COMMODITY FUTURES TRADING COMMISSION 

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

DIVISION OF 

TRADING AND MARKETS 1\ugust' 1,' 1984 

Re: 

Regulation as a commodity pool operator. 

Dear 

This is in response to your letter dated J'\IDe 19, 1984, as supplerrented 

by the prospectus dated March 29, 1984 encl~.seCl therewith (the "Prospectus"), 

in which you requested that we not recamend that the Cc:mnission take any 

enforcenBnt action against (the "Fund") for 

failure to register as a comrodity pool operator ("CPO") subject to the 

conditions and limitations described below. 

From the representations made in your letter, as supplerrented, we understand the facts concerning the Fund's operation in general to be as follows: 

The Fund is a series investrrent canpany registered under the Investrrent 

Calpany Act of 1940. It currently is offering shares in the following four 

invest:rrent Portfolios: ( 1) the Governrrent Money Market Portfolio, which 

seeks high current incCJ!tB and stability of principal by investing in shortterm u.s. obligations; (2) the Money Market Portfolio, which seeks high 

current income and stability of principal by investing in a variety of shortterm instrurrents; (3) the High Yield Bond Portfolio, which seeks to maximize 

total return from capital appreciation and current income by investing 

generally in certain debt securities; and (4) the Aggressive GrONth Portfolio, which seeks to maximize capital appreciation by investing primarily in 

common stocks and securities convertible into common stocks. 

The first two Portfolios do not intend to engage in commodity futures 

transactions. The second two Portfolios, however, do. Specifically, the 

High Yield Bond Portfolio intends to trade financial futures contracts and 

the Aggressive Grcwth Portfolio intends to trade stock index futures contracts. Your letter makes the following representations with respect to each 

sqch Portfolio's camYJdity futures trading: ._ .,. 

The Fund' s sale and purchase of . • • futures contracts will be 

for bona fide hedging purposes only and not for speculation, with the 

purpose of offsetting anticipated price changes in securities held by 

the particular Portfolio or which the particular Portfolio anticipqtes 

purchasing. A hedging transaction is intended to reduce risk of loss, 

not increase it. 
Page 2 

In order to protect against an anticipated decline in the value 

of • • • [a] Portfolio due to general market con9itions or changing 

interest rates, the particular Portfolio would enter into a short 

hedge by selling a futures contract, instead of liquidating or adjusting its portfolio securities and incurring the incident transaction 

charges. To the extent that subsequent decreases in futures prices 

produced gains in the particular Portfolio's futures position that 

offset the decline in the value of the Portfolio, gains on the futures 

position would offset the particular Portfolio's loss on its portfolio 

securities. Further, to the extent that prices in the futures market 

moved in correlation to the prices of the securities comprising the 

hedging Portfolio, any losses in the Portfolio's futures positions 

should be offset by increases in the value of its portfolio securities. · 

When • • • [a] Portfolio wishes to remain in short-term instruments because such instruments are desirable for defensive'purposes or 

because such are otherwise advantageous, and aF the same time wishes 

to avoid the risk that it may have to pay higher prices for portfolio 

securities it intends to acquire in the future, the particular Portfolio would enter into a long hedge by ·purchasing ••• (a] futures 

contract. • • • [T] o the extent tho,t" an increase in the Portfolio's 

futures position offset the high~~·prices to be paid by the Portfolio 

in the future for long-term investments, gains in the Portfolio's 

futures position would offset such increases in prices, Further, to 

the extent that futures prices move in correlation to the prices of 

securities held by the Portfolio, any losses on the Portfolio's 

futures positions should be offset by any difference between what it 

pays for the long-term investment and the larger price it would have 

paid for such investment if it had purchased it with cash. • • • 

(T]he Fund represents that, to insure that all of its commodity 

interest trading is for bona fide hedging purposes, the Fund will 11 complete" its purchases of interest rate futures contracts and stock 

index futures contracts a substantial majority (i.e., approximately 

75%) of the time. '.!./ 

Additionally, the Fund's fundamental policies provide that • • • 

[each] Portfolio may not enter into • • • futures contracts if, 

i.m:rediately after such a cornnitment, oore than 5% of the particular 

Portfolio's total assets would be posted as initial and variation 

margin. 

As you are aware, on February 2, 1984, the Cc:m:nission issued proposed 

Rule 4. 5 , which would exempt certain otherwise regulated persons from registration as a CPO and from the provisions of Subpart B of Part 4 of the 

'.!_/ We note that such a representation concerning completion of long commodity 

interest hedges -- be they in stock index or financial corrm:xlity interests -- is one of the representations we require-to grant relief from CPO 

regulation. 
Page 3 

Comnission's regulations. 2/ See 49 Fed. Reg. 4778 (February 8, 1984), 49 

Fed. Reg. 6910-11 (February 24-;1984) • Based upon our review of the representations made in your letter, as supplemented, it appears that the Fund would 

be eligible for this proposed exemption inasmuch as: (1) the Fund is arrong 

the persons and qualifying entities covered by the proposal -- i.e. , a registered investroont company; (2) each of its two Portfolios that will engage 

in commodity interest transactions will do so solely for bona fide hedging 

purposes; (3) each of these Portfolios will not deposit as initial margin or 

premiums for it:s ccmrodity interest transactions nore than 5% of its total 

assets; (4) the Fund will not be, and has not been, marketed as a corrm:xlity 

pool or otherwise as a vehicle for trading in the carm:x1i.ty interest markets; 

and (5) the Fund will disclose in writing to its prospective participants the 

purpose of and the limitations on the .scope of its cc:mn:x:1ity interest trading. 

Proposed Rule 4,5 does not specifically address the instant situation --

i.e. , where only certain portfolios of a registered series inves-t:n¥mt company 

intend to engage in commodity interest transactions. --~qwever, in'light of 

the separate CMnership in and identii:::ies of the Fund's Portfolios -- ~~ 

separate investment objectives, net asset valuations and dividend policies --

we believe it consistent with the intent of proposed Rule 4.5 to treat· as 

separate entities each of the two Portfolios Phat intend to engage in commodity 

interest trading for purposes of determining··whether the criteria of the 

proposal have been met. 2/ Conversely, where such separate CMnership and 

identities are not present, we might find it nore consistent with proposed 

Rule 4.5 to aggregate all of the portfolios of a series investment fund in 

determining whether the criteria has been met. 

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 Corcmission's regulations, 4/ This position is, hooever, subject to the 

condition that the Fund will cOmply with Rule 4.5 as adopted by the Cammis-

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

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

disclosure, reporting and recordkeeping requirements of registered CPOs. 

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

(August 3, 1983). -

2/ vJi th respect to a series investroont company such as the Fund we believe 

this determination particularly appropriate to the "hedging" and "5%" 

criteria. A contrary finding would enable a Portfolio to cammit 5% of 

the Fund's total assets for its co:nm::xli ty interest positions which, in 

· turn, might enable the Portfolio to ccmni t nore assets th.cm ere necessary 

to hedge its CMn, separate actual or anticipated cash positions. 

!/ Inasmuch as proposed Rule 4.5 would provide exemption for a registered 

investment company and any principal or employee thereof, the position we 

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

Fund -- ~' its officers. 
Page 4 

sion or with any other such rule that the Camnission may adopt to exempt 

certain otherwise regulated persons from regulation as a CPO. 5/ Therefore, 

this position will cease upon the effective date of Rule 4.5 or of such other 

rule. 

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

certain registered inves'l:rt¥mt companies that they would not be pools within 

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

those made by . .the Fund. 6 I HO'v'Vever, in light of the Coomission' s recent 

proposal 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 investrrent companies and the filing of certain 

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

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

recipients of such interpretative letters to, in effect, . "re-submit" an application for exemption -- i.e., to .file ah 

initial notice of eligibility -- in the event the proposal 

is adopted. HO'v'Vever , to insure that these persons (and 

entities) would be in compliance with the requirements of 

the proposed rule, the Conmission inten¢ls 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 Corrmission changed or that, to the extent 

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

would ensure equal treatment of all persons claiming exemption 

under the rule. 49 Fed. Reg. 4778 at 4782-83. 11 

2../ For example, the rule as adopted may or may not contain the sarre standards 

and indicia of bona fide hedging transactions and positions contained in 

the rule as proposed. fllbreover, to the extent that the rule as adopted 

is less restrictive than the rule as proposed -- with respect to the 

standards 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. 

il See , Comm. Fut. L. Rep. (CCH) ~21,908 (available 

Noverrber 3, 1983) ~ _ , Comn. Fut. L. Rep. (CCH) 

~21,906 (available October 21, 1983)~ 

_ , Canm. Fut. L. Rep. (CCH) ~21 ,905 (available Septerrber 13, 

. 1983). See also . , Corm\. Fut. L. ~ (CCH) ~21,910Tavailable November 21, 1983). · 

11 Your letter represents that the Fund will comply with Rule 4.5 as adopted 

"to the sane extent as if it had filed an application for exemption from 

registration as a CPO pursuant to [Rule) 4. 5 and such application had 

been granted. " 
Page 5 

We believe, and intend to reccmrend, that the Carrnission should take this 

sarre position with respect to the Fund. 8/ 

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

not excuse the Fund from compliance with any otherwise applicable requireIOOnts contained in the Act or in the Cc:mnission' 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 requirements for traders 

set forth in Parts 15, 18 qnd 19 of the Cc:mnission's regulations, 17 C.F.R. 

Parts 15, 18 and 19 (1983) , as arrended. 

The position we have taken herein is based upon the representations that 

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

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

request that you notify us immediately in the event the Fund's operations and 

activities change in any way from that as represented to us. 

~/ We historically have treated registered investment companies and their 

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

the unlikely event that Rule 4.5 or any other such rule as the Commission 

adopts includes investment advisers to and distributors of registered 

invesbrent companies atrong the persons who could be considered to be CPOs 

but does not also include provision for exemption from r~on as a 

CPO for such persons, the Division will not recommend that the Commission 

take any enforcement action against the Fund's adviser, distributor, or 

any officer, director or employee thereof pending such persons' compliance with such requirements as the rule may impose. Of course, this 

position assumes that such persons will endeavor to achieve such compliance as promptly as possible.