CFTC Staff Letter 86-24: No-Action on Commodity Trading Advisor Regulation for Insurance Companies

DIVISION OF
TRADING AND MARKETS
COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 October 1, 1986 Re: Request for relief from regulation as a comn:xhty trading advisor Dear Mr. This is in response to your letter dated June 18, 1986, as supple￾rrented by telephone conversations with Division staff held on July 24, 1986 and August 1, 1986, wherein you requested our opinion that "A" and certain of its wholly owned subsidiaries (the "Subsidiaries") would not be subject to regulation as a "ccmrodi ty trading advisor" ( "Cl~") , as that te:r:m is defined in Section 2 (a) (1) (A) of the Corrrrodity Exchange Act (the "Act"), 7 u.s.c. §2 (1982), if they provide conmJdity interest trading advice under the circumstances described below. 1/ Basc'<l upon the representations made in your letter, as supplemented, we unders·tand the facts applicable to "A" in general to be as follows:
"A" is a mutual insurance ca:npany organized under State law. . . . It is licensed to do insurance business in every state, Puerto Rico, the Virgin Islands ru1d canada. . . . 'l'he core business of an insurance company such as "A" has for many years been the issuance of life insurance and rumuity contracts and the administration and managerrent of pension plans. In many facets of this business "A" performs i.nvestrrent managerrent services. "A" is registered as an investnent adviser with the Securities and Exchange Conrnission ("SEC") under the Investrrent Advisers Act of 1940 •• . !/ With respect to those subsidiaries not subject to your request, we note in particular that your letter excludes "B, " which is registered as a futures conrnission rrerchant ("FClvi") under the Act. In this regard, you concluded that the firm's commodity interest advisory services are "solely incidental" to the conduct of its business as an FCM and, thus, that it qualifies for the exclusion from the CTA definition in Section 2 (a) (1) (A) of the Act. For the purpose of this letter it has not been necessary for us to independently confirm your conclusion.

"A"' s investrrent management activities are many and varied [and] include management of the securities portfolios which comprise certain of its separate accounts. . . . "A" also manages securities portfolios as investrnent adviser to a number of independent mutual funds y and to certain e.roployee benefit plans the assets of which are held in trust. A..c. you are aware, in connection with its recent consideration of mnendmP.nts to the Act, the House of Represent .. ""'.ti ves Corrrni ttee on Agriculture considered a proposal by the life insurance industry to exclude certain persons fran the CTA definition. As the Corrmi ttee Report states:
Representatives of the life insurance industry have proposed tlk~t tne definition of "commodity trading ad￾visor" in the Act be ~nded to exclude any investment adviser registered with the Semrrities and Exchange Carmission under the Investment Advisers Act of 1940 whose advice concen1ing corrm::rlit~,7 h~t.Prests is solely in connection with the manngement of inFtitutional securities portfolio [ s] . The life insurance indust-ry urged that such an e~clusion is necessary to avoid duplicative and inappropriate :r0)ulation, and to put irstitutional investroPDt advisers such as insurance companies on a par Hith banks and trust ccropanies, which are already excluded fran the definition of commodity trading advisor if their commodity advisory activities are solely incidental to the conduct of thei:r business as banks and trust companies. Other witnesses supported the insurance companies' proposal. ri.R. Rep. No. 624, 99th Cong., 2d Sess. 46-47 (1986). The Cc:rnrnittee Report then noted the COil.lllission' s objections to the breadth of the proposal. It further noted the Carrrnission' s questioning of the need for a statutory amendment to the CTA definition in light of e~isting autho:rity in Section 2 (a) (1) (A) of the Act, 'l_/ and the Corrmission' s prior 2/ "B" also serves as the distributor of rrost of those mutual funds. In this regard, the Corrmission has stated that the activities in which such persons typically engage would not make such persons subject to regulation as a copnodity pool operator ("CPO"). See 50 Fed. Reg. 15868 at 15871 (April 23, 1985). --- ll Section 2(a) (1) (A) provides the Commission with authority to exclude or P..Xernpt frc:rn the CTA definition "such [other] persons not within the intent of this definition as the Ccmni.ssion may specify by rule, regulation, or order."

responsiveness and stated preparedness to insurance companies regarding some of the problems that would have been addressed by the proposed amendment. In light of the foregoing, the Committee declined to adopt the pro￾posed amendment. Instead, the Committee urged the Commission to issue regulations in this regard. As the Committee Report states:
The Committee believPs that any insurance company subject to regulation by Sta.te insurance departn:'ents (including any wholly awned subsidiary or employee thereof) , provided its commodity advisory activities are solely incidental to the conduct of the business of the insurance company as such, generally is not within the intent of the definition of the term "corrrroC.i ty trading [advisor]." The Cammittee similarly believes that any person who is excluded fran thP definition of the tenn "cc:mnodity pool operator" by Corwlission Rule
4.5 [, 17 C.F.R. §4.5 (1986) ,) should be excluded from
the commodity trading advisor. definition, provided its cc:mnodity advisory activities are solely incidental to its operation of those trading vehi~les for which Rule
4.5 provides relief. Relatedly, where the advisor
n.dvises nn entity that is excluded from registrn.tion as a commodity pool under Rule 4.5 or is a Rule 4.5 qualifying entity and such advisor is subjPct to appropriate regulation unde:r the Invesboont Advisers Act, th:"lt advisor should ordinarily be exempted frcm ccmrodity trading advisor registration if its cc:mnodity advice is solely incidental to its business of providing sec~ities advice to such entity and the advisor is not otherwise holding itseJf out as a corrm:di ty trading advisor. Therefore, the Comni ttee urges the Commission to exercise its n.uthority to adopt regulations in regard to these matters. The Committee understands that rulernaking addres￾sing thesP concerns may take some time for the Commis￾sion to develop and promulgate. Individual requests for exclusions or exemptions, consist:ent with the al:x:>ve guidelines, however, should be processed by the Conmis￾sion as eh~itiously as practicable. The Commission's experience with individual cases should facilitate the fonnulation of rrore general rulPJ:Uaking. Id. at

47-48. 4/
In light of the language in the House Cc:mnittee Report and with respect to the pc>.rticular activities set forth below, our opinions with respect to relief from regulation as a erA for "A" and the Subsidiaries are as follows:
E.'{clusion from the definition of the term "ccmrodity trading advisor." 'lA" 's Insurance Business. Your letter explains that life insurance companies such as "A" are in the business of issuing contra~ts or policies with different insurance and investment features which, from an investment standpoint, can be divided into two classes: general a.ccount contracts and separate account contract.s. '7i th respect to the former class of contract, your letter explains that the insurer promises benefits based on a guaranteed :minimum or discretiona.Y'y excess ~ate of return c>~d that the promise is backed by the insurance cam￾pc>ny' s general corporate assets. As your letter notes, the Division 4/ The Committee Report also provides:. Should the Commission dete1~ne that registration as a comrroc1ity trading advisor is required, the Comuittee e;xpects that the Commission will use its existing authority to consider other appropriate relief. In this regard, the Corrrni ttee is aware that the Commission has exercised its authority to limit, by exemption, those employees of otherwise regulated entities who must register as an associated person of a commodity trading advisor. The Committee further understands that the Cc:mnission has coordinated its activities with the Securities and Exchange Corrmission to eliminate duplicative requirenents, for example, bv deeming in appropriate cases compliance with SEC disclosure, recordkeeping, and reporting requi.-r.eroents as sufficient. compliance with the Cc:mnission's corresponding commodi￾ty pool operator requirP..ments. The Ccmnittee intends that the Commission will continue to provide this and such other relief as m:.1.y be appropriate to applicants for registration as a carunodity trading advisor or in any other registration category. On the other hand, the Cc:mni ttee dops not expect the Commission to grant exempted commodity trading advisors any relief from the antifraud provisions of section 4o of the Act. Id. -

previously has indicated that in providing commodity interest trading advice for the purpose of hedging liabilities to its general account contract holders an insurance company would not appear to come within the erA definition in Section 2 (a) (1) (A) of the Act. 5/ With respect to the latter class of contract your letter explains: - Under separate account contracts, the values under the contract vary according to the investment experi￾ence of a segregated portfolio of assets established and held by the insurer under state law. . . . The separate accounts have been established to hold assets underlying "A"'s variable contracts, including group pension and ammi ty contracts, individual variable annuity contracts, and individual variable life insur￾ance contracts. [Those contracts, which may be issued by a subsidiary insurance ca:npa.ny, consist of "single custOII)2r accounts" and "ccmning led accounts. " 61] All of the single custorrer accounts and certain of-the carming led accounts are exempt from registration under the Investrrent CorrpaEy Act of 1940 pursuant to Section 3(c) (11) thereof. . . . The other commingled accounts, representing the assets underlying variable contracts issued to individuals and certain small benefit plans, are registered with u1e SEC as investrrent companies under the Invesbrent Conpany Act of 1940. The assets 5/ Division of 'l'rading and Markets Interpretative Letter No. 85-16, [1984-1986 Transfer Binder] Ccmll. Fut. L. Rep. (CCH) ~[22, 737 (August 15, 1985). Specifically, in that letter the Division reasoned u1at the i11sura.nce company would not be engaged "in the business of advising others" but, rau1er, would be providing corrmodi ty interest trading advice to itself. §_/ Your letter further explains u1at the variable life contracts and sorne variable annuity contracts are issued by certain Subsidiaries and are funded by separate accow1ts of those companies. 'l'llose accow1ts, which are registered as w1i t investrrent trusts under the Investrrent Cornpany Act of 1940, in turn invest in a series rrn.1tual fund which is advised by "A." In light of the fact that the shares of that fund are available only to separate account custorners of "A" and its affiliatc.-'Cl insurance companies, and as you have requested, the opinion provided below with respect to C'l'A. regulation also would be applicable to "A" in the event one or oore series of the mutual fund traded conm:xlity interests. See Division of Trading and ~.larkets Interpretative Letter No. 86-18, Corrrn. Fut. L. Rep. (CCH) S[23,201 (July 23, 1986). In this regard, we note that like the mutual fund at issue in that letter, you have represented that any such series of the instant fund will comply with Rule 4.5 in the event it trades commodlty interests.

of all these accounts are invested either in portfolios of securities or in shares of registered investment cornpanies I1B.llagE...'Cl by "A" which are sold only to separate accounts of "A" and its subsidiaries to fund variable contracts. "A" may use futures and related options incidental to the ITBJ1agement of the securities portfolios held in certain of its single custorrer and commingled separute accounts. 21 In light of the foregoing, you have represented that in providing conm:xlity interest trading advice "A"' s activities would be "solely incidental to the conduct of the business of the insurance company as such" in issuing and administering sepurate account contracts. In this regard, we note that such advice would be provided to persons to whom "A" (or a subsi￾diary insurance company) bas issued a variable insurance contract and, thus, with whom "A" (or a subsidiary insurance company) has established a relation￾ship through the 1ssuance of that contract. 8/ Accordingly, based upon your representations, and in the spirit of the House Comnittee Report, it is our opinion that in providing cormodity interest trading advice as set forth above "A" would not care within the spirit and intent of the definition of the term "corrm:>dity trading advisor" in Section 2 (a) (1) (A) of the Act. '}/ 7 I ve caution that for the pm-pose of this letter we have not rnade any independent finding on, but rather are presuming as correct, your representations that any commodity interest trading advice to be providE...'Cl by 11 1-~." and the Subsidiaries to the trading vehicles discussed herein will be "incidental" to their providing securities advice. In this regard, the Division previously found the similar "incidental" requirement of Rule 4.5(c) (2) (i) to be absent where-- 8/ 9/ [T]he trading of commodity interests is essential -- not incidental -- to the conduct of the operation of [the trading vehicle at issue]. Sirnply stated, the trading strategy of [the trading vehicle] is so dependent on the use of connroity interests that, absent tl1at use, that strategy could not be pursued. Division of Trading and Markets Interpretative Letter No. 85-10 [1984-1986 'rransfer Binder] Comm. Fut. L. Rep. (CCH) <][22, 730 at: 31,069 (July 22, 1985). See n.12, infra. Based upon the language of the House Comni ttee Report, and as your letter urges, another basis upon which to find that "A" is excluded fran the CTA definition in connection with the foregoing activities is that it is a "person who is excluded from the definition of the term 'COIIIIDdi.ty pool operator' by Conmission Rule 4.5" -- i.e., a State-regulated insurance (Footnote continued)

This opll1lon is, however, subject to compliance with certain conditions set forth at the conclusion of this letter. nell Your letter explains that "C, " a Subsidiary, is a trust company organized pursuant to the State Banking Code. Its Collective Einployee Benefit Trust, a conron trust fund for employee benefit plans, has several subaccounts, each with a separate invesbrent objective. Currently, one of the Subsidiaries 10/ serves as tl1e investrrent adviser to one of the subac￾counts and "A" serves as invesbrent adviser to the other subaccounts. "C" may li1 the future establish other such accounts which ma.y be advised by "A" or other Subsidiaries pursuant to investrrent advisory contracts with "C. 11 Specifically, those contracts will provide that -- 11A11 or the subsidiary bas the discretion to make purchases and sales of securities and, wbere appropri￾ate, futures, subject to the supervision of the Board of Directors of 11C. II Ho.vever, under all such COntraCtS 1 11C11 iS reSf.JOilSi.ble for the exclUSiVe management and control of all assets held under the collective employee benefit trust. (Footnote continued) canpany, and "its connooity advisOr)' activities are solely incidental to the operation of those trading vehicles for which Rule 4. 5 provides relief" -- i.e., a separate account of such an insurance company. Such a finding presumes compliance witl1 Rule 4.5 ru1d the Division's lilterpre￾tations thereunder. §ee, ~' Division of Trading and Jvlarkets Inter￾pretative Letter No. 86-SA, [1984-1986 Trru1sfer Binder] Camm. Fut. L. Rep. (CCH) <.1.:22,990 (November 6, 1985), wherein we stated that the subject insurance campru1y would not have to file a Notice of Eligibility to claim the exclusion from the "pool" definition available under Rule
4. 5 (a) (4) (i), (ii) or (iii) li1 connection with the operation of
single-customer separate accounts each of which was funded by such Rule 4.5(a) (4) "non-pools." This alternate basis for relief would not, however, be applicable to "A" in coru1ection with providillg commodity interest trading advice to the series fund, discussed at note 6, supra. This is because under Rules
4. 5 (a) (1) ru1d (b) (1), respectively, the fund would be roth the "eligible
person" and "qualifying entity." "A," as the fund's illvestrrent adviser, then, would not be the fund's CPO. See 50 Fed. Reg. 15868 at 15871. 10/ As is noted below, each Subsidiary is (or will be) registered as an investment adviser under the Invesbrent Advisers Act of 1940.

As your letter notes, Rules 4.5(a) (3) and (b) (3) provide an exclusion fran the CPO defi11ition for a trust corrpany subject to regulation as such under State law with respect to 1ts management of "any trust, custodial account or other serJarate unit of investment for which it is acting as a fiduciary and for which it is vE::st.ed with invest:rrBnt authority." In light of the fact that "C" remains "responsible for the exclusive I\1ai1a.gement and control" of all assets held under the trust, we agree with your assertion that it is, therefore, entitled to file a Notice of Eligibility pursuant to Rule 4.5 in the event it should decide to use futures in connection with the nanag~~nt of the securities portfolios held in such accounts. He further note that, in light of its responsibilities, "C" would appear to be a person who is eligible for exclusion fran the CPO definition under Rule 4. 5 whose "corrm:x1ity advisory activities are solely incidental to its operation of those trading vehicles for which Rule 4.5 provides relief. 11 Accordingly, based upon your representations, and in the spirit of the House Ccmn:Lttee Report, it is our opinion that in providing comrodity interest tradin':J' advice as set forth above "C" would not COI'!E within the spirit and intent of the definition of the ternt "conm:xlity trading advisor" set forth in SectioH 2 (a) (1) (A) of the Act. 11/ This opinion similarly is subject to conq?liance with the conditions set forth below. Exemption fran registration as a CI'A. With respect to other activities in which "A" and the Subsidiaries engage, and for which relief from regulation as a Cl'A is being sought under the House Comnittee Her:ort language, your letter explains them as follo.vs:
11/
"A" 's Non-Separate Account Pension Advisory Business In addition to the pension plan assets which "A" me:mages through its separate account business, "A" also manages certain pension plan securities portfolios pursuant to an investrrent advisory contract between "A" and each plan. These portfolios are held by a bank trustee or custodian. "A" may wish to use futures incidental to the management of such securities portfolios. . . •
Section 2(a) (1) (A) also provides an exclusion from the CI'A definition for
any bank or trust corrpany, provided that the fmnishing of camodity interest advisory services is solely incidental to the conduct of its business. He interpreted this "solely incidental" proviso in Division of Trading and Markets Interpretative letter No. 86-23, to be reprinted in Comm. Fut. L. Rep. (OCH) (June 16, 1986) and 83-2 [1982-1984 'rransfer Binder] Comm. Fut. L. Rep. (CCH) ~21,788 (~Erch 18, 1983).

"A" 1 s Mutual Ftmd Advisory Bus.iness
In addition to its insurance business, "A" serves as the .investrrent adviser to a number of independent mutual funds with a broad variety of invesbrent objectives. The funds are registered with the SEC under the Investment Ca~y Act of 1940. . . . [C]er￾tain of these funds have, or my develop, invesbrent policies which permit the use of futures in connection with the managerrent of the fund 1 s portfolio of securi￾ties. . .. 12/ "D" In 1984, as part of a reorganization of its invest￾nent function, "A" established "D" as a wholly o.vned subsidiary and transferred to "D" many or ITDst or "A" 1 s investrrent personnel. 13/ Like "A," "D" is also registered with the SEC -as an invesbrent adviser 12/ ~~ previously acknowledged the potential for relief from registration as a C1~ with respect to such rnutual fund advisory bus.iness in Division of Trading and !-:larkets Interpretative Letter lb. 86-18, supra n. 6. Specifically, we stated:
'I'he Division is aware that certa.in State-regulated insurance companies (or a wholly-awned subsidiary thereof) have established and serve as the registered investment adviser to a mutual fund complex into which persons who are not policyholders of the .insurance company and who have no other relationship with the carpany my invest. ~ do not believe that .in pro￾viding commodity interest trading advice to such a mutual fund the activities of the insurance canpany \Duld be "solely incidental" to the conduct of the .insurance company as such. I€pending on the circum￾stances, however, relief from Cl'A regulation my be appropriate -- ~' through relief from CTA regis￾tration based upon the language, and pursuant to the terms and conditions of, the House Corrrni ttee Report. P. 32,531, n.6. ~/ In your July 24, 1986 telephone conversation you further explained that this reorganization was designed to help irrprove the accountability of .invesbrent advisory personnel and to help attract qualified portfolio IIB.nagers and additional clients.

ptrrsuant to the Investment Advisers Act of 1940.
Pursuant to service agreerrents between "A" and "D," "D" furnishes such services, including advice concerning financial future:::: and related options, as "A" may rRqUire in managing its separate accounts and in performing its obligations under its investment advisory contracts with it.s mutual fund and pension clients. "A" continues to have responsibility for all investrrent advisory services undertaken by it in its investrrent advisory agreerrents and supervises "D" 's
provision of services ....
In addition . . . "D" also manages the securities portfolios of certain pension plans pursuant to invest￾ment advisory agreements between "D" and such pension plans. "D" may P.xpand its advisory services to other entities and may find it advantageous to use futures
incidenta.l to the management of the securities port￾folios of such entities ....
other "A" Investment Subsidiaries
"A" has several other wholly owned subsidiaries which a.re registered [or are in the process of registering] as investment advisers with the SEC il1 connection with their rnanagernent of securities port-· folios. . . . While none of these subsidiaries currently uses futtrres in the management of client securities portfolios, they may in the future do so. In connection with the instant request-your letter represents that with respect to the foregoing trading vehicles the use of conmodi ty interests by "A" or any Subsidiary ~dill be solely incidental to the managerrent. of those tradjng vehicles' securities portfolios. Your letter further represents that each such trading vehicle will be either a "non-pool" under Rule 4.5(a) (4) (i), (ii) or (iii) or a qualifying entity under Rule 4.5(b) which is operated L'IJ compliance with the requirements of Rule 4. 5 (c) . Unlike the activities in which "A" engages with respect to its il1surance business and for which we believe "A" should be excluded fran the CTA definition in Section 2(a) (1) (A) of the Act, the other. activities in which "A" and the Subsidiaries engage with respect to their other businesses do not appear to depend on the issuance of an insurance contract -- ~~, a variable contract such as a group pension or annuity contract -- for a relationship betv;reen "A" or a Subsidiary and an advisee to exist. Thus, we do not believe these other activities are "solely incidental to the conduct of tl1e business of the insurance company as such" and we are unable to conclude that "A" and the Subsidiaries similarly should be P..xcluded fran the CTA definition with respect thereto.

Page 1J
We do, however, he lieve that certain relief from CTA regulation is appropriate, subject to compliance with the conditions set forth below and based upon the representations you have made to us. In particular, we note your repn~sentations that: (1) "A" and the Subsidiaries are (or will be) registered as an investment adviser tUlder the Investment Advisers Act of 1940; (2) the]' v7ill provide commodity interest trading advice solely to trading vehicles that are Rule 4 • 5 qualifying entities or for which Rule 4 • 5 provides an exclusion fran the "pool" definition; and (3) such advice vlill be solely incidental to the business of providing securities advice to any such e~.tity. Accordingly, based upon yotrr representations, and in the spirit of the House Conmittee Report, the Division will not recc:mnend that the Corrmission take any enforcement action against "A" or any of its wholly owned subsidiaries named above if an~' such person fails to register as a CTA under the Act in connection with providing commodity interest trading advice as set forth above. 14/ Further in the e.pirit of the House Cc:mnittee Report, the Division willnot reccmnend that the Conmission take any enforcement action against any associated person of "A" or a Subsidiary if it fails to register as such. 15/ Specifically, the opm1ons and "no-action" positions we have issued herein are subject to cc:rnpliance v7ith the follov1ing conditions: (1) "A" and the Subsidiaries will act in a manneJ: "sole 1 y incidental" to the conduct of the business of the insurance company \vith respect to the exclusion from the CTA definition which has been issued herein; (2) neither "A" nor any Subsidiary will ·otherwise "hold itself out" as a CTA with respect to those activities for which a "no-action" position fran CTA registration has been issued herein; (3) with respect to any position based upon the fact that. ccxrrnodi ty interest trading advice will be provided to a Rule 4. 5 "qualifying entity, " t1w.t such entity will carpl y with Rule 4. 5, and in particular, will 14/ Prior to t.be issuance of the House Ccmnittee Report, the Division previously had taken a "no··action" position with respect to CTA registration based upon, among other things, the fact that a registered investment adviser sought to provide commodity interest trading advice to only ~ registered investment company that lw.d filed a Notice of Eligibility under Rule 4.5. Division of Trading and Markets Interpretative Letter No. 85-21, [1984-1986 Transfer Binder] Camm. Fut.
L. Rep. (CCH) SI22,795 (November 8, 1985). In light of the fact that, and
in accordance with the House Ccmnittee Report, the "no-action" position we have taken above would be applicable where " 1 A 1 serves as the investment adviser to a number of independent mutual funds" which will be "managed so as to comply with the requireroonts of Rule 4. 5," our prior position on this issue effectively has been rendered obsolete. 15/ See Section 4k(3) of the Act, 7 u.s.c. §6k(3) (1982) and Rule 3.16, 17 C.F .R. §3 .16 (1986) •

file (where necessary) a Notice of Eligibility; and (4) "A" and the Subsidiaries will con~ly with whatever r~1lations the Commission may adopt to irnple..ment the foregoing House Ccmni ttee Report. Moreover, the relief 'ltle have issued herein is strictly limited to the facts as 1~epresented above. As for the second condition in particular -- i.e., that neither "A" nor any Subsidiary vJill othen1ise hold itself out ae.acrA 'IIlith respect to those activities for which a "no-action" position fran erA registr2.tion has been issued herein -- we believe that fu;.ther discussion is necessary and appropriate to ensure compliance 'IIlith that condition. 16/ In this regard, you asserted that "A" or any Subsidiary "should, however, be allowed to describe to existing and potential clients the limited commodities advice it may provide in accordance with the terms of this letter and how it believes that such advice may be used to benefit its clients" -- which, you noted, v.Duld parallel the disclosures the Ccmnission hc=ts said would be appropriate for the purpose of the "marketing" representation under Rule 4. 5. See 50 Fed. Reg. 15868 at 15879. We furtncr note that in discussing this representation the Commission stated tbat it -- intends the tenn "marketing" to include oral, written and electronic prarotional materials and that an entity v.Duld be "m:-rrketing participations" in a manner incon￾sistent with the required representation if it was actively prcrroted as "a hybrid -- ~' a securities and a corrm::Xii ties --· trading vehicle or as an invest￾ment vehicle in which canmdi ty futures and options trading '~as particularly significant and critical to the growth of its assets, as opposed to being inciden￾tal to protecting those assets against a decline in value." Id. Thus, the marketing materials to be used should state, with respect to txansactions in ccmrodit.y interests, only that strategies consistent with eligibility status under Rule 4 . 5 may be used.. These strategies may, of course, be described in the marketing materials. Further in this regard, we believe that "A" or a. Subsidiary: (1) should market its ability to manage an actual or prospective client's securities portfolio, not a commodity interest 16/ This is not intended to be an all inclusive discussion but, rather, an attempt to identify act.ivities which we believe would be consistent -- or inconsistent --with the "holding out" condition of the House Ccmnittee Report. As we gain more e>.-perience in this area, we expect to identify other such acti vi. ties. Moreover, we expect t.hclt the Ccmnission will construe the "holojng out" issue when it proposes rules based upon the House Ccmni ttee Report language.

trading vehicle; and (2) should not represent that it has any unique expertise or ability in providing cormodity interest trading advice. 17/ You should be aware that this letter does not excuse "A" or any Subsidiary from compliance with any otherwise applicable r~irements con￾tained in the Act or in the Ccrnmission' s regula.tions thereunder. For exam￾ple, each remains subject to the antifraud provisions of Section 4b of the Act, 7 u.s.c. §6b (1982), and the reporting requirements for traders set forth in Parts 15, 18 and 19 of the Comnission's regulations, 17 C.F.R. Parts 15, 18 and 19 (1986) . 2-£/ 'I'he relief issued herein is based upon the representations that you have made to us, as stated above. Any different, changed or omitted facts or conditions might require us to reach different conclusions. In this connec￾tion, we r80J.est that you notify us imnediatel y in the event the operations and activities of "A" or any Subsidiary change in any way from that as represented to us. Moreover, we note that the Futures Trading Act of 1986, to which the above-quoted House Comni ttee Report language relates, has not yet been enacted into law. Should a different approach to the treatment of insurance companies as erAs ultimately be reached by Congress, we request that you seek further guid.ance from the Division at that time. Finally, this position is that of the Division of Trading and Markets and does not 17/ The Securities and Exchange Corrrnission recently had occasion to consider the parameters of a "marketing" criterion in connection with the adoption of Rule 151, which establishes a "safe harbor" for certain forms of annuity contracts such that those contracts will not be deemed to be subject to the Federal seCQrities laws. See 51 Fed. Reg. 20254 (June 4,
1986) . With respect to that criterion tna1:--Commission stated:
[T]he manner in which a contract is primarily marketed is a significant factor which must be considered. In [a prior case, SEC v. United Benefit Life Ins. Co., 387 U.S. 202, (1967);] the insurer advertised its product by "emphasizing the possibility of invest:rr€nt return 2~d the experience of United's management in professional investing. " The Suprere C'..ourt found this activity to be highly relevant in concluding that the contract does not fall -v1ithin the [exclusion for certain insurance contracts fran the provisions] of the Securities Act of 1933. Id. at 20260. 18/ In addition, "A," the Subsidiaries, and the associated persons thereof remain subject to the antifraud provisions of Section 4o of the Act, 7 u.s.c. §6o (1982), with respect to those activities discussed above for which we have concluded that a "no-action" position from erA registration -- and not a total e~clusion from the CTA definition -- is appropriate.

necessarily represent the views of the Ccmnission or any other office or division of tne Commission. If you have any questions about the positions adopted in this letter, please feel free to contact me or Barbara R. Stern, the Division's Assistcmt Chief Counsel, at 202/254-8955. Very truly yours, Andrea M. Corcoran Director