CFTC Staff Letter 96-56: Denial of No-Action Request for CTA Registration Relief

• 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 TRADING & MARKETS Dear July 8, 1996 Re: Request for Relief from Registration as Commodity Trading Advisors under Section 4m(1) of the Commodity Exchange Act with Regard to Producing and Distributing Materials on Commodity Interest Trading This is in response to your letter dated April 29, 1996, to the Division of Trading and Markets ("Division") of the Commodity Futures Trading Commission ("Commission"). By your correspon￾dence, you request on behalf of "Company" and "A" relief from registration as commodity trading advisors (;"CTAs") under Section 4m(l) of the Commodity Exchange Act ("Act").l with respect to producing and distributing materials on commodity interest trading. Based upon the representations contained in your letter, as supplemented by the written materials that the Company distrib￾utes to persons interested in commodity interest trading, we understand the relevant facts to be as follows. Neither the Company nor "A" currentl y is registered with the Commission in any capacity. The Company publishes "U" and 11 V11 , and the Company distributes them for a fee to students/subscribers ("W11 ) as part of "X". Although "U", written by "B", does include general information on trading in commodity interests and approximately one hundred pages of detailed information on price forecasting using technical analysis, it also provides specific advice on market conditions that signal when persons should trade in the futures markets. In addition, 11 U" and "V" promote the Company's; hotline and newsletter services as an integral part of the "X".~ .l/ 7 U.S.C. § 6m(1) (1994). Commission rules referred to herein are f ound at 17 C.F.R. Ch. I (1995), as amended Qy 60 Fed . Reg. 38,146 (July 25, 1995). 2./ "U" also specifical ly, and s trongly, recommends that "W" use "Y", a registered gua rant e ed introducing broker, for their brokerage needs. You represent tha t this recommendation is b a sed (continue d ... )

You state that relief from CTA registration should be granted because the Company and 11 A11 are 11 providing educational opportunities and disseminating financial news and opinions. 11 You represent that the Company and 11A" are neither directly or indirectly involved in the solicitation of funds or trades or the trading of accounts. They receive a flat fee from their 11 W11 , have no financial interest in whether the "W" follow their market opinions and receive no money or other compensation from 11 Y". As we explained in our letter of March 13, 1996 to "A" ("March 13 letter 11 ), Section 1a{5) of the Act defines a CTA as "any person who, for compensation or profit, engages in the business of advising others . . as to the value of or the advisability of trading in" commodity futures contracts, commod￾ity options or leverage transactions.~/ Under the circum￾stances you have presented, none1 of the enumerated exceptions to the Act's CTA definition apply,~ and it appears that the Com￾pany is engaging in the business of advising "W" about trading in the futures markets through the sale of books, a hotline and a newsletter.21 ~/ ( ... continued) upon "Y's" quality of service, rather than upon any compensation from "Y". ~/ See 7 U.S.C. § 1a(5) (1994). The Division has found that persons who make commodity interest trading advice available through newsletters or hotlines are engaged in activities that require CTA registration under the Act. See, ~, CFTC Inter￾pretative Letters No. 95-85, [Current Transfer Binder] Comm. Fut.
L. Rep. (CCH) , 26,540 (October 12, 1995); No. 93-43, [1992-1994
Transfer Binder] Comm. Fut. L. Rep. (CCH) , 25,734 (May 19, 1993); and No. 93-16, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) , 25,692 (February 26, 1993). ~/ See 7 U.S.C. § 1a(5) (B) and (C) (1994). a/ As discussed in our March 13 letter, such activity also results in the indirect solicitation of customer orders since the Company seeks to influence customers to establish customer relationships with "Y". The Company therefore would be required to register as an introducing broker, and "Al' would be required to be listed as a principal and registered as an associated per￾son. We note that, in a May 3, 1996 letter to the Division, "C", the CFO/Compliance for "Y", denies any relationship with "A", states that the "U" courses are educational and includes a copy of a letter instructing "A" to stop using "Y's" name in any of his materials.

For the reasons outlined above, the Division continues to believe that the Company is required to register as a CTA and "A" is required to be listed as a prinlipal and registered as an associated person of the Company.Q You are advised that fail￾ure to comply with the registration requirements for CTAs and the use of misleading marketing materials constitute violations of the Act and the Commission's regulations, and may result in enforcement proceedings or other Commission actions. In addi￾tion, the Company, "A" and any persons participating in or aiding or abetting such conduct may be subject to prosecution for violation of the antifraud provisions of Section 4Q of the Act,21 regardless of registration status. Immediate compli￾ance with the Commission's registration requirements does not necessarily preclude the Commission from taking action against the Company, "A" or any other persons for any past, present or future violations of the Act or the Commission's regulations thereunder. Q/ However, since it does not appear that they would be direct￾ing or guiding accounts, they would not be required to prepare and provide disclosure documents. See CFTC Interpretative Letter No. 95-101, [Current Transf er Binder] Comm. Fut. L. Rep. (CCH) , 26,565 (November 21, 1995). 7 / 7 u.s.c. § 6Q (1994). "U" includes statements such as the following that emphasize the huge profit potential o f investing in commodity interests by following "X's" advice without an equally prominent statement of the risk of loss:
If you have not obtained that dream lifestyle yet, I will not only show you how to reac h for it, but I will be there to guide you in t he r ight directi on, o f fering support as you need it. You should e asily triple whatever mone y you have in￾vested on almost every trade. Though there will be some losses, . those losse s will be minimal. Your profits, on the other hand, should be e noug h to achieve your dreams. Such sta teme nts a ppear in both "U" and the "V".

If you have any questions concerning this correspondence, please contact me or Natalie A. Markman, an attorney on my staff, at (202) 418-5450. Very truly yours, Susan C. Ervin Chief Counsel