general 

partners interviewed four investrt'ent counsel 

and selected one of them. Alrong the reasons 

for E: 'lpr;l i~ng this counsel was this counsel's 
Page 4 

program for using "hedging" to protect the 

asset values of conservative portfolios. 3/ 

By investing the Incare Fund's assets in -

bonds which are included in the Bond Buyer 

Municipal Bond Index and then selling futures 

contracts covering bonds owned by the Incare 

Fund, this program offers substantially 

increased protection against portfolio 

losses. Of course, this inves"t:lrent strategy 

minimizes the potential gain which could be 

realized by the Incare Fund fran asset 

appreciation, such as would occur in connection with a drop in prevailing interest 

rates. HCMever, since the Partnership offers 

a GrCMth Fund for those partners seeking 

capital appreciation, the general partners 

concluded that this was an acceptable price 

to pay •••• 

[T]he Partnership must amend both its 

private placem:mt narorandum and its Limited 

Partnership Agreement to pennit its investnent counsel to engage even in the limited 

"hedging" strategy outlined by the inves"t:m:mt 

counsel. The general partners propose to 

condition the adoption of the strategy upon 

obtaining the consent to the necessary 

amendments to the Limited Partnership Agreenent fran 100% of those limited partners with 

investments in the Inoarne Fund •••• [T]hese 

proposed amendlrents ••. will be as narrow 

as possible. They will pennit the Income 

Fund to engage in carm::x:li. ty trading acti vi ties, but only to the extent deerred necessary by its investment counsel to penni t 

"bona fide hedging transactions" and then 

only stlbject to the further limitation that 

the Incare Fund will not enter into carm::x:li.ty 

futures and carmodi ty options contracts for 

which the aggregate initial margin and 

premiums exceed 5% of the fair market value 

of the Incare Fund's assets. The private 

placem:mt narorandum will be amended 

ll You represent that this counsel has applied for registration as a 

camodity trading advisor. 
Page 5 

consistent with these limitations and will 

contain the follCMing representation: 

The Incare Fund is not intended to 

be, nor it should be regarded by 

investors as, a corrm:xlity pool. 

Futures trading helps the Incane 

Fund to achieve its goal of preserving capital assets while 

obtaining a high level of current 

incane, but it is not the principal 

canponent of the Incare Fund 1 s 

investment program. 

Based upon the foregoing representations, we believe that the relief 

you seek should be issued to the General Partners because of, arrong others, 

the facts that: (1) the general and limited partners (either directly or as 

successors-in-interest) have an investment affiliation that dates back to at 

least 1968, when "Z" was established; (2) the Partnership intends to trade 

carm:::xlity interests for hedging purposes; and (3) the Partnership will not 

ccmnit rrore than 5% of that Fund 1 s assets to initial nargin or options 

premiums. Accordingly, based upon those representations, the Division will 

not recommend that the Commission take any enforcement action against any 

General Partner if he fails to register as a CPO in connection with his 

operation of the Partnership. j_/ 

You should be aware that the "no-action" position taken by this letter 

does not excuse any General Partner fran compliance with any otherwise 

applicable requirements contained in the Act or in the Comnission 1 s regulations thereunder. For e.xanple, each remains subject to Section 4o of the 

Corrm:xlity Exchange Act, 7 u.s.c. §6o (1982)' and to the reporting requirenents for traders set forth in Parts 15 and 18 of the Ccmnission 1 s regulations, 17 C.F.R. Parts 15 and 18 (1985). 

The position taken by this letter is based on the representations that 

have been nade to us. lmy different, changed or anitted facts or conditions 

i/ See Division of Trading and Markets Interpretative letter No. 86-19, 

Ccmn. Fut. L. Rep. (COl) 4][23,202 (July 3, 1986), wherein the Division 

issued similar relief based on similar facts. Corrpare Division 

Interpretative letter Nos. 86-1'7, 86-10 and 83-9, Ccmn. Fut. L. Rep. 

(COl) 4][23,200 (June 24, 1986), 4][23,016 (April 24, 1986) and 4][21,909 (Nov. 

3, 1983), \'lherein we concluded that certain trading vehicles would not be 

pools within the rreaning of Rule 4.10 (d) because they were rrerely joint 

trading accounts comprised essentially of family members or long-time 

friends or business associates, not passive investors as in the instant 

case. 
Page 6 

might require us to reach a different conclusion. In this connection, we 

request that you notify us immediately in the event the Partnership's operation, including its nernbership composition, changes in any way fran that as 

represented in your letter and in your telephone conversation with Division 

staff. 

BSG/rv 

Very truly yours, 

Andrea M. Corcoran 

Director 

cc: Daniel A. Driscoll, National Futures Association