DIVISION OF 

TRADING AND MARKETS 

COMMODITY FUTURES TRADING COMMISSION 

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

M.ay 6, 1986 

Re: Petition for F~cemption fran Certain Registration and 

Recor~ceepinq Reauirements 

This is in response t.o your letters dated November 22, 1985 ana 

December 30, 1985, to the Divisinn of Trading and Mcrl<ets ("Division"), as 

supplemented b~' subsequent telephone conversations and a letter dated 

FPbruary 14, 1986, on beffilf of your client, ("Bcmk"). The Bank has 

detennined to apply for registration with the Cormndity Futures Trading 

Comnission ("Corrmission") as a. cornrocxUty pool operat_or ("CPO") and, based 

upon the facts c.s reprPsented to the Division and as set forth below, has 

requested the Division to grru1t relief fran certain of the registration and 

recordk.P-eping requirements under parts 3 and 4 of the Comnission' s 

regulations . 1_/ 

1/ In addition, the Bank has requested th?,t_, pending registration as a CPO, 

relief he granted to permit the solicitation of plan sponsors of employee 

benefit trusts and to negotiate and execute Trust Agreements as described 

herein providing for the corrmingling of trust assets in collective 

investment f'lmds to engage in fu·tures trading, provided that no trading 

in commodity futures contracts on behalf of such collective investment 

funds commences prior to the effective date of the registration of the 

Ban.k as a CPO. 

Based upon the representations set forth herein, the Division will not 

reconmend that the Ccmnission take any enforcement action against the 

Bank or its employees for failure to be registered as a CPO or as an 

associated person of a CPO, respectively, in connection with the solicitation of plan sponsors of employee benefit trusts as stated in your 

letter. This position is, hov1ever, sub~ ect to the condition that, in 

connection with the solicitation activities set forth above, the Bank 

remains responsible as a CPO for compliance with the antifraud provisions 

(Footnote continued) 
Page 2 

The Facts 

The Division understands that the Bank acts as a fiduciary of a number 

of employee benefit trusts 1 including pension, welfa'l:'e and governmental plans 

as defined under sect. ion 3 of the Employee Retirement Incc:me Secut'i ty Act 

("ERISA"). The Bank enters into v.rritten agreements ("Trust Agreements") 

establishing its fiduciar}r relationships, which obligate the Bank to manage 

trust assets for the exclusive benefit of trust beneficiaries in accordance 

\'lith the provisions of the Trust Agreements and applicable laws, including 

Title I, Subtitle A, Part 4 of ERISA. Pursuant to rules promulgated by the 

Comptroller of the Currency, 12 C.F .R. part 9, the Bank manages employee 

benefit t;nust assets eitber through Master Trusts (which may hold at least 

sane assets that would not qualify for "non-:pool" status under Corrmission 

rule 4.5, 17 C.F.R. §4.5 (1985)) and, subject additionally to express 

authorization provided in the Trust Agreements, one or :rrore collective 

investment funds. Such :t-'laster Trusts and collective investment funds consist 

solely of employee bene::i t trust assets. 

The Baru( intends to engage in the trading of futures (and options on 

futures) on U.S. governrnent securities and stock indices ( collectively 

"financial futures") through the vehicle of several of these collective 

investment funds. I:r> doing so, the BRY1J~ intends to pursue certain invesbnent 

strategies using finand.al futures trading to enhance portfolio return or to 

facilitc.te the allocntio:n of portfolio assets among equity, debt and cash 

instruments. Because these invest:rnen-1: strategies may not necessarily fall 

within the Commission's interpretation of bona fide hedging, as defined in 

Commission rule 1.3(z) 1 17 C.F.R. §1.3(z) (1985), or the alternate test set 

forth in rule 4.5(c) (2) (i), 17 C.F.R. §4.5(c) (2) (i) (1985), the Bank does not 

qualify for exclusion from the definition of a CPO under Corrmission rule 4.5, 

17 C.F.R. §4.5 {1985), witl1 respect to these funds and, therefore, it has 

applied for registration as such. ~/ 

The activities in which the Bank will engage requulng registration as 

a CPO, including all solicitat.ions of prospect.ive customers, will be con-

. ducted through the Fiduciary Futures Mc-magement Department {"Department"), a 

division of the Investment :t-'lanagement Department of the Invesbnent Bank, one 

of three operating banks within the Bank. In order to ensure compliance vlith 

(Footnote continued) 

of section 4~ of the Ccmrodity Exchange Act, 7 U.S.C. §69_ (1985). 

The Bank has also requested relief from certain other regulatODJ requirements applicable to CPOs under part 4 of the Commission's regulations. 

The Division's position with respect to these matters will be addressed 

separately. 

2/ The Bank also manages other funds with respect to vlhich it qualifies for 

exclusion from the definition of a CPO. 
Page 3 

the fiduciary obligations .Dnposed upon it, inter. alia, by the relevant 

provisions of ERISA and the regulations of the Canptroller of the Currency 

-referenced above, the activities of the Department are governed-by the 

Fiduciary Policies and Practices Manual of the Bank. This manual is designed 

to establish a "chinese wall" between the Department and the other divisions 

of the Bank, prohibiting the sharing of informa.tion that would enable any 

employee of the Bank or the Bank itself to profit from knowledge of the 

trading activities of the Department. 

Part 3 of the Commission's Regulations 

Commission rule 3.14 (a) (2) , 17 C.F .R. §3 .14 (a) (2) (1985) , provides 

that an application for registration as a commodity pool operator must be 

accompanied by a Form 8-R and the fingerprints of each natural person who is 

a principal of the applicant. A.s defined in Ccmnission rule 3 .1 (a) , 17 

C .F. R. §3 .1 (a) (1985) , a principal includes any "officer, direct.or, branch 

office manager or designated supervisor or person occupying a similar status 

or performing similar functions, having the power, directly or indirectly, 

through agreement or otherwise, to exercise a controlling influence over (the 

applicant's] activities vvhich are subject to regulation by the Commission." 

Thus, all officers of the Department, an)T officers of the Bank having direct 

or indirect authority over the activities of the Department and the Bank's 

Board of Directors generally v~uld be required to be identified as principals 

and to file a Form 8-R and fingerprints. 

In addition, many of these principals would also be required to be 

registered as associated persons of the CPO in accordance with the provisions 

of Commission rule 3.16, 17 C.P.R. 3.16 (1985). An associated person of a 

CPO, as defined in section 4k(~) of the Commodity Exchange Act, includes any 

officer or employee of the CPO engaged in any activity that involves "(i) the 

solicitation of funds, securities or property for a participation in a 

canmoc1ity pool or (ii) the supervision of any person or persons so engaged. 11 

A..s interpreted by the Commission, the provisions of section 4k(2) would 

require the registration as an associated person of all individuals in the 

line of supervisory authority over the asftociated persons who solicit 

comnodity pool participations, including positions up through that of t.he 

CPO's chief operating officer. ]_/ 

On behalf of the Bank, you have requested the Division to adopt a 

no-action position v1ith respect to the principals of the Bank vvho are not 

directly employed within. the Department. Specifically, you have requested 

that the Di 'Tis ion not recorrmend any enforcement action against such 

individuals for their failure to file a Fonn 8-R and fingerprints as required 

]_/ See Interpretative St0tement Regarding the Scope of the Tenn 

"Supervision" in the Associated Person Requirement, 45 Fed. Reg. 54032 

(August 14, 1980). 
Page 4 

by C()f('[l1ission ruJe 3.14(a) (2). Moreow~r, with respect to those principals 

not directly employed vvithin the Department who would also be required to be 

-registered as associated persons of the CPO, you have requested- an exemption 

from the requirements of the provisions of Comnission rule 3 .16. !/ 

Based upon the n~presentations set forth above, the Division has 

determined to adopt the no-action position you have requested with respect to 

the individual principals of the CPO who ?...re not directly emplo:_,red within the 

Deparbrent. This no-action position is based, in particular, uy:on the 

representation that all of the collective investment func.s managed by the 

BcJJk requiring it to be registered as a CPO will be managed within the 

Department and that, as a result of its obligations under federal law, the 

management of these funds is autonom::ms from the activities of the other 

divisions of the Bank. Boreover, the Division notes that the Bank has 

conducted a fitness examination of each of the principals of t.he Bank in 

connection with his employment. 5/ Although this exarnir.ation is not considered a substitute for the fitness examination required under the 

Commission's regulations, the Division believes that, in connection with the 

other factors discussed above, it would impose an unnecessary burden on such 

individuals to require an additional fitness examination. 

This no-action position, however, is subject to the condition that the 

President, Chief Executive Officer or other officer of the Bm~ with 

authority to siqn on behalf of and bind the Bank furnish the Ccmnission a 

letter setting forth a list of officers (up to at least the level of Senior 

Vice President) responsible for supervising the Fiduciary Futures Management 

Department and certifying that none of tl1ese officers or any director of the 

4/ Pursuant to rule 3.16(g), your request is being treated as a pet.ition for 

exemption fran rule 3.16 (a). Rule 3.16 (g) (1) provides that any person 

adversely affected by the operation of rule 3.16 may file a petition with 

the Secretar:r of tl1e Cormtission requesting an exemption from any of the 

requirements of the rule. Rule 3 .16 (g) ( 1) further provides that the 

Cormtission may grant such a petition if it finds that the exemption is 

not contrBX'J to the public interest and the purposes of the provision 

from which exemption is sought. By rule 3.16(g) (2) (i), the Commission 

has delegated to the Director of the Division of Trading and Markets, or 

the Director's designee, the authority to grant or deny petitions filed 

pursuant to this rule. 

5/ A fitness examination is effectively required by the prov~s~ons of 12 

U.S. C. §1829, which prohibits any bank insured by the Federal Deposit 

Insurance Corpora.tion ("FDIC") from employing any person who has been 

convicted of a crime involving dishonesty or breach of trust witllout the 

prior consent of the FDIC. Such fitness examinations generally include 

the submission of a finqerprint card to the Federal Bureau of 

Investigation for identification and processing. 
Page 5 

Bank could be refused registration v1i th the Commission on the grounds stated 

in section 8a(2) of the Act. Appropriate documents evidencing the authority 

-of the certifying officer to sign on behalf of and bind the Bank must also be 

furnishBd to the Division. 6/ 

For these same reasons, pursuant to the authority delegated by rule 

3.16(g) (2) (i), the Division has determined to exempt from registration as an 

associated person of a CPO those principals not directly employed within the 

Depcrrtrnent whose supervisory responsibilities might othenvise require. them to 

be registered as associated persons. This exemption is conditioned upon 

receipt by the Division of a binding resolution or other appropriate document 

vesting final supervisory authority, including the authority to hire and 

fire, with respect to the futures-related activities of the CPO, as fiduciary 

of employee benefit trust assets, and its associated persons, in a named 

officer. 7/ Evidence of the authority of the officer signing the resolution 

or other appropriate document must also be furnished to the Division. ~ 

Part 4 of the Corrroission' s Regulations 

The recordkeeping reqt1irements applicable to CPOs are set forth in 

Commission rule 4.23, 17 C.F.R. §4.23 (1985). Specifically, rule 4.23(b) 

requires eac11 CPO to make and keep: (1) an itemizPd daily record of each 

comrrcdi ty. interest transaction of the ccrnrrodi ty pool operator and each 

principal thereof; (2) each confirmation of a commodity interest transaction, 

each pu:rchasP and sale statement ancl each monthly statement furnished by a 

futures corrntlission merchant to (i) the crnrrrodity pool operator relating to a 

personal account of the pool operator and ( ii) each principal of the pool 

operator relating to a. personal account of such principal; and (3) books and 

records of all other transactions in all other activities in which the pool 

operator engages. Those books and records must include cancelled checks, 

bank staternP.nts, journals, ledgers, invoices, computer generated records of 

all other records, data and mernoranda which have been prepared in the course 

of engaging in those activities. 

The primary purpose of these recordkeeping requirements is to permit 

the Commission and the National Fuhrres Association ( "NFA") to determine in a 

routine audit whether a CPO, or any principal of a CPO, has used the 

informa.tion it has about the trading activities of the pool to enter into 

~/ A copy of this certification and related dOClnnents should also be sent to 

Daniel A. Driscoll, Vice President-Compliance, National Futures 

Association, 200 West Mc1.dison Street., Chicago, Illinois 60606. 

!__/ The Division understands tha.t initially this officer will be the Bank's 

Chief Investment Officer. 

'§_/ A copy of these documents should also be sent to Mr. Driscoll. 
Page 6 

transactions for its own benefit. With respect to the activities of the 

Bank, however, you have stated tha.t, in light of the "chinese wall" that 

-separates the activities of the Department from the activities of the other 

divisions of the Bank, the Bank will not be in a position to take advantage 

of the trading activities of the Department. Moreover, requiring the Bank to 

make available for audit all of the lx::x::lks and records that would otherwise be 

requin~d under this rule would impose a significant burden on the Bank, given 

its size and scope of activities. Therefore, you have requested that the 

Division exempt the divisions of the Bank other than the Department from the 

requirements of Cmnission rule 4. 23 (b) . In other words, for purp::lses of 

rule 4.23(b), the Department onl)r would be treated as the CPO. 

Tt1e Division understands tl1at the Bank is otherwise required to 

maintain the records required under Corrmission rule 4.23 (b). Nonetheless, 

the Division has determined that granting the requested exemption is not 

contrary to the public interest and the purposes of the rule, in particular 

because of the procedures the Bank has implemented to ensure that no other 

division of the Bank, or any employee of the Bank, will be able to benefit 

from knov1ledge of the trading activities of the Departrnent. Therefore, 

pursuant to the authority delegated by Commission rules 4.12 and 

140.93 (a) (1), the Division hereby P..xempts fran the requirements of Corrmission 

rule 4. 23 (b) every division of the Bank other than the Department. This 

exemption, of course, does not exempt the Bank from making and keeping such 

records as may othenvise he required under the Ccmrodi ty Exchange Act and the 

regulations thereunder. 9/ Nor does the Division intend by this action to 

waive the C<JTllJ'nission 1 s c>.uthority under section 6 (b) of the Act to "require 

the production of any books, papers, corres}X)ndence, memoranda, or other 

records t.hat the Commission dePJnS relevant or material to [an] inquiry. 11 10/ 

The no-action positions adopted, and the exemptions granted, by the 

Division in this letter are based upon the representations that have been 

made to the Division and set forth herein. Any different, changed or omitted 

facts or conditions may require the Division to reach a different conclusion. 

Therefore, we ask that you notify us in:mediately in the event that the 

activities of the Bank or any of the individuals affected hereby change in 

any way. Finally, the no-action position adopted herein is that of the 

Division of Trading and l-'larkets and does not necessarily represent the views 

of the Carru:nission or any other office or division of the Com:nission. 

J_/ See, ~' parts 15 and 18 of the Commission 1 s rules relating to 

reporting requirements of large traders. 

10/ The Division, of course, has no authority to limit the Corrmission 1 s 

statutory jurisdiction in this regard. Nor does the Division intend to 

limit in any way the authority of t.he National Futures Association to 

require production of such records pursuant to its canpliance rule 3-1. 
Page 7 

If you have any questions about the positions adopted in this let.ter, 

please feel free to contact me or Kevin M. Foley, the Division's Chief 

~ounsel, at 202/254-8955. 

cc: Daniel A. Driscoll 

Vice President-Compliance 

National Futures Association