SEC Division of Investment Management staff letter: AFL-CIO Housing Investment Trust

Investment Company Act of 1940 — Section 12(d)(3) AFL-CIO Housing Investment Trust

August 5, 2016

RESPONSE OF THE CHIEF COUNSEL’S OFFICE DIVISION OF INVESTMENT MANAGEMENT

Our response to your letter, dated August 4, 2016, provides assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the “Commission”) under section 12(d)(3) of the Investment Company Act of 1940 (the “1940 Act”) against the AFL-CIO Housing Investment Trust (“HIT”), an open-end management investment company registered under the 1940 Act, under the circumstances described below. Specifically, HIT proposes to organize and acquire the securities issued by a wholly owned and controlled subsidiary, organized as a Delaware limited liability company (the “Adviser Sub”) that will operate as an investment adviser, and will be registered under the Investment Advisers Act of 1940 (“Advisers Act”). [1]

BACKGROUND

You state the following:

HIT is a common law trust organized in the District of Columbia and an internally managed open-end investment company registered under the 1940 Act. HIT operates under and will continue to comply with the terms and conditions of certain regulatory relief. [2]

For federal income tax purposes, HIT has made an election to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986 (the “Code”), and intends to continue to be so treated. As a RIC, HIT generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that it distributes to its shareholders as dividends. To maintain its RIC status, HIT must, among other things, meet specified source-of-income requirements. HIT will satisfy these source-of-income requirements if it derives, in each taxable year, at least 90% of its gross income from dividends, interest, payments with respect to certain securities, loans, gains from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to its business of investing in securities (“Good RIC Income”).

HIT’s board of trustees (“Board”) and officers desire to expand the scope of their advisory activities beyond the management of HIT’s portfolio. Expanding the scope of advisory activities would allow HIT to use its existing resources ( e.g. , its investment professionals) to increase its gross revenue and income.

HIT’s Board and officers have determined that providing advisory services through an investment adviser entity that is wholly owned and controlled by HIT would be most beneficial to HIT’s shareholders. This approach would allow HIT to shield itself from potential liabilities associated with such advisory activities to which HIT would be exposed were it to engage in those activities directly. Moreover, as the advisory business grows, creating a separate subsidiary to provide advisory services and receive investment management fee income would avoid concerns that HIT might fail to satisfy the source-of-income requirements necessary to maintain its RIC status under the Code. [3] You represent that the utilization of the Adviser Sub as a tax “blocker” entity in this manner is a lawful method of tax planning under the Code.

HIT has obtained shareholder approval of its proposal to enter into the business of providing advisory services to U.S. and non-U.S. registered and unregistered investment companies, institutional investors, separate accounts, private clients and others through the Adviser Sub.

You further represent as follows:

HIT will wholly own and control the Adviser Sub. HIT will not have an investment adviser within the meaning of section 2(a)(20) of the 1940 Act. Only persons acting in their capacities as directors, officers or employees of HIT will provide advisory services to HIT.

The determination to enter into the advisory business through the Adviser Sub has been made by a vote of at least a majority of HIT’s directors who are not “interested persons” of HIT as defined in section 2(a)(19) of the 1940 Act.

In addition to information communicated to shareholders in seeking shareholder approval of the proposed arrangement, in each of its annual reports to shareholders and its prospectus, HIT will discuss the existence of the Adviser Sub and the provision by the Adviser Sub of outside advisory services as well as include an assessment of whatever risks, if any, are associated with the existence of the Adviser Sub and its provision of such services.

The Adviser Sub will not make any proprietary investment that HIT would be prohibited from making directly under HIT’s investment objectives, policies and restrictions or under any applicable law.

In assessing compliance with the asset coverage requirements under section 18 of the 1940 Act, HIT will deem the assets, liabilities and indebtedness of the Adviser Sub as its own.

The Board will review at least annually the investment advisory business of the Adviser Sub to determine whether such business should be continued and whether the benefits derived by HIT from the Adviser Sub’s business warrant the continued ownership of the Adviser Sub and, if appropriate, approve (by a vote of at least a majority of its directors who are not “interested persons” as defined in the 1940 Act) at least annually such continuation. In determining whether the investment advisory business of the Adviser Sub should be continued and whether the benefits derived by HIT from the Adviser Sub’s business warrant the continued ownership of the Adviser Sub, HIT’s Board will take into consideration, among other things, the following: (a) the compensation of the officers of HIT and of the Adviser Sub; (b) all investments by and investment opportunities considered for HIT that relate to any investments by or investment opportunities considered for a client of the Adviser Sub; and (c) the allocation of expenses associated with the provision of advisory services between HIT and the Adviser Sub. [4]

LEGAL ANALYSIS

Section 12(d)(3) of the 1940 Act generally provides that it is unlawful for any registered investment company to purchase or otherwise acquire any security issued by any person who is, among other things, an investment adviser of an investment company or an investment adviser registered under the Advisers Act. [5] The Commission has indicated that the prohibited acquisitions under section 12(d)(3) are not limited to the original acquisitions of stock, but may occur as a result of subsequent events. [6]

In support of your request, you argue that HIT’s ownership of the Adviser Sub raises none of the concerns underlying section 12(d)(3) of the 1940 Act. [7] You state that these concerns were two-fold. First, Congress wished “to prevent investment companies from exposing their assets to the entrepreneurial risks of securities-related businesses,” including those of an investment adviser. [8] Second, Congress wanted to prevent potential conflicts of interest and situations in which brokers, securities dealers and other financial intermediaries were in a position to dominate investment companies. [9]

You state that the first concern stems from the fact that, in 1940, when section 12(d)(3) was adopted, most securities-related businesses were organized as privately held general partnerships. [10] You argue that, because the Adviser Sub will be organized as a limited liability company, the proposed arrangement provides a level of insulation for the shareholders of HIT from the entrepreneurial risks of concern to Congress in enacting section 12(d)(3). You also argue the potential for conflicts of interest and overreaching is mitigated due to the fact that HIT: (i) will remain internally managed and will not have an investment adviser within the meaning of section 2(a)(20) of the 1940 Act; (ii) will wholly own and control the Adviser Sub; and (iii) will have HIT’s Board oversee the advisory business conducted by the Adviser Sub. You note that HIT could provide advisory services directly and would be conducting these activities through the Adviser Sub for bona fide tax planning reasons. Finally, you state that this concern in the context of section 12(d)(3) was raised by Congress primarily with respect to an investment company’s ownership of a brokerage or underwriting business. [11]

CONCLUSION

Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under section 12(d)(3) of the 1940 Act against HIT if HIT organizes and acquires the securities issued by the Adviser Sub. This letter expresses our position on enforcement action only, and does not express any legal conclusion or interpretive conclusion on the issues presented. Because our position is based on the facts and representations in your letter, any different facts or representations may require a different conclusion. [12]

/s/ Jean E. Minarick

Jean E. Minarick Senior Counsel

[1] Initially, it is expected that Adviser Sub will provide investment advice to a private fund. It is intended that Adviser Sub will provide investment advice to additional clients over time and will register under the Advisers Act and thus trigger the prohibitions of section 12(d)(3) of the 1940 Act.

[2]

AFL-CIO Housing Investment Trust , SEC Staff No-Action Letter (Aug. 27, 1990); AFL-CIO Housing Investment Trust , SEC Staff No-Action Letter (Apr. 30, 1986); American Federation of Labor and Congress of Industrial Organizations Mortgage Investment Trust, et al., Investment Company Act Rel. Nos. 14129 (Sept. 5, 1984) (notice) and 14179 (Oct. 1, 1984) (order); American Federation of Labor and Congress of Industrial Organizations Pooled Investment Trust, Investment Company Act Rel. Nos. 12303 (Mar. 17, 1982) (notice) and 12387 (Apr. 21, 1982) (order).

[3] Investment management fee income received in connection with the provision of investment advisory services would not constitute Good RIC Income for HIT. Because the Adviser Sub would be a taxable entity under the Code, however, such fee income, if earned by the Adviser Sub and subsequently distributed to HIT, would constitute Good RIC Income for HIT.

[4] Such expenses may include: administration and operating expenses; investment research expenses; sales and marketing expenses; office space and general expenses; and direct expenses, including legal and audit fees, directors’ fees and taxes.

[5] Rule 12d3-1 under the 1940 Act provides a conditional exemption from this prohibition under certain circumstances, which are inapplicable in the case of the Adviser Sub.

[6]

See Acquisitions of Securities or Interests, Investment Company Act Rel. No. 3542 (Sept. 21, 1962).

[7] We have granted relief to internally managed closed-end funds in similar situations. Adams Diversified Equity Fund Inc., SEC Staff No-Action Letter (Apr. 30, 2015). The relevant conditions do not materially differ when applied to HIT, an internally managed open-end fund.

[8]

See Exemption for Acquisition by Registered Investment Companies of Securities Issued by Persons Engaged Directly or Indirectly in Securities Related Businesses, Investment Company Act Rel, No. 13725 (Jan. 17, 1984), at nn. 6-7 and accompanying text.

[9]

Id . at nn. 8-9 and accompanying text.

[10]

See Exemption of Acquisitions of Securities Issued by Persons Engaged in Securities Related Businesses, Investment Company Act Rel. No. 19204 (Jan. 4, 1993), at n. 10 and accompanying text.

[11]

Compare section 12(c)(2)(B) in H.R. 8935, 76th Cong. (3d Sess. 1940) at 30, S. 3580, 76th Cong. (3d Sess. 1940) at 30, and Investment Trusts and Investment Companies: Hearings on S. 3580 before the Subcomm. on Securities and Exch. of the S. Comm. on Banking and Currency, 76th Cong. (3d Sess. 1940), pt. 1, at 10 (“Senate Hearings”) with section 12(d)(3)(B) of the 1940 Act. See

also H.R. Rep. No. 76-2639, at 16 (1940); S. Rep. No. 76-1775, at 15-16 (1940); Senate Hearings, pt. 1, at 243. We note, however, that section 1(b)(2) of the 1940 Act stated that, when investment companies are operated, managed, or their portfolio securities are selected in the interest of investment advisers rather than in the interest of all classes of shareholders of such companies, the public interest and the interest of investors are adversely affected.

[12] The Division of Investment Management generally permits third parties to rely on no-action or interpretive letters to the extent that the third party’s facts and circumstances are substantially similar to those described in the underlying request for a no-action or interpretive letter. See Informal Guidance Program for Small Entities, Investment Company Act Rel. No. 22587 (Mar. 27, 1997), at n. 20. In light of the very fact-specific nature of HIT’s request, however, the position expressed in this letter applies only to HIT, and no other entity may rely on this position.

Incoming Letter

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/investment/noaction/2016/afl-cio-housing-investment-trust-080516-12d3.htm

---

700 13thStreet. NW 0 "1.202.654.6200 PeRKINSCOle Suite 600 G +1.202.654.6211 Washington, D.C. 20005-3960 PerkinsCoie.com August 4, 20 16 By Email Delivery Douglas J. Scheidt, Esq. Associate Director and Chief Counsel Division of Investment Management U.S. Securities and Exchange Commission 100 F Street, N .E. Washington, D.C. 20549 Re: AFL-CIO Housing Investment Trust Dear Mr. Scheidt:
We are writing on behalf of the AFL-CIO Housing Investment Trust ("HIT"), an internally-managed, open-end management investment company, registered under the Investment Company Act of 1940, as amended (the "Act"), to request assurance that the staff ofthe Division ofInvestment Management will not recommend enforcement action to the Securities and Exchange Commission ("SEC" or "Commission") against HIT under Section 12(d)(3) ofthe Act ifit organizes, and wholly owns and controls a subsidiary that will operate as an investment adviser ("Adviser Sub"), providing advisory services to a wide array of clients including U.S. and non-U.S. registered and unregistered investment companies, institutional investors, separate accounts and private clients (together, "Clients"), and to be registered under the Investment Advisers Act of 1940, as amended ("Advisers Act"). 1 BACKGROUND One ofthe earliest socially responsible investment funds, the HIT is a common law trust created under the laws ofthe District of Columbia, registered with the SEC as an open-end investment company under the Act.2 The HIT is an internally-managed fixed income fund. The HIT operates under and will continue to comply with the terms and conditions of certain regulatory relief. 3 The HIT's investment objective is 1 Initially, it is expected that Adviser Sub will provide investment advice to a private fund, excluded from registration under applicable sections of the Act, that invests in and provides financing for real estate pre-development activities. It is intended that Adviser Sub will provide investment advice to additional clients over time and will register under the Advisers Act under the terms ofthe Act and the rules thereunder. 2 See SEC File No. 811-03493. 3 The HIT operates under regulatory relief pursuant to which it is permitted to (i) value its assets and compute its net asset value on a monthly rather than daily basis and (ii) utilize the services of HIT employees for the distribution of its units of participation to certain enumerated institutional investors without registration as a broker-dealer under the Securities Exchange Act of 1934, as amended. In re AFL-CIO Housing Investment Trust, 1986 SEC No-Act. LEXIS 31 26 (Mar. 31 , 1986); In re AFL-CIO Housing Investment Trust, 1990 SEC No-Act. LEXIS 1222 (Aug. 27, 1990); In the Matter ofthe American 127935830.6 Perkins Coie LLP

to generate competitive risk-adjusted total rates of return for investors by investing in fixed-income investments, consisting primarily of multifamily and single family mortgage-backed securities and mortgage-backed obligations (collectively "Mortgage Securities"). Other important objectives of the HIT are to encourage the construction of housing and to facilitate employment for union members in the construction trades and related industries. Only "Labor Organizations" and "Eligible Pension Plans" are eligible to invest.4 To accomplish its objectives, the HIT focuses its investments in multifamily Mortgage Securities (including those that directly or indirectly finance new construction or rehabilitation of multifamily housing projects and healthcare facilities) and in Mortgage Securities backed by multifamily or single family loans. All on-site construction work financed through HIT investments is required to be performed by 100% union labor. The HIT's board oftrustees ("Board") and officers desire to expand the scope oftheir advisory activities beyond the management of HIT's portfolio to, among other things, allow the management of private funds, collective investment funds, and separate accounts that offer exposure to real estate related investments. However, unlike most investment advisers that are legally separate from the investment companies that they manage and therefore are able to provide advisory services to multiple funds and other clients, HIT is internally-managed, making it significantly more difficult to expand and diversify advisory services. HIT's Board and officers have determined that providing advisory services through an investment adviser entity that is wholly-owned and controlled by HIT would be the most beneficial to HIT's shareholders. Federation of Labor and Congress oflndustrial Organizations Pooled Investment Trust, Order pursuant to Section 6(c) ofthe Act exempting applicant from Sections 13(a), 15(a) and (b), 17(a)(3) and 22(c) and (c) of the Act and Rule 22c-1 thereunder (Apr. 21, 1982); In the Matter of the American Federation of Labor and Congress oflndustrial Organizations Mortgage Investment Trust and American Federation of Labor and Congress of Industrial Organizations Housing Investment Trust, Order pursuant to Section I 7(b) ofthe Act for exemption from the provisions of Section 17(a) of the Act (Oct. 1, 1984). 4 Pursuant to Section 5.2(a) of the HIT's Declaration of Trust, a "Labor Organization" means an organization of any kind, any agency, employee representation committee, group, association, or plan in which employees participate directly or through affiliated organizations, and which exists for the purpose, in whole or in part, of dealing directly or through affiliated organizations with employers concerning terms or conditions of employment; any employee benefit plan (such as a voluntary employee beneficiary association (VEBA)) that benefits the members of such an organization, or any other
organization that is, in the discretion of the Board of Trustees, affiliated with or sponsored by such an organization. Pursuant to Section 5.2(b) of the HIT's Declaration of Trust, an "Eligible Pension Plan" is defined as:
(a) a pension plan ("Pension Plan") constituting a qualified trust under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") which has beneficiaries who are represented by a Labor Organization and the assets of which are managed without the direct intervention or control ofthe plan's beneficiaries; (b) a governmental plan ("Governmental Plan") within the meaning of section 414(d) of the Code which has beneficiaries who are represented by a Labor Organization and the assets of which are managed without the direct intervention or control of the plan's beneficiaries; (c) a master trust, including, without limitation, a collective investment trust, holding the assets of more than one Pension Plan or more than one Governmental Plan, where at least one of the plans with assets in such master trust has beneficiaries who are represented by a Labor Organization; (d) a pension or retirement program of a non-United States jurisdiction that is similar to a "governmental plan" as defined in Title 29, Section 1002(32) of the United States Code; or (e) a non-United States employee benefit plan subject to regulation under applicable non-United States laws that are similar in purpose and intent to the Employee Retirement Income Security Act of 1974, as amended. 127935830.6

Among other benefits of this approach, it would allow HIT to use its current resources - e.g., its investment professionals - to increase HIT's gross revenue and income, while at the same time allow an expansion of advisory personnel and advisory activities. It also would allow HIT to shield itself from potential liabilities associated with such advisory activities to which HIT would be exposed were it to engage in those activities directly. 5 In addition, from a practical standpoint, the new investment advisory services that HIT would like to offer may be less marketable to potential new investors if the services were provided by a registered, open-end investment company. Moreover, as the advisory business grows, creating a separate subsidiary of HIT to provide advisory services and receive investment management fee income would avoid concerns that HIT might fail to satisfy the source-of-income requirement necessary to maintain its regulated investment company ("RIC") status under Subchapter M of the Internal Revenue Code of 1986, amended (the "Code").6 Adviser Sub will be organized as a limited liability company under Delaware law and elect to be treated as a taxable entity taxed at corporate tax rates. HIT proposes to obtain shareholder approval of its proposal to enter into the business of providing advisory services to Clients through Adviser Sub and will not proceed until such approval has been obtained, expected to be at a special meeting in the second quarter of2016. HIT will capitalize Adviser Sub with an amount of money and assets reasonably necessary to cover Adviser Sub's organizational expenses, and Adviser Sub will utilize certain employees and facilities of HIT to meet the investment advisory requirements of Clients. It is expected that, initially, a number ofthe officers and employees of HIT will hold similar positions as officers and employees of Adviser Sub. In light of the benefits the wholly-owned and controlled investment adviser subsidiary option offers to HIT's shareholders, we believe that HIT's ownership of Adviser Sub as an investment adviser registered under the Advisers Act raises none ofthe concerns underlying Section 12(d)(3) of the Act. 5 Acting as an investment adviser could expose an investment company to claims of fiduciary breach from its advisory clients and other potential liabilities arising from its advisory activities. 6 HIT has made an election to be treated for tax purposes as a RJC, and intends to continue to make such election in the future. As a RJC, HIT generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that it distributes to its shareholders as dividends. To maintain its RJC status, HIT must meet specified source-of-income and asset diversification requirements and distribute annually at least 90 percent of its net ordinary income and realized net short-term capital gains in excess ofrealized net long-term capital losses, if any. HIT will satisfy
the source-of-income test for purposes of qualifying as a RJC if it derives in each taxable year at least 90 percent of its gross income from dividends, interest payments with respect to certain securities, loans, gains from the sale of stock or other securities, net income from certain "qualified publicly traded partnerships," or other income derived with respect to its business of investing in such stocks or securities (referred to herein as "Good RJC Income"). Importantly, investment management fee income received in connection with the provision of investment advisory services, such as would be generated under an investment advisory contract, does not constitute Good RJC Income (and is hereinafter referred to as "Bad RJC Income"), although any dividends paid by Adviser Sub to HIT would constitute Good RJC Income. The utilization of Adviser Sub as a tax "blocker" entity in such a manner is a lawful method of tax planning under the Code. Therefore, in order for HIT to maintain its RJC status and also assure it can benefit from engaging in an investment advisory business, HIT believes it is in its best interests and those of its shareholders to operate that advisory business from Adviser Sub. 127935830.6

APPLICABLE LAW

Section 12( d)(3) of the Act
Section 12(d)(3) of the Act generally provides that it is unlawful for a registered investment company to
purchase or otherwise acquire any security issued by a person who is a broker, dealer, underwriter, or "an investment adviser of an investment company or an investment adviser registered under [the Advisers Act]." Section 12(d)(3)(A) and (B) ofthe Act carve out of this prohibition ownership by a registered investment company of a wholly-owned subsidiary "primarily engaged in the business of underwriting and distributing securities issued by other persons, selling securities to customers, or any one or more of such or related activities, and the gross income of such person normally is derived principally from such business or related activities [emphasis added]." HIT's ownership of Adviser Sub would be prohibited by Section 12(d)(3) unless the phrase "related activities" highlighted in the above quote encompasses Adviser Sub's investment advisory activities. We believe that both the policies underlying Section 12(d)(3) and the legislative history of Section 12(d)(3) support interpreting the phrase "related activities" in the carve-out of Section 12( d)(3) to include acting as investment adviser and registering as such under the Advisers Act. Policies Underlying Section 12(d)(3) The Commission has stated that Section 12(d)(3) was intended (i) "principally to prevent investment companies :from exposing their assets to the entrepreneurial risks of securities related businesses" and (ii) together with other provisions of the Act, "to prevent investment companies from being organized, operated, managed, or their portfolio securities selected in the interests of brokers, dealers, underwriters, and investment advisers, whether or not those entities are affiliated persons of the companies."7 Much of the concern regarding entrepreneurial risk stemmed from the fact that, in 1940 when Section 12( d)(3) was adopted, most securities-related businesses were organized as privately-held general partnerships. 8 If such a business failed, an investment company holding general partnership interests could have been held accountable for the general partnership's liabilities.9 7 See Exemption for Acquisition by Registered Investment Companies of Securities Issued by Persons Engaged Directly or Indirectly in Securities Related Businesses, Investment Company Act Release No. 13725, 29 S.E.C. Docket 793 (Jan. 17,
1984) (" 1984 Proposing Release"); Section 1 (b )(2) ofthe Act. See also Exemption ofAcquisitions of Securities Issued by
Persons Engaged in Securities-Related Businesses, Investment Company Act Release No. 19716, 54 S.E.C. Docket 2190 at 6 (Sept. 16, 1993); Exemption for Acquisitions of Securities Issued by Persons Engaged in Securities Relating Businesses, Investment Company Act Release No. 19204, 53 S.E.C. Docket 432 (Jan. 4, 1993). 8 See Exemption of Acquisitions of Securities Issued by Persons Engaged in Securities Related Businesses, Investment Company Act Release No. 19204, 53 S.E.C. Docket 432 (Jan. 4, 1993). 9 This same concern is reflected in Rule 12d3-l, adopted by the Commission in 1984, which provides relief from the prohibitions of Section 12(d)(3) by permitting limited ownership ofsecurities-related businesses, but maintains the Section 12(d)(3) prohibitions if such ownership is in the form of general partnership interests. See Rule 12d3-l(c)(l). Rule 12d3-l under the Act provides conditional exemption from the prohibitions of Section 12(d)(3) under certain circumstances, which are inapplicable with regard to Adviser Sub. 127935830.6

As with the Act in general, Section 12( d)(3) was also intended to prevent potential conflicts of interest and situations in which brokers, securities dealers and other financial intermediaries were in a position to dominate investment companies. 10 The Report on the Study of Investment Trusts and Investment Companies (the "Study"), prepared by the Commission prior to the passage of the Act, described several such concerns involving the overreaching of investment companies by their securities-related business affiliates. 11 For example, the Study described concerns that investment company sponsors, such as investment banks, were using affiliated investment companies as a repository for illiquid and distressed securities, 12 that investment banks were using the investment companies to acquire securities that were subject to the investment banks' underwriting endeavors in an effort to increase the banks' underwriting capacity, 13 and that an affiliated securities-related business could take advantage of its control and influence over an investment company by forcing the investment company to purchase or otherwise acquire the outstanding securities of the affiliated securities-related business, regardless ofits value, in an effort to prop up the value of the affiliate's stock. 14 The concerns raised in the Study, however, would not apply in the case of HIT's ownership ofAdviser Sub because most of the specific concerns identified by Congress relate to an investment compants ownership of a brokerage or underwriting business, rather than ownership of an advisory business. Legislative History Including investment advisory activities in the "related activities" carve-out in Section 12(d)(3) is supported by the focus in the legislative history related to this section exclusively on a registered investment company's ownership of brokerage and underwriting businesses. 16 This exclusive focus on 10 See 1984 Proposing Release. 11 See Report on the Study oflnvestment Trusts and Investment Companies, H.R. Doc. No. 707, 75th Cong., 3d Sess. (1938). 12 See id. , part I, at 76-77. 13 See id. 14 See id., part III, at 131. This concern is evident in Rule 12d3- l, which permits limited investment by a registered investment company in securities-related businesses, but specifically prohibits a registered investment company from acquiring securities of its investment adviser, or an affiliated person of its investment adviser. See Rule 12d3-l(c)(3). The Commission stated that the purpose of this prohibition was to prevent potential conflicts of interest, but recognized that such potential conflicts are also addressed under Sections 17(a) and l 7(d). See 1984 Proposing Release, n. 27 ("an investment company would be required to apply for exemptive relief from Section 17, as well as Section 12(d)(3) of the Act, when contemplating the purchase of such securities directly from, or as a joint participant with, the company's investment adviser, promoter, principal
underwriter or their affiliated persons"). 15 Compare Section 12(c)(2)(B), H.R. 8935, 76th Cong. (3d Sess. 1940) ("House Bill"), S. 3580, 76th Cong. (3d Sess. 1940) at 30 ( "Senate Bill"), and Investment Trusts and Investment Companies: Hearings on S. 3580 before the Subcomm. on Securities and Exch. Of the Senate Comm. On Banking and Currency, 76th Cong. (3d Sess. 1940), pt. 1, at 10 ("Senate Hearings") with Section 12(d)(3)(B) ofthe 1940 Act. See also H.R. Rep. No. 76-2639, at 16 (1940); S. Rep. No. 76-1775, at 15-16 ( 1940); Senate Hearings at 243. 16 The language in the original version of Section 12(d)(3)(B) (originally Section 12(c)(2)(B)) provided that a registered investment company could purchase interests in a wholly-owned subsidiary, if "the business of such person is confined to activities in which such registered company itself may lawfully engage," and a registered investment company itself was lawfully permitted to act as an investment adviser. See House Bill at 30; Senate Bill at 10; Senate Hearings at 10. In subsequent drafts of the provision, the language in the carve-out was changed to its current form, carving out persons "primarily engaged in the business of underwriting and distributing securities issued by other persons, selling securities to customers, or any one or more of such or related activities." H.R. 10065, 76th Cong., 3d Sess., at 56 (1940). There is no 127935830.6

brokerage and underwriting businesses is exemplified in statements of David Schenker, the principal draftsman of the bill, during Senate hearings in which he explained that the section prohibits an investment company from buying interests in "a brokerage firm, a distributing company, or an investment banking house. It goes further and says that if it is engaged in the underwriting business itself- if engaged in that business through a wholly-owned subsidiary- it is permissible to do so."17 This focus was also evident in the House Report which stated that the section "prohibits investment companies from acquiring securities of persons engaged in the brokerage business or in the business of underwriting and dealing in securities unless the investment company will, after such acquisition, own all outstanding securities of such person and the principal business of such company is that of underwriting securities." 18 Given this focus on brokerage and underwriting activities, it makes sense that the drafters of the provision wanted to clarify in the revised Section 12(d)(3) carve-out that registered investment companies could themselves engage in brokerage and underwriting activities and therefore also could do so through a wholly-owned subsidiary. Within this context, it also makes sense that the drafters would include in the revised language a new catch-all phrase, "related activities," to maintain the scope of the original language which, as noted, was intended to cover any activities performed by brokers, dealers, underwriters, or investment advisers in which a registered investment company could itself engage. For these reasons, the legislative history supports an interpretation of "related activities" in the Section 12(d)(3) carve-out that includes advisory activities. Commission Staff Precedents Over the past several years, the Staff has granted no-action relief in situations similar to those involved in this request. Although that relief has been granted to internally-managed closed-end funds, we do not believe that the relevant considerations differ when applied to an internally-managed open-end fund, such as the HIT. 19 Most recently, in Adams Diversified Equity Fund Inc. ("ADX")20, the Staff granted no .action relief to an internally managed, closed-end investment company registered under the Act to organize and wholly-own and control a subsidiary that would operate as an investment adviser. ADX provided representations designed to ensure that ADX's ownership and operation ofthe investment adviser subsidiary involved no conflicts of interest that would disadvantage AD X's shareholders or the investment adviser subsidiary's clients. In granting the requested relief, the Staff considered the legal analysis supporting the request, in particular, that (i) ownership of the adviser subsidiary raised none of testimony or explanation in the legislative history of Section 12(d)(3) to explain the changes to the carve-out language.

Nevertheless, it is reasonable to conclude that the revised language in the Section 12(d)(3) carve-out was intended to

encompass all activities that a registered investment company could itself engage in, and that the phrase "related activities" in

the revised language was intended to maintain an exclusion for wholly-owned subsidiaries that engaged solely in investment

advisory activities.
17 Senate Hearings at 243.
18 H.R. Rep. No. 76-2639, at 15-16 (1940). The exclusive focus on brokerage and underwriting activities was also evident in

the Senate Report accompanying a subsequent version of the bill. See S. Rep. No. 76-1775, at 16 (l 940)(referring only to

brokerage and underwriting activities in connection with Section 12).
19 The Adviser Sub will be valued at its fair value determined in good faith under consistently applied procedures adopted by

the HIT's Board, consistent with generally accepted accounting principles in the United States.
20 Adams Diversified Equity Fund Inc., SEC No-Action Letter (Apr. 30, 2015).

127935830.6

the concerns underlying section 12( d)(3) of the 1940 Act because the adviser subsidiary would be organized as a limited liability company, thus providing a level of insulation for the shareholders of ADX from the entrepreneurial risks of concern to Congress in enacting section 12(d)(3) and (ii) the potential for conflicts of interest and overreaching would be mitigated due to the fact that ADX would remain internally managed; would not have an investment adviser within the meaning of section 2(a)(20) of the 1940 Act; would wholly own and control the adviser subsidiary; and would have ADX's board annually review the investment advisory business conducted by the adviser subsidiary and consider whether such business should be continued. The Staff also referenced arguments in the request letter that ADX could provide advisory services directly, and that in the context of section 12(d)(3), Congress was primarily concerned with an investment company's ownership of a brokerage or underwriting business and not the ownership of an advisory business. In Main Street Capital Corporation,21 ("Main Street") the Staff granted no-action relief to an internally￾managed business development company that itself was operating as a registered investment adviser to unaffiliated third-party clients. In order to meet the source-of-income standards under the Code, and limit its income to Good RIC Income, Main Street sought to assign its third-party advisory agreement to its wholly-owned subsidiary, which had been managing Main Street's day-to-day operational and investment activities and that of its other subsidiaries but prior thereto had not entered into third-party advisory arrangements. In order for the subsidiary to accept the assignment of the third-party advisory agreement, it would have been required to register under the Advisers Act and thereby trigger the acquisition and ownership prohibitions of Section 12( d)(3 ). The Staff, in granting the relief requested, referenced the legal arguments supporting the request and, in particular, that (a) the entrepreneurial risks of concern to Congress in enacting the section are not present where an advisory subsidiary is a limited liability company, rather than a partnership of the type common in 1940, and (b) the conflicts ofinterest and reciprocal practices Congress sought to prevent in enacting the section are not present because (i) the subsidiary is wholly-owned and is overseen by the parent company's board of directors, (ii) the parent company could provide the advisory services directly and would be conducting the activities through the subsidiary for bona fide tax planning purposes, and (iii) Congress had raised these concerns primarily with respect to an investment company's ownership of a brokerage or underwriting business and not an advisory business. In ASA Limited ("ASA")22, the Staff granted no-action relief to an internally-managed, closed-end investment company that was registered under the Act by virtue
of an exemptive order under Section 7(d) ofthe Act and operated under a number of subsequent exemptive orders. 23 ASA sought to expand the scope of its advisory activities to offer investors additional investment options through a wholly-owned investment adviser subsidiary. In granting the requested relief, the Staff noted that ASA, as the proposed 21 Main Street Capital Corporation, SEC No-Action Letter (Nov. 7, 2013). 22 ASA Limited, SEC No-Action Letter (July 23, 2010).

23 ASA had been registered with the Commission under Section 7(d) of the Act since 1958. See Investment Company Act

Release Nos. 2739 (July 3, 1958) (notice) and 2756 (August 13, 1958) (order) (the "Original Order"). Initially organized as a

South African company, the Original Order has been amended on several occasions, including amendments permitting ASA to

reorganize as a Bermuda company in 2004. See e.g., Investment Company Act Release Nos. 26582 (Aug. 27, 2004) (notice)

and 26602 (Sept. 20, 2004) (order).

127935830.6

new investment adviser's parent entity, would continue to be subject to the Act and to oversight by the Commission and had, in addition, agreed to operate subject to a number of representations designed to limit conflicts of interest in the operation of the advisory subsidiary. The Staff also referenced arguments in the request letter that (a) establishing the subsidiary as a wholly-owned limited liability company would insulate the parent entity's shareholders by injecting a layer of liability protection from entrepreneurial risks from the subsidiary's advisory activities and (b) most of the specific concerns identified as underlying the Section 12( d)(3) restrictions relate to an investment company's ownership of a brokerage or underwriting business and not an advisory business. 24 ANALYSIS In light of the policies underlying Section 12(d)(3), its legislative history, and past Staff precedent, we believe that ownership by HIT of Adviser Sub should be permitted for the following reasons. HIT's proposal to enter into the advisory business through a wholly-owned and controlled subsidiary will benefit HIT's shareholders by allowing them to share in the profits from the new advisory business, by allowing that advisory business to be more marketable than if provided directly by HIT, by allowing HIT to add advisory personnel such as additional portfolio managers and investment analysts who will be available to provide advisory services both to HIT and to the Clients of Adviser Sub, and by limiting any potential liabilities arising from Adviser Sub's provision of advisory services. In addition, the potential for conflicts of interest or overreaching is mitigated due to the fact that HIT will remain internally managed and will wholly-own and control Adviser Sub. Moreover, the potential for conflicts in the context of Section 12( d)(3) was raised by Congress primarily with respect to an investment company's ownership of a brokerage or underwriting business, and not the ownership of an advisory business. HIT's ownership of a wholly-owned and controlled adviser subsidiary will not disadvantage any of Adviser Sub's Clients because Adviser Sub will be a fiduciary of its clients, will be subject to the anti-fraud provisions of the Advisers Act and the other federal securities laws and will be subject to and will comply with all ofthe duties and responsibilities required of a registered investment adviser under the Advisers Act. Also, it is expected that certain ofAdviser Sub's Clients will be represented by a board of directors or similar entity or person that will be responsible for protecting the Client's interests vis-a-vis Adviser Sub.25 Moreover, by providing advisory services through Adviser Sub, HIT ensures that with respect to such advisory services, shareholders of HIT will be protected from Bad RIC Income through bona fide tax planning and yet receive the benefit of the advisory arrangement. Finally, the Commission has previously granted similar
Section 12(d)(3) relief to permit registered, 24 The Staff also referred to the representations made by the Bermudian parent, such as annual board review and adoption of policies and procedures, as being designed to ensure the absence of conflicts of interest or reciprocal practices against which
Section 12(d)(3) was intended to guard. ASA Limited, SEC No-Action Letter (July 23, 2010). 25 For example, Adviser Sub's Clients are expected to comprise investment companies - whether registered or not - and
certain public pension plans or plans established under the Employee Retirement Income Security Act of 1974, constituting qualified trusts under Section 401 (a) of the Internal Revenue Code of 1986. 127935830.6

internally-managed, closed-end investment companies to establish wholly-owned investment adviser subsidiaries.26 CONDITIONS HIT proposes to organize and operate the Adviser Sub in accordance with the following representations, which are designed to ensure that HIT's ownership and operation of the Adviser Sub involve no conflicts of interest that would disadvantage HIT's shareholders or the Adviser Sub's clients27 :

1. HIT will wholly own and control the Adviser Sub. HIT will not have an investment adviser within the
   meaning of section 2(a)(20) of the Act. Only persons acting in their capacities as directors, officers or employees of HIT will provide advisory services to HIT.
2. The determination to enter into the advisory business through Adviser Sub has been made by a vote of
   at least a majority ofHIT's directors who are not "interested persons" of HIT as defined in section 2(a)(l 9) of the Act.
3. In addition to information communicated to shareholders in seeking shareholder approval of the
   proposed arrangement, in each of its annual reports to shareholders and in its prospectus, HIT will discuss the existence ofthe Adviser Sub and the provision by the Adviser Sub of outside advisory services as well as include an assessment of whatever risks, if any, are associated with the existence of the Adviser Sub and its provision of such services.
4. The Adviser Sub will not make any proprietary investment that HIT would be prohibited from making
   directly under HIT's investment objectives, policies and restrictions or under any applicable law.
5. In assessing compliance with the asset coverage requirements under Section 18 of the Act, HIT will
   deem the assets, liabilities and indebtedness of the Adviser Sub as its own.
6. The Board will review at least annually the investment advisory business of the Adviser Sub to
   determine whether such business should be continued and whether the benefits derived by HIT from the 26 See Main Street Capital Corporation, SEC No-Action Letter (Nov. 7, 2013), note 20, supra: ASA Limited, SEC No-Action Letter (July 23, 2010), note 22, supra. See also General American Investors Company, Inc., Investment Company Act Release Nos. 11345, 20 S.E.C. Docket 1457, (Sept. 10, 1980) (notice) and 11396, 21 S.E.C. Docket 195 (Oct. 10, 1980) (order). As was the case in the no-action letter precedents, because Adviser Sub would be a limited liability company, the proposed arrangement provides a level of insulation for the shareholders of HIT from the entrepreneurial risks of concern to Congress in enacting Section 12(d)(3). Adviser Sub will be wholly-owned and controlled by HIT, and the HIT Board will oversee the advisory business conducted by Adviser Sub. Moreover, because HIT will remain internally-managed and will not engage an external third-party investment adviser, there is no potential for conflicts of interest involving any such external third-party investment adviser. Finally, HIT could provide the advisory services directly and would be conducting the advisory activities through Advisor Sub for bona fide tax planning services. 27 The Staff recently issued a no-action letter to a registered closed-end investment company on substantially similar facts and with identical representations as to conditions. See Adams Diversified Equity Fund Inc., SEC No-Action Letter (Apr. 30, 2015), note 19, supra. 127935830.6

Adviser Sub's business warrant the continued ownership of the Adviser Sub and, if appropriate, approve (by a vote of at least a majority of its directors who are not "interested persons" as defined in the Act) at least annually such continuation. In determining whether the investment advisory business ofthe Adviser Sub should be continued and whether the benefits derived by HIT from the Adviser Sub's business warrant the continued ownership ofthe Adviser Sub, HIT's Board will take into consideration, among other things, the following: (a) the compensation of the officers of HIT and of the Adviser Sub; (b) all investments by and investment opportunities considered for HIT that relate to any investments by or investment opportunities considered for a client of the Adviser Sub; and ( c) the allocation of expenses associated with the provision of advisory services between HIT and the Adviser Sub.28 CONCLUSION For the reasons discussed above, we request the Staffs assurance that, if HIT organizes and acquires the securities issued by Adviser Sub, a wholly-owned and controlled subsidiary, under the circumstances described in this letter, the Staff will not recommend enforcement action to the Commission against HIT under Section 12(d)(3) of the Act. Please contact the undersigned at (202) 654-6254 with any questions regarding the relief requested

herein.

Very truly yours,
~ c Mary han cc: Nicholas Milano, AFL-CIO Housing Investment Trust

Kaitlin C. Bottock, Securities and Exchange Commission

Jean E. Minarick, Securities and Exchange Commission

Daniele Marchesani, Securities and Exchange Commission

28 Such expenses may include: administration and operating expenses; investment research expenses; sales and marketing expenses; office space and general expenses; and direct expenses, including legal and audit fees, directors' fees and taxes. 127935830.6