CFTC Staff Letter 87-05: No-Action Relief for Educational Marketing Club CPO Registration

DIVISION OF
TRADING ANO MARKETS
COMMODITY -FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 September 29, 1987 Re: Educational Marketing Clubs Dear Dr. This is in response to your letter dated August 11, . 1987, as supple￾m:mted by telephone conversations with Division staff, wherein you sought our views on ccmrod.ity pool operator ("CPO") regulation in connection with the operation of certain producer marketing clubs ("PM:s") and student marketing clubs ("SM::s") (collectively educational marketing clubs ("EM:!s")) by the

• (" ") 1 including its
  agents and errployees, and any other person whose involvement with any such club may bring h.im within the CPO definition - ~· 1 the president of the club. !( In your letter you represent the following:
  I. Producer Marketing Clubs

1. "purpose of PM:' s. Agricultural producers traditionally
   use just one type of marketing strategy -- they make cash sales of their comocx1i ties and price them on the date of delivery. Generally speaking, agricultural producers do not use forward cash contracts, futures or optio_ns. In the past, 1/ Your letter broadly sought relief for the operators of EMcs· conducted by other educational organizations and other States. Consistent with Division policy in issuing interpretative letters, however, and as the staff previously advised you, the position we are taking below is limited to those EM:!s with which the specifically is familiar. Thus, · depending on the circumstances, our position may or may not be applicable to any other EMC. · 'I

the and other interested groups have sought to educate producers about marketing by offering saninars, short courses, publications, video tapes and canputer assisted instruction. While attendance at these programs has been good, few participants ever applied the kncwledge they had acquired. PM: 1 s are one nethod to bridge the gap between the acquisition and the application of carm:xli ty marketing knowledge. 2/
2. Legislative History. The 1985 Food Security Act authorized a
pilot program in 40 counties nationwide where groups of agricultural producers would be organized, educated, and encouraged to use advance marketing techniques with certain financial guarantees provided by the government. Furt.hern'ore, [Section 206 of] the Futures Trading Act of 1986 directed the GAO to conduct a study of fcu::ners' use of advance marketing techniques and· the educational programs available to them. • • • Finally • • • the in alliance with the Land Grant universities and colleges, have long used test-plots, dem:>nstration projects, and producer 'K.)rkshops as a proven nethod for instructing fanrers about new management practices and production technologies. It is apparent that Congress is concerned about agricultural producers' knOwledge and use of advance marketing teclmiques (including futures and options). Furt.h.erm:>re, the is specifically charged with providing educational programs for fanners and others. ConsE.¥IUently, l?M:!s appear to be a legitimate way to address the concerns of Congress as expressed in the aforerrentioned legislation.
3. Historical Background. The
began to sponsor and/ or support the activities of ~ 1 s in 1984. Similar clubs had been sponsored by the extension service and other groups before but this seems to be the first organized st~~ide effort. • • •
4. Fonn of organization of W.C 1 s. PI«: 1 s are organized under a
variety of fonns. Merrbership is, of course, voluntary and, consequently, the by-laws (if any) adopted by the club reflect the unique concerns of those individuals willing to associate with the club. • • • " !:_I In this regard, you explained to staff that as the purpose of W.C:s is to pro.rrote interest in the ccmrodi ty futures and options markets in general, the clubs are not restricted to trading in agricultural cornrodities.

Generally speaking, the IM::' s we are familiar with in are infm:mal associations of agricultural producers who neet for several hours every two weeks. Most clubs were organized by a county extension agent in cooperation with one or rore camumity leaders but the nernbers determine by majority vote . what actions t,he club will take -- ~. , which tl;'ades will be placed. 3/ A typical PM: neeting involves one or oore of the following activities: . · ( 1) Education. • • • (2) Price Analysis •• . . (3) Marketing Strategy/Execution/Evaluation •. ~· . . 5. Canpensation Structure of the PM:' s. • • • To finance ccmoodi ty interest trades, clubs collected an average of $80-$100 fran each voting nenber. !/ Most clubs traded only in mini-futures contracts and purchased oot-of-the-roney put/call options with relatively small premitims. ~ More ooney could have been collected fran each member but that would have increased the cost and discouraged participation. Increasing membership to rore than 15 appears to be a violation of current CF'l'C regulations. 2f However, a $1500 pool of capital would, at trost, pel:lllit only one or two trades to be made sinrultaneously with mini-contracts or the entire amount could easily be spent on the premium for just one option. Consequently, penni.tting PMC ne:nbership to expand beyond 15 persons would increase "pool" funds, pennit a larger number of sinrulated marketing actions using futures or options, yet would keep individual contributions to the club's "pool" small. other than the individual contributions to the PW::!' s trading account, no additional fees are charged. Occasionally, county 11 Depending on the structure of any given PMC, the trade may or may not be placed by one of the club' s officers. !/ As you explained below with respect to Sf!X::s, you also explained to staff that a oonetary ccmnitJrent to the PM: would oore likely prorrote "real" learning than a hypothetical investment. ~/ See Rule 4.13(a) (2), 17 C.F.R. §4.13(a) (2) (1987), Which generally provides exemption fran CPO registration where a person collects no rrore than $200,000 for all of its pools and has no more than 15 participants in each of its pools. -

agents may provide educational materials at cost or the PM:! · may subscribe to agricultural market newsletters. Most guest speakers and other, educational materials are provided at no cost to the club. Most Io/.C' s cease rreeting at an agreed upon date (usually during the spring) • At that time, any funds left in the club' s account are distriliuted equally. Occasionally, clubs approve a s~ contribution to fund trades but these addi￾tional levies are approved only by majority vote.
6. PMC gperation and Advice. Except for the coordinating
activities of the county extension agent and/or other comnunity leaders, xrost clubs are operated by and for its rrernbers. Most clubs make up their cmn minds about what actions, if any, are appropriate given the existing market situation and the clubs · simulated marketing strategies. PM:!' s receive education and advice frau many sources: the extension service, farm pub￾lications, market newsletters, farm organizations, brokers, neighbors, feedlot and elevator wanagers, grain rrerchandisers, etc. Except for the subscription cost of publications and newsletters, no club pays for "advice fran any of these sources. 7 • Menbership. Merrbership in PM:' s is as diverse as the population of m:>st small towns. H<:Mever, because xrost clubs are organized to address a particular issue (agricultural marketing), three-quarters of the membership seems to be full-tilre fru::rrers and ranchers.
II. Student Trading Clubs &/

1. ;purpose. Many degree-granting institutions teach courses in
   agricultural marketing and/or cammodio; futures. A feature

• ca.mon to m:my of these courses is the "paper" trading
  gal't\:. • • •
  The problem with "paper" trading is that little, if any, "real" learning takes place and the typical student's approach to the exercise is to treat it as if it were a grure of chance. Since no "real" xroney is involved, the student never has to bear responsibility for the, trades and few students take the time to investigate market fundarrentals, assess alternative §./ In your telephone conversations with staff you explained that you intended to develop and to teach this course at • W~ have phrased the facts; then, in light of this e..'q)lanation.

trading strategies, or to relate carcmodi ty trading to comrodi ty marketing activities (i.e., hedging ccmrodity sales and purchases). - Ih order to correct the shortccmings of "paper" trading, [you propose to] form Student Trading Clubs (STC' s) • These clubs would function in much the same manner as Producer Marketing Clubs but their activities may differ. For e.xanple, a STC conducted as part of a course on ccmnodity futures at would likely include a large number of agriculture majors. These students would probably concentrate on agricultural ccmocxliti~s but rather than trying to simulate actual farm marketing situations, they may focus. solely on price direction and could just as easily buy and sell ccmoodity futures. 7 I In addition, non-agricultural ccmrodities may attract' their attention. There are several advantages to this method of instruction:
(1) With only a limited pool of capital to trade, groups of students would be assigned to -specific cormodities and en￾couraged to develop detailed market analysis, to present and defend their trading recarmendations, and to conduct ex-post evaluations of actual trades. ( 2) Making decision rreans accepting and living with the consequences of those decisions. • • • Although the dollar value is small, the psychological impact of club trading losses is significant and can be beneficial.
2. Historical and Legislative Background. To [your] knowledge,
there are no STC' s operating as part of any college or :vocational agricultural curriculum. To the extent that an STC serves the educational needs of future fanrers and agribusiness managers, then the same congressional mandate that would apply to Producer Marketing Clubs should be extended to Student Trading Clubs.
3. Fonn and Organization of the S'l'C. Organization of STC' s would
probably be under the direction of the class instructor. • • but the decision making authority [would] rest with the student nernbers. Formal by-laws and procedures (minutes, treasurer reports, written trade recOIJlt'endations) ['lould be] recOJ:Tmended. While the students [would] be encouraged to draw ]_/ As with PM:!s, however, to prcrrote maxirmnn participation SM:!s would not be restricted to trading in agricultural canm:xlity interests.

,, on a variety of infornation sources, it is hoped that they will develop their cmn analytical skills when assessing ccmrodity markets. Obviously,· [I] would take a far m:::>re active role in guiding the club's activities than would a county extension agent working with a PM:!.
4. Compepsation of the STC. Manbership [iliuld] be voluntary but
only contributing rrembers [would be able to] vote on trade reccmrendations. Any funds remaining at the end of regular scheduled classes [would] be disbursed equally to all contri￾buting members. Few, if any, additional club expenses are anticipated.
5. Membership of the STC. Menbership would be restricted to
students duly enrolled in the institution. • • • [W]e intend to offer it as a 1 hour paninar concurrently offered with a 3 hours course in carm:x:lity futures. A grade will be assigned but other similar seminars could be set up on a credit/no credit basis. Rule 4.10(d) defines the tenn ca:rm:xlity "pool" to xrean "any invest:nent trust, syndicate or similar fonn of enterprise operated for the purpose of trading camooity interests" (emphasis added). In explaining this definition, the Ccmnission stated:
Whether a particular entity is operated "for the purpose" of trading C<ll'IOOdi ty interests and, thus, is a pool within the scope of §4 .10 (d) , depends on an evaluation of all the facts relevant to the entity's operation. The Carmission recognizes that in the past its staff has issued interpretations of the Part 4 rules. Consistent with that practice, the Camd.ssion invites interested persons to seek such staff interpretations of §4 .10 (d) and of all the other Part 4 rules. 46 Fed. Reg. 26004, 26006 (May 8, 1981). The definition of the term "pool" closely follCMs the definition of the term "ccmrodity pool operator" contained in Section 2 (a) (1) (A) of the Comrodity Exchange Act, as arrended (the "Act"), 7 u.s.c. §2 (1982). · Specifically, Section 2 (a) (1) (A) provides in pertinent part:
The tenn "cc:mrodi ty pool operator" shall xrean any person engaged in a business which is of the nature of an invest:nent trust, syndicate, or similar fonn of enterprise and who; in connection therewith, solicits, accepts, or receives fran others ••• property •.• for the purpose of trading in [ccmrodity futures contracts], but does not include such persons ••• as the Comnission may specify. . • • The term "corrrrodity pool operator" was added to the Act by the Ccmnodity Futures Trading Carmission Act of 1974, Pub. L. No. 93-463, §202,

88 Stat. 1389 (1974). The legislative history of this addition indicates that it was intended to bring CPOS within the Conmi.ssion Is jurisdiction for the purpose of protecting unsophisticated investors fran undesirable mana￾gerial and trading practices. '2} The Division previously has had occasion to consi&3r whether, in light of the foregoing, a particular trading vehicle would be a ccmrodity pool and, thus, whether its operator would cane within the CPO definition. Generally speaking, the Division found that there would be no pool and no CPO thereof where the partlcipants were family mambers or had kna,.m each other for several years and where the idea and fonnation of the trading vehicle were the products of all persons involved. 9/ Such factors are not present in the instant request. - Certain other factors are, however, present. Specifically, we nqte the educational purpose o;f the EM!s and the fact that they will be praroted and effectively sponsored by (and the ) . Based upon those factors, and in furtherance of the purpose of the CPO definition, the Division will not recattrend that the carroission take any enforcement action for failure to register as a CPO against the · · , including its agents and employees, the president of any EMC and any other person whOse involvement with an EMC \rotlld require him to register as a CPO provided the following conditions are met:
(1) each participant in the EMC receives in writing the statement prescribed by Rule 4.13 (b) , to the effect that the organizer of the pool is not registered as a CPO and is not subject to Disclosure Document and Annual Report requirements; (2) no participant contributes oore than $300 to any ~, .(3) the EMC has no nore than 50 participants7 (4) the EMC has a specific expiration date; (5) the camodity interest trading account of the EMC is opened and traded in the narre of the club; and (6) any withdrawal fran the account is requested in writing and is signed by two rrembers of the club, of which facts the futures camlission merchant can:ying the account nn.:tst be informed in writing. You should be aware that the "no-action" position expressed in this letter does not excuse any person who may claim it fran ccmpliance with any otherwise applicable requirerrents contained in the Act or in the Ccmnission' s regulations thereunder. For example, each such person remains subject the anti-fraud provisions of Section 4£ of the Act, 7 u.s.c. §6£ (1982). 'E.f See, ~·, Staterrent of Dr. Clayton Yeutter 1 Assistant Secretary of Agriculture, House Carmittee on Agriculture Report en the Comrodity Futures Trading Com:nission Act of 1974, H.R. Rep. No. 93-975, 93d Cong., 2d Sess., 79 (1974). 1/ See, ~. , Division of Trading and Markets Interpretative Letters No. 86-10 and 86-17, carom. Fut. L. Rep. (car) ~23,016 (April 24, 1986) and ~23,200 (June 24, 1986), respe<;:tively.

The position taken in this letter is based on the representations you have made to us and is subject to carpliance with certain conditions, as set forth above. Any different, changed or emitted facts or conditions might re:;ruire us to reach a different conclusion. In this connection, we request that you notify us .i.mrediately in the event the EMC programs are not conducted as set forth above.