CFTC Staff Letter 84-11 (No-Action): CPO Registration Relief for Registered Investment Company

~L(·- 1/
DIVISION OF
TRADING AND MARKETS
Re:
COMMODITY FUTURES TRADING COMMISS,ON
2033 K STREET, N.W., WASHINGTON, D.C. 20681 'J _, July 17, 1984 Regulation as a commodity pool operator, Daar This is in response to your letter dated JUne 15, 1984, as supple￾rrented by the letter of your associate, , dated ', June 27, 1984 and the draft prospectus dated June 22, 1984 (the "Prospectus") enclosed e1erewith, in which you requested an opinion that (the "Fund") would not be a "r;x:x>l" as defined in Rule 4.10(d) of the Commission's regulations, 17 C.F.R. §4,10(d) (1983). From the representations JMde in your letter, as supplemented, we understand the facts to be as follo;..rs: The Fund is a Maryland corporation which has applied for registration as an open-end invest.rrent manageroont company under the Invest:Irent Cc:.>rrpany Act of 1940. The investrrent objective of the F\rnd is "to provide investors with a high current return by investing in [Federal] debt obligations • • • and by writing covered call options and secured put options against such securities. " In addition, the Fund IMY also engage in transactions involving interest rate futures contracts and options on such contracts "in order to hedge. against changes in interest rates." These conm:Xl.ity interest transactions would, ho;..rever, be subject to certain limitations. The Prospectus, at page 13, sets forth, arrong others, the follO'Wing limitations: ",, !=) The Fund will not engage in transactions in ··' futures contracts or reJ/ated options for speclila￾ti ve purposes but only as a hedge against changes <\I resulting fra.1 market conditions in the values of debt securities held in the Funds's portfolio or \17 hich it intends to purchase. . . In addition, the Fund may not purchase or sell futures con￾tracts or purchase or sell related options if immediately thereafter the sum of the amount of margin deposits on the Fund' s existing futures and related options positions and the amount of premiums paid for related options would exceed 5% of the Fund's total assets.

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[The Fund will] sell futures contracts, purchase put options on futures contracts and write call options on futures contracts solely for the purpose of protecting its portfolio against declines in value. In addition, the Fund expects that in the normal course upon sale (or other termination) of long futures contracts, long call

• options on futures contracts and written put
  options on futures contracts, it will have pur￾chased or will purchase the debt securities covered by such futures contracts or options a substantial majority of the ti.roo, but \ll1der \ll1Usual rrarket conditions it may terminate any of such positions without a 90rresponding purchase of securities. · ·~ On February 2, 1984 1 the Ccmnission issued proposed Rule 4. 5, which would exempt certain otherwise regulated persons from registration as a . cc:mnodity pool operator ("CPO") and fran the provisions of Subpart B of Part 4 of the Ccmnission's regulations. 1/ See 49 Fed. Reg. 4778 (February 8, ., 1984), 49 Fed. Reg. 6910-11 (February 241;-1984). Based upon our review of the representations made in your letter 1 as supplerrented, it appears that the F\ll1d would be eligible for this proposed exemption inasmuch as the Fund: (1) is arrong the persons and qualifying entities covered by the proposal -- i.e., a registered investment company; (2) will engage in commodity interest ---- transactions solely for bona fide hedging purposes; (3) will not deposit as initial margin or premiums for its commodity interest transactions more than 5% of its total assets1 (4) will not be, and has not been, marketed as a commodity pool or otherwise as a vehicle for trading in the commodity interest markets; and (5') will disclose in writing to its prospective participants the purpose of and the limitations on the scope of its camodi ty interest trading. 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 Commission's regulations.2/ This position is, however, subject to the condition that the Fund will 'Corrply with Rule 4.5 as adopted by the Commission or with any other such rule that the Commission rnay adopt )j Section 4m(l) of the Act, 7 u.s.c. §6m(1) (1982), requires each person who comes \vithin the CPO definition to register as a CPO with the Cern￾mission. The provisions of Subpart B of Part 4 concern the operational, disclosure, rep::>rting and recordkeeping requirerrents of registered CPOs. See 17 C.F.R. §§4.20-4.23 (1983), as amended by 48 Fed. Reg. 35248 (August 3, 1983) . - rr~asmuch as proposed Rule 4 • 5 would provide exemption for a registered investrrent canpany and any principal or employee thereof 1 the position we are taking herein also would apply to any principal or employee of the Fund -- ~~ its officers.

, Page 3 to exerrpt certain otherwise regulated persons from regulation as a CP0.3/ Therefore, this position will cease upon the effective date of Rule 4.5-or of such other rule. - In ills connection, we note that previously we have issued opinions to certain registered investment companies that they would not be pools within the ~reaning and intent of Rule 4 .10 (d) based upon representations similar to those.made by the Fund.4/ However, in light of the Commission's recent proposai 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 investment companies and the filing of certain notices proposed in Rule 4. 5, the Corrrnission has stated:
[\ve do] not believe that it should be necessary for the recipients of such interpretative letters to, in effect, "re-submit" an application for exerrption -- i.e., to file an initial notice of eligibility-- in the event the proposal is adopted. Ho;.vever, to insure .that these persons (and entities) would be in compli￾ance with the requirerrents ·of the proposed rule, the Commission intends 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 Conmission changed or that, to the extent that the proposal would require any additional repre￾sentations, they were not in compliance with B1ern. This position would ensure equal treatment of all persons claiming exerrption under the rule. 49 Fed. Reg. 4778 at 4782-83. ;}_/ For exarrple, the rule as adopted may or may not contain the same standards and indicia of bona fide hedging transactions and positions contained in the rule as proposed. Moreover, to the extent that the

• rule as adopted is less restrictive than the rule as proposed -- with
  respect to the stru1dards 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. i_/ See -,---,--.-~~..,------~' Conrn. Fut. L. Rep. (CCH) ~21, 908 (available Nove1nber 3, 1983); Corrun. Fut. L. Rep. (CCH) ~2],906 (available October 21, 1983); ~~~~--~~~~~~--~ , Cor~. Fut. L. Rep. (CCH) ~21,905 (available September 13, T~T(3:-;)-.--::S-ee-· -'-also ____ ., Conrn. Fut. L. Rep. (CCH) ~21,910~vailable November 21, 1983). ' - '

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We believe, and intend to recanrend, that the Ccmuission should take this sarre position with respect to the Fund. 2./ You should be aware that the position we have taken in this letter does not excuse the Fund fran cropliance with any otherwise applicable requirerrents contained in the Act or in the Ccmuiss.ion' s regulations there￾under. 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 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 (1983), as amended. The position we have taken here:i,n is based upon the representations that have been made to us. Any different, changed or anitted facts or conditions might require us to reach differ~lt conclusions. In this connec￾tion, we request that you notify us i.Iirrediately in the event the Fund's operations and activities change in any way fran that as represented to us. Very truly yours, -,\ "' /} / I i;'' / I 0 j/ / l .../.( . /- . / .. \ .. .... Ai:ldrea 'M •. Corcoran -+ ·~.-<.--. ~ ..... -- Director 'i/ He historically have treated registered investrrent companies and their officers and directors as those persons subject to CPO regulation. You have requested our opinion, however, that neither the Fund's registered investrrent adviser, (the "Adviser"), nor its registered broker-dealer, (the "Distributor"), nor any officer, director or errployee of the Adviser or Distributor is a CPO. Proposed Rule 4 • 5 does not cont.enplate that any such person would be a CPO. See, ~' Rule 3.16 (a) (5), which generally exempts fran registration as an associated person of a CPO persons registered with the National Association of Securities Dealers as a registered representative or registered principal. 48 Fed. Reg. 35248 (August 3, 1983). Accordingly, we do not believe that any such opinion is necessary at this time. ' . However, :in the unlikely event that Rule 4. 5 or any other such rule as U1e Commission adopts includes investment advisers to and broker-dealers of registered investment ccmpanies arrong the persons who could be con￾sidered to be CPOs but does not also include provision for exemption from regulation as a CPO for such persons, the Division will not recommend tll['lt. the Ccmnission take any enforcerrent action against the Adviser, the Di std.butc1r, or any officer, director or employee thereof pending such persons' carpliance with such requirerrents as the rule may irrpose. Of course, this position assumes that such persons will endeavor to achieve such compliance as promptly as possible.