CFTC Staff Letter 89-02: No-Action Relief for CTA Registration of Investment Adviser Providing Commodity Advice to Insurance Clients

© CCH. All rights reserved. Originally published in the CCH Commodity Futures Law Reporter. Reposted by the CFTC with permission. Such reposting does not constitute or imply endorsement by the Commodity Futures Trading Commission of the accuracy of the reposted material or of any summaries thereof. 1 Commodity Futures Archive - Selected materials, CFTC Interpretative Letter No. 89-2. (Request for CTA Exemption.), ¶24,405, Commodity Futures Trading Commission, (Mar. 1, 1989) ¶24,405. Commodity Futures Trading Commission. Division of Trading and Markets. March 1, 1989. Correspondence in full text. Registration: Interpretations: CTA Exemption..– A “no action” position such that a company would not be required to register with the CFTC as a CTA in connection with certain activities would not be inappropriate or inconsistent with the purposes of Reg. §4.14(a)(8), since the company is otherwise regulated as an investment adviser under the Investment Advisers Act of 1940. The “no action” determination was also based upon the fact that the company's provision of commodity interest trading advice would be solely incidental to its business of providing securities advice to each insurance company client and that any general accounts of the company's insurance company clients would be subject to substantial state regulation. Further, the “no action” position is subject to the company's strict compliance with the condition that it will provide commodity interest trading advice to insurance company clients whose general accounts are at all times subject to state regulation concerning, without limitation, the filing of annual reports, periodic examinations, and authorized asset categories. See ¶7625, "Registration" division, Volume 1. This is in response to your letter dated September 29, 1988 to the Division of Trading and Markets (the “Division”), Commodity Futures Trading Commission (the “Commission”), on behalf of the Company. In your letter, you ask the Division not to recommend that the Commission take enforcement action against the Company for its failure to register as a commodity trading advisor (“CTA”), or against any associated person (“AP”) of the Company for failure to register as such, in connection with the provision of commodity interest trading advice to certain insurance company clients as more particularly set forth in your letter. In your letter, you have represented the following:
The Company previously sought and received a no-action letter from the Commission regarding its commodities advice to pension plans…. Subsequently, the Commission … amended Rule 4.14 to add subpart (a)(8) thereto…. The [enclosed copy of a notice of exemption filed pursuant to Commission Rule 4.14] states that the Company's advice will be directed not only to entities excluded from the term “pool” or qualifying entities as required by Rule 4.14(a)(8)(i)(A), but entities with respect to which the Company has received a no-action letter. The Company's earlier request for a no-action letter dealt with its advice to entities that were either “non-pool” entities under [Commission] Rule 4.5(a)(4)(i) or were qualifying entities under [Commission] Rule 4.5(b) which comply with the requirements of [Commission] Rule 4.5(c). One such exempt entity is an insurance company “separate account.” Although the Company does not intend to offer advice to any insurance company separate account, it wishes to be in a position to advise insurance companies and accordingly seeks a no-action position from the Commission permitting it to do so. You have also represented that: (1) the Company is registered as an investment adviser under the Investment Advisers Act of 1940; (2) the Company will not engage in commodity interest trading for an entity unless such entity is not a pool by virtue of the proviso to Commission Rule 4.5(a)(4), has filed a notice of eligibility under Commission Rule 4.5(c) or is an insurance company which represents to the Company that its investment activities are regulated by state law; (3) with respect to such entities, the Company will employ only trading strategies that are consistent with those permitted under Commission Rule 4.5(c) (including, without limitation, not committing more than five percent of the fair market value of an entity's assets to initial margin and option premiums); (4) the Company's provision of commodity interest trading advice to its insurance company clients will be solely incidental to its business of providing securities advice to such clients; (5) the Company has not, and will not, market its services to clients in any way that emphasizes commodity interest trading as particularly significant and critical to the growth of assets, but will describe the trading of such interests as a means of refining the implementation of strategies originating from analyses of the cash fixed income market and, therefore, incidental to the Company's investment strategy; and (6) the Company will submit to such special calls as the Commission may make to demonstrate compliance with the representations made in your letter. As you know, Commission Rule 4.14(a)(8), 17 C.F.R. §4.14(a)(8) (1988), provides, in part, as follows:
(a) A person is not required to register under the [Comodity Exchange Act (the “Act”), 7 U.S.C. §2 (1982)] as a commodity trading advisor if: