CFTC Staff Letter 95-89: No-Action for Registered Investment Adviser Operating Test Partnership

U.S. COMMODITY FUTURES TRADING COMMISSION Three Lafayette Centre 1155 21st Street, NW, Washington, DC 20581 Telephone: {202} 418-5430 Facsimile: {202} 418-5536 DIVISION OF 1RADING & MARKETS Dear June 5, 1995 Re: Rules 4.13(a) (1) and 4.14(a) (8) --Availability of Registration Exemptions This is in response to your letter dated March 16, 1995, as supplemented by your letters dated March 24, 1995 and April 20, 1995, to the Division of Trading and Markets ("Division") of the Commodity Futures Trading Commission ("Commission"), and by telephone conversations with Division staff. By your correspon￾dence you request certain relief with respect to the registration status of "X". Based upon the representations made in your March 16, 1995 letter, as supplemented, we understand the relevant facts to be as follows. "X" is registered as an investment adviser ( "IA") under the Investment Advisers Act of 1940. "X" is the IA of ("X" Funds"), an investment company registered under the Investment Company Act of 1940. "X" Funds has filed a notice of exclusion from the definition of the term commodity pool operator ("CPO") pursuant to Rule 4.5 and "X" has filed a claim for exemption from commodity trg.ding advisor ("CTA") registration pursuant to Rule
4.14 (a) (8) . .l! "X" does not hold itself out to the public as a
CPO or CTA.
"X" has formed (the "Partnership") to expand its activities with respect to commodity interest trading advice for clients in addition to "X" Funds. The Partnership will be used on an ''in￾house" basis to test and validate various investment strategies and to establish a reportable track record that may in the future be provided to prospective clients. The Partnership will invest in a portfolio consisting primarily of financial futures . .l/ Commission records indicate that the notice of exclusion was filed on July 13, 1994 and the claim of exemption was filed on May 8, 1995. Commission rules referenced herein are found at 17 C . F . R . Ch . I ( 19 9 4 ) .

The Partnership has commenced operations with $250,000 in capital contributions. You do not expect that any additional capital contributions would cause this sum to exceed $1 million in the aggregate. "X" serves as general partner and manager of the Partnership and will direct the Partnership's commodity interest trading. It has contributed fifty percent of the initial capital, with the remainder of the capital provided by the following eight investment professionals, who are full-time employees of "X": "A", "B", "C", "D", "E", "F", "G" and "H". The ninth limited partner, "I", is an employee of "Y", the parent company of "X". The limited partners all hold the functional equivalent of the title of Vice President or above. "X" will not receive any compensation or other payment for operating the Partnership. First, you ask whether "X" may claim relief from CPO regis￾tration pursuant to Rule 4.13(a) (1) in connection with its serving as a general partner of the Partnership. Based upon your representations it appears that "X 11 satisfies the requirements of the rule in that: (1) it will not receive any compensation for opera5~ng the pool; (2) it will operate only one commodity pool;-/ (3) it is not otherwise required to register with the Commission and is not a business affiliate of any person required to register with the Commission; and (4) the pool is not adver￾tised. Based upon the foregoing, it appears that "X" may claim relief from CPO registration under Rule 4.13(a) (1). You next request whether, by claiming CPO registration relief pursuant to Rule 4.13(a) (1), "X" would invalidate the relief from CTA registration it has claimed pursuant to Rule 4.14(a) (8) with respect to "X" Funds. In this regard we note that upon commencement of operations of the Partnership, includ￾ing providing commodity interest trading advice thereto, "X" will no longer comply with each condition of Rule 4.14(a) (8). However, we further note that "X": (1) will continue to be registered as an IA; and (2) will not be holding itself out as a CTA. In addition, the Partnership, as noted above, is owned by "X" and nine investment professionals who are employed as vice president (or equivalent) or higher by "X" or its parent. Based on the foregoing, the Division will not recommend that the Commission take any enforcement action against "X" for failure to register as a CTA based solely upon its failure to comply with the criteria set forth in Rule 4.14(a) (8) in connection with its activities on behalf of the Partnership, as set forth above. 2_/ In this regard, we note that "X" is not the operator of Funds and, further, that "X" Funds is excluded from the definition pursuant to the Rule 4.5 notice it has filed. "X" CPO

This letter does not excuse 11 X11 from compliance with any other applicable requirements contained in the Commodity Exchange Act ( 11 Act 11 ) or in the Commission 1 S regulations issued thereunder. For example, 11 X" remainEJ subject to the antifraud provisions of
Section 4Q of the Act,~/ to the reporting requirements for
traders set forth in Parts 15, 18 and 19 of the Commission's rules, and to all otherwise applicable provisions of Part 4. In addition, the Division notes that it is not excusing or in anyway limiting the Commission's authority to proceed against "X" for any past violation of the Act or the Commission's rules thereun￾der. The position stated herein is prospective only. The views expressed herein are based upon the representa￾tions that you have made to us and are applicable to "X" solely in connection with its serving as the general partner of the Partnership. Any different, changed or omitted facts or condi￾tions might require us to reach a different conclusion. In this regard, we request that you notify us immediately in the event the activities of "X", "X" Funds or the Partnership change in any way from those as represented to us. Finally this letter represents the views of the Division of Trading and Markets only. It does not necessarily reflect the views of the Commission or any other office or division of the Commission. If you have any questions concerning this correspon￾dence, please contact me or Myra R. Silberstein, an attorney on my staff.~ at (202) 254-8955. 7 u.s.c. §§ 6b and 6Q (1988). Very truly yours, Susan C. Ervin Chief Counsel