CFTC Staff Letter 93-03: No-Action Relief for CPOs Converting Part 4 Pools to Rule 4.12(b) Status

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Advisory 6-93
For Rdease: Febnulry 3, 1993
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Office of Communication and Education Services Contact: Joe Duggan, (202) 254-8630 • Fax: (202) 254-3678 Advisory. Relief Granted to Certain CPOs Who Wish to Convert 1beir Pools to 4.12(b) Pools The Commodity Futures Trading Commission's Division of Trading and Markets has iuued Interpretative Letter 93-3, which states that the Division will not recommend that the Commission take any enforcement action against certain registered commodity pool operators who were operating or selling a pool in full compliance with Part 4 of the Commission's rules if they subsequently operate the pool purs~t toR,~~ 4.12(b). The Di·vision's letter notes that recently adopted Commission Rule 4.7(a)(3)(i)(2) provides a m(\Chanism for CPOs who have offered or sold their pools in full compliance with Part 4 to subsequently claim relief under Rule 4.7, but that Rule 4.12(b) does not specifically address the issue of a CPO who wishes to claim 4.12(b) relief for a pool subsequent to commencement of commodity interest trading by the pool. The Division's letter provides no-action relief that makes Rule 4.12(b) relief availeble subject to conditions patterned after the requirements for pools converting to Rule 4.7 status. Specifically, the Division conditioned its relief upon compliance with the following requirements, among others: (1) the operation of the pool pursuant to the relief available in Rule 4.12(b )(2) is otherwise consistent with the duties of the CPOs and the rights of the pool's participants; (2) the CPOs will notify the pool's participants that, absent objection within Zl days after the date of the notification by the holders of a majOritfljf the units of participation in the pooi unaffiliated with the CPOs, the CPOs intend to operate the pool pursuant to Rule 4.12(b); (3) sut"h majority holders have not objected within that period; and (4) the CPOs either continue to comply iin full with Rules 4.21, 4.22 and 4.23 with respect to objecting participants or allow such participants to redeem their units of participation within three months following the date of notification of the CPOs' intention to operate the pool pursuant to Rule 4.12(b ). The relief also was conditione-d upon the CPOs' amending the pool's Disclosure Document so as to bring it into compliance with the disclosure requirements applicable under Rule 4.12(b), u, to disclose that the pool will not enter into commodity futures and commodity option contracts for which the aggregate initial margin and premiums exceed 10 percent of the fair market value of the pool's assets. Copies of the letter are available from the Commission's Office of Communication and Education Services, (202) 254-8630. ZOJJ K Street, N.W. • Washington, D.C. Z0581 • Federal Regulatory Agency for Futures Trading ~~~k-~>~·~-~· .· .. "' ,-. '

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DIVISION OF
'IRADING AND MARKETS
Dear Mr.
COMMODITY FUTURES TRADING COMMISSION
2033 K Street, NW, Washington, DC 20581
(202) 254-8955
(202) 254- 8010 Facsimile
December 21, 1992
Re: Unrestricted Pool Becomes Rule 4.12(b) Pool 1.3-3 This is in response to the letter dated October 5, 1992 from A, B, and C, the registered commodity pool operators ("CPOs") of D (the "Pool"), requesting und~~ Rule 4.12(a) the relief avail￾able pursuant to Rule 4.12(b).•l OUr review of the request indicates that, as is explained below, the CPOs have not met all of the requirements of Rule 4.12 (b) . -- Rule 4.12(b) {l) (i) (C) specifies that the pool for which a CPO is claiming Rule 4.12(b) relief may not enter into commodity futures and commodity options contracts for which the aggregate initial margin and premiums exceed 10 percent of the fair market value of the pool's assets. Rule 4.12(b) (1) (ii) states that participants in the pool must be informed in writing of this re￾striction. However, the Pool's Disclosure Document dated June, 1992 and filed with the Commission on June 17, 1992, states on
page 21 that "the Commodities Manager intends to limit the per￾centage of net assets of the Partnership inve~ted in commodities
margir- and premiums to no more than 15\ of net assets at any time."
Further, Rule 4.12(b) (5) (i) requires that if a claim of exemption has been made with respect to Rule 4.12(b) (2) (i), the CPO must make a statement to that effect on the cover page of each offering memorandum, or amendment thereto, that it is required to file with the Commission pursuant to Rule 4.21(g). However, the Pool's Disclosure Document does not contain such a statement. Finally, Rule 4.12(b) (4) (i) specifies that the claim of exemption pursuant to this rule must be filed before the date the commodity pool first enters into a commodity interest transac￾tion. The Pool began trading securities and commodity interests in August, 1992, without the CPOs having first filed a claim of exemption pursuant to Rule 4.12(b). ~/ Unless otherwise indicated, Commission rules referred to herein are found at 17 C_F.R. Ch. I (1992).

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Based upon the foregoing, it appears that the CPOs are seeking to convert a pool which they operate in compliance with
Part 4 to a Rule 4.12(b) pool, a situation that is not specifi- cal~¥ addressed by Rule 4.12(b). However, recently adopted Rule
4.7- does provide a mechanism for CPOs who have offered or sold their pools in full compliance with Part 4 to subsequent￾ly claim relief under Rule 4.7 (and, thus, to effectively con￾vert their pools into "Rule 4.7 pools"). Specifically, Rule 4.7(a) (3) (i) (I) (2) provides that a CPO may claim an exemption under Rule 4.7 with respect to a pool it has commenced operating provided that: (1) the claim for exemption is otherwise consis￾tent with the duties of the CPO and the rights of the pool par￾ticipants; (2) the CPO has notified the pool participants that, absent objection within 21 days after the date of the notifica￾tion by the holders of a majority of the units of participation in the pool unaffiliated with the CPO, he intends to claim Rule
4.7 relief; and (3) such holders have not objected within that
period. The CPO would then be required either to continue to provide disclosure and reporting in accordance with the require￾ments of Part 4 to objecting participants or allow them to redeem their units of participation within three months of the filing of the Rule 4.7 notice. We b .... i ;e that a similar mechanism should be available to the CPOs wilu respect to Rule 4.12(b). Accordingly, the Division will not recommend that the Commission take any enforcement ac￾tion against the CPOs if they operate the Pool pursuant to the relief available in Rule 4.12(b) (2) in lieu of full compliance with Rules 4.21, 4.22 and 4.23, provided that: (1} the operation of the Pool pursuant to the relief available in Rule 4.12(b) (2) is otherwise consistent with the duties of the CPOs and the rights of the Pool's participants; (2) upon receipt of this let￾ter the CPOs notify the Pool's participants· that, absent objec￾tion within 21 days after the date of the notification by the holders of a majority of the units of participation in the Pool unaffiliated with the CPOs, the CPOs intend to operate the Pool pursuant to Rule 4.12(b); (3) such majority holders have not objected within that period; and (4} -~e CPOs either continue to comply in f11ll with Rules 4.21, 4.22 and 4.23 with respect to objecting participants or allow such participants to redeem their units of participation within three months following the date of notification of the CPOs' intention to operate the Pool pursuant to Rule 4.12 (b) . This no--action position is further subject to the condition that the CPOs amend the Pool's Disclosure Document so that it complies with the informational requirements of Rules 4.12(b) (1) (C) and 4.12(b) (5) (i), referred to above in the second ~I 57 Fed. Reg. 34853 (August 7, 1992). Rule 4.7 provides relief from certain Part 4 requirements to registered CPOs who have only "qualified eligible participants" in their pools.

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  and third paragraphs of this letter. Specifically, the Disclo￾sure Document must be amended to state that the Pool will not enter into commodity futures and commodity option contracts for which the aggregate initial margin and premiums exceed 10 percent of the fair ma.rket value of the Pool's assets and the Pool must be operated in accordance with such statement. The Document also must be amended to state on the Document's cover page that pur￾suant to relief issued by CFTC staff, the Do~qment has been pre￾pared in accordance with Rule 4.12(b) (2) (i).~l Further, pursu￾ant to Rules 4.21(b) and (g), the amended Document must be dis￾tributed to existing and previously solicited prospective pool participants and filed with the Commission as set forth in those rules. This letter is based upon the representations that have been made and is strictly limited to those representations and to compliance with the conditions set forth above. Any different, changed or omitted facts.o~ circumstances might require us to reach a different conclusion. In this connection', we.~-request that you notify us imnediately in the event the operations of the Pool change in any way from those as represented to us. Further, this letter represents the views of the Division of Trading and Markets only. It does not necessarily represent the views of the Commission or of any other office or division of the Commission. If you have any questions concerning this correspondence, please contact me or Barbara S. Gold, Assistant Chief Counsel, at (202) 254-8955. Very truly yours, Susan C. Ervin Chief Counsel ~/ Similarly, the CPOs should comply with the requirements of Rule 4.12(b) (5) (ii) by stating on the cover page of each Annual Report that pursuant to relief issued by CFTC staff, the Annual Report has been prepared in accordance with Rule 4.12(b} (2) (iii). _--, ! -i l i .-· i