SEC Division of Investment Management staff letter: 16th Amendment Advisors LLC

Investment Advisers Act of 1940 - Section 206(4) 16th Amendment Advisors LLC

March 23, 2015

Response of the Division of Investment Management IM Ref. No. 801-70324

Edwin C. Laurenson McDermott Will & Emery 340 Madison Avenue New York, NY 10173

Dear Mr. Laurenson:

Your letter dated March 23, 2015 requests our assurance that we would not recommend enforcement action to the United States Securities and Exchange Commission (“Commission”) under Section 206(4) of, and Rule 206(4)-2 (the “Custody Rule”) under, the Investment Advisers Act of 1940 (the “Advisers Act”) if 16th Amendment Advisors LLC (“16th Amendment”), an investment adviser registered with the Commission under the Advisers Act, does not comply with the independent verification and account statement provisions of clauses (a)(2), (a)(3) and (a)(4) of the Custody Rule in connection with 16th Amendment's management of Vicksburg Municipal Trading Fund LP, a private investment fund (the “Master Fund”), and a private feeder fund into the Master Fund, Vicksburg Municipal Trading Offshore Fund LTD (the “Feeder Fund,” and together with the Master Fund, the “Funds”). [1]

Background

You state that 16th Amendment is registered with the Commission as an investment adviser. You state that Messrs. Evan D. Lamp, John J. Lee and Richard J. McCarthy together own (with their family members and family trusts) a 91% interest in 16th Amendment. [2] You state that the only other member of 16th Amendment, Mr. Bidyut Sen, owns a 9% interest. Each of Messrs. Lamp, Lee and McCarthy is listed as a “control person” in Schedule A to Form ADV because of his status an officer of 16th Amendment. You state that Mr. Sen owns a passive interest in 16th Amendment, without management responsibilities or authority (although he has the rights to access to information concerning 16th Amendment’s affairs that are provided by section 18-305(a) of the Delaware Limited Liability Company Act (the “Delaware LLC Act”)).

You state that 16th Amendment currently manages the Master Fund (which is a Delaware limited partnership that trades in municipal securities) and the Feeder Fund, which is a Cayman Islands corporation. The general partner of the Master Fund is Vicksburg Municipal Partners LLC (the "General Partner"). You state that, as the joint managers of the General Partner, Messrs. Lamp, Lee and McCarthy are jointly responsible for the General Partner's affairs and have access to all information concerning those affairs. Messrs. Lamp, Lee and McCarthy together own (with their family members and family trusts) 100% of the General Partner.

You state that the General Partner has sole control over the Master Fund, which is owned entirely by the General Partner and the Feeder Fund. Messrs. Lamp, Lee and McCarthy are the sole directors of, and therefore solely control, the Feeder Fund. As directors of the Feeder Fund, you state that Messrs. Lamp, Lee and McCarthy have access to all information concerning the Feeder Fund's affairs and are ultimately responsible for keeping accurate books and records of the Feeder Fund. You state that the only investors in the Feeder Fund are IRAs for the benefit of Messrs. Lamp, Lee and McCarthy or their spouses.

Discussion

A registered investment adviser with custody of client funds or securities is required by Advisers Act Rule 206(4)-2 to take a number of steps designed to safeguard those client assets. [3] An adviser with custody must maintain client funds and securities with “qualified custodians” either under the client’s name or under the adviser’s name as agent or trustee for the client. [4] The adviser must have a reasonable basis, after due inquiry, for believing that the qualified custodian sends quarterly account statements directly to the client. [5] An adviser that has custody of client assets generally must undergo an annual surprise examination by an independent public accountant to verify the client funds and securities. [6] If the adviser is the general partner of a limited partnership (or holds a similar position with another form of pooled investment vehicle), the adviser is deemed to have complied with the annual surprise examination requirement and need not form a reasonable belief regarding delivery of account statements if the pool’s financial statements are audited by an independent public accountant that is registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board, and the audited statements are distributed to the pool’s investors. [7]

You suggest that the policy considerations that informed the Commission's adoption of the examination/audit provisions, as well as the distribution provisions, are not implicated when the only investors in a pooled investment vehicle client of which a registered investment adviser has custody are (1) individuals who (a) have plenary access to information (either statutory, contractual or some combination of the two) concerning the management of the investment adviser, the pooled investment vehicle and the vehicle’s general partner or managing member (or equivalent), (b) are listed as “control persons” in Schedule A to Form ADV because of their status as the investment adviser’s officer or director with executive responsibility (or having a similar status or function) and (c) have a material ownership interest in the investment adviser (“Principals”) and/or (2) any of the Principals’ spouses and minor children, as well as investment vehicles established solely for the individual or joint benefit of the Principals, their spouses or minor children. [8]

Conclusion

Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under the Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act if 16th Amendment does not comply with independent verification and account statement delivery provisions of clauses (a)(2), (a)(3) and (a)(4) of the Custody Rule in connection with the Funds. [9] Our position is based on the facts and representations in your letter dated March 23, 2015, particularly the representations of 16th Amendment that the only investors in the Funds are the following:

Individuals who (a) have plenary access to information (either statutory, contractual or some combination of the two) concerning the management of 16th Amendment, the Funds and each of the Fund’s general partners (or equivalent), (b) are listed as “control persons” in Schedule A to Form ADV because of their status as 16th Amendment’s officers or directors with executive responsibility (or having a similar status or function) and (c) have a material ownership in 16th Amendment (“16th Amendment Principals”); and

The 16th Amendment Principals’ spouses and minor children, as well as investment vehicles established for the individual or joint benefit of the 16th Amendment Principals, their spouses or minor children. [10]

Because our position is based on the facts and representations made in your letter, you should note that any different facts or circumstances might require a different conclusion.

Sincerely,

Christopher J. Mulligan Division of Investment Management

[1] You also request assurance that 16th Amendment would not be required to obtain audits that comply with clause (b)(4) of the Custody Rule with respect to the Funds.

[2] You state that the ownership of 16th Amendment approximately is as follows: Evan Lamp, 23%; The Evan Lamp 2001 Trust (trust for the benefit of Mr. Lamp's spouse and minor children), 8%; John J. Lee, 20%; Marguerite B. Lee (Mr. Lee's wife), 5%; Marguerite E. Lee (Mr. Lee's minor child), 2%; John W. Lee (Mr. Lee's minor child), 2%; Austin J. Lee (Mr. Lee's minor child), 2%; Richard J. McCarthy, 20%; McCarthy Family Trust (trust for the benefit of Mr. McCarthy's minor children), 10%; and Bidyut Sen, 9%.

[3] Advisers Act Rule 206(4)-2(d)(2). Custody means “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” An adviser has custody if an affiliate has custody of its client funds or securities in connection with advisory services it provides to clients. Custody includes any capacity that gives an adviser or its supervised person legal ownership of or access to client funds or securities (such as acting as general partner or trustee of a pooled investment vehicle).

[4] Advisers Act Rule 206(4)-2(d)(6). Qualified custodians are broker-dealers, banks, savings associations, futures commission merchants and non-U.S. financial institutions that customarily hold financial assets for their customers.

[5] Advisers Act Rule 206(4)-2(a)(3).

[6] Advisers Act Rule 206(4)-2(a)(4).

[7] Advisers Act Rule 206(4)-2(b)(4).

[8] 16th Amendment has determined that the Funds are investment advisory clients. Whether an entity is an investment advisory client will depend on the particular facts and circumstances, which this letter is not addressing.

[9] The includes relief from obtaining audits that comply with clause (b)(4) of the Custody Rule with respect to the Funds.

[10] We consider spouses to include spousal equivalents (as defined in the family office rule (rule 202(a)-11(G)-1 under the Advisers Act).

Incoming Letter

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McDermott

Will&Emery

Boston Brussels Chicago Dusseldorf Frankfurt Houston London Los Angeles Miami Edwin C. Laurenson Attorney at Law etaurenson@mwe.com

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Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C. +1 212 547 5657 March 23, 2015 VIA E-MAIL Associate Director and Chief Counsel Division of Investment Management Securities and Exchange Commission 1 00 F Street, NE Washington, D.C. 20549 Re: 16th Amendment Advisors LLC Dear Mr. Scheidt:
On behalf of our client 16th Amendment Advisors LLC ("16th Amendment"), an investment adviser registered with the Commission under the Investment Advisers Act of 1940 (the "Advisers Act"), we are writing to request relief from the provisions that apply under Section 206( 4) of, and Rule 206( 4)-2 (the "Custody Rule") under, the Advisers Act when the manager of a private investment fund does not comply with the independent verification and account statement delivery provisions of clauses (a)(2), (a)(3) and (a)(4) ofthe Custody Rule in connection with 16th Amendment's management ofVicksburg Municipal Trading Fund LP, a private investment fund (the "Master Fund"), and a private feeder fund into the Master Fund, Vicksburg Municipal Trading Offshore Fund LTD (the "Feeder Fund," and together with the Master Fund, the "Funds"). 1 As discussed below, the basis for 16th Amendment's request for relief is that the client protections provided by the Custody Rule are unnecessary where the client and the investment adviser are essentially the same. Background 16th Amendment registered with the Commission as an investment adviser in 2009. The firm specializes in trading in municipal securities and manages a number of separate accounts in that connection. This includes a request for assurance that 16th Amendment would not be required to obtain audits that comply with clause (b)(4) ofthe Custody Rule with respect to the Funds. U.S. practice conducted through McDenmott Will & Emery LLP. 340 Madison Avenue New York. New York 10173-1922 Telephone: +1 212 547 5400 Facsimile: +1 212 547 5444 -w.mwe.com

March 23, 2015
Messrs. Evan D. Lamp, John J. Lee and Richard J. McCarthy together own (with their family members and family trusts) a 91% interest in 16th Amendment; each of the Lamp, Lee and McCarthy tamilies owns 30-1/3% of 16th Amendment. 2 Each of Messrs. Lamp, Lee and McCarthy is listed as a ·'control person" in Schedule A to Form ADV because of his status as an officer of 16th Amendment. The other member of 16th Amendment, Mr. Bidyut Sen, owns a 9% interest. Mr. Sen was one of two original"outside" seed investors in the predecessor of 16th Amendment, 1861 Capital Management LLC (which no longer exists), and became the sole outside investor upon his acquisition of the interest ofthe other original outside seed investor. Mr. Sen owns a passive interest in 16th Amendment, without management responsibilities or authority (although he has the rights to access to information concerning 16111 Amendment's affairs that are provided by section 18-305(a) ofthe Delaware Limited Liability Company Act (the "Delaware LLC Act")). 3 Messrs. Lamp and McCarthy are 16th Amendment's portfolio managers. Specifically, Mr. McCarthy exercises day-to-day investment discretion in municipal securities for all of 16th Amendment's clients while Mr. Lamp manages client financing transactions and hedging and is responsible for overall portfolio structuring for the third-party accounts advised by 16th Amendment. Mr. John J. Lee has overall administrative and operational charge over 16th Amendment's affairs, serves as chief compliance officer and is primarily responsible for marketing its investment advisory/management services. Messrs. Lamp, Lee and McCarthy all have plenary access to information concerning the affairs 16th Amendment. As the managing members (i.e., managers) of 16th Amendment, each of Messrs. Lamp, Lee and McCarthy has statutory access to the intonnation specified in section 18-305(a) ofthe Delaware LLC Act pursuant to section 18-305(b) ofthat Act and, pursuant to the powers give to them as managers, contractual plenary access to all of 16th Amendments information systems and are jointly responsible for 16th Amendment's affairs (although Mr. Lee does not have authority to initiate trades on behalf of 16th Amendment's client, including the Master Fund). In addition to its separate account management activities, 16th Amendment currently manages the Master Fund (which is a Delaware limited partnership that trades in municipal securities) and the Feeder Fund, which is a Cayman Islands corporation. The general partner of the Master Fund is Vicksburg Municipal Partners LLC (the "General Partner"). As the joint managers ofthe The ownership of 16th Amendment approximately is as fi:>l!o·ws: Evan Lamp, The Evan Lamp 2001 Trust (tms! fi:.w the benefit of Mr. Lamp·:; spouse and minor children), 8%; John l L('C, Marguerite B. Lee (Mr Lee's E. Lee . Lee's minor Austin J. 2°/i,; R khard J. f()f the benefit of rvlr. and Bidyut The right to access the int!.1rmation spel:ified in section
1 8-305(a) of the Delaware LLC Act can be restricted by a limited liability company's operating agreement both in the case of a member and a manager, pursuant to section !8-305(g) of the Delaware LLC Act but 16th Amendment's operating agreement does not impose any restTictions ofthat kind.

March 23,2015
General Partner, Messrs. Lamp, Lee and McCarthy are jointly responsible for the General Partner's affairs and have access to all information concerning those affairs. Messrs. Lamp, Lee and McCarthy together own and control (with their family members and family trusts) I 00% of the General Partner. 4 'fhe Oeneral Partner has sole control over the Master Fund, which is owned entirely by the General Partner and the Feeder Fund. Messrs. Lamp, Lee and McCarthy are the sole directors of~ and therefore solely control, the Feeder Fund. As directors ofthe Feeder Fund, Messrs. t,amp, Lee and McCarthy have access to all information concerning the Feeder Fund's affairs and are ultimately responsible for keeping accurate books and records of the Feeder Fund. The only investors in the Feeder Fund are IRAs for the benefit of Messrs. Lamp, Lee and McCarthy or their spouses. 5 The IRAs invest in the Master Fund through the Feeder Fund, which is classified as a corporation for U.S. federal income tax purposes. Analysis and Request Under the Custody Rule, 16th Amendment is deemed to have custody of the assets of a pooled investment vehicle, such as the Master Fund, with a general partner that is under common control with 16th Amendment. 6 We also concede that 16th Amendment should be deemed to have custody of the assets of the Feeder Fund. As a result, in the absence of relief to the contrary, 16th Amendment is required either to arrange for a surprise independent verification of the Funds' funds and securities by an independent public accounting firm (a "surprise examination") or an annual audit of the Funds, prepared in accordance with generally accepted accounting principles, by an independent accounting fim1 registered with, and subject to examination by, the PCAOB (referred to below as the "audit approach"). 7 We refer to the surprise examination and audit approach provisions below as the "examination/audit provisions." 1f 16th Amendment chose the surprise examination option, it would also be required to arrange for the delivery of quarterly account statements to the Feeder Fund's investors by the Feeder Fund's qualified custodian. 8 If 16th Amendment chose the audit approach, it would also be required to deliver the resulting audited financial statements to the Feeder Fund's investors !'he ownership of the General Partner approximately is as follows: Evan Lamp, 23%; The Evan Lamp 2001 Trust 10%; John J. Lee, 22%; Margaret B. Lee, 5%; Margaret E. Lee. 2%; John W. Lee, 2~~: Austin J. Lee, 2%,; Richard J. McCarthy, 22%; and McCarthy Family Trust, ll%. 'T'he investors in the Feeder Fund are as follows (ownership percentages approximate): PENSCO Trust Cmnpan; C\tst. FBO Eunyoung Koh IRA (spoust~ of Evan Lamp), 7S·o; PENSCO Trust Company Cust. FBO Evan D. IRA, PENSCO Trust Company CusL FB() K. Lee (Dec.) (John J. Lee K. Lee was !\1r. Lee's l PENSC'() Trust CusL fBO John J. L!::e 13':1;,: and PENSCO Trust Company Cust. FBO Richard J. McCarthy Roth IRA, 55%,. Rule
206(4)-2(d)(2)(iii). Rule 206(4)-2(a)(4) and (b)(4). Rule 206(4 )-2(a)(3) and (a)( 5).

March 23,2015 within 120 days of the end of Feeder Fund's fiscal year (together with the account statement delivery provisions noted above, the "distribution provisions").9 The Custody Rule requirement that registered advisers with custody of client assets must in all cases (except when custody is based solely on the ability to deduct fees) comply with the examination/audit and the distribution provisions was adopted in 2009 to help prevent fraudulent activities. 10 As noted by the Commission, "We believe these amendments ... will provide for a more robust set of controls over client assets designed to prevent those assets from being lost, misused, misappropriated or subject to advisers' financial reverses." 11 We believe, however, that the policy considerations that informed the Commission's adoption of the examination/audit provisions, as well as the distribution provisions, are not implicated when the only investors in a pooled investment vehicle ofwhich a registered investment adviser has custody are (1) individuals who (a) have plenary access to information (either statutory, contractual or some combination of the two) concerning the management of the investment adviser, the pooled investment vehicle and the vehicle's general partner or managing member (or equivalent), (b) are listed as "control persons" in Schedule A to Form ADV because oftheir status as the investment adviser's officer or director with executive responsibility (or having a similar status or function) and (c) have a material ownership interest in the investment adviser ("Principals") or (2) any of the Principals' spouses and minor children, as well as investment vehicles established for the individual or joint benefit ofthe Principals, their spouses or minor children. 12 Accordingly, we seek the staffs assurance that it will not recommend enforcement action to the Commission if 16th Amendment does not comply with the examination/audit provisions or the distribution provisions with respect to the Funds. In that connection, we note that the Staff has taken the position in a direct account management context that when a related natural person of a registered adviser individually controls an account that is managed by the adviser, the adviser should not be deemed to have custody of that account solely because the related natural person has access to the account. 13 Similarly, if an adviser's supervised person serves as a trustee or executor as a result of a personal relationship with a 9 Rule 206(4)-2(b)(4). 10 As noted in the Commission's promulgating release for the 2009 amendments to the Custody Rule, the Custody Rule previously provided that an independent verification was required only if an adviser with custody elected to send account statements to its clients rather than arranging for the provision of statements by the clients' qualified custodian. Custody ofFunds or Securities by Clients ofInvestment Advisers, Release No. IA-2968 (December 30, 2009) (the "2009
Promulgating Release"), text at notes 5-6. II 2009 Promulgating Release, text following note 12. 12 We also believe this should extend to spousal equivalents (as defmed in the family office rule (rule 202(a) 11(G)-1 under the Advisers Act). 13 StaffResponses to Questions About the Custody Rule (most recently updated December 13, 2011) (the "Staff Responses") at question Il.7.

March 23, 2015 settlor, beneficiary or the deceased, the supervised person's control and powers of custody over the assets held in the trust or estate is not imputed to the adviser. 14 While control over the Funds' assets is exercised collectively, not individually, by 16th Amendment's Principals, we believe that these previous StafT positions draw upon the same kind of assessment that is advocated in this letter. Each of Messrs. Lamp, Lee and McCmihy has plenary contractual or statutory access to information concerning the management of the Funds, the General Partner and 16th Amendment, is listed as a "control person" in Schedule A to Fom1 ADV because of his status as an officer of 16th Amendment and has a material ownership interest in 16th Amendment. Further, Messrs. Lamp, Lee cmd McCarthy are sophisticated investors with many years of experience in investment management. We also believe that the Principals' spouses and minor children benefit from similar protections. Accordingly, we respectfully request that the Stafi advise us that it will not recommend enforcement action to the Commission if 16th Amendment proceeds in the manner described in this letter. If you would like to discuss or have questions about 16th Amendment's request, please call me (212-547-5657) or John T. Lutz (212-547-5605) ofthis office. Sincerely, Edwin C. Lauren son DM__US 58622918-6 ()75780 00 I 0 Staff Responses at question IL2; 2009 Promulgating Release, note 139. 14