SEC Division of Investment Management staff letter: Colonial Trust I et al.

OCT 2 0 192J

Our Ref. No. 95-CC-480
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Colonial Trust I et al. DIVISION OF INVESTMNT MAAGEMENT File No. 801-2019 Your letter of September 21, 1995 requests that the staff

confirm your view that Ms. Lora Collins, a trustee of several

registered investment companies advised by Colonial Management

Associates, Inc., ("Colonial Management"), i will not be

considered an "interested person" within the meaning of section

2 (a) (19) of the Investment Company Act of 1940 (the "Act") of those investment companies, Colonial Management, Colonial

Investment Services, Inc. ("CISI"), or any other investment

company of which she may serve as trustee in the future that has

Colonial Management a~ its investment adviser or CIS I as its

principal underwriter (together" the Colonial Companies") if Ms.

Collins rej oins as an employee the law firm of Kramer, Levin,

Naftalis, Nessen, Kamin & Frankel ("Kramer Levin"). You also

request our assurance that we would not recommend to the

Commission enforcement action against the Colonial Companies

based on Ms. Collins' status under section 2 (a) (19) . Ms. Collins joined Kramer Levin as an associate in September

1986, five years after she first became a trustee of some of the

investment companies in the Colonial Companies. She resigned her

employment with Kramer Levin in March 1995, and currently works

as an independent contractor. While employed with Kramer Levin,

she practiced, and if reinstated will continue to practice, in

the employee benefits section of the firm's New York office.

Mr. Meyer Eisenberg joined Kramer Levin as counsel to the

financial services group in the firm's Washington, D. C., office

in September 1994. Prior to joining Kramer Levin, Mr. Eisenberg

provided legal services to Colonial Management within the last

two fiscal years of investment companies in the Colonial

companies.3 Since joining Kramer Levin, however, Mr. Eisenberg

lyOU state these investment companies are Colonial Trust I,

Colonial Trust II, Colonial Trust III, Colonial Trust IV,

Colonial Trust V, Colonial Trust VI" Colonial Trust VII, Colonial

High Income Municipal Trust, Colonial InterMarket Income Trust I,

Colonial Intermediate High Income Fund, Colonial Investment Grade

Municipal Trust, and Colonial Municipal Income Trust. Ms.

Collins does not serve as a trustee or director of any other

registered investment company or business development company in

the Colonial Companies.

2you state that CISI currently serves as the principal

underwriter for each investment company that is an open-end

management investment company.

3At the time Mr. Eisenberg provided legal services to the

Colonial Management, it also served as the principal underwriter

for the investment companies that were open-end management

• 2
  has not provided any legal services to Colonial Management or any

other member of the Colonial Companies. In addition, other than

Mr. Eisenberg, no attorney at Kramer Levin has ever provided

legal services to the Colonial Companies. The Colonial Companies

will not retain Mr. Eisenberg or any other attorney at Kramer

Levin to provide legal services while Ms. Collins remains a

trustee of any of the investment companies.

Section 2 (a) (19) (A) (iii) of the Act provides that

"interested person" of an investment company means "any

interested person of any investment adviser of or principal

underwriter for such company." Section 2 (a) (19) (B) (iv) in turn defines "interested person" of an investment adviser of or

principal underwriter for any investment company, to include "any

person or partner or employee of any person who at any time since

the beginning of the last two completed fiscal years of such

investment company has acted as legal counsel for such investment

adviser or principal underwriter." Because Mr. Eisenberg has

acted as legal counsel to Colonial Management within the last two

completed fiscal years, you are concerned that Ms. Collins could

be deemed to be an "interested person" of the Colonial Companies

if she were deemed to be an "employee" of Mr. Eisenberg. This

concern led to Ms. Collins' resignation from the firm.

The term "employee" is not defined in the Act. The staff,

however, has issued no-action letters relating to the definition

of employee (as that term is used in section 2 (a) (3) (D) of the Act) in determining whether a director of an investment company

is an affiliated person of any registered broker-dealer and thus

an interested person within the meaning of se~tions

2 (a) (19) (A) (v) and 2 (a) (19) (B) (v) of the Act. The parties requesting no-action relief maintained that a director was not an

employee of a broker-dealer because the director's relationship

with the broker-dealer did not meet the four elements generally

considered when determining whether an employer/employee

investment companies. These services were subsequently

transferred to CISI. Although Mr. Eisenberg has never performed

legal services for CISI, you have requested relief with respect

to CISI to address any possibility that Mr. Eisenberg may be

deemed to have performed such services for CISI as a result of

CISI's succeeding Colonial Management as principal underwriter.

4Section 2 (a) (3) (D) defines "affiliated person" of another person to mean "any officer, director, partner, copartner, or

employee of such other person." Sections 2 (a) (19) (A) (v) and 2 (a) (19) (B) (v) define "interested person" of another person, when used with respect to an investment company, an investment

adviser, or a principal underwriter, to include any affiliated person of a registered broker or dealer.

• 3
  relationship exists at common law. 5 These elements include the

selection and engagement of the employee; the payment of wages;

the power of dismis~al; and the power of control of the

employee's conduct.
Using this analysis, you maintain that Ms. Collins should

not be considered to be an employee of Mr. Eisenberg. In

particular, you represent that Mr. Eisenberg has not had, and

will not have in the future, any decision making authority

relating to (1) the terms of Ms. Collins' employment, including

her hiring, compensation, retention and promotion, (2) the

assignment and evaluation of Ms. Collins' work, and (3) the 7 Therefore manner in which Ms. Collins' work is to be performed.

you conclude that, if reinstated, Ms. Collins would not be an

employee of Mr. Eisenberg and thus would not be an interested

person of the Colonial Companies.

We agree. Accordingly, if Ms. Collins reJ oins Kramer Levis

as an employee, we would not recommend to the Commission

enforcement action against the Colonial Companies based on her status thereafter under section 2 (a) (19) by virtue of Mr. Eisenberg's prior legal representation of Colonial Management.

This response is based on the representations made to the

Division in your letter and subsequent phone conversations. Any

different facts or circumstances might require a different

conclusion.
(¡ Ij ." I~., ¡l _. t'L~ . f.~ ~~ 1.1 '- i;-Lj~ Rochelle Kauffman Plesset

Senior Counsel

SLoomis-Sayles Mutual Fund, Inc. (pub. avail. Oct. 27,

1971); Merrill Lynch (pub. avail. July 20,1981).

6See 53 Am. Jur. 2d, Master and Servant, § 2.

7 See also telephone conversation of October 6, 1995 between

Rochelle Kauffman Plesset and David C. Sullivan.

Investment Co. Act - Sect. 2 (a) (19) ROPES & GRAY

ONE INTERNATIONAL PLACE

BOSTON, MASSACHUSETTS 02110-2624

1001 PENNSYLVANIA AVENUE, N. W. 30 KENNEDY PLAZA (617) 951-7000 SUITE 1200 SOUTH PROVIDENCE, R. i. 02903 TELECOPIER: (617) 951-7050 WASHINGTON, D. C. 20004 (401) 455 -4400 (202) 626 - 3900 TELECOPIER: (401) 455 -4401 TELECOPIER: (202) 626-3961 September 21, 1995

N: :il.\J t-Ç"k.It~, CC_i' ~'\ k: Jack Murphy, Chief Counsel 8EN 2. ( o.)C l "" ) Office of Chief Counsel

Division of Investment Management RUL

Securities and Exchange Commission ~ +.- Washington, D. C. 20549 .A.~11 Dc .20 ,ie¡ 'l.5 Re: Request for No-Action Relief from the Provisions of Section 2 (a) (19) of the Investment Company Act of 1940 (the "Act") Dear Mr. Murphy:

On behalf of Colonial Trust I (" CT1 "), Colonial Trust I I

( "CT2 "), Colonial Trust I (" CT3 "), Colonial Trust IV (" CT4 ") ,

Colonial Trust V (" CT5"), Colonial Trust VI (" CT6"), Colonial

Trust VII ("CT7") (together the "Open-End Trusts") i Colonial High

. Income Municipal Trust, Colonial InterMarket Income Trust I,

Colonial Intermediate High Income Fund, Colonial Investment Grade

Municipal Trust, Colonial Municipal Income Trust (together the

"Closed-End Trusts" and together with the Open-End Trusts, the

"Trusts") and any now or future created series of the Trusts i Colonial Management Associates, Inc. (the "Manager") ¡and

Colonial Investment Services, Inc. (" CISI") (all of the foregoing being referred to as the "Applicants"), we request (i) the advice

of the staff of the Division of Investment Management (the

"Staff") that Ms. Lora Collins, a trustee of each of the Trusts,

will not, under the circumstances described below, constitute an

"interested person" of the Applicants within the meaning of

Section 2 (a) (19) of the Act if she rejoins as an employee the law

firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel ("Kramer

Levin") and (ii) your confirmation that the Staff will not

recommend that the Securities and Exchange Commission (the

30744.01

ROPES & GRAY

"Commission") take any enforcement action against the Applicants

based on Ms. Collins' status under Section 2 (a) (19) . THE APPLICANTS

Each Open-End Trust is an open-end management investment

company organized as a business trust under the laws of The

Commonwealth of Massachusetts. Currently, CT1 and CT2 each

consist of three series of shares i CT3 consists of eight series

of shares i CT4 consists of seven series of shares i CT5 consists

of nine series of shares i CT6 consists of two series of shares i

and CT7 consists of a single series of shares. Each Closed-End

Trust is a closed-end management investment company organized as

a business trust under the laws of The Commonwealth of

Massachusetts and each consists of a single series of shares. i

The Manager, a registered investment adviser, serves as

investment adviser for each existing Fund with the exception of

the Colonial Global Utilities Fund ("CGUF") and the Colonial

Newport Tiger Fund ("CNTF"). The Manager serves as administrator

for CGUF and CNTF. CISI, a registered broker-dealer, serves as

the principal underwriter of each of the Funds in the Open-End

Trusts.
STATUS OF MS. COLLINS WITH RESPECT TO THE APPLICANTS

Ms. Collins is a trustee of each of the Trusts. She joined Kramer Levin as an associate in September of 1986, more than five years after she first became a trustee of certain of the Trusts. She resigned her employment with Kramer Levin in March of 1995, and currently does work for the firm as an independent contractor. On September 1, 1994, Meyer Eisenberg joined Kramer Levin,

taking "counsel" status at the firm. Prior to his employment

with Kramer Levin, and since the beginning of the last two

completed fiscal years of each Fund, Mr. Eisenberg provided legal

services to the Manager (which at the time also served as the

As used herein, "Fund" refers to each series of the Trusts that

consist of more than one series of shares, and to each Trust that consists

of a single series of shares.

30744.01 -2

ROPES & GRAY

principal underwriter of the Open-end Trusts) while a partner

successively at two other law firms.
Upon learning of Mr. Eisenberg's affiliation with Kramer

Levin, the Applicants became concerned that such affiliation

might bring Ms. Collins within the definition of "interested

person" in Section 2 (a) (19) of the Act with respect to certain of

the Applicants. Ms. Collins resigned her employment with Kramer

Levin prior to the acquisition of The Colonial Group,

Inc., the Manager's parent, by Liberty Financial Companies, Inc.,

to help ensure that the Applicants could rely on the safe harbor

provided by Section 15 (f) of the Act.2 Based on the following discussion, and notwithstanding Mr.

Eisenberg i s prior representation of the Manager, the Applicants believe that Ms. Collins will not be an interested person of any

Applicant if she rej oins Kramer Levin as an employee. We request

your concurrence with this position and your confirmation that

the Staff will not recommend enforcement action against the

Applicants based on Ms. Collins' status under Section 2 (a) (19) if she rej oins Kramer Levin as an employee.

2 Section 15 (f) of the Act permits an investment adviser to realize a profit upon the sale or transfer of its advisory business without incurring

liability to an investment company client or its shareholders provided

certain conditions are met. Section 15 (f) (1) (A) requires, in part, that for three years following the sale of securities or other interest in an

investment adviser which results in an assignment of its advisory contract

with a registered investment company, at least 75% of the board of

directors (or trustees) of the investment company be persons who are not

"interested persons" of the investment adviser. If Ms. Collins rej oins

Kramer Levin and is deemed to be an "interested person," the Applicants

will remain in compliance with the board composition requirements of

Section 15 (f) (1) (A) of the Act in that at least 75% of the Boards will
consist of trustees who are not "interested persons." However, if certain

of the trustees who are disinterested become interested, or leave the

Boards and are not immediately replaced, the Applicants' ability to rely on

~ the Section 15 (f) safe harbor may depend on Ms. Collins' status.
30744.01 -3

ROPES & GRAY

DISCUSSION
Section 2 (a) (19) of the Act provides in relevant part that:

"Interested Person" of another person means

(B) when used with respect to an

investment adviser of or principal

underwriter for any investment company .

(iv) any person or partner or employee of any

person who at any time since the beginning of

the last two completed fiscal years of such

investment company has acted as legal counsel

for such investment adviser or principal

underwriter . (Emphasis added) .

With the exception of Mr. Eisenberg, neither Kramer Levin

nor any attorney at the firm (including Ms. Collins) has provided

legal services of any kind to the Applicants or any affiliate of

the Applicants.3 The Applicants will not retain Mr. Eisenberg,

Ms. Collins or Kramer Levin to participate in any legal matters

relating to the Trusts, the Manager or CISI.

Accordingly, if Ms. Collins rej oins Kramer Levin, she would

be an II interested person II of the Manager and the Funds4 only if she were deemed to be an II employee of" Mr. Eisenberg, a person

who acted as legal counsel to the Manager wi thin the last two

completed fiscal years of the Funds. 5

3 In addition, neither Ms. Collins nor Kramer Levin has at any time had

a "material business or professional relationship" with the Applicants or

with the principal executive officer or any controlling person of the

Applicants or with any other investment company for which the Manager acts

as investment adviser or CIS
I acts as principal underwriter within the

meaning of Sections 2 (a) (19) (A) (vi) and 2 (a) (19) (B) (vi) of the Act. 4 If Ms. Collins were deemed interested with respect to the Manager she

would also be interested with respect to the Funds pursuant to Section

2 (a) (19) (A) (iii) of the Act which provides, in part, that "interested person" of another, when used with respect to an investment company, means

"any interested person of any investment adviser of . . . such company."

5 For the sake of clarity, if Ms. Collins rejoins Kramer Levin the

threshold issue would not be whether Ms. Collins is an employee of Kramer

Levin (clearly she would be) or of the Funds or the Manager (clearly she is

30744.01 -4

ROPES & GRAY

Neither the federal courts nor the Commission has defined

the term II employee " in the context of Sections 2 (a) (19) (A) (iv) or 2(a) (19) (B) (iv) of the Act. Further, the Commission has not addressed whether, and under what circumstances, an associate at

a law firm will be considered an "employee of" an attorney with

IIcounsel" status at the firm.

The Commission has issued several no-action letters relating

" in Sections 2 (a) (19) (A) (v) and 2 (a) (19) (B) (v) of the Act (relating to broker-dealers). These to the definition of II employee letters considered whether a director of a fund is an "employee"

of a broker-dealer for purposes of the Act. ~ Loomis-Sayles

Mutual Fund. Inc., 1971 SEC No-Act. LEXIS 3642 (October 27,

1971) ("Loomis-Sayles") i Merrill-Lynch Accumulation Pro9rams,
1977 SEC No-Act. LEXIS 2841 (November 11, 1977).

In Loomis-Sayles, the party requesting no-action relief

argued that the legislative history of Section 2 (a)i (19) indicates that the term "employee" should be given its common law meaning

for purposes of the Section. The Commission staff did not

disagree with this interpretation and granted no-action relief,

suggesting that the common law meaning of "employee" may apply

for purposes of Section 2 (a) (19) .
At common law, four elements are generally considered in determining whether an employer/employee relationship exists. These are:

1. The selection and engagement of the employee i

2. The payment of wages i

3. The power of dismissali and,

4. The power of control of the employee's conduct.

~ 53 Am. Jur. 2d, Master and Servant, § 2.

Having "counsel" status at Kramer Levin, Mr. Eisenberg does

not share in the equity of the firm. He lacks the direct

not), but whether she might be considered an "employee of" Mr. Eisenberg, a

person who acted as legal counsel to the Manager within the last two

completed fiscal years of the Funds.

3074464.01 -5

ROPES & GRAY

authority to hire or dismiss employees, and neither sets nor

distributes compensation at the firm. As such, the relationship

between Mr. Eisenberg and Ms. Collins (if she were to rejoin

Kramer Levin as an employee) would clearly fail to satisfy the

first three common law elements.

The essential and conclusive element of the

employer/employee relationship at common law is the employer's

right of control over the employee's conduct, or: "the right of

one person, the (employer), to order and control another, the

Iemployee), in the performance of work by the latter, and the

right to direct the manner in which work shall be done." l.

This so-called "control test" has been considered by the

Commission in distinguishing employees of a company from

independent contractors for purposes of Section 2 (a) (19). The

test requires that control extend to the "details and method of

performing the work." ~ Merrill Lynch, 1981 No-Act. LEXIS 3783

(July 20, 1981).

The circumstances surrounding the prior relationship (and

any future relationship) between Mr. Eisenberg and Ms. Collins at

Kramer Levin strongly suggest that no employer/employee

relationship existed or will exist between the two.

Mr. Eisenberg serves as "counsel" to the financial services

group in the Washington offices of Kramer Levin. Ms. Collins

served (and if she rejoins the firm will serve) as an associate

in the employee benefits section of the firm's New York office.

Aside from their brief discussions concerning the subj ect of this

letter, Ms. Collins has had no contact with Mr. Eisenberg. They

have not worked on common client matters at Kramer Levin and

would not do so in the future. Ms. Collins has never assisted

Mr. Eisenberg in any capacity. Accordingly, Mr. Eisenberg

exercised no direct or indirect control over the details and

method of Ms. Collins' work at Kramer Levin and will not do so in

the future.
Therefore, if the Commission applies the common law

definition of employee for purposes of Section 2 (a) (19), the Applicants maintain that Ms. Collins was not and will not be an

lIemployee of" Mr. Eisenberg and therefore, will not be an

"interested person" of the Funds, the Manager or CISI within the

3074464.01 -6

ROPES & GRAY

meaning of Section 2 (a) (19) if she rejoins Kramer Levin as an

employee.
In relation to Section 10 (a) of the Act6, the General

Counsel of the Commission chose not to accept the common law

definition of the term "employee" and instead construed the term

as used in Section 2 (a) (3) (D) of the Act to include an attorney on a general retainer from a registered investment company, or an associate or partner at a law firm which acts in that capacity. ~ SEC Investment Company Act Release 214, 1941 SEC Lexis 1829 (September 15, 1941) (the "1941 Release").

The 1941 Release states, in part, that: "(c) ases involving

the construction of the term 'employees' indicate that the term

has no fixed meaning, but must be construed in the context and

connection in which it is used. . . . The settled rules of

statutory construction require that the term, as used in a

particular Section of a statute, must be interpreted in the light

of the purpose of the particular Section and the evil sought to

be remedied thereby." l.

The Investment Company Amendments Act of 1970 (the ".J

Amendments"), which superseded the 1941 Release, were predicated

upon the Congressional determination that the Act did not

adequately regulate the conduct of investment company directors

with IIstrong ties" to the managers of an investment company or

"substantial business or professional relationships with the

investment company or its adviser-underwriter . . . ." S. Rep.

No. 91-184, 91st Cong., 1st Sess. 32 (1969). The Commission has

generally recognized that there is no Congressional policy behind

the 1970 Amendments which calls for the extension of the normal

meaning of the word "employee" to encompass people who do not

meet this description. ~ Loomis-Sayles, infra (citing S. Rep.

No. 91-184, 91st Cong., 1st Sess. 32 (1969)) i In the Matter of

Donald J. Robinson. et al., Investment Company Act Release Nos.

19444 (April 30, 1993) (notice) and 19494 (May 26, 1993) (order)

(the Commission granted an order of exemption from Section

6 Section 10 (a) of the Act generally provides that no registered

investment company shall have a board of directors more than sixty percent

of the members of which are persons who are interested persons of such

investment company.

30744.01 -7

ROPES & GRAY

2 (a) (19) of the Act for purposes of Section 15 (f) of the Act for a member of the boards of trustees of registered investment

companies who was also a partner at a law firm which rendered

limited legal services to various life-insurance affiliates of

the advisers to the investment companies and to a registered

broker-dealer affiliate) .
The 1970 Amendments devised the term "interested person" to cover certain individuals who might not be independent of an investment company's management, including "partners II and "employees" of a law firm providing services to the adviser.

However, there is no suggestion in any of the legislative history

of the Act or the 1970 Amendments that the Commission and

Congress were attempting to treat as "interested" all persons who

might have a connection, _ however remote, with an investment company. Where the Applicants will not retain Mr. Eisenberg or any

other attorney at Kramer Levin to provide legal services in the

future, it is clear that neither Ms. Collins nor Kramer Levin has

or will have "strong ties" to the Manager, or "substantial

business or professional relationships" with the Applicants.

Thus, the Applicants submit that Ms. Collins does not now, nor

will she, have the type of relationship with the Applicants that

Congress was concerned with when it adopted Section 2 (a) (19) . In short, if Ms. Collins rejoins Kramer Levin, Mr.

Eisenberg's prior representation of the Manager would in no

manner impair or otherwise affect Ms. Collins' ability to

exercise sound independent business judgment in the fulfillment

of her fiduciary duties and obligations as an independent trustee

of the Trusts.

30744.01 -8

ROPES & GRAY

For the reasons set forth above, we request the concurrence

of the Staff that Ms. Collins will not constitute an "interested

person" of the Applicants within the meaning of Section 2 (a) (19) of the Act if she rejoins Kramer Levin and accordingly, your

confirmation that the Staff will not recommend that the

Commission take any enforcement action against the Applicants

based on Ms. Collins' status under Section 2 (a) (19) . Very truly yours,

J!~~
David C . Sullivan

DCS/alr cc: Robert Bagnall, Esq.

Rochelle Kauffman PIes set , Esq.
Michael H. Koonce, Esq.

Peter MacDougall, Esq.

John M. Loder, Esq.

3074464.01 -9