CFTC Staff Letter 87-11: No-Action Relief from CPO Registration for Church Plan Trustees

DIVISION OF
TRADING AND MARKETS
COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581

• T&r-1 No. 87-11
  December 4, 1987
  Re: CPO Relief for the Board of a Church Plan.
  Dear
  This is in response to your letter dated July 7, 1987, as supplemented by your letter dated Novanber 2, 1987 and telephone conversations a:rrong you and your associate and Division staff, wherein you requested on behalf of the Board of "X" Church relief fran ccmrodity pool ope_rator ("CPO") regulation with respect to its operation of certain employee retireroont plans (the "Plans"). Based upon the representations made in your July 7 letter, as supple￾rrented, we understand the facts to be as follows:
  The Board
  The Board was incorporated in [the early 1900s] by a special Act of the State of New York for the purpose, a:rrong others, of providing retireroont benefits to ministers and missionaries of the- "X" denomination (the "denomination"). [Subsequently,] the Board' s Act of Incorporation was aroonded to enable the Board to extend such benefits to the denanina.tion 1 s lay arployees. The Board is one of [several] Related Boards of [the Church] • o • • The closeness of the relationship between the Board and the Church is illustrated by the fact that, under the Board's Act of Incorporation and By-Laws, all but three of the Board's 20 Managers (i.e. , directors) are elected by the Church 1 s General Board or by the other Related Boards o The three remaining Managers of the Board are elected, by the members of the Board, fran the general public on the basis of particular skills helpful

to the Board in perfonning its functions. The Board presents a written annual report to the Church, and the Church has the power to instruct the Board in respect to its general policies. • • • Each proposed amendment to the Board 1 s By-Laws is required to be provided to the Church • • • at least 15 days prior to the date of the rreeting at which a vote is taken. • Accordingly, although it is separately incorpo￾rated, the Board is an integral part of the Church. As such, and on the basis of the Board 1 s own purposes and operations, the Board is exenpt from Federal income taxation as a religious organization described in Section 50l(c) (3) of the Internal Revenue Code of 1986, as amended. • . • The Plans [T] his letter relates to three defined contribution retirement plans which are maintained by the Board •••• Each of the Plans is both a "pension plan" and a "church plan" within the meaning of Sections 3 (2) and 3 (33) , respectively, of the Enployee Retire￾rrent Income Security Act of 1974, as curended ("ERISA") • As church plans, the Plans are exercpt fran the requirements of Titles I and IV of ERISA. ERISA §§4 (6) (2) , 4021 (b) (3) • The first plan is the basic retirement program of the denanination and provides variable annuities based upon individual accounts of the participating members. Contributions to this plan are made by the employing churches and other affiliated organizations of the Church on behalf of their participating erployees. There are approximately 4,000 participating employer organizations ••• and approximately 11,460 participants •••• Since this plan is noncontributory, the Board established two supplemental retirernent programs • • • to enable participants to elect to set aside fran their salaries, on a tax-deferred basis, additional arrounts for their retirement. There are approximately 1, 282 participants in one [and] there are 195 participant accounts in the other. --· -

• •• [As of December 31, 1986] [t]he total assets
  of the three Plans amounted to $627,222,908. A portion ($619,676,990) of these assets, along with a portion ($135,459,740) of the assets of the Board that are held for its other purposes, have been canbined for invesbnent purposes in a Fimd. • • . The total assets of the Fund mrounted to $755,136,730 as of December 31, 1986 •••• The Finance Carmittee of the Board appoints the invesbnent managers, rroni tors their performance, detennines the portion of the Fund that is to be managed by each manager, d.etennines the investrrent objectives and guidelines to be follCMed by the managers and detennines the portion of each manager's account that is to be invested (within specified limits) in fixed incare, equity or other types of invesbnent. After study of the potential uses of_f!nancial futureS and optiOnS 1 One investlrent manager haS recarmended that such instruments be included in the fixed incare portion of the account which it manages for the Board. At December 31, 1986, such account consisted of a portfolio of stocks, bonds and cash equivalents having a fair market value of approximately $180,000,000. Of this amount, approximately 31 percent was represented by fixed incare investirents. The invesbnent manager believes that the use of such futures and options could help to limit interest rate risk in the Board's bond portfolio. It believes that the Board will not incur greate..r risk through the use of financial futures or options than would normally be incurred in a portfolio corrposed of cash-market securities exclusively. • • • 1/ As you are aware, Rule 4.5, 17 C.F.R. §4.5 (1987), provides relief from CPO regulation for the eligible persons named therein with respect to their operation of certain qualifying entities. This reliefgenerally is ]:_! For the purpose of this letter we have not made any detennination on the relative risJr.s of the Board' s conterrplated camodi ty interest trading. Accordingly, the position we have taken below should not be construed to i.nply any such detennination.

effective upon the filing of a notice of eligibility with the Commission, which Imlst contain certain representations on how the qualifying entity will be operated -- ~·, that it will ccmnit no nore than five percent of its assets to initiate its ccmrodity interest positions and that those positions will be "bona fide hedging transactions and positions" or, with respect to certain long positions, will be incidental to the qualifying entity' s activities in the underlying cash market. Specifically, Rule 4.5(a) (4) makes this relief available for the trustee or named fiduciary of a pension plan that is subject to Title I of ERISA with respect to its operation of such plan. Rule 4.5 (a) (4) further provides, hc:Mever, that certain pension plans are not can:rodi ty pools and, thus, that no notice of eligibility needs to be filed -- i.e. , the relief provided by the rule is self-executing and is not subject to any operating criteria. Those plans are as follCMs: (i) a noncontributory plan covered under Title I of ERISAi (ii) a contributory defined benefit plan covered under Title IV of ERISA.i and (iii) a plan defined as a governmental plan in
Section 3(32) of Title I of ERISA. But because, as is noted above, as church
plans the Plans are exempt fran the requirements of Titles I and IV of ERISA, neither the fiduciary or named trustee of any Plan is eligible to clabn relief fran CPO regulation under Rule 4.5 (a) (4) nor is any Plan eligible for exclusion fran the pool definition under either J;ru1e 4.5 (a) (4) (i) or Rule
4.5 (a) (4) (ii). Accordingly, you have requested that we exclude the Plans
fran the pool definition on grounds similar to those under Rule 4.5 (a) (iii) upon which the Ccmnission excluded certain govenurental plans: considerations of federalism. As the Carmission stated in adopting that exclusion:
State and local govenurents nust be allCMed to make their own determination of the best method to protect the pension rights of municipal and state employees. These are questions of state and local sovereignty and the Federal government should not interfere. 50 Fed. Reg. 15868 at 15873 (April 23,
1985) (quoting 1 Legislative History of the
Elrployee Retiremmt Incate Security Act of 1974, 97th Cong., 2d Sess. 224 (Carom. Print 1976)). In support of the requested relief, by your Novanber 2 letter you represented the follov;ring:
With respect to the ERISA church plan exemption, there appears to be only one statement in the · pre-enactrrent legislative history regarding the reasons underlying the exemption. Such statement

• •. explains why church plans were not made
  subject to the plan tennination insurance system established by Title IV of ERISA •••.

Follcming the enactrrent of ERISA, it became apparent to many churches that the ERISA language defining an exempt church plan was so narrowly drafted that many church plans 'lOuld be unable to comply with such language [and] ••• church plans would be prevented fran covering many ministers and lay workers who were engaged in carrying on the work of the church as arployees of denanina￾tional agencies. • • • [C] larifying legislation was enacted in 1980 as
Section 407 of the Multianployer Pension Plan
Amendments Act of 1980 (P.L. 96-364, 96th Cong., 2d Sess. ) ( "MPPA11 ) • • • • In 1978, in introducing the House bill which was the predecessor to Section 407 of MPPA, Represen￾tative Barber Conable stated:
In 1974 when we enacted the Employee
Retirem:mt Incare Security Act of 1974, popularly called ERISA, we exarpted church plans fran the provisions of the act to avoid excessive Goverrnrent entanglement with religion in violation of the first amendlrent to the Constitu￾tion. Mr. Speaker, I ·believe that when we enacted ERISA, we required far :rrore of our churches than we intended. We certainly did not in 1974 intend to draft a definition of church plan that fails to take into consideration the way our church plans are operated or that is disruptive of church affairs. 124 Cong. Rec. 12,108 (1978) (emphasis added). A similar bill was introduced in the Senate in
1978. Because Congress did not act upon the House
and Senate bills prior to its adjournment in 1978, the bills were reintroduced in the House and the Senate when the new congress convened in
1979. • • . In explaining the purpose of the bill
to the Senate, Senator Talmadge stated:
Mr. President, these and other problans over the church plan definition under

present law confront the churches today.
They are worried that their plans do not nCM xreet the church plan requirements and concerned over the inpending restruc￾turing of their plans. It is time we rerrove the churches fran this statutory cloud. If we have enacted a statute that may require the church plans to care under ERISA, file reports, be subject to the examination of books and records and possible foreclosure of church prgeerty to satisfy plan liabil￾ities, it ImlSt be Changed because we have clearly created an excessive Government entanglement with religion. 125 Cong.· Rec. at 10,052 (1979) (emphasis added). On Decanber 4, 1979, hearings on the Senate bill were held before the SUboammittee on Private Pension Plans and Employee Fringe Benefits of the Carmittee on Finance of the Senate •.. Sfulator Talmadge' s statement in support of the bill included the following:
In drafting the Ertployee Retirenent
InC<J~re Security Act of 1974, which is called ERISA, Congress recognized that there were serious Constitutional objections. to subjecting the churches, through their plans, to the examination of books and records and possible levy on church property to satisfy plan liabilities. As a consequence, "church plans" were excluded fran the purview of ERISA. Hearings on S. 209, Etc. Before the SUbccmn. on Private Pension Plans and Employee Fringe Benefits of the Senate Cam. on Finance, 96th Cong., 1st Sess. 364 (1979). Based upon the foregoing, we believe that relief from' CPO regulation is appropriate with respect to the instant case. But because tl12.. Plans are not anong those specified in Rule 4.5 (either as being qualifying entities or excluded fran the pool definition) and, further, because the Plans will not be operated pursuant to the criteria of Rule 4.5 (c) (2), we are declining to make the relief available under Rule 4. 5 available to the Board and the

Plans. 2/ Rather, the Division will not reccmrend. that the carmi.ssion take any enforcement action against the Board of the "X" Church if it fails to register as a CPO in connection with its operation of the Plans. This position is, however, subject to compliance with the condition that the Board indicate in each Plan's docu!rents that, as a result of its request for relief, it is neither req,uired to register as a CPO nor is it subject to the operating criteria of Rule 4. 5. You should be aware that the "no-action" position taken by this letter does not excuse the Board fran cal'pliance with any otherwise applicable requireroonts contained in the CcmtOOi ty Exchange Act or in the carmi.ssion' s regulations thereunder. For example, it remains subject to Section 4o of the Canrodi:Ly Exchange Act, 7 U.S.C. §6o (1982), and to the reporting requirements for traders set forth in Parts 15 and 18 of the Commission's regulations, 17 C.F.R. Parts 15 and 18 (1985). The position taken by this letter is based on the representations that have been made to us and is subject to cal'pliance with the condition set forth above. Fmy different, changed or anitted facts or conditions might require us to reach a different conclusion. In this connection, we request that you notify us imnediately in the event any Plan' s operation changes in any way fran that as represented in yoo.r letter c;ma in your telephone conver￾sations with Division staff. BSG/md Very truly yours, Andrea M. Corcoran Director cc: Daniel A. Driscoll, National Futures Association 2/ Carpa.re Division of Trading and Markets Interpretative Letter No. 87-3, Calm. Fut. L. Rep. (CCH) ~23, 730 (July 14, 1987), where we found that the insurance canpany at issue would cane within Rule 4.5; catpa.re also Division Interpretative Letter No. 85-8, Ccmn. Fut. L. Rep. ~22, 728 (February 8,1985), which extended the relief proposed under Rule 4.5 to a private investment cal'panY.