CFTC Staff Letter 86-11: No-Action Relief for CPO Registration of Partnership with Foreign Participants

DIVISION OF
TRADING AND MARKETS
COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 April 29, 1986 Re: CPO Registration "No-Action" Position vfuere Pool Consists of 'l'vlo Foreign Participants Dear This is in respom:;e to your letter dated February 7, 1986, as supple￾rrented by telephone conversat.ions vvit'.h Division staff, whereby you requested an interpretative letter that the General Partner, in connection with the operation of the Partnership, need not. comply with the registration, repor￾ting c..nd related requirements applicable to comrodit;r pool operators ( "CPOs") , co.rm'.odi ty trading advisors ("eTAs") , or their principals or associated pe:rsons ("APs") 1.mcler Sections 4k, 4m and 4n, respectively, of the Comrrodity F....'ZchangP. Act (the "Act"), 7 U.S.C. §§6k, 6m and 6n, and the Corrrrnission' s regulations issued thereunder. J:../ Based upon the representations made in your letter, as supplemented, we understand the facts in general to be as follows: The Partnership is a NP.vv York limited partnership, which was fanned and corrroenced business in April of 1985. Its priDcipal business purpose is to permit foreign investors to invest and trade in securities through the Partnership. ll In this regard we note that, among other things, the CamQission's regulations prescribe for such persons registration requirements at Part 3, 1.7 C.P.R. Part 3 (1985), and disclosure, reporting, recordkeeping and advertising requirements at Part 4, 1.7 C.F.R. Part 4 (1985). Alternatively, you have requested that the Commission issue an order exempting the General Partner, its principals and APs from such registration, reporting and related requirements. In light of the positions we are taking below, however, it has not been necessary to consider that alternate request.

The General Partner is a New York general partnership whose sole bus￾iness activity is to serve as the general partner and the investment manager of the Partnership. 'The General Partner's three partners are "X," who organized the Partnership, and "X"' s father and "X"' s brother-in-law, both of whom are u.s. persons. Other than the Partnership, none of the partners of the General Partner currently conducts any investment advisory activities involving securities or c0IT1!1.'DC1ity interests for other persons. Moreover, in connection with receipt of the requested interpretative letter, you have represented that neither the Gene:tal Partner nor any individual partner thereof "vJould do anything further in cCJ!tUl1CX:1.ities. outside the Partnership." !:_I 'rhere are two limited pa.rtners in the Partnership. One is a non-resi￾dent alien individual who has been known both socially and professionally to 11X11 for 10 years and to his father for 15 years. The other li.rrlited partner is a foreign corporation whose sole shareholder is a non-resident alien individual who has been knovm socially to "X" for 2 years and to his father for 4 years. These individuals sought out "X11 to manage their funds and, accordingly, the Partnership ,.ms fonred as a result of a series of informal conversations between the parties. 1J Net profits and losses of the Partnership are allocated among the partners in accordance with their respective capital accounts, except that (1) any net profits are first allocated to the limited partner's in an amount sufficient to provide them with a preferred return equal to an agreed upon pPrcentage of their capital, and (2) any net profits in excess of that amount a!:'P split between the limited partners and the General Partner in accordance '"i th an agreed upon percentage. viith respect to the Partnership's trading activities in particular, your letter represents:
Since its inception, the preponder0nce of invest￾ments of the Partnership Th~Ve consisted of investments in securities and options and rights relating thereto. However, the Partnership' s investment focus has e.'q)an￾ded recently to include, to a ve~' limited extent, futures contracts on Treasury bond and municipal rond indices. 2/ :t-larch 5, 1986 telephone conversation. 3/ Id.

The Partnership's primary investment focus and the bulk of its assets have been and will remain carrmi tted to i:rwesi::rrlents in secm:ities. Within the Partnership's overall inw~stment program, tradinq in futures con￾tracts, in te~s of aggregate contract values and of margin deposits re]ative to the total assets, ... will ... be a limited secondary activity (and will be incidental to the Partnership's overall trading activi￾ty 4/]. In this regard, the General Partner and the Pa~tnership represent that at no time will the Partner￾ship cc:mnit more than five percent of its assets for initial margin deposits and preroiums for commodity futures contracts and options thereon. Based upon the foregoing representations, the DDrision will not recom￾mend that the Commission take any enforcement action against the General Partner if it fails to register as a CPO in connection with the operation of the Partnership. This position is basec'l upon, among other things, our understanding of the facts as stated above that: (1) the Partnership was formed to trade ir the securities markets and its commodity interest trading will be incidental to its overall trading activities; (2) the Partnership will commit no more than 5% of its assets for initial margin deposits and premi~s for its commodity interest positions; (3) the limited partners are non-U.S. citizens or residents who have known t.v1o of the partners of the Gnneral Partner for the past several vears; aT'd (4) neither the General Partner nor any individua.l partner thereof intends to "do anything further in COITIJ:'lYxiities outside the Partnership." ~/ 4/ March 5, 1986 telephone conversation. 5/ Compare Division of Trading and Markets Interpretative Letter No. 84-2, Conm. Fut. L. Rep. (CCH) <JI21,983 (January 17, 1984), whe:r-ein we concluded, based on similar facts, that the trading vehicle at issue would not be a comrrodi ty "pool" -- and that the vehicle' s investment manager and its :managing director would not be CPOs. In that case, however, both the trading vehicle i·tself and the managing director were located outside the United States. Compare also Division of Trading and Markets Interpretative Letter No. 86-10, April 24, 1986, to ~ reprinte~ in Ca:ron. Fut. L. Rep. (CCH) , wherein we also concluc'led that the trading vehicle at issue would not be a "pool" -- and that the vehicle ' s general partners '._rould not be CPOs. Like the instant case, the (U.S.) participants in the trading vehicle had kno.-m the individual partners of the GP for several ye.-ars. Unlike the instant case, however, which concerns a "passive" investment vehicle, in that ot~er case t~e trading vehicle itself was actively engaged in a (Footnote continued)

In light of the fC'lct that the General Partner will be providing advice on commodity interest trading to a u.s. person (the Partnership), we believe that, absent relief, it would be required to register as a CTA. In this regard, v7e note that SectioE 4m(l) of the Act provides for an exemption fran CTA registration for any person ·-- who, during the course of the preceding twelve :rronths, has not furnished comrrodity trading advice to more than fifteen persons and who does not hold hirokself out generally to the public as a commodity trading advisor. We fu_"Lther note that, bn_sed upon our understanding of the facts as stated abovP, it appears that the General Partner would be eligible to clabn this exemption. With respect to the first criterion of the exemption, tllere are essentially two -- "not .•. more than fifteen" -- clients. vJith respect to the second criterion, in light of the facts that these individuals sought out the General Partner to manage their funds and that the Partnership was formed as a result of a series of informal conversations between the parties, it appears that the General Partner has not held itself "out generally to the public as a cornrrodity t-rading advisor." ~/ You should be aware that this letter does not excuse the General Partner fr.om any otherwise applicable requirements contained in the Act or the Commission's regulations thereunder. For example, it remains subject to the 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 Commission's regulations, 17 C.F.R. Parts 15, 18 and 19 (1985). This letter is b0sed on the representations that have been made to us and is strictly lbnited to those representations. Any different, changed or emitted facts or conditions might require us to reach a different conclu￾sion. 7 I In this coJmection, we request that you notify us i.nmediately in the event the Partnership's operation, including its investrrent objectives (Footnote continued) 6/ 7/ commercial business i.e., that of a securities options market maker. Moreover, as such, the vehicle's activities were subject to ongoing oversight by various regulatory aut..ho:ri.ties. Thus, there would appear to be no APs of the General Partner, as that term is defined in Section 4k(3) of the Act -- i.e._, a person associated with a CTA in any capacity which involves the solicitation of a client's or prospective client's discretionarjr account or the supervision thereof. For example, in the event the General Partner accepted more participants into the Partnership the conclusions reached herein may no longer obtain.

and membership composition, changes in any way from that as represented in your letter and in telephone conversations with Division staff. Very truly yours, Andrea M. Corcoran Director cc: Daniel A. Driscoll, National Futures Association