DIVISION OF 

TRADING AND MARKETS 

Dear 

COMMODITY FUTURES TRADING COMMISSION 

2033 I< STREET, N.W., WASHINGTON, D.C. :IOM1 

!! c# n1 R~~?t:caz~ /t~c.tt:r,1 ~~u ~ tP/Vdr"Aez;;_Cf 

j':J/L{)/Jvc4:J f) /1,-e.--e'~~ ~ f7 . 

September 26. 1984 

This is in response to your letter of August 6, 1984, in which you 

requested the Division of Trading and Markets ("DiviEion") to adopt a 

no-action position with respect to the activities of _ •1'1"' . , an applicant for registration as a futures ccmnission 

rrerchant ("rol"), its affiliated cmpani.es and their respective erployees. 

For the reasons set forth herein, the Division has detennined to adopt the 

no-action position you requested, subject to the condition that "A·" and its 

affiliated cropanies carply with the undertakings prOfOsed in your letter. 

Basea upon the representations set forth in your letter and in 

subsequent telephone conversations with you, we understand the facts to be as 

follows: · 

"II.. .. rr is a wholly-o,.med subsidiary of The 

'13 " Corporation (" J3 '") , a bank holding 

carpany, as defined in the Bank Holding Carpa.ny 

Act of 1956, and the activities of .. A " 

contarplated here are pennitted by Regulation Y of 

the Board of Governors of the Federal Reserve 

Syst.er.. (12 C.F .R §225. 25 (b) (18)). ·~' intends to 

solicit and accept orders primarily from 

non-affiliated, major corporate custarers of the 

.. J3 to Bank, N.A. (the "Bank"), a 

national bankin_g association and wholly-cMned 

subsidiary of .. [j ' , for futures contracts on 

securities issued or guaranteed by the U.S. 

Government, JTOney market inst.rurrents, bullion, 

foreign exchange and options on futures contracts 

for securities issued or guaranteed by the u.s. 

Government. .'" A"' will also accept orders for such 

futures contracts and options for the accounts of 

the Bank itself ana other direct and indirect ·rs " 

subsidiaries. 
Page 2 

.. .. 

It is intended that fr will have a close 

operational relationship with the Bank, which will 

on a contractual basis provide "A ' with necessary 

"back office" services and cust.c::rrer credit 

analysis. Moreover, .. A ' will -- at least 

initially - have only a minimum sales force of 

its CMn, as it intends to rely principally upon 

personnel of the Bank and other '/3 " subsidiaries 

to solicit orders. 

Accordingly, nost salepersons who will solicit 

and accept orders on behalf of .. t'l .. will be 

enployed not by .. ft"' . , but by the Treas~ 

Depa.rtment of the Bank and by other • (3-

subsidiaries, including "(.3 " . Governrrent 

Securities, Inc., .. fJ"' . Capital Markets 

Corporation, or •13 .. · . Treasury 

Corporation, all of which are wholly-c:wned 

subsidiaries of • n lo or the Bank (which 

salespersons are collectively referred to as the 

"Affiliated Salespersons," and their errployers are 

collectively referred to as the "Affiliated 

Thployers") • The offiCE.s of "A" and of the 

Affiliated Errployers generally are located at the 

corporate headquarters of • Q ". Ho.vever, certain 

offices, designated Regional Treasury Offices, are 

located else.vhere in the United States. The 

Affiliated F.irployers will be cc:llpensated, an a 

basis yet. to be determined, by 41 #t" in consideration of the solicitation and acceptance of 

orders ~1 the Affiliated Salespersons in their 

errploy and the performance of related services. 

The activities of the Affiliated Eirrployers and their Affiliated 

Salespersons are similar to those conducted by persons fonrerly designated 

"agents" of FQv1s. As you kno.v, Congress arrended the Ccmrodi ty Exchange Act 

("Act") in 1982 to eliminate this category and to require those persons who 

perforrred the types of activities traditionally engaged in by agents 

generally to register with the Ccmrodi ty FUtures Trading Ccmnission 

_{"Ccmn.ission") as introducing brokers. !/ In prc::m..llgating regulations to 

inplarent this provision of the Act, the Ccmnission noted: 

]j Futures Trading Act of 1982, Pub. L. No. 97-444, §201 96 Stat. 2294 

(1982). 
Page 3 

[P] ersons who fomerly operated as agents of an 

F01 ITUst elect either to operate as an introducing 

broker or as a branch office of an FCM •••• 

[This) is rrore fully consonant with the requirerrents of the Futures Trading Act of 1982 which 

specifically contetplate the separate existence 

and business identity of introducing brokers. !:_/ 

As further interpreted by the Division, this amendment to the Act generally 

requires a separately incorporated branch office of an FCM either to register 

as an introducing broker or forsake its separate corporate identity. 3/ 

Because the Affiliated Dnployers are separate corporations, they 

ordinarily would not be pennitted to operate as branch offices of • 

Rather, each firm would be required to register as an introducing broker, and 

the Affiliated Salespersons would be required to register as associated 

persons of their respective Affiliated Employer. You have recognized that 

such registration may be required but have asserted that this result is 

neither necessary to satisfy the Ccmni.ssion 1 s regulatory purposes nor 

appropriate in these circumstances. In particular, you have stated that, 

with respect to bank holding CClTpc3.llies or national banks and their affiliates, the :irrposi tion of introducing broker registration would not further the 

Ca:mission 1 s regulatory cbjectives but would s.inply add another layer of 

operational, minim.mt capital, recordkeeping and reporting requirerrents upon a 

national bank and its affiliates. 

AE an alternative to registration as an introducing broker, you have 

suggested the follCMing operational structure: 

1. All Affiliated Salespersons will be registered 

with the Carmission as associated persons of "~"· .• 

2. Each office of each Affiliated Employer in 

which Ccmnission-regulated activity will be 

conducted will be identified on .. fr" 's registration application or a supplement thereto as a 

branch office of "f't' . 

3. A supervisor with respect to the Ccmnissionregulated activities of the Affiliated Salespersons will be designated for each branch office. 

Such supervisor will be listed as a principal and 

be registered as an associated person of "'A"' • 

2/ 48 Fed. Reg. 35248, 35252 (August 3, 1984). 

3/ See CFIC Interpretative Letter 84-10 (May 29, 1984) 2 Coml. Fut. L. Rep. 

(CCH) !22,252. 
Page 4 

4. An officer of at least the level of Vice 

President for each Affiliated Eitplorer will also 

serve as an officer or director of A-.. and will 

be listed as a principal and registered as an 

associated person of~~.... Such officer will be 

vested by the relevant Affiliated Enployer with 

final supervisory authority, including the authority to hire and fire, with respect to the 

Ccmnission-regulated activities of the Affiliated 

Salespersons. Apprcpriate docurrents evidencing 

such authority will be furnished to the 

Ccrrrnission. 

5. To the extent that any other officer or 

errployee of the Affiliated Eirployers has supervisory authority with respect to the Ccmnissionregulated activities of the Affiliated Salespersons, such officer or errployee will be listed 

as a principal and registered as an associated 

person of "'~ "' • 

6. Each Affiliated Drployer will disclose to the 

Cmrnission the narres of those errployees and 

officers (up to at least the level of Senior Vice 

President) with supervisory authority over the 

non-commission-regulated activities of the 

Affiliated Salespersons and their supervisors. 

Each Affiliated Employer will disclose the names 

of such other senior officers as the Ccmnission 

may request. 

7. The Ccmnission will be furnished with a letter 

fran the President, Chief Executive Officer or 

other officer with authority to sign oo behalf of 

and bind the Affiliated Eirployer certifying as to 

the status, duties and responsibilities of its 

Affiliated Salespersons, setting forth a list of 

officers (up to at least the level of Senior Vice 

President) responsible for supervising the 

Affiliated Salespersons and their supervisors and 

specifying the activities for which they have 

responsibility. The President, Chief Executive 

Officer or other officer will also certify that 

none of the Affiliated Salespersons, their supervising officers or any·director of the Affiliated 

&rployer oould be refused registration with the 

Carm:ission on the grounds stated in §8a(2) of the 

.Act. Appropriate docurrents evidencing the 

authority of the certifying officer to sign on 

behalf of and bind the Affiliated Eirployer will be 

furnished to the CCmni.ssion. 
Page 5 

8. In addition, the Ccmni.ssion will receive fran 

each Affiliated Drployer an undertaking to the 

effect that it will be jointly and severally 

liable with" f-t "'., both to the custaner of the 

Affiliated Salesperson and (in respect of fines) 

to the Ccmni.ssion, for any violations of the Act 

and the regulations thereunder ccmni tted by any 

Affiliated Salesperson e.rrployed by such atployer. 

""f1"" may agree to indemnify each Affiliated 

Drployer in respect of such liability. 

Appropriate docurrentation of the authority to 

enter such undertaking and to birrl the Affiliated 

Einployer will also be furnished to the Ccmni.ssion. 

9. On a basis consistent with that described in 

this letter, .., A':- and the other " ~ .. subsidiaries 

will fran t.ilre to tirre inform the Ccrrmi.ssion of 

any changes in personnel referred to herein or 

changes in any information furnished pursuant to 

the above paragraphs and will, as appropriate, 

register new personnel with the Ccmni.ssion. 

In essence, you have asked the Division to adopt a no-action position 

with respect to the failure of ll (\ .. and its Affiliated Drployers to carply 

with the Carrnission 1 s prohibition on "non-proprietary" branch offices and 

with the provisions of Carrnission rule 166.4 which requires "[e]ach branch 

office of each Comnission registrant [to] use the name of the finn of which 

it is a branch for all purposes, and [to] hold itself out to the public under 

such narre. 11 This no-action position would be adopted subject to the condition 

that " (1 ~ and its Affiliated Einployers croply with the undertakings you 

proposed. 

' When the Division published its interpretative letter on nonproprietaJ.·y branch offices, it recognized that there may be t.ilres when a 

separately incorp:>rated branch office may be authorized. As an exarrple, the 

Division noted that certain stc.te laws may require a branch office located in 

that state to inoorp:>rate there. In such circumstances, the Division stated 

that it would grant appropriate relief. The Division has determined that 

this is a similar case. In particular, the Division notes that, in the 

conduct of the principal activities for which they were established, the 

Affiliated Employers will be receiving funds frCITI their corp:>rate custarers 

to effect certain transactions on their behalf. By definition, hc.':7.Ever, the 

Affiliated Employers could not accept funds frCITI these same custarers to 

hedge their transactions in the futures markets if the etployers were registered as introducing brokers. !/ Tiuls, .. ~... would be required to create a 

!/ Section 2 (a) (1) (A) of the Act, 7 u.s.c. S2 (1982). See also, CPIC 

Interpretative Letter 83-15 (Decatber 1, 1983) [1982-1984 Transfer 

Binder] Ccmn. Fut. L. Rep. (CCH) !21 ,968. 
0' 

Page 6 

separate sales force to effect what would be essentially the seccnl half of 

one transaction. SUch a result would be duplicative and unnecessarily 

burden sane. 

t-breover, the Division has concluded that, because of the close 

relationship betv1een ... A" and its Affiliated En-players, registration of the 

Affiliated Employers as introducing brokers is not necessary in this case. 

The Division notes that both .. A\, and the Affiliated Eirployers are 

wholly-o,.med subsidiaries of the • (3 " Corporation or the . 

_ Bank. In addition, many of the officers of "A" are also officers 

of the Affiliated Employers. This close relationship contrasts sharply with 

the separate relationships which generally existed between FCMs and their 

forrrer agents. Indeed, it was because ro1s generally sought to disavow any 

responsibility for the conduct of their agents that Congress, at the urging 

of the F0·1 carmunity, created the introducing broker category of registrant. 

"ft l1 ., hc:Mever, is not seeking to disavow responsibility for the 

conduct of its Affiliated Employers and the Affiliated Salespersons. To the 

contrary, '"A"' and its Affiliated ErTployers have agreed to be jointly and 

severally liable for the commodity-related activities of the Affiliated 

Salespersons. The relationship between • A' and its Affiliated Errployers, 

therefore, is not unlike the relationship between an FCM and a guaranteed 

introducing broker. In this instance, however, the protections afforded 

custarers by this relationship are, if anything, greater, since the Affiliated Fitployers may actually have greater net capital than "fJ". 

Finally, the Division notes that "A" intends to solicit and accept 

orders primarily fran non-affiliated major corporate cu.staners of th t. 

Bank and for the accounts of the Bank itself and other direct and 

indirect subsidiaries of the parent bank holding carpany. Thus, the risk of 

custarer confusion is greatly reduced. -

For all of the reasons set forth above, the Division has concluded 

that it will not reccmrend any enforcerent action against "'A"' and its 

Affiliated Enployers and their Affiliated Salespersons for their failure to 

comply with the Commission's prohibition against non-proprietary branch 

offices and with the provisions of Corrmission rule 166.4. This no-action 

position is subject to the condition that ~A~~, and its Affiliated Enployers 

continuously carply with the undert.akings set forth in your letter of August 

6, 1984. 

This no-action position is the position of the Division of Trading and 

Markets only and is not necessarily the position of the Camd.ssioo or any 

other division or office of the Ccmnission's staff. Nor has the Division 

sought to determine whether the operational structure which '"·tj 14 arrl its 

Affiliated Eirployers intend to ~lement is authorized under the provisions 

of the Bank Holding carpany Act and any rules, regulations or orders 

thereunder. f.breover, the Division understands that certain futures .. .. 

exchanges may have rules which prohibit non-proprietary branch offices. Awill have to review the rules of the exchanges of which it intends to becc:me 

a nerber to determine whether relief fran such rules is necessary. 
Page 7 

If you have any questions, please feel free to contact me or Kevin M. 

Foley, the Division's Chief Counsel, at 202/254-8955.