December 11, 1986 

Re: Request by a National Bank for Relief from Regulation as a 

CTA. 

D2ar Mr. 

'rhis is in response to your letter dated October 23, 1986, as supplerrented by your letter dated Oc:tober 24, 1986 and telephone conversation with 

Division staff held on November 18, 1986, whereby you requested on behalf of 

"A", a national bank, confinnation that the Division will not recommnd that 

the Corrmission take any enforcem=nt action against "A" if it fails to register 

as a comrrodity trading advisor ("CTA") under the circumstances set forth 

belo.v. 

Based upon the representations you made in your Oc:tober 22, 1986 

letter, as supplerrented, we understand the facts to be as follo.vs: 

"A" is the principal banking subsidiary of 

"B". "A" is a com:rercial bank that has provided 

cornprehensi ve banking and trust services to 

individuals, government entities and businesses 

since 1933. Pursuant to agree:rrent, "A" acts as 

the Investment Administrator to two portfolios of 

the Trust, which is registered as an investment 

company with the Securities and Exchange Corrmission 

("S:EX:") under the Investment Corrpany Act of 1940 

[the "1940 Act"]. 

The Trust is a diversified, open-end investrrent company established under Massachusetts law 

as a Massachusetts business trust. The Declaration 

of Trust permits the Trust to offer one or nore 

separate series of units of beneficial interest 

("units 11 ) representing interests in separate port-
Page 2 

folios of securities. Each unit of each portfolio 

represents an equal proportionate interest in that 

portfolio. Although the Trust currently consists 

of three separate series, "A" acts as Invest:rrent 

Administrator only with respect to two Portfolios. 

One of the Portfolios is authorized to enter 

into stock index futures contracts. • • • 

It has not yet corrmenced trading in stock 

index futures contracts. Prior to and throughout 

such trading, the Trust intends to cc:>rrply fully 

with 17 C.F.R. §4.5, including the advance filing 

of a Notice of Eligibility thereunder, in order to 

be exempt from registration as a cammodity pool 

operator. 

As you have acknowledged, in providing commodity interest trading 

advice to the Trust "A" would appear to corre within the definition of the 

term "ccmrodity trading advisor" in Section 2 (a) (1) (A) of the Corrrrodity 

Exchange Act (the "Act"), 7 U.S.C. §2 (1982), 1/ and, absent any relief, 

would be required to register as a CI'A pursuant to Section 4m(l) of the Act, 

7 u.s.c §6m(1) (1982). 

As you also are aware, in connection with its recent consideration of 

arrendrrents to the Act, the House of Representatives Comnittee on Agriculture 

urged the Commission to issue rules which would provide relief from CTA 

regulation for, among other persons, registered investrrent advisers to Rule 

4. 5 trading vehicles. !:_/ As the Cornni ttee Report states: 

[W]here the advisor advises an entity that is 

excluded from registration as a comrodity pool 

under Rule 4.5 or is a Rule 4.5 qualifying entity 

and such advisor is subject to appropriate regulation under the Investrrent Advisers Act, that 

advisor should ordinarily be exempted from 

commodity trading advisor registration if its 

camodity advice is solely incidental to its 

}j You further acknowledged that Section 2 (a) (1) (A) of the Act excludes from 

the erA defjni tion such persons as a bank or trust corrpany, provided that 

the furnishjng of conm:x1ity interest trading advice is solely incidental 

to the conduct of their business or profession. You stated, however, 

that "A" is not requesting at this tim:"! any Division interpretation on 

the availability of .this exclusion. 

2/ H.R. Rep. No. 624, 99th Gong., 2d Sess. 46-48 (1986). 
Page 3 

business of providing securities advice to such 

entity and the advisor is not otherwise holding 

itself out as a commodity trading advisor. 

Therefore, the Committee urges the Commission to 

exercise its authority to adopt regulations in 

regard to these matters. [Ehlphasis added.] 

The Committee understands that rulemaking 

addressing these concerns may take SOI'!"e ti.rre for 

the Commission to develop and promulgate. Individual requests for exclusions or exemptions, 

consistent with the above guidelines, however, 

should be processed by the Commission as expeditiously as practicable. The Commission's experience with individual cases should facilitate the 

formulation of more general rulemaking. 

The Comrni ttee Report also provides in pertinent part: 

[T]he ConuUttee does not expect the Commission to 

grant exempted cormodi ty trading advisors any 

relief from the antifraud provisions of section 4o 

of the Act. 3/ 

In furtherance of the foregoing, the Division recently issued registration "no-action" relief of the nature that you seek to certain registered 

investment adviser subsidiaries of a State-licensed insurance company in 

connection with the providing by those subsidiaries of commodity interest 

trading advice to certain registered investment companies which met (or would 

meet) the requirements of Rule 4. 5. j_/ 

In support of the instant request, we note your representations, a.rrong 

others, that "A" will provide cornmodity interest trading advice to a Rule 4.5 

qualifying entity (the Trust, a registered investrnent company) and that it 

Id. 

Division of Trading and Markets Interpretative letter No. 86-24, Corrm. 

Fut. L. Rep. (OCH) ~23,292 (October 1, 1986). See also Division of 

Trading and Markets Interpretative letter No. 86-25, Conm. Fut. L. Rep. 

(CCH) ~23,332 (October 9, 1986). 
Page 4 

will not hold itself out as a erA. 5/ He further note, however, that "A11 is 

not registered as an investment adviser in light of the fact that, and as you 

have explained, it is excluded from the definition of the tem "investrnent 

adviser 11 pursuant to Sections 202 (a) (2) and (a) (11) of the Investment Advisers 

Act of 1940 (the "Advisers Act"), 15 U.S.C. §§80b-2(a) (2) and (11) (1982). §_/ 

In further support of the instant request, then, you represented the 

following: 

~I 

§_/ 

Requiring "A" to register as a erA would 

undemine the legislative intent of exempting 

banks from registration under the Advisers Act. 

Congress clearly determli1ed that the pervasive 

oversight of banks, including their investment 

advisory activities, precluded the need for duplicative regulation in the fom of SEC registration. 

Preventing banks from qualifying under the staff's 

no-action position due solely to their reliance on 

this statutory exemption would contradict Congressional intent and place banks at an unwarranted 

competitive disadvantage vis a vis non-bank 

investment advisers. 

f-breover, "A" is subject to the substantial 

regulation applied to investment company advisers 

under the 1940 Act because banks are not exempt 

from the "investment adviser" definition in that 

act. It is the 1940 Act -- and not the Advisers 

Act -- which irrq_:x)ses the primary restrictions on 

the activities of investment advisers with registered investment companies. . • • 

With respect to disclosure obligations in particular you explained: 

Section 15 (c) of the 1940 Act in pertinent 

part provides as follows: 

For the purpose of the position we are taking below, we are assuming that 

this latter representation will meet the criteria established for "not 

holding out 11 as a erA in Interpretative letter No. 86-24, id. 

Unlike the CTA exclusion for banks and trust companies in Section 

2 (a) (1) (A) of the Act, the investrrent adviser exclusion does not contain 

a 11 solely incidental" requirement. 
Page 5 

[I] t shall be unlawful for any registered 

investment company having a board of 

directors to enter into, renew, or 

perf om any contract or agreement, 

written or oral, whereby a person 

undertakes regularly to serve or act as 

investment adviser of • • • such company 

unless the terms of contract or agreement 

and any renewal thereof have been 

approved by the vote of a majority of 

directors. • . • 

It shall be the duty of the directors of 

a registered investment company to request and evaluate, and the duty of an 

investment adviser to such company to 

furnish, such info:rmation as may reasonably be necessary to evaluate the terms 

of any contract whereby a person undertakes regularly to serve or act as 

investment adviser of such company. 

(Ehphasis added.) 

In short, the 1940 Act imposes the precise 

same disclosure requirements on every adviser to 

an investment company -- including "A" -- regardless of whether the adviser is registered under 

the Investment Advisers Act of 1940. Accordingly, 

prior to the jnitial approval of "A" by the 

•rrust' s Board of Trustees, "A" provided the Board 

with all relevant info:r:mation, including (1) the 

experience of "A" in managing portfolio assets in 

general and indexed assets in particular, (2) the 

identities and experience of the particular "A" 

employees who would be primarily responsible for 

managing the Trust's account, (3) the proposed 

rrethod by which "A" intends to inplernent the 

Trust's stated investment objectives and policies, 

(4) the basis for "A"' s proposed fees, and (5) any 

other i.nfo:r:mat.ion requested by the Board. Section 

15 (c) requires that "A" provide such information 

at each annual renewal of the contract between the 

Trust and "A". 

You also explained that, like the principals of an applicant for 

registration as an investment adviser, the principals of a bank insured by 

t11e Federal Deposit Insurance Corporation ("FDIC"), such as "A", are subject 
Page 6 

to a fitness examination in that the bank effectively is prohibited from 

employing any :person who has been convicted of a crirre involving dishonesty 

or breach a trust without the prior consent of the FDIC. 1/ 

Accordingly, based upon the foregoing and in furtherance of the House 

Committee Re];X)rt, the Division will not rec0l't1lend that the Corrrnission take 

any enforcerrent action against "A" if it fails to register as a CI'A in 

connection with providing commodity interest trading advice to the Trust as 

set forth above. ~/ 

You should be aware that this position does not excuse "A" from 

compliance with any otherwise applicable requirerrents contained in the Act or 

in the Corrrnission' s regulations thereunder. For example, it remains subject 

to the ru1tifraud provisions of Section 4o of the Act, 7 u.s.c. §6o (1982), 

and 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 (1986). ~/ 

The position adopted herein is based upon the representations that you 

have made to us, as stated above. Any different, changed or omitted facts or 

conditions might require us to reach different conclusions. In this connection, we request that you notify us imrediately in the event the o:perations 

and activities of "A" change in any way from that as represented to us. 

Finally, this position is that of the Division of Trading and Markets and 

does not necessarily represent the views of the Commission or any other 

office or division of the Commission. 

If you have any questions about this letter, please feel free to 

contact me or Barbara R. Stern, the Division's Assistant Chief Counsel, at 

202/254-8955. 

Very truly yours, 

Andrea M. Corcoran 

Director 

cc: Daniel A. Driscoll, National Futures Association 

]_/ 

8/ 

~I 

Compare Section 203(e) of the Advisers Act, 15 u.s.c. §80b-3(e) (1982), 

to Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. §1829 

(1982). 

See supra, n. 5. Similarly, and as you have requested, the Division will 

not recomrend tha·t the Commission take any enforcerrent action against the 

associated persons ("APs 11 ) of 11A" if they fail to register as such in 

connection with such activity. 

The APs of "A11 similarly remain subject to Section 4o.