CFTC Staff Letter 86-08: No-Action Relief for CPO and CTA Registration Regarding Multiple-Employer Pension Trust

DIVISION OF
TRADING AND MARKETS
COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 April 4, 1986 Re: Multiple-Employer Master Trust -- Requests for CPO and CTA 11No-Action11 Positions Dear This is in response to your letter dated February 3, 1986, wherein you requested that the Division not recommend that the Commission take any enforcement action against 11X&Y Inc., II Mr. 11X11 and Mr. nyn for failure to register as a canmodi ty pool operator ("CPO") or as a caumodi ty trading advisor ("CTA") in connection with the proposed use of financial futures contracts ];./ by the "X&Y Inc." Joint Master Trust as described below. ?:../ Based upon the representations made in your letter, we understand the facts to be as follavlS :
"X&Y Inc." [is] a registered invesunent adviser under the Invesb'nent Advisers Act of 1940 (the "Advisers Act") and the invesb'nent manager (as defined in the Employee Retirement Income Security Act of 1974 ("ERISA") ) for the "X&Y Inc. " Joint Master Trust (the "Trust") . The Trust is a qualified group pension trust fonned for the collective investment of assets of qualified pension and profit sharing plans (the "Plans 11 ). The Trust is organized under the laws of the State of Washington pursuant to an Agreement and Declaration of 1/ In a telephone conversation held with Division staff on February 26, 1986, you explained that for purposes of this request the tenn "financial futu't'es contracts" includes futures contracts based on debt securities and on stnck indices. Y You also requested such a "no-action" position with respect to the Trust itself. Inasmuch as the Trust appears to be the "pool" that a CPO would operate or a CTA would advise, it has been unnecessary for us to consider that request.

Trust (the "Trust Agreement") entered into am:mg the Plans, "X&Y Inc." as Investment Manager, Mr. "X" and Mr. "Y'i as Trustees, and Rainier National Bank as Olstodian. The Trust was formed to allow the parti￾cipating Plans, each of which is a pension plan that is subject to the reporting, disclosure, administration and enforcement provisions of Title I of ERISA, to cam￾mingle all or portions of their respective assets for investment in order to obtain the benefits of various economies of scale. Under the tenus of the Trust Agreement, each of the Plans adopts and incorporates the Trust Agreement by reference as part of its quali￾fied plan under Section 401 (a) of the Internal Revenue Code of 1954 (the "Code"). The Trust Agreement auth￾orizes "X&Y Inc. " to manage, acquire, control or otherwise dispose of the assets of the Trust and, as the Investment Manager, "X&Y Inc. " has assumed the investment management authority and the associated fiduciary duties with respect to those assets. Olrrently, the Trust has assets of approximately $260 million. The assets of the Trust are invested in four investment funds according to the investment criteria of the Plans: (1) an investment company fund, which includes equity mutual funds and rroney market mutual funds; (2) an equity fund, which includes equity mutual funds and rroney market mutual funds, as well as a portfolio of stocks and rroney market securities; (3) a bond fund, \vhich includes treasury bonds and rroney market securities; and (4) a rroney market fund, which includes high quality debt securities with maturities of one year or less. "X&Y Inc." intends to use only financial futures (and has no intention of using commodity options) solely for bona fide hedging purposes within the meaning and intent of Rule 1.3(z) (1), 17 CFR §1.3(z) (1) (1985) . "X&Y Inc. , " the Trust and the Trustees have given notice of their desire to claim the exclusion from the definition of CPO pursuant to Rule 4. 5, 50 Fed. Reg. 15868 (April 23, 1985), in conformity with the requirements of paragraph (c) of that Rule and, for purposes of the exclusion and this request, the staff

should assume that the Trust will be operated in the manner specified in paragraph (c) of Rule 4. 5. ~/ Mr. "X" and Mr. "Y" as the Trustees of the Trust Although you recognize that the activities of the Trust could consti￾tute the operation of a ccmrodi ty pool, you assert that the rule 4. 5 exclu￾sion fran the definition of the term "ccmrodi ty pool operator" should be available to the Trustees. In this regard, the Division notes that the relevant provision of the rule is found in paragraph (a) (4), which essen￾tially provides that "a trustee or named fiduciary of a pension plan that is subject to Title I of [ERISA]" is eligible for exclusion fran the definition of the term "CPO" with respect to the operation of a qualifying entity specified in paragraph (b) -~i.e., a pension plan subject to Title I of ERISA and operated pursuant to the criteria specified in paragraph {c). However, the Trust itself does not fall within the express definition of a "qualifying entity" under rule 4.5(b) (4) for which a notice of eligibility may be filed. As we have indicated in previous interpretative letters concerning rule 4.5(a) (4), 4/ Where the assets of multiple pension plans are commingled under a separate-trading vehicle, one looks to that separate trading vehicle for the purposes of the "qualifying entity" definition. Accordingly, a determination of whether relief is available or not under rule 4.5 must be based upon an evaluation of tlle structure and trading activities in commodity interests of the trading vehicle as a single entity. Such an evaluation would consider, among other things, the characteristics of each pension plan under the trading vehicle and the purposes for which the trading vehicle was fonned. ~ Commission records confirm that the Trustees filed such (intended) notice of eligibility on September 24, 1985. We note that the structure of the Trust appears to be similar to that of a registered "series" invest:rnent ca:npany, a qualifying entity under rule 4.5(b) (1). In this regard, the Commission has stated that it intends to interpret rule 4. 5 such that, arrong other things, each portfolio of the investment company that intends to trade commodity interests must separ￾ately meet the operating criteria of rule 4.5(c). See 50 Fed. Reg. 15868 at 15872. We believe that, in light of the similarity in structures, each investment fund of the Trust that intends to trade commodity inter￾ests similarly must separately meet the operating criteria of rule 4.5(c). if Division of Trading and Markets Interpretative Letters 85-13, Comm. Fut.
L. Rep. (CCH) CJt22, 734 (August 2, 1985), 85-15, Conm. Fut. L. Rep. (CCII)
(Footnote continued)

Those previous interpretative letters addressed the application of ~le 4.5 to a trading vehicle comprised of single-employer pension plans ""mere (1) each such plan individually v.ras excluded from the "pool" definition by rule 4.5(a) (4) (i), (ii) or (iii), 51 and (2) the trading vehicle had been created for the administrative convenience of the employer. 61 On those facts, each of those letters concluded that neither the filing of a notice of eligibility nor any other action would be necessary to clatm the exclusion from the "pool" definition available under rule 4.5(a) (4). The instant request presents a question of first tmpression, then. Unlike the facts presented in the previous letters, those of the instant request pertain to a trading vehicle comprised of multiple-employer pension plans where E"..ach such plan individually would be a "qualifying entity" under rule 4.5 (b) for which a notice of eligibility must be filed. Moreover, there is no evidence that the trading vehicle was created for the administrative convenience of the various employers sponsoring those plans. In light of this, the Division believes that the Trust would not be a "qualifying entity" for the purposes of rule 4.5(b) and that Messrs. "X" and "Y" 'lOUld not be able to claim an exclusion from the CPO definition under rul~ 4.5(a) with respect to their operation of the Trust. The Division further believes, however, that under the facts presented certain relief from CPO regulation is merited. 71 Since each pension plan participating in the Trust is required to adopt and incorporat..e the Trust Agreement a.s a part of the plan, Messrs. "X" and "Y," the trustees of the Trust, also would be the trustees or named fiduciaries of each individual (Footnote continued) <][22,736 (August 15, 1985) and 86-5A to be reprinted in Corrm. Fut. L. Rep. (CCH) (November 6, 1985). 2_1 If a pension plan is excluded from tl1e "pool" definition by rule 4.5(a) (4) (i), (ii) or (iii), no action needs to be taken to claim relief from CPO regulation. (If there is no "pool," there is no CPO.) §_I AS the Division noted in Interpretative Letter 85-15, supra, n.4, at p. 31,081:
[This letter] does not address the case where a finan￾cial depository institution (or other such persons as a private brokerage firm or invesbnent advisory company) were to initiate formation of a master trust (or other ccmningled trading vehicle) in order to obtain custo￾mers for its business. [Emphasis added.] 7 I In this regard, we note tl1at the Canrnission has directed the Division to interpret rule 4. 5 as may be necessary and appropriate to fulfill the purposes of the rule. See 50 Fed. Reg. 15868 at 15870.

plan. 8/ Moreover, Messrs. "X" and "Y" have represented to the Commission that they intend to operate the Trust in compliance with tlle criteria of rule 4.5(c).' Accordingly, the Division will not recommend that the Commission take any enforcement action against the Trustees for failure to register as a CPO in connection with their operation of the Trust. 2./ You also have requested a "no-action" position in the event the Trus￾tees fail to register as a erA in connection with their operation of the Trust. In light of the nature of the responsibilities of those persons as described above-- i.e., essentially only the selection of the Trust's in￾vestment managers, we do not believe that their activities would require them to register as a CTA. See 49 Fed. Reg. 4778 at 4780 (February 8, 1984), wherein the Ccmnission explained that rule 4.20(a), 17 C.F.R. §4.20(a) (1985) , which establishes certain organizational require:rrents for CPOs, is intended to clarify the responsibility of CPOs for the activities and invest￾ment policies of their pools. The Ccm:nission further explained:
[F]requently, Commission staff is called upon by members of the public to offer guidance on determining 'Who, in fact, would be the CPO of a particular pool. In providing such guidance, the staff typically looks at such factors as who will be acting in the manner contemplated by the statutory definition of the term "carrnodity pool operator" -- ~, who will be praro￾ting the pool by soliciting, accepting or receiving fran others, property for the purposes of carrnodi ty interest trading -- and who will have the authority to hire (and to fire) the pool's CTA and to select (and to change) the pool's F01. Thus, the Commission has stated t.hat because the choosing of a pool' s CTA is consistent with the functions of a CPO, no separate registration as a CTA by the CPO is required. "X&Y Inc. " as the Investment Adviser to the Trust 8/ Specifically, in a telephone conversation held with Division staff on February 26, 1986, you represented that as a. result of this requirement Messrs. "X" and "Y" are deemed to be named as trustees of each individual plan in the "plan documents" and, accordingly, as trustees of that plan for ERISA purposes. 2/ This "no-action" position supersedes, then, the notice of eligiblity.

\
We agree with your assertion that the activities of "X&Y Inc." in its capacity as t..he investment adviser to the Trust do not appear to bring "X&Y Inc." within the definition of the term "ccmrodity pool operator" as set forth in section 2 (a) (1) (A) of the Corrrnodity E.,'{change Act (the "Act"), 7 U.S.C. §2 (1982). This is because, as you have noted, the activities of "X&Y Inc." as investment adviser to the Trust are analogous to the investment activities of an investment adviser to an investment company. In this regard, the Cortmission previously has concluded that: 10/ The Commission does not believe that the activities in which such persons [investment advisers and certain others] typically engage are, without more, the activi￾ties in which a CPO typically engages. Rather, the Commission believes that such persons are outside the CPO definition and, therefore, that relief from regu￾lation as a CPO is not necessary in order to exclude such persons from the CPO definition. [Footnotes omitted.] Accordingly, and as you have requested, the Division will not recommend that the Commission take any enforcement action against "X&Y Inc." if it fails to register as a CPO in connection with serving as an investment adviser to the Trust. FinRlly, you contend that "X&Y Inc. 11 should not be required to register as a CTA because, under the facts presented, "X&Y Inc." appears to fall within the spirit, if not the lettP.r, of rule 4.14(a) (5), 17 C.F.R. §4.14(a) (5) (1.985). That rule provides that a person is not required to register as a CTA if -- it is exempt from registration as a comrrodity pool operator and the person's trading advice is directed solely to, and for the sole use of, the pool or pools for which it is so 8-'{empt. Although you recognize that rule 4.14(a) (5) applies solely to persons:
who are exempt from registration as a CPO and does not expressly apply to persons who are excluded fram the definition of CPO by rule 4. 5, you assert that the activities of "X&Y Inc. 11 with respect to the Trust are analogous to the activities described in a recent Division "no-action" position concerning CTA registration. 11/ There, the Division stated that it would not recommend that the Cammissionttake any enforcement action for failure to register as a 10/ 50 Fed. Reg. 15868 at 15871 (April 23, 1985). 11/ Division of Trading and Markets Interpretative Letter 85-21 (November 8,, 1985), 2 Comm. Fut. L. Rep. (CCH) ~22,795.

I
CTA against a person registered as an investment adviser in the event that person provided comnodity interest trading advice to only one rule 4.5 qualifying entity --- i.e., a registered investment company -- that it had helped to form and for which a notice of eligibility had been filed with the Commission. As the Division explained~ ];];_/ Nonetheless, rule 4.l4(a) (5) does reflect a general Commission intent to el~ate any unnecessary costs and burdens of regulation. Consistent with that in￾tent, the Division believes that adoption of a no￾action position with respect to a person's CTA regis￾tration would be appropriate under otller circumstances not specified in rule 4 .14 (a) where the costs and bur￾dens of erA registration would appear to out'\veigh any regulatory benefit -- ~' in the instant situation. Furthermore, adoption of such a position in this situ￾ation would be consistent with the general policy of rule 4.5, which ess~ntially reflects a Congressional and Corrmission intent to avoid, where appropriate, unnecessary and duplicative CPO regulation for certain "otherwise regulated" person..c;. In support of the instant request you have represented that "X&Y Inc." was formed to provide investment advice to the Trust and that although "X&Y Inc." has other clients, the Trust is the only client that "X&Y Inc." would currently advise to use commodity options or futures contracts of any kind. 13 I Moreover, we note that the sole principals of "X&Y Inc. , " Messrs. "X" and"Y," individually are trustees or n.arred fiduciaries of both the •rrust and each underlying plan and, thus, are persons who are "otherwise regulated" persons under rule 4.5(a) (4). 14/ In light of the foregoing, we agree that the facts of this case and the prior "no-action" case are similar. Accordingly, based upon the foregoing, the Division will not recorrmend that the Commission take any enforcement action against "X&Y Inc." if it fails to register as a CTA in connection with providing advice on commodity interest trading to the .Trust. I,i.ke the position we took in the prior case, however, this position is subject to compliance with the following two conditions: (1) upon the request of a duly-authorized Comnission representative, "X&Y Inc." must provide access to the books and records it keeps and maintains in connection with directing the commodity interest 12/ Id. at pp. 31,333-34. 13/ This representation was made by you in a letter dated February 13, 1986. 14/ For the reasons provided above, however, the Trust would not be a "qualifying entity" under rule 4. 5 (b) (4).

trading of the Trust; 15/ and (2) "X&Y Inc." must agree to comply with whatever n1le the Commission may adopt to e...xempt from registration as a CTA -- or to reqt1ire registxation as a CTA -- persons who are registered as an investment adviser and who provide advice on comnodity interest trading to persons or entities who have claimed exclusion from the CPO definition pursuant to n1le 4 . 5.

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The positions we have taken herein are based upon the representations you have made to us and are strictly limited to those representations. For example, in the event the Trust is not operated in compliance with the criteria of rule 4.5(c) or if "X&Y Inc." provides advice on comnodity interest trading to one or rrore other persons, the "no-action" positions we have taken with respect to the need for Messrs. "Y" and "X" to register as a CPO and for "X&Y Inc." to register as a CTA would no longer obtain. We note that this letter does not excuse Messrs. "Y" and "X" , "X&Y Inc . " and the Trust fram compliance with any other applicable requirements contained in the Act or in the Corrmission' s regulations thereunder. For e~ample, they 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 require~nts
for traders set forth in Parts 15,-18 and 19 of the regulations, 17 C.F.R. Parts 15, 18 and 19 (1985). This letter is based upon the representations made to us and is sub￾ject to compliance with the conditions stated above. Any differe.nt, changed or omitted facts might require us to reach a different conclusion. In this connection, we request that you notify us inmediatel y in the event that the activities of "X&Y Inc.," Messrs. "Y" and "X" or the Trust change in any way from that as represented to us. If you have further questions on this matter, please do not hesitate to contact Barbara R. Stem, Assistant Chief Counsel, or Robert H. Rosenfeld, Division staff attorney, at (202) 254-8955. Very truly yours, Andrea M. Corcoran Director 15/ We expect that those books and records would be in the nature of those required of registered CTAs by Rule 4.32, 17 C.F.R. §4.32 (1985).