SEC Division of Investment Management staff letter: Caxton Corporation

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28 DEè 1994 p. Bli
Our Ref. No. 94-722-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Caxton Corporation

DIVISION OF INVESTMNT MAAGEMENT File No. 132 - 3

Your letter of November 3, 1994 requests assurance that we

would not recommend that the Commission take any enforcement

action under the Investment Company Act of 1940 ("1940 Act") if,

as more fully described in your letter, Troye Limited Partnership

("Troye") counts the defined contribution plan sponsored by

Caxton Corporation ("Caxton"), Troye's general partner, as a

single beneficial owner of Troye's securities for purposes of

section 3 (c) (1) of the 1940 Act.

According to your letter, Caxton employs approximately 120

people. The company has established the Caxton Corporation

Savings & Profit-Sharing Plan (the "Plan"), a participant-

directed defined contribution plan qualified under section 401 (a)

of the Internal Revenue Code and subj ect to the Employee

Retirement Income Security Act of 1974, as amended ("ERISA").

The Plan has four trustees, all of whom are senior officers of

Caxton. The Plan permits Caxton employees to invest in four

options: three investment companies registered under the 1940

Act and Troye. Caxton manages Troye' s portfolio, which is

invested primarily in securities and commodities. Troye has

assets of approximately $328 million, including approximately $20

million invested by Caxton employees through the Plan. Caxton

receives no management or incentive fees ~t th respect to that

portion of Troye' s assets contributed by Caxton employees.

Troye is not registered under the 1940 Act in reliance on
section 3 (c) (1) of the Act, which excepts from the definition of
investment company any issuer whose outstanding !ecurities are

beneficially owned by not more than 100 persons. As of

September 30, 1994, Troye had 43 limited partners, counting the

Caxton Plan and four other participant-directed defined

contribution plans as single beneficial owners.

In PanAgora Gro~p Trust (pub. avail. Apr. 29, 1994), the

staff concluded that, for purposes of determining compliance with the 100-person limit of section 3 (c) (1), each participant in a participant-directed defined contribution plan who chooses to

invest in a private investment company must be counted as an

individual beneficial owner of that company's securities. The

PanAgora position would require Troye to count each Caxton

employee who has elected to invest in Troye through the Caxton

Plan as a beneficial owner of Troye.

1 Section 3 (c) (1) also requires that the issuer is not making and does not propose to make a public offering of its

securities. You represent that Troye satisfies this requirement.

• 2
  The investment vehicle proposed in the PanAgora letter was

to be created as an investment vehicle for a variety of plans

unaffiliated with the sponsor or the investment vehicle. By

contrast, the Caxton Plan participants who invest in Troye are

investing in a partnership for which Caxton acts as sponsor,

general partner, and investment adviser, and with which Caxton

employees have substantial contact and familiarity. You

represent that many Caxton employees are involved in the

operation of Troye and that all Caxton employees have easy access

to those employees and to the four senior Caxton officers who

serve as the trustees of the Caxton Plan. Thus, you assert that

Caxton Plan participants have complete and accurate informtion

about Troye sufficient to make an informed investment decision, including information regarding Troye's investment objectives, portfolio, and performnce.

Based on the foregoing fact~ and representations, we would not recommend enforcement action to the Commission if, for purposes of section 3 (c) (1), Troye counts the ~axton Plan as a single beneficial owner of Troye's securities. Our position applies notwithstanding the addition of new employees under the Caxton Plan, provided that these employees will have the same access to senior management and pertinent informtion about Troye's operations and investments that current Caxton employees have, as described in your letter. Because our position is based upon the unique facts and

representations in your letter, any different facts or

circumstances would likely require a different conclusion.

Further, this response expresses the Division's position on

2 Our position is based specifically on the relationship between Caxton and Troye and the unusual degree of access Caxton employees have to informtion about Troye. This letter should not be read as reversing the interpretive position expressed in PanAqora or as agreeing with any other argument set forth in your letter. 3 Our conclusion applies only to the Caxton Plan and does

not extend to the other limited partners of Troye that are

participant-directed defined contribution plans. Simultaneously

with this response, the staff is issuing a letter providing until

December 31, 1995 for private investment companies meeting

certain conditions to come into compliance with the PanAqora

position. Until then, assuming Troye meets the specified

conditions, it can continue to count each of those other plans as

a single beneficial owner of its securities. No later than

December 31, 1995, the other plans must liquidate their

investments in Troye, or Troye must count each participant

invested in Troye through those Plans as a beneficial owner of

Troye for purposes of section 3 (c) (1) .

• 3
  enforcement action only and does not purport to express any legal

conclusions on the issues presented.

B~.~~l~
Senior Counsel

ROSENMAN & COLIN
S?S MADISON AVENUE. NEW YORK. NY 10022-2S8S

TE:LE:PHONE: (2'21 lJ.o.eeoo SÀ"UE:L I. ROSE:"'...... (iees -'Sl73) CÀSLE: RoeOKÀV NE:WVORK RÀL"H ... COLIN (leCO-ISlSS) TE:LE:eOPIER (212) lJ.0-e776

(112) Sl3S-067lJ WÀSHINGTON O....,CE TELE" .27571 ROSCOL (ITT) 1300 18~" STREET. N. W. W"SHINGTON, O. C. 10036 871&20 RC"LC NVK (W. u.) TELEPHONE: CIOII .83-7177 EDWAJID H. F'LEISCHMAN TEL (212) 8.0 ee.oo

Section 3 (c) (1)

ACT :reA of. 11'10
SEION ~G.)(i) Barbara Green, Esq.

Deputy Director RULE
Division of Investment Management

450 5th street, N. W.

Washington, D. C. 20549 i~ii~BILIT 1)-cc.;, ~t-jjJL Re: Caxton Corporation §401 (k) Plan - Troye Limited Partnership

Dear Ms. Green:

On behalf of our client, Caxton Corporation ("Caxton"), we

hereby request the staff of the Division of Investment Management

to concur in our view that the position taken by the Division in

the no action letter concerning PanAaora GrouD Trust (Apr. 29,

1994) should not preclude continued investment in Troye Limited

Partnership ("Troye") by the Caxton Corporation Savings & Profit-

Sharing Plan (the "Caxton Plan"), a participant-directed section

401 (k) plan.

In the PanAqora letter, the Division took the position that,

if a qualified plan which invested in the group trust thereunder

consideration allowed plan participants to allocate their

individual account balances to the group trust and/or to allocate

their investments in the group trust among the various investment

options provided by the group trust through its sub-trusts, each

individual participant who exercised such choice would be

considered to be a beneficial owner of the group trust for the

purposes of calculating the 100-beneficial-owner limit imposed by

Section 3 (c) (1) of the Investment Company Act as a condition of
exclusion from "investment company" status and regulation under

such Act. As you know, many people interpreted the PanAgora

letter as a reversal of the Division's prior published position

on this issue taken in Intel Corporation (Nov. 18, 1992).

In a subsequent letter to Edward Fleischman of this Firm,

the staff delayed the effective date of the interpretive position

taken in the PanAgora letter until January 1, 1995. Edward H.

Fleischman (June 30, 1994). The staff also requested that

interested parties submit information in writing which would aid

the Division in clarifying its position concerning the

interaction of participant choices of investments in qualified

plans and the Section 3 (c) (1) exclusion from the definition of

"investment company". Specifically, the staff requested that any

request for clarification should distinguish the fact pattern

submitted from the fact pattern described in the PanAqora letter.

The purpose of this letter is to request that the staff

interpret its position in the PanAgora letter in a manner that

will permit Troye to continue to count the Caxton Plan as a single beneficial owner for purposes of Section 3 (c) (1), even though Troye includes investments by the CaxtonPlan pursuant to participant direction. We believe that the factors set forth

below distinguish the fact situation which exists at Caxton/Troye

from the fact situation described in the PanAgora letter.

Description of Caxton/Trove

At September 30, 1994, Caxton employed approximately 120

people. Caxton is the general partner of Troye, a Connecticut

limi ted partnership which commenced operations in February 1983.

The business of Troye is investing in securities and commodities.

Caxton has sole discretion over, and responsibility for, Troye's

transactions. Caxton itself makes the majority of the trading

decisions on behalf of Troye and, in addition, exercises

discretionary authority to allocate funds to independent

discretionary traders. At September 30, 1994, the assets of

Troye exceeded $328 million.

Troye structured its operations and admitted limited

partners in reliance upon the exclusion from the definition of

"investment company" permitted by Section 3 (c) (1) of the Investment Company Act as interpreted prior to the issuance of

the PanAgora letter. Limi ted partnership interests in Troye were

offered in transactions which are exempt from registration under

the Securities Act of 1933. Troye has not made, is not making

and does not propose to make a public offering of its securities. After giving effect to the attribution principles which must be used for the purposes of Section 3 (c) (1) of the Investment Company Act (other than any attribution arising from the

application of the PanAaora letter), Troye has fewer than 100

beneficial owners of its securities.

The Caxton Plan was adopted on or about April 1, 1983 and is

intended to be a qualified plan within the contemplation of

section 401(a) of the Internal Revenue Code of 1986, as amended

(the "Code"). The Caxton Plan is subject to the provisions of

the Employee Retirement Income Security Act of 1974 ("ERISA").

Four senior officers of Caxton (Caxton's President, its

Controller, its Treasurer and its General Counsel), all of whom

are sophisticated and knowledgeable in investment matters and all

of whom are intimately involved with the affairs of Troye, are

the trustees of the Caxton Plan. Troye is one of four vehicles

that are made available to participants in the Caxton Plan for

investment of their account balances thereunder. These vehicles

were all selected by the trustees of the Caxton Plan in the

exercise of their ERISA fiduciary duty. While the trustees of

the Caxton Plan allow employees to allocate portions of their

assets in the Caxton Plan to Troye, neither Caxton nor any of the

trustees recommends that any employee elect to make such an

allocation. Furthermore, in the case of the Caxton Plan, Caxton

has waived the management and incentive fees that Caxton receives

with respect to the investments by other limited partners in

Troye.
At December 31, 1993, the assets of the Caxton Plan

aggregated $19,759,141 and 118 individuals were participants

therein. As pointed out above, the Caxton Plan provides each

participant with a number of choices concerning the investment of

his or her account balance thereunder and is intended to be a

plan described in section 404 (c) of ERISA. The current investment choices available to participants in the Caxton Plan

are the Fidelity Daily Income Trust, the Fidelity Equity Income

Fund, the Fidelity Intermediate Bond Fund and the Troye Limited Partnership. At September 30, 1994, Troye had 43 limited partners. Of

these limited partners, 5 were qualified plans all of which

allowed their participants to choose whether or not to have all

or a portion of their respective account balances invested in

Troye. The aggregate amount of limited partnership interests in

Troye owned by all qualified plans at September 30, 1994 was

approximately $31 million, or approximately 9.5' of Troye. The

Caxton Plan owned approximately 5.1' of Troye and no other plan

owned more than 2.4' of Troye. Since the ownership of Troye by

qualified plans is in the aggregate less than 25', a plan which

invests in Troye is deemed, for the purposes of applying the

fiduciary responsibility provisions of ERISA, to own its limited

partnership interest in Troye but is not deemed to own a

undivided interest in the underlying assets of Troye. Department

of Labor Regulation 2510.3-101. For the purposes of ERISA,

therefore, the assets of Troye that are attributable to the plan

accounts of the individuals who direct their assets into Troye

are not "plan assets" and are not subject to the responsibilities

and prohibitions imposed upon fiduciaries of employee benefit

plans by the provisions of Part 4 of Title I of ERISA.

Distinctions from PanAaora

For the reasons set forth below, we believe that the

Caxton/Troye fact pattern differs markedly from the PanAgora situation.

1. In the Caxton/Troye situation, a portion of the assets
   of the 401 (k) plan of the general partner of an investment

partnership has been invested for a numer of years in such

partnership. At all times, significantly less than 25 percent of

the assets of Troye were attributaple to investments by plans.

In contrast, the PanAgora si tuation involved a newly formed group

trust whose target market was unaffiliated participant-directed

plans. In fact, by definition, 100% of the assets of a group

trust like the PanAgora vehicle, but unlike Troye, must be

attributable to investment by qualified plans.

2. The investment vehicle proposed in the PanAaora letter

was to be created as an investment vehicle for a variety of plans

unrelated to the sponsor of such investment and to each other.

By contrast, the Caxton employees who participate in the Caxton

Plan invest in a partnership for which Caxton acts as sponsor,

general partner and investment advisor and with which the

employees of Caxton have substantial contact and familiarity.

The Division has previously expressed concern that participants

in many defined contribution plans do not receive sufficient

information to make an informed investment decision concerning

direction of their plan account balances. In the Caxton/Troye

situation, many Caxton Plan participants are intimately involved

in the operation of Troye and all personnel have access to the

trustees of the Caxton Plan. Thus, informational concerns in the

Caxton/Troye situation are significantly different from those in

the PanAqora situation, where unaffiliated plans were involved

and personal contact was missing.

3. The group trust described in the PanAaora letter was
   intended to be a so-called plan asset entity wi thin the contemplation of the Department of Labor regulations. Troye is

not a plan asset entity since ownership of Troye by benefit plans

is not considered to be "significant" under such regulations.

Thus, the Department of Labor, the agency which is charged by law

with regulating the investment activities of employee benefit

plans, has determined that, in the case of Troye and other

similarly situated entities, no regulation based upon the plan

asset "look through" is appropriate or necessary. The Commission

stated that they are

currently engaged in a j oint study concerning the relationship of

so-called 404 (c) plans and the various securities laws. At the

least it would appear to be premature to preclude participation

by the Caxton Plan in Troye, and to require redemption of the

interests in Troye held for years by the Caxton Plan, before the

completion of that j oint study, before any resulting

determination that the principal task of regulation in situations

such as Troye's should lie with the Commission, and before the

effective date of any required enabling legislation.

and the Department of Labor have publicly

4. The investment in Troye by the Caxton Plan represents

substantially less than 10% of Troye. Congress, in enacting

Section 3 (c) (1) (A), established a 10% "bright line" test in order
to require a look-through for the purposes of the Section 3 (c) (1) exclusion. Where a plan like the Caxton Plan is affiliated with a Section 3 (c) (1) entity that does not hold plan assets, we believe that the traditional application of Section 3 (c) (1) to such plans, as set forth in Intel, is more appropriate than the

complete "look through" approach of PanAgora.

5. In the PanAqora letter, the commingled investment

vehicle under consideration was a new vehicle that had no

investors or investments. Thus, in the PanAqora situation, there

was no hardship imposed upon either an existing issuer or its

existing investors. By contrast, in the Caxton/Troye situation

over one half of Caxton's employees have elected to place

portions of their Caxton Plan account balances in Troye. All of

these employees have participated in Troye through this election

for at least three years, and in many cases for a longer period

of time. Moreover, as mentioned above, in the case of the Caxton

Plan, Caxton has waived the management and incentive fees it receives from other limited partners of Troye. Therefore, the application of the PanAaora letter in the Troye/Caxton situation

will impose a substantial hardship by requiring Caxton' s

employees to ignore (and withdraw from) the otherwise available

investment vehicle with which they and the trustees are most

directly involved and which is being made available free of

charge.
6. Application of the PanAqora position specifically to

Caxton/Troye would create the following anomalous result.

CUrrently, the Caxton Plan is a limited partner of Troye, for

which Caxton acts as general partner and trading adviser.

Instead, Caxton could manage the portions of the Caxton Plan as a

separate managed account, without registering as an investment

adviser and without the securities laws mandating any addi tional

disclosure or providing any greater protections to the Caxton

Plan or its participants. In fact, the Caxton Plan and its

participants currently have greater protection and benefits by

virtue of having limited liability as a limited partner in Troye

and the ability to participate in a portfolio of investments made

available by Troye' s size but which would not be possible for a

single smaller managed account.

7. Many qualified plans are undertaking investment

activities which cannot be accomplished through an investment

company. For instance, the Investment Company Act restricts the

ability of a registered investment company to purchase securities

on margin, to effect short sales, to engage in futures

transactions and to engage in certain option strategies. In

contrast, ERISA permits and many plans do, trade on margin,

effect short sales, buy and sell options and trade futures

wi thout being subj ect to such restrictions. Applying the

PanAgora letter to the Caxton/Troye situation would effectively

preclude the participants from participating in these types of

investments.
Because plan fiduciaries, even in a plan which provides for

participant direction, have an overriding responsibility to

examine, approve and moni tor ~he investment al ternati ves made available, investment by a person in a private investment company

throuqh a plan provides that individual with more protection than

he or she would have if that individual was able to, and did,

invest individually. Thus, the application of the PanAgora posi tion to caxton/Troye would frustrate the purposes of section 404 (c) of ERISA and would deprive Caxton's employees of the ability, with an overlay of ERISA protection, to participate in

the nontraditional but modern and ERISA-complying investments

engaged in by Troye at no cost to the employee.

Conclusion
On the basis of the foregoing, we advise you of our opinion that the Division's position in the PanAqora letter should not

preclude continued investment in Troye by the Caxton Plan, and we

request that the Division advise us whether it concurs in our

conclusion.
This is an extremely important issue for the employees of

Caxton. We shall be pleased to discuss this issue in greater

detail at your convenience and to submit any further information

that you might require. since the effective date of the PanAgora

letter is now January 1, 1995, we would appreciate your prompt

consideration of this letter.

--

Thank you for your consideration in this matter.

Very truly yours,

ROSENM & COLIN r,
¿i ..-~..rI /:; .

By: .?iftY¿ l-~((~).1 C.;ÚtflO-.
A Partner cc: Scott Bernstein, Esq.