CFTC Staff Letter 84-16: No-Action Relief for Non-Depository Trust Company Trading in Futures Markets

COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 DIVISION OF TRADING AND MARKETS Dear September 7, 1984 Re; Regulation as a ccmrodi ty trading advisor or a carrrcx:1i ty pool operator. This is in response to your letter dated July 26, 1984, in which you requested on behalf of (the "Trust Canpany") our opinion that: (1) certain corporate employee benefit plan assets for which the Trust Carpany acts as a fiduciary would not be a "pool" within the meaning of Rule 4.10(d), 17 C.F.R. §4.10(d) (1983); and (2) that the Trust canpany would not be either a ccmocxlity trading advisor ("CTA") or a conm:xlity pool operator ("CPO") as those terms are defined in Section 2(a) (1) (A) of the Cormodity Exchange Act (the "Act") ,,7 U.S.C. §2 (1982). From the representations made in your letter, we understand the facts to be as folloos:
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A. Trust Canpany
The Trust Carpany is a non-depository trust can￾pany organized under the banking laws of the State of

• • • • As a trust carpany operating under
  the state banking laws, the Trust CaTpany is subject to regulation and examination by the Supervisor of Banking of the State of 'lashington ••• • y B. Provision of Trust Services The Trust Carpany offers caTlprehensive trust services to employee stock bonus, pension or profit￾sharing plans which treet the requirerrents for In this connection, your letter represents that the requirarents of the Administrative Code for a state chartered bank trust departrrent are substantially the same as the requirarents applic￾able to a national bank trust department subject to direct regulation by the Carptroller of the Currency.

qualification under Section 401 of the Internal Revenue COde (referred to hereafter as "Corporate Ertployee Benefit Plans") • The Trust Ccmpany, as a trustee or "investment rranager", enters into written agreerrents ("Trust Agree￾rrents") establishing fiduciary relationships with respect to property then held and subsequently acquired by the Corporate Enployee Benefit Plans. The Trust Agreenents ooligate the Trust Carpany to hold and manage the property for the benefit of the benefi￾ciaries of the trust in accord with the provisions of the Trust Agreenents and applicable laws, including ERISA. At June 30, 1984, the Trust Canpany served as "trustee" or "investroont rranager" for approxi.m:\tely $1.2 billion of assets held by Corporate Employee Benefit Plans SfOnsored by approxi.m:\tely 110 different corporations. Although the Trust Ccnpany is empc:Mered to invest Corporate Employee Benefit Plan assets on a non-ccmn.ingled basis and on occasion does so, nost assets are invested in portfolio securities through collective trust funds naintained by the Trust CCl!Tpal1y. £/
C. Collective Trust Funds
The Trust Agreerrents provide that each trust's assets may be ccmningled with assets of other trusts for which the Trust canpany is a trustee or investrrent rranager, and invested in one or rrore collective trust funds consisting exclusively of funds transferred to it by Corporate Employee Benefit Plans. The Trust Ccmpany currently maintains eight collective trust funds for this purpose, each with different investment objectives and policies:
and
. . . .
Your letter further explains that, in order for the collective trust funds to not be subject to Federal incare tax, the Trust Colpany "nust conduct and does conduct" its operations and the operations of its collective trust funds in conformity with the substantive provisions of 12 C.F.R. Part 9, "which Part constitutes the regulations adopted by the canptroller of the Currency for application to trust depa.rbrents of national banking associations."

The Trust Carpany is the sole trustee of each of the collective trust funds, and has final and c:atplete authority to determine the specific securities pur￾chased and sold by each collective trust fund. Howev~, the Trust Cal\JanY retains the services of a nurrber of investrrent advisers to advise and to make reccmnenda￾tions. • • • [T) hese recarnendations are reviewed and approved by officers of the Trust Canpany, which have final authority with respect to investrrents. D. Use of Futures Contracts The Trust Crntpany, in its capacity as trustee or investrrent manager, intends to invest in financial instrurrent futures and stock index futures including options thereon (hereafter collectively referred to as "Futures") on behalf of both Corporate Eitployee Benefit Plans and the collective trust funds (hereafter collec￾tively referred to as the "Trusts"). Futures investrrents in the Trusts shall not be for speculation and shall be limited to hedging transactions (i.e., "short hedge" and "long hedge" transactions) and are intended to reduce risks in the management of trust assets which arise fran the potential change in the value of such assets, In this regard, the Trust Ccrrpany' s Trusts will use Futures for each Trust solely for bona fide hedging purposes, as defined by Regulation §1.3(z) (1), ••• To insure that the Trust' s use of Futures xreets this definition, the Trust will enter into them for the purposes and with the hedging intent specified in Regulation §1,3(z) (1) and that a substantial majority -- approximately 75% of Futures purchases -- will be "completed. " In addition, the Trust Carpany (1) will not enter into Futures ccmnitrrents which would require as deposits for initial margin or premiums for the Futures (and options thereon) rrore than 5% of the fair market value of a Trust's total assets (taken at market value at the t.i.rre of entering into the Futures contract) 1 (2) will not market to the public participation in the Trusts as or in a camr::x:1i ty pool or otherwise as or in a vehicle for trading in the ccmrodi ties futures or ccmrodity options markets7 and (3) will disclose in writing to each prospective participant in the Trusts

the purpose of and the limitations on the scope of the Futures trading. 3 I Investments in Futures will be made upon the reccmrendation of the various investment advisers to the Trust Carpany. HCMever, the Trust Coopany • • • will have final and carplete authority to accept or reject the inv~stment advisers' recommendations ••••
I. Regulation as a CTA.
Section 2 (a) (1) (A) of the Act defines the term "carrrodity trading
advisor" to rrean in relevant part:
[A]ny person who, for compensation or profit, 'engages in the business of advising others, either directly or through publications, writings or electronic rredia, as to the value of or the advisability of trading in any contract of sale of a commodity for futures delivery made or to be made on or subject to the rules of a contract market, any carm::xlity option authorized under
section 4c, or any leverage transaction authorized
under section 19 or who, for compensation or profit, and as part of a regular business, issues or promul￾gates analyses or reports concerning any of the fore￾going; but such term does not include (i) any bank or trust canpany or any person acting as an employee thereof, ••• Provided, that the furnishing of such services by the foregoing persons is solely incidental to the conduct of their business or profession. • • • Thus, the Act excludes fran the CTA definition any bank or trust canpany, provided that the furnishing of services which would otherwise bring such an entity within the statutory definition is solely incidental to the conduct of its business. Ccmn:i..ssion staff· previously has expressed the view that the words "solely incidental" must be interpreted "in the context of the business concerned and the factual situation in which the services are rendered." See CFTC Staff Interpretative Letter No. 76-l, [1975-1977 Transfer Binder] ~ Fut. L. Rep. (CCH) ~20 ,907. (February 26, 1976). With respect to the instant situation, your letter represents that law provides that arrong the prirrmy corporate pCMers of an entity engaged in a business such as the Trust Company is the po.-;er "to execute trusts of every description." 4/ Thus, your 2/ In a telephone conversation with Division staff held an August 6, 1984, you explain that these disclosures would be made to the fiduciary, co-trustee, or administrator of a Corporate Eiiployee Benefit Plan -- · i.e. , the person who has the authority to appoint the Trust carpany to serve as a fiduciary of the Plan. . Your letter represents that this authority is provided in Code ch. 30.08, §150(11) (1974). Rev.

letter further represents that the Trust Crnpa.ny is authorized to act in the capacity of fiduciary as a regular part of its business and its senrices as a fiduciary are arrong the range of banking services it may lawfully offer. Based upon our review of the representations made in your letter, it appears that the Trust Corrpany, and its employees, would care within the statutory exclusion fran the definition of the tenn "camodity trading advisor" contained in Section 2 (a) (1) (A) of the Act. We note that this opinion is based _upon, among other things, the fact that any carm::xlity trading advice the Trust carpany may furnish will be furnished solely inci￾dental to the conduct of its business as a non-depository trust canpany and in its capacity as a fiduciary of the Trusts. §./
II. Regulation as a CPO.
As you are aware, on February 2, 1984, the Catmission issued proposed Rule 4. 5 , which would exempt certain otherwise regulated persons fran registra￾tion as a cro and fran the provisions of Subpart B of Part 4 of the Cromission' s regulations. 6/ 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, it appears that the Trust Canpany would be eligible for this proposed exemption inaErnUch as the Trust Canpany: (1) is arrong the persons covered by the proposal -- i.e., a trust carpany subject to State regulation; (2) will engage in commodity interest transactions as a fiduciary of the Trusts solely for bona fide hedging purposes; (3) will not deposit as initial margin or premiums for a Trust's commodity interest transactions rrore than 5% of such Trust's total assets; (4) will not, and has not, marketed any Trust as a ccmrodi ty pool or otherwise as a vehicle for trading in the ccmrodity interest markets; and (5) will disclose in writing to the prospec￾tive participants in the Trusts the purpose of and the lirn:i. tations on the scope of such ccmrodi ty interest trading. Accordingly, this Division will not recommend that the ~ssion 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 2./ &/ See Division Trading and Markets Staff Interpretative letter No. 83-2 [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ~21,788 (March 18,
1983) •
We note that you have not requested, and therefore that by our letter we also are not providing or inplying, an opinion that any of the investrrent advisers to the Trusts are not erAs.
Section 4m(1) of the Act, 7 u.s.c. §6m(1) (1982) , requires each person
who canes within the CPO definition to register as a CPO with the Commission. The provisions of Subpart B of Part 4 ooncem the operational, disclosure 1 reporting and recordkeeping requirerrents of registered CPOs. See 17 C.F.R. §§4.20-4.23 (1983), as amended by 48 Fed. Reg. 3524'8 (August 3, 1983). -

the carrnission' s regulations. l/ This position is, ho.vever, subject to the condition that the Trust Coopany will carply with Rule 4.5 as adopted by the carmission or with any other such rule that the Ccmnission may adopt to exempt certain othe:rwise regulated persons fran regulation as a CPO. 8/ Therefore, this position will cease upon the effective date of Rule 475 or of such other rule. . In this connection,· we note that previously we have issued opinions to certain other persons that they would not be pools wi th.in the meaning and .intent of Rule 4.10 (d) based upon representations similar to those made by the Trust Corrpany. 2_/ HCMever, in light of the Ccmnission' s recent proposal in this area, we believe that such a "no-action" position is the appropriate relief that should be afforded at this ti.rre. We further note that with respect to such persons and the filing of certain notices proposed in Rule
4. 5, the Coomission has stated:
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[We do] not believe that it should be necessary for the recipients of such interpretative letters to, in effect, "re-sul:mit" an application for exemption -- i.e., to file an initial notice of eligibility -- .in the event the proposal is adopted. Hcwever, to insure that these persons (and entities) would be .in coopli￾ance with the requirerrents of the proposed role, 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 Ccmnission changed or that, to the extent that the proposal would require any additional Inasmuch as proposed Rule 4 • 5 would provide exemption for a trust corrpany subject to regulation by any State, and any principal or enployee thereof, and as you have requested, the position we are taking herein also would apply to any principal or enployee of the Trust Catpany -- ~' its officers. For example, the rule as adopted may or may not contain the sane standards and indicia of bona fide hedging transactions and positions contained in the rule as proposed. tvbreover, to the extent tru:tt 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 Trust Canpany would be able to trade cammodity interests subject to such other restrictions provided, of course, that such trading is conducted in accordance with the rule as· adopted. See Ccmn. Fut. L. Rep. (CCH) !21,908 (available Noverrber 3, 1983); Ccmn. Fut. L. Rep. (CCH) ~21,906 (available October 21, 1983); e . , Ccmn. Fut. L. Rep. (CCH) '.!I21 ,905 (available Septerrber 13, 1983). See also . , Ccmn. Fut. L. Rep. (CCH) '.!I21,910 (available November 21, 1983).

representations, they were not in canpliance with them.
This position would ensure equal treabrent of all persons claiming exemption under the rule. 49 Fed. Reg. 4778 at 4782-83. We believe, and intend to recanrend, that the Ccmnission should take this same position with respeq to the Trust Ccrrpany.

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You should be aware that the positions we have taken in this letter do not excuse the Trust Ccrnpany fran canpliance with any otherwise applicable requirenBnts contained in the Act or in the Carmission' s regulations there￾under. For example, as a CPO it remains subject to the anti -fraud provisions of Section 4o of the Act, 7 u.s.c. §6o (1982), and as a "person" under the Act it remains subject 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 wended. The positions we have taken herein are based upon the representations that have been ma.de to us. Any different, changed or emitted facts or con￾ditions might require us to reach different conclusions. In this connection, we request that you notify us immediately in tre event the Trust Company's operations and activities change in any W.?J..Y fran that as represented to us. 1 , :Z:7) / L/ __ L Andrea H. Corcoran ~. Director