~L(·- 1/ 

DIVISION OF 

TRADING AND MARKETS 

Re: 

COMMODITY FUTURES TRADING COMMISS,ON 

2033 K STREET, N.W., WASHINGTON, D.C. 20681 

'J _, 

July 17, 1984 

Regulation as a commodity pool operator, 

Daar 

This is in response to your letter dated JUne 15, 1984, as supplerrented by the letter of your associate, , dated 

', 

June 27, 1984 and the draft prospectus dated June 22, 1984 (the "Prospectus") 

enclosed e1erewith, in which you requested an opinion that 

(the "Fund") would not be a "r;x:x>l" as defined in 

Rule 4.10(d) of the Commission's regulations, 17 C.F.R. §4,10(d) (1983). 

From the representations JMde in your letter, as supplemented, we 

understand the facts to be as follo;..rs: The Fund is a Maryland corporation 

which has applied for registration as an open-end invest.rrent manageroont 

company under the Invest:Irent Cc:.>rrpany Act of 1940. The investrrent objective 

of the F\rnd is "to provide investors with a high current return by investing 

in [Federal] debt obligations • • • and by writing covered call options and 

secured put options against such securities. " In addition, the Fund IMY also 

engage in transactions involving interest rate futures contracts and options 

on such contracts "in order to hedge. against changes in interest rates." 

These conm:Xl.ity interest transactions would, ho;..rever, be subject to 

certain limitations. The Prospectus, at page 13, sets forth, arrong others, 

the follO'Wing limitations: ",, 

!=) 

The Fund will not engage in transactions in ··' 

futures contracts or reJ/ated options for speclilati ve purposes but only as a hedge against changes <\I 

resulting fra.1 market conditions in the values of 

debt securities held in the Funds's portfolio or 

\17hich it intends to purchase. . . In addition, 

the Fund may not purchase or sell futures contracts or purchase or sell related options if 

immediately thereafter the sum of the amount of 

margin deposits on the Fund' s existing futures and 

related options positions and the amount of 

premiums paid for related options would exceed 5% 

of the Fund's total assets. 
.. 'Page 2 

[The Fund will] sell futures contracts, purchase 

put options on futures contracts and write call 

options on futures contracts solely for the 

purpose of protecting its portfolio against 

declines in value. In addition, the Fund expects 

that in the normal course upon sale (or other 

termination) of long futures contracts, long call 

·options on futures contracts and written put 

options on futures contracts, it will have purchased or will purchase the debt securities 

covered by such futures contracts or options a 

substantial majority of the ti.roo, but \ll1der 

\ll1Usual rrarket conditions it may terminate any of 

such positions without a 90rresponding purchase of 

securities. · ·~ 

On February 2, 1984 1 the Ccmnission issued proposed Rule 4. 5, which 

would exempt certain otherwise regulated persons from registration as a . 

cc:mnodity pool operator ("CPO") and fran the provisions of Subpart B of Part 

4 of the Ccmnission's regulations. 1/ See 49 Fed. Reg. 4778 (February 8, ., 1984), 49 Fed. Reg. 6910-11 (February 241;-1984). Based upon our review of 

the representations made in your letter 1 as supplerrented, it appears that the 

F\ll1d would be eligible for this proposed exemption inasmuch as the Fund: (1) 

is arrong the persons and qualifying entities covered by the proposal -- i.e., 

a registered investment company; (2) will engage in commodity interest ---- transactions solely for bona fide hedging purposes; (3) will not deposit as 

initial margin or premiums for its commodity interest transactions more than 

5% of its total assets1 (4) will not be, and has not been, marketed as a 

commodity pool or otherwise as a vehicle for trading in the commodity interest 

markets; and (5') will disclose in writing to its prospective participants the 

purpose of and the limitations on the scope of its camodi ty interest trading. 

Accordingly, this Division will not recommend that the Commission take 

any enforcement action against 

for failure to register as a CPO or to comply with the provisions of Subpart 

B of Part 4 of the Commission's regulations.2/ This position is, however, 

subject to the condition that the Fund will 'Corrply with Rule 4.5 as adopted 

by the Commission or with any other such rule that the Commission rnay adopt 

)j Section 4m(l) of the Act, 7 u.s.c. §6m(1) (1982), requires each person 

who comes \vithin the CPO definition to register as a CPO with the Cernmission. The provisions of Subpart B of Part 4 concern the operational, 

disclosure, rep::>rting and recordkeeping requirerrents of registered CPOs. 

See 17 C.F.R. §§4.20-4.23 (1983), as amended by 48 Fed. Reg. 35248 

(August 3, 1983) . -

rr~asmuch as proposed Rule 4 • 5 would provide exemption for a registered 

investrrent canpany and any principal or employee thereof 1 the position 

we are taking herein also would apply to any principal or employee of 

the Fund -- ~~ its officers. 
, Page 3 

to exerrpt certain otherwise regulated persons from regulation as a CP0.3/ 

Therefore, this position will cease upon the effective date of Rule 4.5-or of 

such other rule. -

In ills connection, we note that previously we have issued opinions to 

certain registered investment companies that they would not be pools within 

the ~reaning and intent of Rule 4 .10 (d) based upon representations similar to 

those.made by the Fund.4/ However, in light of the Commission's recent 

proposai in this area, we believe that such a "no-action" position is the 

appropriate relief that should be afforded at this time. We further note 

that with respect to such investment companies and the filing of certain 

notices proposed in Rule 4. 5, the Corrrnission has stated: 

[\ve do] not believe that it should be necessary for the 

recipients of such interpretative letters to, in 

effect, "re-submit" an application for exerrption -- i.e., to file an initial notice of eligibility-- in 

the event the proposal is adopted. Ho;.vever, to insure 

.that these persons (and entities) would be in compliance with the requirerrents ·of the proposed rule, the 

Commission intends to take the position that such 

persons must file supplemental notices in the event 

that any of the representations they previously had 

made to the Conmission changed or that, to the extent 

that the proposal would require any additional representations, they were not in compliance with B1ern. 

This position would ensure equal treatment of all 

persons claiming exerrption under the rule. 49 Fed. 

Reg. 4778 at 4782-83. 

;}_/ For exarrple, the rule as adopted may or may not contain the same 

standards and indicia of bona fide hedging transactions and positions 

contained in the rule as proposed. Moreover, to the extent that the 

·rule as adopted is less restrictive than the rule as proposed -- with 

respect to the stru1dards and indicia of bona fide hedging transactions 

and positions or to any other aspect of the proposal -- the Fund would 

be able to trade commodity interests subject to such other restrictions 

provided, of course, that such trading is conducted in accordance with 

the rule as adopted. 

i_/ See -,---,--.-~~..,------~' Conrn. Fut. L. Rep. (CCH) ~21, 908 (available 

Nove1nber 3, 1983); Corrun. Fut. L. Rep. (CCH) ~2],906 (available October 21, 1983); ~~~~--~~~~~~--~ 

, Cor~. Fut. L. Rep. (CCH) ~21,905 (available September 13, T~T(3:-;)-.--::S-ee-· -'-also ____ ., Conrn. Fut. L. Rep. (CCH) 

~21,910~vailable November 21, 1983). 

' - ' 
., ,Page 4 

We believe, and intend to recanrend, that the Ccmuission should take this 

sarre position with respect to the Fund. 2./ 

You should be aware that the position we have taken in this letter 

does not excuse the Fund fran cropliance with any otherwise applicable 

requirerrents contained in the Act or in the Ccmuiss.ion' s regulations thereunder. For example, it remains 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 of the Commission's regulations, 

17 c.F.R. Parts 15, 18 and 19 (1983), as amended. 

The position we have taken here:i,n is based upon the representations 

that have been made to us. Any different, changed or anitted facts or 

conditions might require us to reach differ~lt conclusions. In this connection, we request that you notify us i.Iirrediately in the event the Fund's 

operations and activities change in any way fran that as represented to us. 

Very truly yours, 

-,\ "' /} / I _i;'' / I 0 j/ / l .../.( . /- . / .. \ .. _._... Ai:ldrea 'M •. Corcoran -+ ·~.-<.--. ~ ..... --

Director 

'i_/ He historically have treated registered investrrent companies and their 

officers and directors as those persons subject to CPO regulation. You 

have requested our opinion, however, that neither the Fund's registered 

investrrent adviser, (the 

"Adviser"), nor its registered broker-dealer, 

(the "Distributor"), nor any officer, director or errployee of the 

Adviser or Distributor is a CPO. Proposed Rule 4 • 5 does not cont.enplate 

that any such person would be a CPO. See, ~' Rule 3.16 (a) (5), which 

generally exempts fran registration as an associated person of a CPO 

persons registered with the National Association of Securities Dealers as 

a registered representative or registered principal. 48 Fed. Reg. 35248 

(August 3, 1983). Accordingly, we do not believe that any such opinion 

is necessary at this time. 

' . 

However, :in the unlikely event that Rule 4. 5 or any other such rule as 

U1e Commission adopts includes investment advisers to and broker-dealers 

of registered investment ccmpanies arrong the persons who could be considered to be CPOs but does not also include provision for exemption from 

regulation as a CPO for such persons, the Division will not recommend 

tll['lt. the Ccmnission take any enforcerrent action against the Adviser, the 

Di std.butc1r, or any officer, director or employee thereof pending such 

persons' carpliance with such requirerrents as the rule may irrpose. Of 

course, this position assumes that such persons will endeavor to achieve 

such compliance as promptly as possible.