I. INTRODUCTION

The U.S. Commodity Futures Trading Commission (the "CFTC") has issued no-action relief exempting certain persons from registration as commodity pool operators ("CPOs") and commodity trading advisors ("CTAs"). The CFTC has issued this no-action relief pending its evaluation of certain rulemaking proposals received by the CFTC which would provide additional exemptions from registration as a CPO and as a CTA.

II. INTERIM NO-ACTION RELIEF

Under the interim no-action relief, certain persons may claim exemptive relief from having to register as CPOs and CTAs.

A. Relief for CPOs

In order to qualify for the interim no-action relief, an unregistered CPO must meet the following criteria:

(a) the CPO seeking an exemption restricts participation in any pool that it operates to: (i) "accredited investors" [as defined in Rule 501(a) under the U.S. Securities Act of 1933, as amended (the "Securities Act")]; (ii) "knowledgeable employees" [as defined in Rule 3c-5 under the U.S. Investment Company Act of 1940, as amended]; (iii) Non-United States persons as defined in CFTC Regulation §4.7(a)(1)(iv); and (iv) certain persons described in CFTC Regulation §4.7(a)(2)(viii)(A) (certain CPOs, CTAs and investment advisers to an "exempt pool" and their affiliates); and

(b) the aggregate notional value of each such pool's commodity interest positions (whether entered into for bona fide hedging purposes or otherwise) does not exceed fifty percent (50%) of the liquidation value of the pool's portfolio, after taking into account unrealized profits and unrealized losses on any such positions it has entered into. "Notional value" is calculated by multiplying the size of the futures contract, in contract units, by the current market price per unit, and for each such option position by multiplying the size of the option contract, in contract price, by the strike price. This test is referred hereinafter as the "notional test."

B. Relief for CTAs

Similarly, in order to qualify for the interim no-action relief, an unregistered CTA must fulfill one of the following two groups of criteria:

(a) the CTA has claimed relief from CPO registration under the interim no-action relief and its commodity interest trading advice is directed solely to, and for the sole use of, the pool or pools that it operates; or

(b) it is (i) registered as an investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), or with the applicable securities regulatory agency of any state of the United States; (ii) exempt from such registration; or (iii) excluded from the definition of the term "investment adviser" pursuant to Section 202(a)(2) or 202(a)(11) of the Investment Advisers Act; provided that the exempt CTA is not holding itself out as a CTA and its commodity interest trading advice (A) is directed solely to, and for the sole use of, pools operated by exempt CPOs who claim relief from CPO registration under the interim no-action relief; (B) is solely incidental to its business of providing securities advice to each such pool; and (C) employs only such strategies as are consistent with the "notional test" under the interim no-action relief.

C. How to Claim the No-Action Relief

The interim no-action relief is not self-executing. A person or entity eligible for the interim no-action relief (each, a "Claimant") must file a claim (a "Claim") to perfect the relief and must make a one-way disclosure to its participants and clients, respectively, whether prospective or existing.

A Claim will be effective upon filing so long as the Claim includes: (a) the name, main business address and main business telephone number of the Claimant; (b) the capacity of the Claimant (i.e., CPO, CTA or both) and, where applicable, the name of the pool(s), for which the Claim is being filed; (c) a representation that the Claimant qualifies for the no-action relief, that it will comply with the criteria of the no-action relief, and that it will provide the CFTC-specified disclosure; and (d) the signature of the Claimant. The Claim must be filed with the National Futures Association ("NFA") with a copy to the CFTC prior to the date upon which the Claimant first engages in business that would otherwise require registration.

To comply with the terms of a Claim that is has filed, an exempt CPO must provide disclosure to prospective and existing participants in each pool it operates or intends to operate prior to engaging in the activities that otherwise would require it to register as a CPO. An exempt CTA also must provide clients with a similar disclosure statement.

Persons which file Claims will nevertheless remain subject to the anti-fraud provisions of the U.S. Commodity Exchange Act, as amended (the "CE Act"), and certain other provisions of the CE Act. To the extent that any final rule making differs from the interim no-action relief, the CFTC will provide Claimants with a period of time to allow compliance with the final rules or to cease engaging in activities which would require registration.

A Claim may be filed upon the publication of the proposed rule by the CFTC in the Federal Register which occurred on November 13, 2002; no-action relief will be effective immediately upon filing of a Claim.

III. THE PROPOSALS REGARDING ADDITIONAL EXEMPTION FOR CPOS AND CTAS

The CFTC issued the no-action relief while it is seeking comment on proposals submitted by the NFA and the Managed Funds Association ("MFA") for exemptions from registration for CPOs and CTAs.

A. The NFA Proposal Regarding Additional Exemption for CPOs

Under the NFA proposal, a person will not be required to register as a CPO under the CE Act if it operates only commodity pools that use commodity futures or commodity options solely for bona fide hedging purposes. In addition, the aggregate initial margin and premiums required to establish any non-bona fide hedging positions for any pool must not exceed five percent (5%) of the liquidation value of that pool's portfolio, after certain considerations. Such person must not market interests in such fund to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures or commodity options markets, and it must limit the participants in such funds to "accredited investors." Additionally, the person seeking relief under this proposed exemption must disclose in writing to each prospective participant the purpose of and the limitations on the scope of the commodity futures and commodity options trading in which it will engage. To ensure compliance with the above provisions, the NFA proposal would also require such person to submit to such special calls as the CFTC may make to require it to demonstrate compliance with the exemption, including information on its pools' financial status and position holdings and to maintain books and records for certain periods. In order to claim an exemption from registration under the NFA proposal, such person would also have to comply with various procedural requirements, including filing a claim and making certain written disclosures before accepting any funds, securities or property for pools it operates.

B. The NFA Proposal Regarding Additional Exemption for CTAs

The NFA Proposal provides similar exemptions from the CTA registration requirements. Specifically, a person would not be required to register as a CTA under the CE Act if the person's commodity interest trading advice is: (a) directed solely to and for the use of commodity pools that meet the requirements of the NFA's CPO exemption proposal and are operated by a person exempt from registration; (b) solely incidental to its business of providing investment advice to such pools in instruments that are either exempt from regulation pursuant to the CFTC's regulations or excluded from CFTC regulation under the CE Act; and (c) employs only such strategies as are consistent with eligibility status under the CPO exemption provisions. Such person also may not otherwise hold itself out as a CTA. Furthermore, the person seeking relief from registering as a CTA must submit to such special calls as the CFTC may make to provide information on its position holdings and file a notice of exemption with the CFTC.

C. The Managed Fund Association (the "MFA") Proposal Regarding Additional Exemption for CPOs

Under the MFA proposal, a CPO would be exempt from the registration requirement provided that: (a) interests in all pools it operates are exempt from registration under the Securities Act; (b) such interests are offered or sold without marketing to the public in the United States; and (c) such pools are limited to individuals which are "qualified eligible persons" as defined in CFTC Regulation §4.7 or entities which are accredited investors or qualified eligible persons. In addition, with certain exceptions, the exempt CPO and all of its principals must not be subject to any statutory disqualifications set forth in Section 8a(2) or 8a(3) of the CE Act.

Notwithstanding the above, an exempt CPO would remain subject to the anti-fraud and anti-manipulation provisions of the CE Act. The exempt CPO also would be required to file with the CFTC and deliver to the pool participants certified year-end financial statements prepared in accordance with generally accepted accounting principles. Additionally, any person who desires to claim the exemption would need to file with the CFTC a notice of eligibility, which it must keep updated by filing supplemental notices if necessary.

IV. CONCLUSION

It is possible that the final exemptions from CPO and CTA registration adopted by the CFTC will vary from the interim no-action relief as a result of comments received during the comment period on the NFA's and the MFA's proposals. If you feel that you may qualify for interim no-action relief from registration as a CPO and/or CTA, please let us know and we will be happy to assist you in applying for such relief.

If you have any questions, please do not hesitate to contact Michael F. Griffin at (212) 415-9222 or griffin.michael dorseylaw.com; J.P. Bruynes at (212) 415-9238 or bruynes.john dorseylaw.com; or Robert E. Holton at (212) 415-9226 or holton.robert dorseylaw.com.

November 18, 2002