CFTC Staff Letter 00-49: No-Action Position on CPO and CTA Registration for Real Estate Investment Trust Hedging

00-49
CFTC Letter No. 00-49
March 24, 2000
No-Action
Division of Trading and Markets
Re: Section 4m(1): -- Request for no-action position from CPO registration requirements for directors of a corporation that was formed to operate as a real estate investment trust by primarily investing in adjustable rate mortgage securities and loans and that intends to engage in commodity interest trading.
Section 4m(1): -- Request for no-action position from CTA registration requirements for a
corporation formed to provide advice, including commodity interest trading advice, to a real estate investment trust formed to invest in adjustable rate mortgage securities and loans. Dear :
This is in response to your letter dated October 26, 1999, to the Division of Trading and Markets (the "Division") of the Commodity Futures Trading Commission (the "Commission"), as supplemented by your letter dated March 24, 2000 and by telephone conversations with Division staff. By your correspondence, you request on behalf of your clients the "Company" and the "Manager", that the Division issue: (1) an interpretation that the Company is not a commodity pool if it begins limited use of interest rate futures and options contracts as described below, and (2) an interpretation that the Manager need not register under Section 4m(1) of the Commodity Exchange Act (the "Act")1 as a commodity pool operator ("CPO") or as a commodity trading advisor ("CTA"), or in the alternative, a CTA registration no-action letter for the benefit of the Manager if the Manager restricts its commodity interest trading advice to the Company. After reviewing the representations made in your correspondence, the Division has determined to treat your correspondence as a request for CPO registration relief on behalf of the members of the Company's Board of Directors (the "Directors"), coupled with a request for CTA registration relief on behalf of the Manager. 2 Facts Based upon the representations made in your correspondence, we understand the facts to be as follows. The Company is a mortgage acquisition company that invests primarily in adjustable rate mortgage ("ARM") securities and ARM loans. It has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 (the "Code"). ARM securities represent interests in pools of ARM loans, which often include guarantees or other credit enhancements against losses for loan defaults. The Company leverages its equity capital using borrowed funds, and seeks to generate income based upon the difference between the yield on its ARM asset portfolio and the cost of its borrowings. The Company is publicly held, and is currently listed on the New York Stock Exchange ("NYSE") and subject to the NYSE rules governing listed companies. It is a reporting company under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is also subject to the periodic reporting requirements of the Exchange Act.3 The Manager is responsible for the day-to-day operations of the Company. The Manager is subject to the supervision of file:///S|/Website%20Management/LegacyDataCopyasof2010-04-21/tm/letters/00letters/tm00-49.htm (1 of 5) [5/6/2010 6:20:03 PM]