CFTC Staff Letter 95-93: No-Action Relief from CTA Registration for Advisory Services to General Partners

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 November 15, 1995 Re: Request for Interpretation of Exemption from Registration as a CTA in Section 4m(1) of the Commodity Exchange Act This is in response to your letter dated September 15, 1995 to the Division of Trading and Markets ( 11 Division 11 ) of the Commodity Futures Trading Commission ( 11 Commission 11 ), as supple￾mented by telephone conversations with Division staff, by which you inquired whether you must register as a commodity trading advisor ( 11 CTA. 11 ) under Section 4m(1) of the Commodity Exchange Act (the 11 Act")1.1 in connection with providing the services de￾scribed below. Facts. Based upon the representations made in your letter, as supplemented, we understand the relevant facts to be as follows. 11 X11 is a sole proprietorship, operated by you. Neither you nor 11 X11 is currently registered as a commodity pool operator ("CP0 11 ) or a CTA. However, you are the general partner and CPO of "Y 11 , a commodity pool you operat~ pursuant to an exemption under Rule 4.13(a) (2) ( 11 Y" Pool 11 ) .2.1 You represent that the 1./ 7 U.S.C. § 6m(1) (1994). Commission rules referred to hereinafter are found at 17 C.F.R. Ch. I (1995). 2_/ Rule 4.13(a) (2) provides that a person who operates a commodity pool is not required to register as a CPO if: (1) the total gross capital contributions the person receives in all the pools the person operates or intends to operate do not in the aggregate exceed $200,000; and, (2) none of the pools operated by such person has more than 15 participants at any time. In order to obtain the exemptive relief, a person must meet the above criteria and also comply with the filing, disclosure and other requirements of the rule. Our records reflect that on date, 1994, the Division re￾ceived a filing made pursuant to Rule 4.13(a) (2) regarding your operation of the nyn Pool.

pool has five investors currently, and a sixth investor will probably participate by the end of the year. You have developed a model for trading options, futures and options on futures on any commodity, including bonds, equity securities and stock indices, the price for which is subject to real-time reporting on an electronic service. You have been asked by a partner of nzn to provide commodity trading advice to nzn by using your model. 11 Z11 , a partnership comprised of four general partners, has funds under management of approximately $10 million. The funds are those of the four general partners. The business purpose of the partnership is to invest its assets in the financial markets. To date, the part￾nership has invested such assets in the stock market. One of the partners, 11 A11 , contacted you when the partnership began to consider entering into transactions in futures and options on futures contracts on various long-term U.S. government bonds. To establish such positions, nzn intends to commit as aggregate initial margin and premiums less than one percent of 11 Z'S 11 funds under management. Each partner is engaged in the business of investing and managing the partnership's assets and may veto any proposed investment that he does not think is appropriate for the partner￾ship. Also, each partner has more than 20 years of experience as an inv1 estor in the securities market and is an accredited inves￾tor . .l 11 A11 , however, is the general partner who has been des￾ignated to make investment recommendations to the four partners and implement such decisions, provided that the other partners do not object to the proposed investments. He does not receive compensation from the partnership for this activity. You represent that neither 11 X" nor you has marketed your expertise in commodity interest trading and that you have not solicited 11 A11 or any of his partners to provide commodity trading advice to any of them. Instead, your communication with 11 A11 developed as follows. You state that you have known 11 A11 since 1990, when you met him at a seminar concerning the electronic display and dissemination of information on the bond markets. The seminar was not open to the public but was 11 by invitation only 11 and was held for the purpose of obtaining from users of bond market information how best to display such information electronically. You sat next to 11 A" at the conference. Persons who are your and 11 A's 11 mutual friends and business acquaintances also attended the conference and, during its course, you and he d./ The term 11 accredited investor 11 is defined in Regulation D, promulgated by the Securities and Exchange Commission, 17 C.F.R. § 230.501(a) (1995).

became acquainted. During the period of five years from the conference to the time "A" contacted you by phone, you and "A" maintained the relationship through occasional contact. You represent that "A" learned from mutual acquaintances that you were developing a model to use for the trading of futures and options on futures on various commodities, including U.S. govern￾ment bonds, and contacted you regarding your providing such services to "Z". Although you do not have a personal relation￾ship with any of the other three general partners, "A" has discussed your program, background and credentials with the other three general partners. Legal Analysis. Before you were contacted by "A" to provide commodity trading advice to the four general partners of "Z", it appears that, pursuant to Rule 4.14(a) (5), you were exempt from registE;ring as a CTA with respect to services you provided to "Y" Pool.~/ In your letter, you request exemptive relief to permit you to continue to claim an exemption from CTA registration while providing commodity trading advice to both the "Y" Pool and the "Z" general partners inasmuch as the exemption from Rule 4.14(a) (5) would not extend to your activities in connection with the "Z" general partners.~/ Based upon the representations you have made, the Division believes that, subject to the following conditions, the relief requested would not be inappropriate. Accordingly, the Division confirms that it will not recommend that the Commission take enforcement action against you or "X" based solely upon your or "X's" failure to register as a CTA in connection with your commodity trading advisory services to the four "Z" general part￾ners and the participants of the "Y" Pool, subject to the follow￾ing conditions: (1) you and "X 11 together may provide commodity trading advice to not more than fifteen persons, including the participants in the "Y" Pool; (2) you and "X" must limit your ~/ Rule 4.14(a) (5) provides that a person exempt from register￾ing as a CPO is not required to register as a CTA if the person's commodity trading advice is directed solely to, and for the sole use of, the pool or pools for which it is so exempt. ~/ The Act provides, in Section 4m(1), an exemption from regis￾tration as a CTA for a person who "during the course of the preceding twelve months, has not furnished commodity trading advice to more than fifteen persons and who does not hold himself out generally to the public as a commodity trading advisor." In considering your request for relief as a request for a no-action position, we do not address whether "Z" is a pool under Rule 4.10(d) (1) I 17 C.F.R; § 4.10(d) (1) (1995).

commodity trading advisory services to persons who are current and future participants in the "Y" Pool and the four general partners of "Z"; (3) if you or "X" continue to. operate the nyn Pool, you or "X" must do so pursuant to Rule 4.13(a) (2); and (4) "Z" may not commit more than two percent of its funds as margin or option premiums for positions in futures contracts and options on such futures. This letter does not excuse you or "X" from compliance with any otherwise applicable requirements contained in the Act or in the Commission's regulations promulgated thereunder. For exam￾ple, you and "X" remain1 subject to the antifraud provisions of
Section 4Q of the Act,Q the reporting requirements for traders
set forth in Parts 15, 18 and 19 of the Commission's regulations, and all other applicable provisions of Part 4. The relief granted by this letter is based upon the repre￾sentations made to us and is subject to compliance with the conditions set forth above. Any different, changed or omitted facts or circumstances might require us to reach a different conclusion. In this connection, we request that you notify us immediately in the event that your or "X's" activities in connec￾tion with the "Y" Pool or "Z" general partners change in any way from those as represented to us. Further, nothing in this letter should be construed as limiting in any way the Commission's ability to take enforcement or other action against you or any other person for any past violation of the Act or Commission regulations. Finally, this letter represents the position of the Division only and does not necessarily represent the views of the Commission or any other division or office of the Commission. If you have any questions concerning this correspondence, please feel free to contact me or Sharon Zackula, an attorney on my staff, at (202) 254-8955. Q/ 7 u.s.c. § 6Q (1994). Very truly yours, Susan C. Ervin Chief Counsel