CFTC Staff Letter 86-07: No-Action Relief for U.S. Citizen Director of Foreign Fund

Dear
COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 Februa.D.J 6 , 19 86 RE: :'No-Action" !Position for CPO of Foreign Pool. This is in response to your letter dated January 16, 1986, as supplemented by your letter dated January 24, 1986, in which you requAsted confirmation that the Dj~rision will not recommend that the Cqmmission take any enforcement action against any director or the ac1m:inistrator '}) of the Fund as a result of engaging in the activities described below without registering as a commodity pool operator ("CPO") pursuant to Section 4m(1) of the Corrmoc1ity Exchange Act (the "Act"), 7 U.S.C. §6m(1) (1982). Y Y For the purposes of this letter, and as your correspondence requests, the tArm "e1clministrator" includAs any United States affiliate of the aclminis￾trator or any principal of the aclministrator or its United States affiliates. ]:_/ You also have requested a "no-action" position on behalf of any director of the Fund and t:he Fund' s administrator in the event that they engaged in the activities described below without registering as a cornrrodity trading advisor ("erA") pursuant to Section 4m(1). In light of the nature of the responsibilities of those persons as describecl below -- i.e. , essentially only the selection and the review of the Fund's outside investroent managers, we do not believe that their activities \1-lOUld, however, require them to register as a erA. See 49 Fed. Reg. 4778 at 4780 (February 8, 1984), wherein the Commission explained that Rule 4.20(a), 17 C.F.I~. §4.20(a) (1985), which establishes certain organizational requirements for CPOs, is intended to clarify the responsibility of CPOs for the activities and investment policies of their pools. The Commission further explained:
[F] requentl y, Corcrnission staff is called upon by members of the public to offer guidance on determining vlho, in fact, would be the CPO of a particular pool. In providing such guidance, the s·taff typically looks (Footnote continued)

I
Based upon the representations made in your correspondence, ·we 'l.mderstand the facts to be as follows :
The Fund
The Fund is an open-ended investment company incorporated in the Cayman Islands and resident in Guernsey (Channel Islands). The Fund is not registered with the Securities and Exchange Comnission as an investment company under the Investment Company Act of
1940. None of the participating shares of the Fund
(the "shares") are registered with the Securities and Exchange Commission under the Securities Act of 1933. The shares may not be directly or indirectly offered or sold in the United States of America (including its territories, possessions and areas subject to its jurisdiction) or to or for the benefit of a United States person. 21 (Footnote continued) at such factors as who will be acting in the manner conte1rplated by the :3tat.utory definition of the term "corrmodity pool operator" -- ~, who will be pro￾ooting the pool by soliciting, accepting or receiving fran others, property for the purpose of commodity interest trading -- and Who will have the authority to hire (and to fire) the pool 1 s CI'A and to select (and to change) the pool 1 s FCM. 21 Specifically, your correspondence represents that the placing meirorandum in respect of the shares defines the tem "United States pen~on" for the purposes of this restriction as follows:
a national or resident of the United Stc.tes of America, a partnership organized or e...xist.ing in any state, territory or possession of the United St~tes of America, a corporation orgw.ized under the laws of the United States of America or of any state, territory or possession thereof or any estate or trust other than an estate or trust the incorre of Which fran sources outside of the United States of America (which is not effectively connected 'li·th the conduct of a trade or business within the United States of America) is not included in gross incorre for the purposes of canputing United States federal incane tax. In a telephone conversation held with Division staff on J'anuary 31, 1986, (Footnote continued)

The Fund is comprised of 5 individual funds, including a fixP-d income fund and an equity fund investing in securities issued and traded in the United States. Trading in each individual fund is directed by investment managers selected by the board of directors of the Fund. Each investment manager exercises sole investment discretion with respect to that portion of the individual fund 1 s assets which is allocated to it, subject to guidelines adopted by the board of direc￾tors. (The board of directors may from time to time establish guidelines for the use of corrm:xli ty futures contracts and comrrodi ty options contract.s ("futures contracts") by canrrodi ty trading advisors and, in certain ci.rcUil1Btances, direct that such guidelines be implemented.) The board of directors of the Fund has responsibility for reviP-wing the investment performance of P-ach investment manager and, to the extent deemed desirable, dismissing investment managers and hiring new or additional investment managers. The board of directors is assisted in this function by the ~.&ninis￾trator which is responsible for providing the board of directors with such statistical and other information respecting investment managemPnt results as the board of directors may require. . . . Management and Aclministration of the Fund The management of the Fund is under the control of the board of directors. The board of directors is canprised of 4 directors, one of whan, "X," is a U.S. citizen and a principal of "Y," a domestic investment consulting firm which is registered with the Securities and Exchange Commission as an investment adviser pursuant to the Investment Advisers Act of 1940. [Neither "X" nor "Y" is directly or indirectly affiliated with any Camnission registrant. iJ) All (Footnote continued) your associate represented that we may interpret the foregoing as prohibiting the use of a foreign corporation (or other such entity) by United States residents or citizens for the purposes of evading the restriction on sales of the Fund 1 s shares to a "Unit.ed States person." i/ This representation also was made by your associate in the January 31, , 1986 telephone conversation held with Division staff. Your correspondence further represents that "X" has been a principal of (Footnote continued)

meetings of the board of directors have been, and will in the, future be, con<'lucted outside of the United States and all other activities of the directors related to the management of the Fund have been, and will in the future be, conducted outside of the United States. The administrator of the Fund is "Z, 11 a limited liability company incorporated in Guernsey, Channel Islands. The administrator is empowered to delegate its administrative responsibilities and to retain consultants. It will not, however, delegate its administrative responsibilities, directly or indirectly, to any United States person or other person located in the United States. 5/ Pursuant to its authority, the administrator has delegated certain of its administrative responsibilities, including certain recordkeeping, valuation and reporting duties, to the custodian of the Fund, hank and trust c001pany of Guernsey, Channel Islands. (Footnote continued) the firm since its inception in the 1970s and that, as of June 30, 1985, the aggregate asset value of all multiple manager investment programs supervised by the firm substantially exceeded one billion dollars. 5 I In this regard, your correspondence e_xplains that the administrator is indirectly affiliated with certain United States firm.s, including 11Y11 • Your correspondence further represents, however, that while the administrator may retain its affiliates to perform certain ministerial functions-- e.g., verification of asset valuations and transmission of information on investment managers, no affiliate will receive a fee for performing any such service. Rather, the affiliate only will receive reimbursement for its "direct out~of-pocket" expenses incurred in performing such service. Further in support of tl1e requested relief your correspondence represents that neither any director (or affiliat.e) of the Fund, the adminiAtrator (or affiliate) of the Fund, nor any principal of any of the foregoing persons has bePn subject within the last ten years to any material civil, criminal or administrative action which would adversely reflect upon such person's fitness to act in a fiduciary capacity.

Futures Trading Activity
It is anticipated that a portion of the assets of certain of the individual funds comprising the Fund may be comroi tted to investment in futures contracts in the United States. The discretion to invest any assets of the Fund in futures contracts will, however, only be granted to an invesbuent manager if it is registered as a comrrodi ty trading advisor. with the National Futures Association, exempt fran such registration under the Act or otherwise not required to so register under the Act. Under existing agreements the aggregate underlying carrrnodity value of all futures contracts in a particu￾lar manager's investment portfolio would not be permit￾ted to exceed the aggregate value of cash and cash market instruments in that roanager's investment po:r.t￾folio. As a result of this rest:r.iction, it is extrertlE!ly unlikely (given existing margin levels) that more than 5 percent of any individual fund's net assets would ever be cormni tted at any one time to initial margin and premiums -- even if every investment manager exercisins discretion over the assets of the individual fund were authorized to invest, and to the fullest extent of its authority did invest, in futures contracts. §_/ As you are aware, Conmission staff has considered the application of the registration requirements of Section 4m ( 1) of the Act to the CPO of a "foreign" carrrnodity pool on several prior occasions. For example, C.onrnission staff previously stated that it would not recommend enforcement action based upon the failure of a person operating a ccmrodity pool outside of the United St.Rtes to register as a CPO with the Corrmission where, am:mg other things, the following facts are present: (1) such pe:r.son is located outside the territorial United States~ (2) such person confines its pool activities to areas outside the territorial United States; (3) none of the participants in the pool is a resident or citizen of the United States; and (4) no funds or other capital are contributed to the pool from United States sources. CFI'C Staff Interpretative Letter No. 76-21, [1975-1977 Transfer Binder] Comm. Fut.
L. Rep. (CCH) ~20,222 (August 15, 1976). See also Division of Trading and
Markets Interpretative Letter No. 85-18, Ccmn. Fut. L. Rep. (CCH) '.[22: 786 (October 16, 1985) (with respect to the foreign administrator and the foreign §} We note that for the purposes of this letter it has not been necessary for us to consider and to opine on whether such trading of futures contracts would come within the definition of the term "bona fide hedging transactions and positions" set forth in Rule 1.3(z), 17 C.F.R. §1.3(z) (1985) •

manager of a foreign comrrodity pool). Cf. Division of Trading and Markets :Lnterpretative Letter No. 84-2, [198/.-1984 Transfer Binder] Corrm. Fut. L. Rep. (CCH) '.1[21,983 (January 17, 1984) (wherein Corrrnission staff similarly issued a "no-action" position to, arrong other persons, a United States domiciled firm based upon a finding that the trading vehicle at issue was not a ccmncx:lity pool within the :rreaning and intent of Rule 4.10 (d), 17 C.P.R. §4.10(d) (1985)). In certain other cases, however, Commission staff declined to issue such a "no-action" position. 7 I See Division of Trading and Markets Interpretative Letter No. 85-18, supra-(with respect to the United States domiciled Invesbrent Consultant of a foreign conm:xiity pool; Division of Trading and Markets Interpretative Letter No. 83-14, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) '.1[21,967 (June 6, 1983) (where all of the officers and all but one of the directors of a foreign general partner of a foreign commodity pool were United States residents and citizens and where the foreign general partner "~:las a wholly-awned subsidiary of a Corrmission registrant and maintained an office in the United States). The instant case does not fall squarely within either category of cases Corrmission staff previously has considered. On the one hand, it presents the following facts which similarly were present in the "no-action" ca.ses: (1) the commodity pool activities of the Fund will be confined to areas outside the territorial United States; (2) none of the participants in the Fund may be a United St.ates resident or citizen; and (3) no funds or other capital mDY be comnitted to the Fund fran United States sources. On the other hand, like those cases where staff declined to issue a "no-action" position but provided certain other relief, it presents the fact that "X," one member of the Fund's Board of Directors, is a United States citizen. In this regard, we note that the instant case presents such further facts as: (1) all meetings and all other activities of the Board of Directors related to the management of the Fund have been, and will in the future be, conducted outside of the United States; (2) "X" is but one of four directors of the Fund; and (3) neither "X" nor "Y" is direct.ly or indirectly affiliated with any Commission registrant. In light of these further facts, we believe that the instant case more closely resPJmbles those cases in which Cormuission staff issued a "no-action" position. Accordingly, based upon the representations you have made to us, the Division will not recommend that the Comrrd.ssion take any enforcement action against any director or the administrator of the Fund as a result of engaging in the activities described above without registering as a CPO. 2/ In those cases staff required the CPO of the foreign canrrodity pool to register as such but provided relief fran, among other t:hings, the disclosure and reporting requirerrents of Rules 4. 21 and
4. 22, respec￾tively, 17 C.F.R. §§4.21 and 4.22 (1985).

We note tha_t this letter does not excuse any person covered thereby :(rom cq:nplianc.e with any other applicable requiremPnts contained in the Act or in the Corrrnission' s regulations thereunder. For example, each would remain 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 and 19 of the rPgU1ations, 17 C.F.R. Parts 15, 18 and 19 (1985). Moreover, the position we have taken herein is solely applicable to such persons in connection with their operation of the Fund. This letter is based upon the represe-ntations that have been made to us. Any different, changed or omitted facts or conditions might require us to reach a different conclusion. 8/ In this connection, we request that you notify us immediately in the event that operations of the Fund; including its shareholder and Board of Directors compositions, change in any way from that as represented to us. 8/ Very truly yours, Andrea M. Corcoran Director For example, the "no-action" position issued herein may no longer obtain in the event "X" becomes affiliated with a Corrmission registrant or if another United States resident or citizen becomes a member of the Fund's Board of Directors.