CFTC Staff Letter 86-12: No-Action Relief for Bank Employees Not Involved in Managing Investment Funds

DIVISION OF
TRADING AND MARKETS
COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 M.ay 6, 1986 Re: Petition for F~cemption fran Certain Registration and Recor~ceepinq Reauirements This is in response t.o your letters dated November 22, 1985 ana December 30, 1985, to the Divisinn of Trading and Mcrl<ets ("Division"), as supplemented b~' subsequent telephone conversations and a letter dated FPbruary 14, 1986, on beffilf of your client, ("Bcmk"). The Bank has detennined to apply for registration with the Cormndity Futures Trading Comnission ("Corrmission") as a. cornrocxUty pool operat_or ("CPO") and, based upon the facts c.s reprPsented to the Division and as set forth below, has requested the Division to grru1t relief fran certain of the registration and recordk.P-eping requirements under parts 3 and 4 of the Comnission' s regulations . 1_/ 1/ In addition, the Bank has requested th?,t_, pending registration as a CPO, relief he granted to permit the solicitation of plan sponsors of employee benefit trusts and to negotiate and execute Trust Agreements as described herein providing for the corrmingling of trust assets in collective investment f'lmds to engage in fu·tures trading, provided that no trading in commodity futures contracts on behalf of such collective investment funds commences prior to the effective date of the registration of the Ban.k as a CPO. Based upon the representations set forth herein, the Division will not reconmend that the Ccmnission take any enforcement action against the Bank or its employees for failure to be registered as a CPO or as an associated person of a CPO, respectively, in connection with the solici￾tation of plan sponsors of employee benefit trusts as stated in your letter. This position is, hov1ever, sub~ ect to the condition that, in connection with the solicitation activities set forth above, the Bank remains responsible as a CPO for compliance with the antifraud provisions (Footnote continued)

The Facts
The Division understands that the Bank acts as a fiduciary of a number of employee benefit trusts 1 including pension, welfa'l:'e and governmental plans as defined under sect. ion 3 of the Employee Retirement Incc:me Secut'i ty Act ("ERISA"). The Bank enters into v.rritten agreements ("Trust Agreements") establishing its fiduciar}r relationships, which obligate the Bank to manage trust assets for the exclusive benefit of trust beneficiaries in accordance 'lith the provisions of the Trust Agreements and applicable laws, including Title I, Subtitle A, Part 4 of ERISA. Pursuant to rules promulgated by the Comptroller of the Currency, 12 C.F .R. part 9, the Bank manages employee benefit t;nust assets eitber through Master Trusts (which may hold at least sane assets that would not qualify for "non-:pool" status under Corrmission rule 4.5, 17 C.F.R. §4.5 (1985)) and, subject additionally to express authorization provided in the Trust Agreements, one or :rrore collective investment funds. Such :t-'laster Trusts and collective investment funds consist solely of employee bene::i t trust assets. The Baru( intends to engage in the trading of futures (and options on futures) on U.S. governrnent securities and stock indices ( collectively "financial futures") through the vehicle of several of these collective investment funds. I:r> doing so, the BRY1J~ intends to pursue certain invesbnent strategies using finand.al futures trading to enhance portfolio return or to facilitc.te the allocntio:n of portfolio assets among equity, debt and cash instruments. Because these invest:rnen-1: strategies may not necessarily fall within the Commission's interpretation of bona fide hedging, as defined in Commission rule 1.3(z) 1 17 C.F.R. §1.3(z) (1985), or the alternate test set forth in rule 4.5(c) (2) (i), 17 C.F.R. §4.5(c) (2) (i) (1985), the Bank does not qualify for exclusion from the definition of a CPO under Corrmission rule 4.5, 17 C.F.R. §4.5 {1985), witl1 respect to these funds and, therefore, it has applied for registration as such. ~/ The activities in which the Bank will engage requulng registration as a CPO, including all solicitat.ions of prospect.ive customers, will be con- . ducted through the Fiduciary Futures Mc-magement Department {"Department"), a division of the Investment :t-'lanagement Department of the Invesbnent Bank, one of three operating banks within the Bank. In order to ensure compliance vlith (Footnote continued) of section 4~ of the Ccmrodity Exchange Act, 7 U.S.C. §69_ (1985). The Bank has also requested relief from certain other regulatODJ require￾ments applicable to CPOs under part 4 of the Commission's regulations. The Division's position with respect to these matters will be addressed separately. 2/ The Bank also manages other funds with respect to vlhich it qualifies for exclusion from the definition of a CPO.

the fiduciary obligations .Dnposed upon it, inter. alia, by the relevant provisions of ERISA and the regulations of the Canptroller of the Currency -referenced above, the activities of the Department are governed-by the Fiduciary Policies and Practices Manual of the Bank. This manual is designed to establish a "chinese wall" between the Department and the other divisions of the Bank, prohibiting the sharing of informa.tion that would enable any employee of the Bank or the Bank itself to profit from knowledge of the trading activities of the Department.
Part 3 of the Commission's Regulations
Commission rule 3.14 (a) (2) , 17 C.F .R. §3 .14 (a) (2) (1985) , provides that an application for registration as a commodity pool operator must be accompanied by a Form 8-R and the fingerprints of each natural person who is a principal of the applicant. A.s defined in Ccmnission rule 3 .1 (a) , 17 C .F. R. §3 .1 (a) (1985) , a principal includes any "officer, direct.or, branch office manager or designated supervisor or person occupying a similar status or performing similar functions, having the power, directly or indirectly, through agreement or otherwise, to exercise a controlling influence over (the applicant's] activities vvhich are subject to regulation by the Commission." Thus, all officers of the Department, an)T officers of the Bank having direct or indirect authority over the activities of the Department and the Bank's Board of Directors generally v~uld be required to be identified as principals and to file a Form 8-R and fingerprints. In addition, many of these principals would also be required to be registered as associated persons of the CPO in accordance with the provisions of Commission rule 3.16, 17 C.P.R. 3.16 (1985). An associated person of a CPO, as defined in section 4k(~) of the Commodity Exchange Act, includes any officer or employee of the CPO engaged in any activity that involves "(i) the solicitation of funds, securities or property for a participation in a canmoc1ity pool or (ii) the supervision of any person or persons so engaged. 11 A..s interpreted by the Commission, the provisions of section 4k(2) would require the registration as an associated person of all individuals in the line of supervisory authority over the asftociated persons who solicit comnodity pool participations, including positions up through that of t.he CPO's chief operating officer. ]/ On behalf of the Bank, you have requested the Division to adopt a no-action position v1ith respect to the principals of the Bank vvho are not directly employed within. the Department. Specifically, you have requested that the Di 'Tis ion not recorrmend any enforcement action against such individuals for their failure to file a Fonn 8-R and fingerprints as required ]/ See Interpretative St0tement Regarding the Scope of the Tenn "Supervision" in the Associated Person Requirement, 45 Fed. Reg. 54032 (August 14, 1980).

by C()f('[l1ission ruJe 3.14(a) (2). Moreow~r, with respect to those principals not directly employed vvithin the Department who would also be required to be -registered as associated persons of the CPO, you have requested- an exemption from the requirements of the provisions of Comnission rule 3 .16. !/ Based upon the n~presentations set forth above, the Division has determined to adopt the no-action position you have requested with respect to the individual principals of the CPO who ?...re not directly emplo:_,red within the Deparbrent. This no-action position is based, in particular, uy:on the representation that all of the collective investment func.s managed by the BcJJk requiring it to be registered as a CPO will be managed within the Department and that, as a result of its obligations under federal law, the management of these funds is autonom::ms from the activities of the other divisions of the Bank. Boreover, the Division notes that the Bank has conducted a fitness examination of each of the principals of t.he Bank in connection with his employment. 5/ Although this exarnir.ation is not con￾sidered a substitute for the fitness examination required under the Commission's regulations, the Division believes that, in connection with the other factors discussed above, it would impose an unnecessary burden on such individuals to require an additional fitness examination. This no-action position, however, is subject to the condition that the President, Chief Executive Officer or other officer of the Bm~ with authority to siqn on behalf of and bind the Bank furnish the Ccmnission a letter setting forth a list of officers (up to at least the level of Senior Vice President) responsible for supervising the Fiduciary Futures Management Department and certifying that none of tl1ese officers or any director of the 4/ Pursuant to rule 3.16(g), your request is being treated as a pet.ition for exemption fran rule 3.16 (a). Rule 3.16 (g) (1) provides that any person adversely affected by the operation of rule 3.16 may file a petition with the Secretar:r of tl1e Cormtission requesting an exemption from any of the requirements of the rule. Rule 3 .16 (g) ( 1) further provides that the Cormtission may grant such a petition if it finds that the exemption is not contrBX'J to the public interest and the purposes of the provision from which exemption is sought. By rule 3.16(g) (2) (i), the Commission has delegated to the Director of the Division of Trading and Markets, or the Director's designee, the authority to grant or deny petitions filed pursuant to this rule. 5/ A fitness examination is effectively required by the prov~s~ons of 12 U.S. C. §1829, which prohibits any bank insured by the Federal Deposit Insurance Corpora.tion ("FDIC") from employing any person who has been convicted of a crime involving dishonesty or breach of trust witllout the prior consent of the FDIC. Such fitness examinations generally include the submission of a finqerprint card to the
Federal Bureau of Investigation for identification and processing.

Bank could be refused registration v1i th the Commission on the grounds stated in section 8a(2) of the Act. Appropriate documents evidencing the authority -of the certifying officer to sign on behalf of and bind the Bank must also be furnishBd to the Division. 6/ For these same reasons, pursuant to the authority delegated by rule 3.16(g) (2) (i), the Division has determined to exempt from registration as an associated person of a CPO those principals not directly employed within the Depcrrtrnent whose supervisory responsibilities might othenvise require. them to be registered as associated persons. This exemption is conditioned upon receipt by the Division of a binding resolution or other appropriate document vesting final supervisory authority, including the authority to hire and fire, with respect to the futures-related activities of the CPO, as fiduciary of employee benefit trust assets, and its associated persons, in a named officer. 7/ Evidence of the authority of the officer signing the resolution or other appropriate document must also be furnished to the Division. ~
Part 4 of the Corrroission' s Regulations
The recordkeeping reqt1irements applicable to CPOs are set forth in Commission rule 4.23, 17 C.F.R. §4.23 (1985). Specifically, rule 4.23(b) requires eac11 CPO to make and keep: (1) an itemizPd daily record of each comrrcdi ty. interest transaction of the ccrnrrodi ty pool operator and each principal thereof; (2) each confirmation of a commodity interest transaction, each pu:rchasP and sale statement ancl each monthly statement furnished by a futures corrntlission merchant to (i) the crnrrrodity pool operator relating to a personal account of the pool operator and ( ii) each principal of the pool operator relating to a. personal account of such principal; and (3) books and records of all other transactions in all other activities in which the pool operator engages. Those books and records must include cancelled checks, bank staternP.nts, journals, ledgers, invoices, computer generated records of all other records, data and mernoranda which have been prepared in the course of engaging in those activities. The primary purpose of these recordkeeping requirements is to permit the Commission and the National Fuhrres Association ( "NFA") to determine in a routine audit whether a CPO, or any principal of a CPO, has used the informa.tion it has about the trading activities of the pool to enter into ~/ A copy of this certification and related dOClnnents should also be sent to Daniel A. Driscoll, Vice President-Compliance, National Futures Association, 200 West Mc1.dison Street., Chicago, Illinois 60606. !__/ The Division understands tha.t initially this officer will be the Bank's Chief Investment Officer. '§_/ A copy of these documents should also be sent to Mr. Driscoll.

transactions for its own benefit. With respect to the activities of the Bank, however, you have stated tha.t, in light of the "chinese wall" that -separates the activities of the Department from the activities of the other divisions of the Bank, the Bank will not be in a position to take advantage of the trading activities of the Department. Moreover, requiring the Bank to make available for audit all of the lx::x::lks and records that would otherwise be requin~d under this rule would impose a significant burden on the Bank, given its size and scope of activities. Therefore, you have requested that the Division exempt the divisions of the Bank other than the Department from the requirements of Cmnission rule 4. 23 (b) . In other words, for purp::lses of rule 4.23(b), the Department onl)r would be treated as the CPO. Tt1e Division understands tl1at the Bank is otherwise required to maintain the records required under Corrmission rule 4.23 (b). Nonetheless, the Division has determined that granting the requested exemption is not contrary to the public interest and the purposes of the rule, in particular because of the procedures the Bank has implemented to ensure that no other division of the Bank, or any employee of the Bank, will be able to benefit from knov1ledge of the trading activities of the Departrnent. Therefore, pursuant to the authority delegated by Commission rules 4.12 and
140.93 (a) (1), the Division hereby P..xempts fran the requirements of Corrmission
rule 4. 23 (b) every division of the Bank other than the Department. This exemption, of course, does not exempt the Bank from making and keeping such records as may othenvise he required under the Ccmrodi ty Exchange Act and the regulations thereunder. 9/ Nor does the Division intend by this action to waive the C<JTllJ'nission 1 s c>.uthority under section 6 (b) of the Act to "require the production of any books, papers, corres}X)ndence, memoranda, or other records t.hat the Commission dePJnS relevant or material to [an] inquiry. 11 10/ The no-action positions adopted, and the exemptions granted, by the Division in this letter are based upon the representations that have been made to the Division and set forth herein. Any different, changed or omitted facts or conditions may require the Division to reach a different conclusion. Therefore, we ask that you notify us in:mediately in the event that the activities of the Bank or any of the individuals affected hereby change in any way. Finally, the no-action position adopted herein is that of the Division of Trading and l-'larkets and does not necessarily represent the views of the Carru:nission or any other office or division of the Com:nission. J_/ See, ~' parts 15 and 18 of the Commission 1 s rules relating to reporting requirements of large traders. 10/ The Division, of course, has no authority to limit the Corrmission 1 s statutory jurisdiction in this regard. Nor does the Division intend to limit in any way the authority of t.he National Futures Association to require production of such records pursuant to its canpliance rule 3-1.

If you have any questions about the positions adopted in this let.ter, please feel free to contact me or Kevin M. Foley, the Division's Chief ~ounsel, at 202/254-8955. cc: Daniel A. Driscoll Vice President-Compliance National Futures Association