SEC Division of Investment Management staff letter: Daughters of Charity National Health System, Inc.

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April 3, 1998

Our Ref. No. 97-S22-CC

Daughters of Charity
RESPONSE OF THE OFFICE OF CHIEF COUNSEL National Health System, Inc.
DIVISION OF INVSTMNT MAAGEMENT File No. 132-3
Your letter of March 20, 1998 requests assurance that the

staff would not reconuend enforcement action to the Conuission if

the Daughters of Charity National Health System, Inc. ("DCNS")

expands the categories of institutions that may participate in

DCNHS's cash management system and investment program (together,

the "Health System Depository") and reallocates certain expenses

relating to the Health System Depository among participants in

the depository without: (1) registering DCNS or the Health

System Depository as an investment company in reliance on Section

3 (c) (10) of the Investment Company Act of 1940 (the "Investment
Company Act"); (2) registering DCNHS as an investment adviser

under the Investment Advisers Act of 1940 (the "Advisers Act");

(3) registering interests in the Health System Depository under
 the Securities Act of 1933 (the "Securities Act") or the
Securities Exchange Act of 1934 (the "Exchange Act") in reliance

on Section 3 (a) (4) of the Securities Act and Section 12 (g) (2) (D)
of the Exchange Act; or (4) registering DCNS or the Heal th

System Depository as a broker or dealer under Section 15 (b) of
the Exchange Act.

Facts
You represent that DCNS is a not-for-profit Roman Catholic
 organization exempt from taxation under Section 501 (c) (3) of the
Internal Revenue Code. DCNS serves as a holding company for 33
wholly controlled and three 50% controlled subsidiaries that

manage hospitals or other health care facilities

("Members"). 1.1 You represent that each Member is a not-for profit organization exempt from taxation under Section 501 (c) (3)
of the Internal Revenue Code.

DCNS offers its Members access to certain services

including insurance, purchasing services, auditing services, and

the Health System Depository. You represent that DCNS has

established the Health System Depository to assist its Members in

il You represent that all of the wholly controlled subsidiaries

are Roman Catholic health care organizations. You also represent

that of the three subsidiaries that are 50% controlled by DCNS,

the reminder of control is held by a Baptist hospital, in one

case, and by conuunity-controlled hospitals in the other two

cases. You state that each of these three subsidiaries has

agreed to abide by the ethical and religious directives for Roman

Catholic health care facilities.

managing their cash and investments. 21 The Health System

Depository consists of two components: a cash management system

through which Members may pool excess daily cash balances from

their checking accounts in a short - term investment fund (the

"Short-Term Fund"), and an investment program through which

Members may invest funds from other sources (including endowment

funds and other funds not needed for daily operations) in the

Short-Term Fund or in a longer-term investment fund (the "Long-

Term Fundi" together with the Short-Term Fund, the "Funds"). You

represent that a Member may invest in the Funds only those assets

to which the Member has inuediate, unrestricted, and exclusive

use, benefit, and enjoyment. You further represent that none of

the assets invested may be attributable to a retirement plan

providing for employee contributions or variable benefits . In

addition, you represent that no participant in the Health System

Depository may assign, encumer, or transfer its interest in the

Funds.
You represent that the board of directors of DCNHS has

ultimate responsibility for setting the investment objectives of

the investment program, but takes no part in implementing those

obj ectives. Rather, DCNHS retains professional investment

advisers registered under the Advisers Act to make day-to-day

decisions regarding investment of the Funds' assets. ll You

represent that the investment conuittee of the board of directors

of DCNHS monitors the performnc~ of the advisers and, if it
 determines that the performnce of an adviser is unsatisfactory,
will reconuend to the board of directors that it replace the

adviser. If the board of directors agrees with the

reconuendation, it would authorize the investment conuittee to

mae the reconuended change. You state that third-party

custodians hold the assets of the Funds. You
 represent that Members are informed that DCNHS is not registered as an
investment adviser under the Advisers Act or as a broker-dealer

under the Exchange Act, and that neither DCNS nor the Health

System Depository is registered as an investment company under

the Investment Company Act.

CUrrently, the incidental expenses of administering the

Health System Depository are charged to Members on a pro rata

ál You represent that the Health System Depository does not have

a legal existence separate from that of DCNS.

ll You represent that these investment advisers will have no

affiliation with DCNS, its Members, or, as discussed below, any
of its proposed non-Member participants. You further represent
that all securities trades will be executed only by a bank, or a
broker or dealer registered under the Exchange Act that is not
affiliated with DCNHS, its Members, or any of its proposed non￾Member participants.

basis according to assets invested. These expenses include

investment management fees and office administration expenses for

the division of DCNS that administers the Health System

Depository. ~I You proposß to modify this method of allocating

expenses so that certain expenses of the Health System Depository

will be allocated in part ona usage basis, rather than solely on
the basis of assets invested. In addition, you propose that

Members also pay overhead expenses relating to
 Health" System Depository . the
You also propose to expand participation in the Health

System Depository to include other not-for-profit health care

organizations exempt from taxation under Section 501 (c) (3) of the

Internal Revenue Code. Specifically, you propose to add two

general categories of non-Member participants: (1) entities that

would utilize more than one service provided by DCNS and would

enter into a relationship with DCNS for a period of more than

one year ("Affiliates") i and (2) entities that would utilize only

one of the services provided by DCNHS and would not necessarily

enter into a long-term relationship with DCNS ("Limited Service

Participants"). You represent that
 each non-Member participant

will be a Roman Catholic health care organization.

You further represent that assets invested by any non-Member

participant, like those invested by Members, will be limited to

assets to which the participant has inuediate, unrestricted, and

exclusive use, benefit, and enjoyment, and which are not

attributable to a retirement plan providing for employee

contributions or variable benefits. In addition, you represent

that non-Member participants, like Members, will be informed that
 DCNS is not registered as an investment adviser under the
Advisers Act or as a broker-dealer under the Exchange Act, and

that neither the Health System Depository nor DCNHS is registered

as an investment company under the Investment Company Act.

You state that monthly financial reports and a quarterly

newsletter containing financial reports are currently distributed

to all Members and will be distributed to all non-Memer

participants. You represent that DCNS is audited on an annual

basis, and distributes audit reports to all participants in the

Health System Depository.

41 You state that these expenses include salaries, benefits
including health insurance, disability insurance, pension

contributions and a tuition reimbursement plan, computer time, a

portion of accounting expenses, and out-of-pocket expenses. You

do not request relief, and we take no position, regarding whether

the current allocation of these expenses among Members is

consistent with DCNHS's opinion that it currently is not acting

as an investment adviser within the meaning of Section 202 (a) (11)
of the Advisers Act.

You represent that the activities of DCNS and its officers,

directors, and employees will comply with the requirements of

Rule 3a4-1 under the Exchange Act, and that their activities will
 be limited to those permitted by paragraph (a) (4) (iii) of the
rule. 51 In particular, you represent that no representative or

other associated person of DCNS who conuunicates with

participants in the Health System Depository will be subject to a
 statutory disqualification described in paragraph (a) (1) of the
rule, and that no associated person of DCNS will receive any
 transaction-based compensation. In addition, you represent that
associated persons of DCNS will limit their activities with
respect to participants in the Health System Depository to
ministerial and clerical matters, and preparation and delivery of
written conuunications that have been approved by an officer of
DCNS .
You also represent that DCNS will not solicit potential
non-Member participants through general advertising or other
broad-based solicitation methods. Rather, you represent that
DCNHS will limit its solicitation of potential non-Member
participants to other not-for-profit health care systems that are
exempt from taxation under Section 501 (.c) (3) of the Internal
Revenue Code, have an existing relationship with DCNHS or one of

its Members, and share the charitable goals of DCNHS.

Analysis
Based on the facts and representations in your letter, we

would not reconuend enforcement action to theConuission under

Section 7 (a) of the Investment Company Act if neither DCNHS nor

the Health System Depository registers as an investment company

in reliance on Section 3 (c) (10) (A) of the Investment Company

Act. QI Our position is based particularly on your

representations that: (1) DCNS and the Health System Depository

will be organized and operated, at all times, exclusively for

religious, educational, benevolent, fraternal, charitable, or

reformtory purposes and no part of the net earnings of DCNHS or

the Health System Depository will inure to the benefit of a

private shareholder or individual; (2) only Members, Affiliates,

~I Rule 3a4 - 1 provides a safe harbor under which associated

persons of an issuer will not be deemed to be brokers under the

Exchange Act, provided that they limit their activities to those
 specified by the rule.
~I Section 3 (c) (10) (A) excepts from the definition of investment
company "(a) ny company organized and operated exclusively for

religious, educational, benevolent, fraternal, charitable, or

reformtory purposes . . . no part of the net earnings of which

inures to the benefit of any private shareholder or individual

"

and Limited Service Participants may invest in the Funds; (3)
each Member, Affiliate, and Limited Service Participant will be a

Roman Catholic health care organization; 71 (4) DCNS and each

participant in the Health System Depository will be
 exempt at all

times from taxation under Section 501 (c) (3) of the Internal
Revenue Code; (5) each participant in the Health System

Depository will invest only those assets to which it has

inuediate, unrestricted, and exclusive use, benefit, and

enjoyment, and no participant may assign, encumer or otherwise

transfer any part of its interest in the Healt~ System

Depository; (6) participants will not invest assets that are

attributable to a retirement plan providing for employee

contributions or variable benefits; (7) certified public

accountants annually will prepare a written report on DCNS and

the Health System Depository, and will send the report to

participants; and (8) each participant will be informed that

neither DCNHS nor the Health System Depository is an investment

company registered under the Investment Company Act. ~I

You assert that DCNHS is not an investment adviser within

the meaning of Section 202 (a) (11) of the Advisers Act. Section 202 (a) (11) provides, in relevant part, that an investment adviser
is "any person who, for compensation, engages in the business of

advising others . . . as to the value of securities or as to the

advisability of investing in, purchasing, or selling securities

. . . ." We believe that DCNHS's activities with respect to

setting the investment objectives of the investment program,

choosing registered investment advisers to manage the Funds, monitoring the performnce of these advisers, and replacing an
adviser if the adviser's performnce is unsatisfactory may

constitute the provision of investment advice. ~I Because DCNHS

performs these functions on a regular basis, and receives

compensation for such advice in the form of reimbursement for

certain operating expenses, we believe that DCNS may be

7 I In the case of the partially controlled Memers, each Member

will be at least 50% controlled by DCNS, and will agree to abide

by the ethical and religious directives for Roman Catholic health

care facilities.

~I See,~, National Association of Congregational Christian

Churches of the United States (pub. avail. Aug. 11, 1995);

American Heart Association (pub. avail Feb. 26, 1993).

~I See Investment Advisers Act Release No. 1092 (Oct. 8, 1987)

(" (a) person providing advice to a client as to the selection or

retention of an investment manager . . . under certain

circumstances, would be deemed to be ' advising' others within the

meaning of Section 202 (a) (11) . ") .

considered an investment adviser within the meaning of Section

202 (a) (11). 101
We would not reconuend enforcement action to the Conuission,

however, if DCNHS does not register as an investment adviser

under the Advisers Act in reliance on Section 203
 (b) (4) of that Act. 111 Our position is based on the facts and representations
in your letter, particularly your representations that: (1)

DCNHS is a charitable organization exempt from taxtion under

Section 501 (c) (3) of the Internal Revenue Code; and (2) DCNS

will provide investment advice only to Memers, Affiliates, and

Limited Service Participants, all of which will be charitable

organizations exempt from taxation under Section 501 (c) (3) of the Ipternal Revenue Code.

The staff of the Division of Corporation Finance has asked

us to tell you that, on the basis of the facts presented, noting

in particular that: (1) the Health System Depository, as defined

in your letter, does not have a separate legal - status and is not

a legal entity separate from DCNHS; (2) DCNHS, its Members and

its Non-Member Participants, as each is defined in your letter,

will at all times be organizations that are exempt from taxation

under Section 501 (c) (3) of the Internal Revenue Code; (3) Non-

Member Participants will be health care related entities or

entities involved in a conuunity-based network with current

Members, and will meet the criter~a set forth in your letter; (4)

any monies invested in DCNHS by Members and Non-Member

Participants must represent monies Over which the Members and

Non-Member Participants have inuediate, unrestricted and

exclusive use, benefit and enjoyment; (5) monies that are

attributable to a retirement plan providing for employee

contributions or variable benefits may not be invested in DCNHS;

(6) all benefits, profits, and income generated from DCNHS will

inure only to Members and Non-Member Participants and will be

distributed exclusively to the Members or Non-Member

101 See ide (the compensation element of Section 202 (a) (11) is
satisfied by the receipt of "any economic benefit"); Northeastern
Pennsylvania SYnod of the Evangelical Lutheran Church in America
(pub. avail. May 25, 1988) (reimbursement for expenses, including

salaries, supplies, and office costs associated with investment

program, may constitute "compensation" within the meaning of

Section 202 (a) (11) ) .
111 Section 203 (b) (4), in relevant part, exempts from

registration under the Advisers Act any investment adviser that
 is a charitable organization as defined in Section 3 (c) (10) (B) of
the Investment Company Act and whose advice is provided only to
 other charitable organizations. Section 3 (c) (10) defines a
charitable organization to include an organization described in

Section 501 (c) (3) of the Internal Revenue Code.

Participants, as the case may be, and will be used solely for

their tax-exempt purposes; (7) independent certified public

accountants annually will prepare a written report on DCNS' s

financial condition and performnce, which will include audited

annual financial statements of each of DCNS and the Health

System Depository and will be sent to Members and Non-Member

Participants; and (8) Members and Non-Memer Participants may not

assign, encumer, or otherwise transfer any part of their

interest in DCNHS; it will not. reconuend any enforcement action

to the Conuission if DCNHS, in reliance on your opinion as

counsel that the exemptions afforded by Section 3 (a) (4) of the
Securities Act and Section 12 (g) (2) (D) of the Exchange Act are
available, implements the Health System Depository in the manner

described without registration under the Securities Act and the

Exchange Act.
The staff of the Division of Market Regulation has asked us

to inform you that, based on the facts and representations in

your letter, and strict adherence thereto by DCNS and its

officers, directors, and employees, it would not reconuend

enforcement action to the Conuission under Section 15 (a) (1) of
the Exchange Act if DCNS engages in the activities described in

your letter without DCNHS, its officers, directors, or employees

registering with the Conuission as brokers or dealers under

Section 15 (b) of the Exchange Act.

In reaching this position, the staff of the Division of

Market Regulation notes particularly your representations that,

in connection with its conuunications to prospective participants

in the Health System Depository, DCNS, its officers, directors,

and employees will comply with the requirements set forth in Rule

3a4-1 under the EXChange Act, and their activities will be

limited to those permitted
 by paragraph (a) (4) (iii) of the rule.

Consequently, among other things, those activities will not

involve the oral solicitation of potential participants. In

addition: (1) only qualified entities maintaining a relationship

with DCNHS (as described in your letter) will be offered an

opportunity to participate in the Health System Depository; (2)

neither DCNS, its affiliates, nor any of their officers,

directors, or employees will receive any transaction-based

compensation in connection with the establishment or operation of

the Health System Depository; (3) neither DCNS, its affiliates,

nor any of their officers, directors, or employees engaging in

any activities in connection with the Health System Depository
 will be an associated person of a broker-dealer; (4) neither
DCNS, its affiliates, nor any of their officers, directors, or

employees will hold funds or securities in connection with the

establishment or operation of the Health System Depository; (5)

each transaction in the portfolio of securities held by the

Health System Depository will be effécted by a registered broker-

dealer that will not be affiliated with DCNS, its Members, its

A£filiates, or the Limited Service Participants; and (6) all

investment decisions will be made by registered investment

advisers that will have no affiliation with DCNS or any of its

Members, Affiliates, or Limited Service Participants.

Because these positions are based on the representations

made in your letter, you should note that any different facts or

circumtances may require different conclusions. Further, this

letter expresses the positions of the Divisions of Corporation

Finance and Market Regulation on enforcement action only and does

not express any legal conclusions on the questions presented.

~t uJ~
Sarah A. Wagmn

Special counsei

. . 1933 Act/3 (a) (4) CHOATE, H YV.n 3 (a) (4); ALL & STE.uTA'D'T 1934 Act/12 (g) (2) (D) ;
A PARTNRSHIP INUDING PROFESSIONAL CORPRAIONS C A /33( (a) )( (50)) ;
 ompany ct c 1.;
 EXCHANGE PLACE Advisers Act/202 (a) (11); CA B. HEwr P.C: 203 (b) (4)
(617) 24S0 53 STATE STREET
BOSTON, MASACHUSETIS 02109-2891

TELEPHONE. (617) 246-5000

FACIMLE (617) 246-400
TELEX 49615860 .
March 20J 1998
Marin Dun, Esq.
Bar Mendelsohn, Esq.

Paula Jensen, Esq.

Sarah Wagman, Esq.
Offce of the Chief Counsel
Division of Corporation Finance
Division of
 Investment Management
Division of
 Market Regulation
Securties and Exchange Commission

450 Fift Street, N.W.

Washington, DC 20549
Re: Daughters of Charty National Health Svstem. Inc.
Dear Mr. Dun Mr. Mendelsohn, Ms. Jensen and Ms. Wagman:

Daughters of Charty National Health System, Inc. ("DCNHS"), a Missour not-for-profit
corporation, exempt from taxation under Section 501
 the Internal Revenue Code (the
~'Tax Code") has authonzed us to request a No-Action Letter from the sta of the Commission (c)(3) of

(the "Staff') regarding the applicabilty of
 the Securties Act of 1933, as amended (the
"Securties Act"), the Exchange Act of 1934, as amended (the "Exchange Act"), the Investent

Company Act of 1940, as amended (the "Investent Company Act"), and the Investent

Advisers Act of 1940, as amended (the "Investent Advisers Act"), to both the expansion of the
categones of institutions permitted to paricipate in a cash management system (the "Cash
Management System") and investment progr (the "Investment Progr") (collectively the
~'Health System Depository") provided by DCNS, and a proposal to allocate certn expenses
relating to the Health System Depository among paricipants in such Depository. At present, the
Health System Depository is made available only to Members ofDCNHS and it is proposed to
extend its availabilty to Affliates and Limited Services Paricipants (as such tenns are
hereinafter defined at pages 9- 10).
'.

A. Factual Background

1. General

DCNS is a not-for-ptofit corporation and serves as a holding company for th￾thee (33) wholly controlled but separate subsidiares (the "Full Members") that manage or
operate hospitals and other health care related organzations thoughout the United States and
thee (3) similar operating organzations over which DCNS exercises fift percent (50%)
control (the "Associate Members" and collectively with the Full Members, the "Members").
All Full Members ofDCNHS are Roman Catholic health care organizations. The 50% control of
the the Associate Members that does not rest in DCNHS, itself a Roman Catholic organization,
is as follows: In one case, it is in a Baptist hospital and in the other two cases in community￾controlled hospitals. However, both the Baptist and the communty-controlled hospitals each
have agreed to abide by the ethical and religious directives for Catholic health care facilties.
Each of the thirty-six (36) Members is a not-for-profit organization exempt from taation
under Section 501(c)(3) of the Tax Code. DCNHS through its Board of Directors, the
managing board (the "DCNHS Board" or the "Board"), creates the policies and operating
procedures which govern the management of each of the Members. As all of the entities are
not-for-profit, there is no equity or financial investment involved and therefore there can be
no control stemming from a financial interest. With respect to the three (3) Associate
Members, the decision making power is split equally between DCNHS and another entity. By
analogy to a for-profit corporate context, thirty-three (33) of the thrty-six (36) Members, the
Full Members, would be wholly-owned direct subsidiaries and the thee Associate Members
would be fifty percent (50%) owned.
DCNHS provides to its Members a variety of shared services which are designed to
furer the benevolent objectives of the Members by achieving, on
 their behalf, economies of
scale. Such shared services include access to insurance, purchasing services, internal auditing,
and the Health System Depository. The purose of these services, including the Health
System Depository, is to maximize the utilzation of the Members' financial resources and
produce greater effciency in the Members' operations. Ths no-action request concerns the
proposed expansion of the Health System Depository to offer certn services to other not-for￾profit health care related paricipants that are not controlled by DCNHS. The request includes
a proposal to allocate to the Members and proposed new paricipants certin expenses related
to .the Health System Depository.
The DCNS Obligated Group (the "Obligated Group") provides an example of the
benefits DCNS can attin on behalf of its Members by uniting Members' resources and
credit strengths with the result of fuhering the Members' charitable mission that includes
-.

. \

:

providing the best health care services to the areas served at the most economical cost. i
DCNHS, twenty-four (24) Full Members and 10 other entities, that are either an Associate
Member or a subsidiar of aI Associate Member, make up the th-five (35) Members of
the Obligated Group. In September, 1997,DCNS issued thee series of bonds (the "Bonds")
for the benefit of DCNS and cert Members, which are paricipants in the Obligated
Group (collectively, the "Borrowers"). Pursuat to a Maser Tru rndentue, the Obligated
Group has assumed financial obligations related to the payment of debt service with respect to
the Bonds. The Obligated Group's combined cash and other investent assets as of June 30,
1997 totaed approximately $1.7 billon,equa to one hundred seventy-four percent (174%) of
the Obligated Group's outstading long-term debt. Pursuant to the Master Trust Indentue,
Members of the Obligated Group are jointly and severally obligated to make payments under
the Loan Agreements relating to the Bonds.
The Master Trust Indentue imposes upon the Obligated Group a payment obligation
that is simultaneous with that of the applicable Borrower for each bond series. The Obligated
Group is treated as a single entity for financing puroses. Due to the simultaneous payment
obligation, individual member hospitals which could not have obtained satisfactory financing,
because of the nature of the credit risk they present, are able to obtain financing and on much
more favorable terms. The Bonds have received "AA" ratings from Fitch and Standard and
Poor's. Moody's has rate all such DCNHS transactions Aa since 1983. The hospitals most
benefitted by this financing arangement are those that serve patients with the greatest
financial need and are often located in troubled communties.
Because of the combined financial power of the Obligated Group, the joint and several
liabilty. feature and the simultaneous payment obligation of the Obligated Group, the
Borrower is able to borrow at terms much more favorable than any the member Borrower
could achieve individually. In the event that a Borrower lacks fudsto meet debt service
obligations, the shortfall needed to meet the obligation is loaned to the Borrower by the
Obligated Group. The Obligated Group exemplifies the overriding goal of DCNHS to utilze
its Members' resources efficiently and for the maximum benefit.of the individua Members.
The Health System .Depository similarly promotes Member goals by means of the combination
of individual Member fuds.
2. The Health System Depositorv

The Health System Depository is the system established by DCNS to manage the
cash of the Members employed in their day-to-day operations and to manage the investment
of their assets. The Members' assets, including excess cash, are pooled for the puroses of
investment, thereby achieving the benefits of professional money management, diversification
i No relief
 is requested on account of
 any activities of
 the Obligated Group.

and economies of scale. The Health System Depository does not have a separate legal status
and is not a legal entity separate from DCNHS. Although the Health System Depository is
audited separately from DCNS for the inormation of its varous paricipants, its operating
results and balance sheet are also included in DCNS' conslidated financial statements.
Certin expenses of DCNHS that relate to the operation of the Health System Depository are
charged to the Health System Depository. The Health System Depository operating
ståtements separately break out and reflect those categories of expenses. . The abilty to pool
the excess cash through a cash management program allows Members to act as a single entity
with respect to cash management and investments. One of the underlying premises of the
Health System Depository is that by combining the Members' excess working capital, the
Members are able to paricipate in the benefits inherent in the management of larger sums of
money, including: (i) access to professional money managers, (ii) reduction in proportionate
costs of investing funds, (ii) maintenance of liquidity, (iv) availabilty of diversification
greater investment and (v) abilty to occasionally finance projects internally. The end result is
the maximization of Members' resourcès for the promotion of the charitable puroses of the
Members and the benefit of the local communities served by the Members.
The components of the Health System Depository are the Cash Management System
and the Investment Program which are described in further detatl below. Paricipants in the
Cash Management System automatically paricipate in the Investment Program. Members
may paricipate in the Investment Program without paricipating in the Cash Management
System. Members have been informed that DCNHS is not registered as an investment adviser
under the Investment Advisers Act or as a broker-dealer under the Exchange Act and that
neither DCNHS nor the Health System Depository is registered as an investment company
under the Investment Company Act.
(a) The Cash Management System

One of the two components of the Health System Depository is the Cash Management
System, the role of which is to manage the operating cash of the Members and to
 keep it
invested at all times. Under the Cash Management System, each Member maintans an
individual. checking account though a third-par ban. Curently that ban is Mellon Ban,

in Pittsburgh, Pennsylvania. The checking account is the day-to-day operating account and it
is utilzed for both the deposit of income and donations generated by the Member and the
payment of expenses that the Member incurs. It includes only assets to which the Member
has immediate, unrestricted and exclusive use, benefit and enjoyment and does not include
assets attibutable to a retirement plan providing for employee contrbutions or varable
anuities.
At the end of
 each day, if the net balance of any Member's individual checking
account at Mellon Ban is positive, the balance is swept into a sweep account under DCNHS'
control also at Mellon Ban (the "Sweep Account"), leaving the Member's checking account
..

balance at zero for each day. If the aggregate net balance of the fuds of all the varous

Members in the Sweep Account is positive at the end of the day, then the net balance is swept
into a pooled investment fud, consisting of investents with an average maxum matuity
of two-years (the "Short-Term Investment Fund") and managed by a registered investent

adviser (the "Adviser"). Ths sweep process, leaves the Sweep Account at zero at the end of

each day. If the aggregate net balance of the Sweep Account at the end of the day is
negative, it would be replenished to zero by a tranfer from the Short-Term Investent Fund.
An internal record keeping system keeps track of the fuds and b(;lances of each individual
Member. If at the end of any day the net checking account balance of a Member is positive
that balance passes though the Sweep Account into the Short Term Investment Fund to the
credit of the Member. Conversely, if at the end of any day the Member's net checking
account balance is negative, a call for funds passes through the Sweep account and is satisfied
by a charge to the Member's assets in the Short Term Investment Fund. The result is that the
Member's individual checking account is retured to zero by reducing the fuds being
invested in the Short Term Investment Fund on its behalf. If, however, there were
insufficient funds to the
 credit of the Member in the Short-Term Investment Fund an advance
in the natue of a loan to the Member would be made from the Short-Term Investment Fund.
If arangements had already been made for a line of credit and the advance was within the
limits of the line, the interest charged on the loan
 would be equa to the Bond Buyers Index
rate. Otherwise, the loan would be treated as coverage of an overdraft and the interest rate
would be one and one-half times the Bond Buyers Index rate. All interest generated by this
arangement is credited to the Short-Term Investment Fund and fuer credited to 'the
accounts of the Members in proportion to their respective interests in such Fund. Futue
paricipants who are not Members would be covered for shortfalls in their accounts with the
Cash Management System but only to the extent that such futue paricipants who experience
shortfalls have sufficient funds to their respective credit in the Short-Term Investment Fund.
If a futue paricipant has a shortfall in its checking account at Mellon Ban, DCNHS would
attempt to satisfy the shortfall by a charge to the paricipant's assets in the Short-Term
Investment Fund, but a line of credit or loan would not be available to the parcipant.
Interest at market rates on positive balances in the Short-Term Investment Fund is credited to
the respective account of the Members based on their assets in that Fund.
(b) The Investment Proipam

Program,
the role of which is to invest fuds of the Members not anticipated to be needed for day-to￾day operations, on a longer term basis. The Investment Program pools the fuds of the
The second component of the Health System Depository is the Investment

paricipants for the purposes of investment, while also recording separately the account

balance of each Member in the program. The source of these fuds includes endowments,

donations, certin statutory contributions relating to Medicare requirements, funded

depreciatioIi,2 as well as any fuds not needed for daly
 operations mid allocated by the
paricipant to the Investment Program. The Investent Program has its short-term ar, the
Short-Term Investment Fund. already referred to, which invest entiely in debt instrents as
well as a long-term ar (the "Long-Term Investent Fund") which invest sixt percent
(60%) in fixed-income securties and fort percent (40%) in equity securties. The paricipant
determines the percentage of its fuds to be invested in each fud.

The Investment Program invests in a short-term fud (i) the daily net balances of the
Sweep Accounts, as indicated above, and (ii) the fuds in the Short-Term Investent Fund of
its Members as designated by them for such investment. It also invests its Members' funds in
the Long-Term Investment Fund as designated by them for such investment. The DCNHS .
Board has ultimate responsibilty for setting the investment objectives of the Investment
Program, but takes no par in implementing those objectives. The Investment Committee. of
the Board anually reviews, and makes recommendations to the Board regarding the
investment objectives of the Investment Program. Upon approval by the Board of the
recommendations, the Investment Committee retains professional registered investment
advisers to make the day-to-day investment decisions and to implement the objectives. The
Investment Committee monitors the pedormaIce of such investment advisers and if it were
found to be unsatisfactory, would recommend to the Board that a change in an investment
adviser or advisers be made. If
 the Board agreed, it would, pursuant to its authority, authorize
the Investment Committee to make the recommended change. The investment advisers to be
retained by the Investment Committee to make investment decisions concerning the
Investment Program wil be registered under the Investment Advisers Act and will be entirely
independent of and wil have no affliation with DCNHS or any of its Members, Affiliates, or
Limited Services Paricipants. Securities trades will be pursuant to orders issued by the
investment adviser or advisers having management responsibilty and will
 be effected only by
a ban or a broker or dealer registered under the Exchange Act who is not affiiated with
DCNHS, its Members, its Affiiates or the Limited Services Paricipants (a "Registered
Broker-Dealer"). Third-par custodians, hold the assets employed in the Investment Program.
Curently, State Street Ban is custodian of
 the Long-Term Investment Fund assets and J.P.
Morgan is custodian of the Short-Term Investment Fund assets.
Members may invest assets in the Investment Program over and above the amounts
invested from the Sweep Account at the end of each day. However, a Member is permitted to
invest only those assets to which such Member has immediate, unestrcted and exclusive use,
2 Funded depreciation refers to fuds generated from a pas Medicare reimburement statute
which permitted providers to treat depreciation as a reimburable expense so long as an amount
in cash equal to the amount treated as depreciation were placed in a separte account. Although
the statute which provided for ths treatment has since been repealed, DCNHS continues to
require its Members to make contrbutions to their accounts for fuded depreciation.

benefit and enjoyment. None of the assets may be attibutable to a retirement plan providing
for employee contributions or variable benefits.
Each Member's share of the Sweep Account and any additiona assets committed to .
the Investent Program (the "Member's Investent Assets" or in the aggregate the
"Members' Investment Assets") may be invested in one of two portfolios, the Short-Term
Investment Fund and the Long-Term Investment Fund, or a combination of the two. As .
indicated above, the Short-Term Investment Fund is the vehicle mandated for the Sweep
Account assets. Each portfolio is invested consistent with anounced objectives and
strategies, and the incidental expenses of the Investment Program, discussed infra, are
allocated pro-rata among the Members based on the Member's deposits invested in each such
fund. Similarly, the incidental expenses of the Cash Management System are allocated pro
rata among the Members based upon the Member's assets in the System. No paricipant in
the Health System Depository may assign, encumber or transfer its interest in the Health
System Depository.
percent (70%) of the assets in the
Short-Term Investment Fund to be invested in instruments with an average maximum life of
one year. The remaining thirt percent (30%) of the assets may be invested in the discretion
of the Adviser provided that the maximum average life of the entire portfolio does not exceed
Curent asset allocation guidelines call for seventy

two years. '

Currently, Members are permitted to withdraw their assets from the Investment
Program at wil, but DCNHS does not allow more than three withdrawals in a three-month
period from the Long-Term Investment Fund. Withdrawals ofTen Milion dollars
($10,000,000) or more from the Long-Term Investment Fund are subject to an advance notice
requirement of up to thirty (30) days so as to avoid the necessity of liquidating investments in
a fire-sale atmosphere.
It is our belief that neither the curent practice òf DCNHS regarding withdrawals nor
the imposition of the notice requirement with respect to signficant withdrawals would
constitute an impermissible restriction on access to the paricipants' fuds. In several past

No-Action Letters, various non-profit entities received no-action relief despite similar or more
severe restrictions on access to funds. In Florida Baotist Investment Services (June 30, 1994),
the certifcates at issue could be redeemed upon notice but redemptions were limited to one a
month. In AASCU Capital Fund (October 19, 1988) withdrawals were permitted only
anually and on a specified date. The YMCA required at leas thrt days' notice prior to
redemption in National Council of Young Men's Chrstian Associations (October 29, 1990).
Finally, Common Fund (April 23, 1971) contaned a restriction that was more limiting than
the one proposed above by DCNHS in that the Common Fund program required thee
month' wrtten notice prior to withdrawaL.

Marh 20, 1998

Furermore, any paricipant can terminate its paricipation in the Health System
Depository at any time and at no cost other th the repayment of any debts owed to
DCNHS. Ths unestrcted right
 of withdrawal in and of itself provides a level of access that
we believe should be suffcient.
3. Expenses

Curently, the incidenta expenses.
 of administering the Investment Program are
charged pro-rata among the Members based on the Member's invested assets. Besides the
investment management fees, the Investment Program's assets contribute to office
administrative expenses of that division of DCNHS devoted entirely to the Health System
Depository. These expenses constitute salaries, fringe benefits, computer time, a small portion
of accounting expenses and out-of-pocket expenses. Fringe benefits include such usual
employee benefits as health insurance, disabilty insurance, pension contrbutions, and a
tuition reimbursement plan, and are benefits that are strictly standard withn the health care
industr.
At this time the Health System Depository charges the expenses of the Cash
Management System checking accounts against all earings with the result that these expenses
are paid by paricipants pro-rata to their investment in the Cash Management System and not
necessarily in relation to usage. Management feels that this system of allocation has become
unfair to those who use the Cash Management System less than their counterpars. In the
future the Health System Depository wil instead bil paricipants for these expenses based
more on usage. All other expenses of the Cash Management System ("General Services
Expenses") wil continue to be charged against earings and therefore will be borne by present
and future paricipants pro-rata to their investments in the Cash Management System;
Expenses curently being charged the paricipants exclude overhead. It is contemplated that in
the future overhead pertaining to the Health System Depository will be included in General
Services Expenses and will be charged as well. However, these expenses are not significant.
Anual administrative or operating expenses, as a percentage of tota assets, is only .21 of 1 %
at ths date: With the inclusion of overhead, the percentage would increase .02% to .23 of
1 %. In the past five years, the expenses of the Health System Depository as charged to
Members has constituted between .16 of 1 % and .21 of 1 % of total assets. Ths expense ratio
compares very favorably to the Management costs of mutual fuds that are marketed to
intitutional investors.

B. Expanded Participation
To date, paricipation in the Health System Depository has been a benefit provided
only to Members of DCNHS. Recent changes in the health care industr, especially the trend.
towards consolidation, has led DCNHS to conclude that it would be in the best interests of its
Members, and the other not-for-profit health care entities with which it seeks to collaborate,
..

~
to expand paricipation in the Health System Depository beyond curent Members to include
cert other not-for-profit health care entities.

The attention to costs related to the provision of health care services has led to an
indus-wide effort to trim cost though strctual reorganzations and consolidations. For￾profit entities have increasingly moved. to acquire assets and build large organzations that can
draw on economies of scale in the operation of health care facilties. Not-for-profit entities,
whose eleemosynar goals supported and fueled the health care indus for many years, have
had to adapt to the changing environment in order to preserve the effectiveness of their
charitable mission and continue to serve the local communities commitment with their
tradition. DCNHS believes that there are business areas where distinct not-for-profit health
care entities can work together to maximize resources and yet stil remain independent so as
to offer the health care consumer more choice and cost efficiencies while preserving the
viabilty of not-for-profit institutions devoted to the provision of health care services.
DCNHS proposes to extend its paricipation in the Health System Depository solely to
other not-for-profit tax exempt health care-oriented organizations. The By-Laws of DCNHS
describe the membership classes that may paricipate in the Health System Depository.
Currently, Members include Regional Corporation Members, Full Members and Associate
Members, each of which have in common the fact that they are controlled in some degree by
DCNHS. DCNHS proposes to expand paricipation in the Health System Depository to
include entities which wil comprise four new types of non-membership categories. All such
new paricipants would be not-for-profit entities exempt from taxation
 under Section 501(c)(3)
of the Tax Code ("Exempt Organizations"). The following is a description of the four new
types of paricipants, i.e. three categories of Affliates, and
 the category of Limited Services
Paricipants:
There are three categories of Affiiates. Paricipants in each of these categories would
utilze more than one service provided by DCNHS and would enter into a relationship with
DCNHS with a duration of more than one year. For example, an Affliate might parcipate
in the Health System Depository and DCNHS' programs for risk management. Thè categories
of Affliates include (i) a single organization, (ii) a system of health .care or health care related
organizations and (ii) an entity involved in a communty-based network with one of the
Members of DCNHS.
Limited Services Paricipants are entities that would access only one of the services
provided by DCNS and would not necessarly anticipate a long-term relationship with
DCNHS. A limited services parcipant can be a single not-for-profit hospital or .other not￾for-profit health care entity or an entire system of not-for-profit hospitas.
All of the Affiiates and Limited Services Paricipants (collectively "Non-Member
Paricipants") wil be health care related organizations or entities involved in a community
..

Page i 0
based network with a Member. Furermore, the assets invested would be limited to assets to
which the Non-Member Paricipants had immediate, unestcted and exclusive use, benefit
and enjoyment and which were not attbutable to a retirement plan providing for employee
contributions or varable benefits. Moreover, the Non-Member Paricipants would 'be
informed that DCNS is not registered as an investment adviser under the Investent
Advisers Act or as a broker-dealer under the Exchange Act. In addition, the Non-Member
Paricipants would be informed that neither the Health System Depository nor DCNHS is a
company registered under the Investent Company Act.
Curently, monthy financial reports and a quarerly newsletter contaning financial
report of DCNHS are distributed to all Members and will be distributed to all Non-Member
Paricipants. In addition, an. anual audit of DCNHS, which includes the Health System
Depository as well as a separate audit of the Health System Depository itself, is conducted by
an independent "Big Six" accounting firm, and will be distributed to Members and Non￾Member Paricipants.
DCNHS is in the process of preparing explanatory material describing its services,
including the Health System Depository, to be furished to prospective Non-Member
Paricipants. DCNHS, in targeting prospective Non-Member Paricipants to which it would
offer the opportnity to paricipate in the Health System Depository, would include other not￾for-profit exempt health care systems that are Exempt Organizations and do not have a similar
system in place. DCNHS wil not solicit Non-Member Paricipants in the Health System
Depository through general advertising or broad-based solicitation means. Rather, DCNHS
will utilze the informative material to contact only those entities with which it or one of its
Members has an existing relationship and which share the mission of the Daughters of Charty
organzation. All Non-Member Paricipants will be Exempt Organizations and will tend to be
other religiously affliated entities.
One of the primar puroses of any relationship with a .Non-Member Paricipant is to
assist the Non-Member Paricipant having common values with DCNHS to meet the needs of
the sick and the
 poor. Among the criteria to become a Non-Member Paricipant are (1) that it
be a Roman Catholic health-care organzation, (2) that the organization's historical behaviors
and actions indicate that its values are compatible with the DCNS core values, (3) that the
organtion is committed to high quality patient care and to maintaining an effective quality
and utilzation management program and (4) that the organzation complies with federal and
ste anti-discrimination statutes and regulations.
c. No-Action Request

We wish to confirm that the Staff would not recommend any enforcement action if (i)
access to the Health System Depository were expanded to include Non-Member Paricipants,
and/or (ii) General Services Expenses were allocated to parcipants in the Health System

Page 1 1
Depository in accordance with the proposal described in Section A.3. above if, in each case,
there were no registration of (x) interests in the Health System Depository, including the
Investment. Program (the "Interests") under Section 12(g). of the Exchange Act or under the
Securities Act, or (y) DCNHS, or the Health System Depository, as an investment company
under the Investment Company Act, as an investment adviser under the Investent Advisers

Act, or as a broker or dealer under the Exchange Act.
D. Analysis of Applicable Securities Laws
We are of the opinion that neither the intended expansion of the Health System
Depositòry nor the proposed method of allocation of General Services Expenses should
require (i) the Interests to be registered under the Securities Act or the Exchange Act or (ii)
DCNHS or the Health System Depository to be registered as an investment company under
the Investment Company Act, as an investment adviser under the Investment Advisers Act or
as a broker or dealer under the Exchange Act. The Staff has recognized such a position
previously with respect to other not-for-profit entities that operated pooled investment funds
on behalf of not- for-profit entities engaged in similar missions.
1. The Securities Act

Weare of the opinion that the Interests are exempt from registration and certin other
provisions of the Securties Act based on Section 3(a)( 4), which exempts therefrom "any
securty issued by a person organized and operated exclusively for religious, educational,
benevolent, fraternal, charitable or reformatory purposes and not for pecunar profit, and no
par of the net earings of which inures to the benefit of any person, private stockholder, or
individuaL." Furermore, neither the expansion of the Health System Depository to include
Non-Member Paricipants nor the allocation of General Services Expenses, as proposed herein,
alters that opinion.
In the National Ass'n of Congregational Christian Churches of the United States (April
I I, 1995)(hereinafter "National Association No-Action Letter"), the Staff indicated that
satisfaction of the following six elements involving "paricipating Members" was necessar for
the subject Trust to qualify for the Section 3(a)(4) exemption:
First, any monies invested must represent monies over which the paricipant had
immediate, unestricted and exclusive use and could not be attibutable to a retirement
plan that provides for employee contrbutions.
Second, the Association must notify Member churches of the establishment of the
Trut through a written communication, either in the form of a letter or in the
Association's newsletter. In such communcations, Members would be instrcted to
call or write the Association's national office to obtan detailed information and the
'.

information would be provided only to Member churches, all of which are not-for￾profit organzations. Furermore, prior to the time when a Member elected to
paricipate in the Tru, each Member would have been fuly inormed about the
Trut's policies, operations and objectives; All wrtten communcation would be
approved by the Association's management and would specifically state that (i) neither
the Association nor the Corporation is a re.gistered broker-dealer; (ii) the Corporation,
the Association and the Trust will not be registered as investent companes under the

Investment Company Act; and (ii) neither the Corporation nor the. Association will be
registered under the Investment Advisers Act.
Third, all financial benefits, chiefly income and the right of a paricipant to redeem all
or any portion of its interest in the trst, less fees and expenses, would be distributed
only to Members, and would be used only for ta exempt puroses.
Fourth, independent certified public accounts would prepare a written report regarding
the Trust's financial condition and performance in connection
 with the anual review
of the Association's books and records. The report would include audited financial
statements of the Trust and would be sent to paricipating members. All paricipating
Members would be permitted to inspect the books and records relating to the Trust.
Fift, no paricipating Member could assign,
 encumber or otherwise transfer any par
of its interest in the fud.
Sixth, the Trust would not purchase the securities of, or otherwse invest in, the

Corporation, the Association or any Member.
The Health System Depository satisfies all six elements specified in the National
Association No-Action Letter. First, the assets invested in the Health System Depository have
been and wil continue to be assets of which the paricipant ha sole, exclusive use and would

not be attbutable to a retirement plan providing for employee contrbutions. Second, as
stted previously, a brochure describing the program will be distbuted to all futue

paricipants. All Members and Non-Member Paricipants will be inormed that DCNS is not
registered as an investment adviser under the Investment Advisers Act and that neither
DCNHS nor the Health System Depository is registered as an investment company under the
Investent Company Act. Thrd, all benefits, profits, and income generated from the Health
System Depository will inure only to the Members, and Non-Member Paricipants, all of
which are Exempt Organzations, and all such proceeds will be used only for ta-exempt
puroses. Net earngs of the Health System Depository are distributed to each paricipant
pro-rata to its invested assets. Fourh, also as stted previously, monthy financial report and
a quarterly newsletter is curently distributed to all Members and an anual audit is conducted
by an independent "Big Six" accounting firm, and will be distrbuted to Members. Fift,
neither a Member or a Non-Member Paricipant may assign, encumber or otherwse tranfer
..

any par of its
 interest in the Health System Depository. Finally, neither DCNS or the
Health System Depository will invest in or purchase the securties of any Member or Non￾Member Paricipant.
In No-Action Letters such as National Council of Young Men's Chrstian Associations
29, 1991)(hereinafer "YMCA No-Action Letter), the National Association No-Action
Letter, AASCU Capital Fund (October 19, 1988)(hereinaer "AASCU No-Action Letter", and
(April
Common Fund for Non-profit Organizations (April 23, 1971)(hereinafer "Common Fund No￾Action Letter"), the Staff failed to require registation under the Securities Act since all. of the
paricipants in the investment programs organzed by the entities involved were organzations
exempt from taxation under Section 501(c)(3) of
 the Tax Code and, therefore able to benefit
from the exemption provided in Section 3(a)(4) of the Securties Act.
The investment programs were created by each .of the entities referred to in the
YMCA, AASCU and Common Fund No-Action Letters for the purose of furering their
respective charitable goals and those of the paricipants involved in the related investment
programs. As stated above, the Health System Depository complies with the six factors
specified in the National Association No-Action Letter. Therefore, the objectives underlying
the Health System Depository and the investment programs created by the YMCA, the
AASCU, and the National Association of Congregational Christian Churches, and discussed in .
the No-Action Letters cited in the preceding paragraph, would be identical: to better promote
the charitable puroses for which the entities were established. .
In Mennonite Foundation (September 10, 1980)(hereinafter "Mennonite Foundation
No-Action Letter"), the Staff granted no-action relief under the Securities Act to the
Foundation based on the representation that "all institutions and organizations advised by the
Foundation would be exempt organzations under Section 501(c)(3) of the Tax Code and
would be either (i) affiiates of the Mennonite Church, meanng organzations which are
offcially pars of that denomination whose activities are cared out as programs of the
Mennonite Church, (ii). affiliates of the General Conference of the Mennonite Brethen
Church, or (ii) aligned in outlook with the Mennonite Church, meaning organizations which
are not officially affliated . with the Mennonite Church, but whose stated puroses or activities
furher the mission of the Mennonite Church."
The expanded paricipation anticipated by DCNS would involve entities with a
similar outlook and objectives, analogous to the relationship between the Mennonite Church
and the entities paricipating in the Mennonite Foundation. The objective of the Investment
Program would be identical to the objective of the programs of each of the paricipants:
namely, to contribute as much as possible to the well-being of society though the provision
of high quality, affordable health care services.
. .

Based on the above No-Action Letters and the similarty of the paricipants in the
programs discussed therein to DCNHS's curent and proposed futue activities, we are of the

opinion that the Interests, if offered to Non-Member Paricipants as proposed, would be
exempt from registration under Section 3(a)(4) of the Securties Act. Furermore, we are of
the opinion that registation would not be required even if the contemplated allocation of a

portion of the General Services Expenses, as described herein, were implemented.
2. The Exchange Act

Weare of the opinion that the Interests are exempt from registration pursuant to
Section 12(g)(2)(D) of the Exchange Act. Furhermore, neither the expansion of the Health
System Depository to include Non-Member Paricipants nor the proposed allocation of a
portion of the General Services Expenses, as proposed herein, alters that opinion. Section
12(g) of the Exchange Act provides for the registration of equity securities when held by
seven hundred fifty (750) or more persons. DCNHS wil not attin that number of
paricipants, even after the contemplated expansion of the Health System Depository.
Neverteless, Section
 12(g)(2)(D) exempts from registration "securities of an issuer organized
and operated exclusively for religious, educational, benevolent, fraternal, charitable, or
reformatory puroses and not for pecuniar profit, and no Pai of the net earings of which
inures to the benefit of any private shareholder or individuaL." As the applicant stated in the
AASCU No-Action Letter, "the exemption is intended to exempt offerings and issuers with
respect to which the protections of the federal securities laws are not necessar because such
offerings are not made by profit-motivated principals, promoters or salesmen or for the benefit
of any private person." The investment program created by the AASCU was. exempt from
registration under the Exchange Act based on much the same rationale as its exemption from
the Securities Act.
The Exchange Act exemption is equally applicable to the factual circumstances
surounding DCNHS' s contemplated futue expanion of the Health System Depository and
the implementation of the proposed allocation of some General Services Expenses. The
protection of the federal securities law is unecessa with respect to DCNS or the Health
System Depository because no profit-motivated person ha been involved in the organzation, .
promotion, and expansion of the Health System Depository, and no profit-motivated person
will derive any benefit from the operation or performance of the Health System Depository.
Finally, neither DCNS nor the Health System Depository would come withn the
definition of broker or dealer under the Exchange Act. Sections 3(a)(4) and 3(a)(5),
respectively, define "broker" and "dealer". The definitions are similar in that both require the
respective regulated person to be "engaged in the business." The business in which a dealer
would be engaged would be buying and sellng securties for that person's own account. The
business in which a broker would be engaged would be that of "effecting transactions in
securities for the account of others." Neither DCNHS nor. the Health System Depository can
..

~

be regarded as being "engaged in the business." Securties trades will be pursuat to orders
issued by the investent adviser or advisers having management responsibilty and will be

effected only by a ban or a Registered Broker-Dealer. The activities of DCNHS and its
offcers, directors and employees, in disseminating information about the Health System
Depository to actu paricipants and foreseeable paricipants will comply with the
requirements of Rule 3a4- 1 under the Exchange Act (the "Rule"), aid their activities will be
limited to those permitted by paragraph (a)(4)(ii) of
 the Rule. No representative or other
associated person of DCNHS who has communcations with paricipants in the Health System
Depository (an "Associated Person") will be subject to a sttutory disqualification described in
paragraph (a)(l) of the Rule and no Associated Person will receive any transaction based
compensation. Furtermore, each Associated Person's activities with paricipants in the
Health System Depository wil be restricted to ministerial and clerical matters and preparation
and delivery of written communications that have been approved by an offcer of DCNHS.
In American Heart Ass'n, (February 26, 1993)(hereinafter "American Hear
Association No-Action Letter") the Staff exempted the American Hear Association (the
"AHA") from registration under Section 15(b) of
 the Exchange Act. The AHA contended that
neither it nor its employees would be "engaged in the business," since a registered broker￾dealer would make all securities trades and employees would be engaged only in ministerial
activities and not specially compensated though commissions or salaries based on the amount
or performance of the investments.
The Staff also exempted the AASCU Capital Fund from registration under the
Exchange Act. The AASCU Capital Fund engaged a registered investment adviser. No par
of the net earings of the AASCU Capital Fund would inure to the benefit of any private
shareholder or individuaL. Moreover, the paricipants in the AASCU Capital Fund would
reimburse the AASCU Capital Fund for the actual cost incurred in acting as a representative
of the paricipating institutions, would be charged for the fees imposed by the investment
adviser, and under the Administration Agreement, would reimburse the AASCU for its direct
expenses in administering the Fund and for indirect costs according to a fee schedule based on
the market value of the securities and the amount of cash held by the Fund as necessar
incidental expenses.
Neither DCNHS nor the Health System Depository can be considered to be "engaged
in the business" under the Exchange Act. The Health System Depository is similar to the
programs in the American Hear Association No-Action Letter and the AASCU No-Action
Letter. DCNHS has employed and will continue to employ a registered investment adviser.
The employees of DCNHS will continue to perform only administrative and ministerial duties
regarding the Health System Depository and the Members pay only direct costs associated
with the administration of the Health System Depository. It is proposed that the Members
and Non-Member Paricipants pay a portion of General Services Expenses for such indirect
costs as building and maintenance, pro-rata to their investments and for baning fees on a

Page i 6
usage basis. Ths proposed arangement is consistent with the arangement described in the
AASCU No-Action Letter. Since the Members and Non-Member Paricipants will pay only
administrative expenses, the Health System Depository has contracted for and will continue to
use the services of a registered investment adviser, and employees of the Health System
Depository will remain responsible only for administative and ministerial duties. regarding the
Health System Depository, we are of the opinion that neither DCNS nor the Health System
Depository will be "engaged in the business" as either a broker or dealer under the Exchange
Act
3. The Investment Company Act
. Section 3(c)(lO) of the Investment Company Act excludes from the definition of an
investment company "any company organized and operated exclusively for religious,
educational, benevolent, fraternal, charitable or reformatory puroses, no par of the net
earings of which inures to the benefit of any private shareholder or individuaL." Since
Section 3(c)(lO) of the Investment Company Act is virtually identical to Section 3(a)(4) of the
Securities Act and Section 12(g)(2)(D) of the Exchange Act, we are of the opinion that the
discussion of the applicabilty of these exemptions to the Health System Depository and
DCNHS as well as the No-Action Letters cited above, is equally relevant here. See also,
American Hear Association No-Action Letter. Consequently, neither DCNHS nor the Health
System Depository should be considered an investment company and each should be exempt
from registration under the Investment Company Act pursuantto Section 3(c)(10) thereof.
4. The Investment. Advisers Act

Section 202(a)(1l) of the Investment Advisers Act defines an investment adviser as

"any person who, for compensation, engages in the business of advising others, either directly
or though publications or writings, as to the value of securities or as to the advisabilty of
investing in, purchasing, or sellng securities, or who, for compensation and as par of a
regular business, issues or promulgates analyses or report concernng securties.. ." Whether
the proposed expanion of the Health System Depository to include Non-Member Paricipants
or the proposed allocation of some General Services Expenses would cause DCNHS or the
Health System Depository to be an investment adviser under ths definition depends on
whether DCNHS or the Health System Depository would (a) provide advice regarding
securities, (b) be in the business of providing such advice to others, and ( c) provide such
advice for compensation. As the YMCA stted in its letter of inquiry, to be an investent
adviser all thee elements of Section 202(a)(11) must be satisfied.
We are of the opinion that neither DCNHS nor the Health System Depository would
be an investment adviser under Section 202(a)(11) of
 the Investment Advisers Act. Because
the proposed expansion of the Health System Depository would only increase the number of
paricipants, but not the involvement or interaction of DCNS in the Health System

Depository, DCNHS would, in spite of such expanion, contiue to be exempt from the
requirements of the Investment Advisers Act since it would not provide advice regarding
securities, nor be "in the business of' providing such advice to others, nor would it do either
for compensation. Furermore, the iiichision ora portion of General Services Expenses in
the costs being allocated would not alter that opinion. However, should the Staf not agree
with our conclusion that neither DCNS nor the Health System Depository is an investment
adviser under Section 202(a)(1 1) of the Investment Advisers Act, we also believe that
DCNHS and the Health System Depository are exempt from registration pursuat to Section
203(b)(4) of the Investment Advisers Act.

(a) Neither DCNHS nor the Health System Depositorv will give investment
advice.
Based on the Staffs position in the American Hear Association and the National
Association No-Action Letters, neither DCNHS nor the Health System Depository should be
subject to regulation as an investment adviser. DCNHS, like the AHA and the National
Association of Congregational Christian Churches, has retained and will continue to retain
professional money managers, all of which wil be registered investent advisers under the
Investment Advisers Act, to manage the assets of the Investment Program. The role of the
Investment Committee is similar to the roles of the Corporation and Association in the
National Association No-Action Letter and of the AHA in the American Hear Association
No-Action Letter. Those entities, like the Investment Committee, chose the investIent
adviser, promulgated guidelines or investment objectives, and had ultimate supervisory
responsibility for the investment program, but played no role in the choice of investments.
Although DCNHS recommends paricipation in the Health System Depository to its Me~bers
and expects to recommend such paricipation to proposed Non-Member Paricipants, it does
not and will not require such paricipation; it will merely offer the opportty to paricipate
as did the AHA in the American Hear Association No-Action Letter and the Association and
Corporation involved in the program discussed in the National Association No-Action Letter.
(b) Neither DCNHS nor the Health System Depositorv would be in the
"business of' providing advice regarding securties to others.
(1) Inclusion of Some General Services Expenses as Costs Allocated among

DCNHS and its Subsidiares
The allocation of expenses among a parent and its controlled subsidiaries, pursuant to
the curent and proposed allocation arangements, raises issues that are an internal matter not
falling within the ambit of protection under the Investent Advisers Act. Until the expanded
paricipation occurs, DCNHShas been and will be allocating expenses among entities that,
except in the case of thee Associate Members, which it parially controls, it wholly controls.
Equitable Capital Management Corporation (April 18, 1989)(hereinafter "Equitable Capita
..

No-Action Letter") suggests that the expense arangement. between a parent and subsidiar,

can be distinguished from traditional fee arangements between an inv~stent adviser and its
client. In the Equitable Capital No-Action Letter, a subsidiar registered under the Investment

Advisers Act provided investment advisory servces for the parent. At times, the advisory
arangement provided for performance-based fees in violation of Section 205 of the
Investment Advisers Act. However, the Staff granted no-action relief based on the fact that
the request related only to the subsidiar's management of the parent's assets and the
management of the assets of other wholly-owned subsidiares. The. subsidiar argued that the
clear focus of the Investment Advisers Act is with regard to persons who are in the business

of giving advice to the "public." Moreover, it observed
 that there is no public interest to be
served in the regulation of the internal business arangements between a corporate parent and
its subsidiar.
The principles underlying the Equitable Capital No-Action Letter are equally if not
more applicable to the allocation of expenses between DCNHS and those wholly controlled
and parially controlled Members in the current expense situation. The Investment Advisers
Act, which seeks. to protect the clients of investment advisers, should not play as urgent a role
where the entities are wholly-controlled or parially controlled. An investment adviser is
defined as a person who advises "others." A controlled entity appears less like others and
more like an extension of self. Moreover, DCNHS's expense allocation arangement is
merely the administration of internal business between parent and subsidiar. The aggregate
expenses allocated on an anual basis to the Full Members' and Associate Members' assets
amount to less than twenty-three one hundredths of a percent (.23%) of the Members'
investment assets. Even if the proposed allocation of some indirect expenses were
implemented, the percentage would not rise above one-four of one percent (.25%). Finally,
as the Equitable Capital No-Action Letter suggests, the level of scrutiny under the Investment
Advisers Act for parent-subsidiar interaction and investment services is lessened.
Therefore, we are of the opinion that neither the. curent arangements to allocate
expenses among Members nor the proposed expansion of the
 expenses being allocated among
Members so as to include some General Services Expenses would cause DCNHS or the
Health System Depository to be in the "business or' providing advice regarding securties to
others~
(2) Expansion of entities to which expenses are charged to include Non-Member

Paricipants
Furermore, it is our opinion that neither DCNS nor the Health System Depository
will be engaged in the "business or' providing advice regarding securities to others upon the
addition of Non-Member Paricipants to the Health System Depository and the charging of
expenses to such Non-Member Paricipants.
"

The purose of DCNS in establishing the Health System Depository and in offering
the other services provided by it is to fuer the chartable. goals of the Exempt Organzations
that. are its Members. The activities of the Health System Depository are wholly incidenta to
the promotion and advancement of the chartable goals of all curent and proposed .
paricipants. The rationale underlying the existence and expanion of the Health System
Depository is identical to the rationale underlying the programs created by the AH and the
Nationa Association of Congregational Chrstian Churches (the "National Association") in
that the investment programs are wholly incidenta to, and a means to fulfill the chartable
puroses of the respective institutions.
The Health System Depository, the Investment Trust created by the National
Association, and the Equity and Intermediate Funds created by the AHA each pool the assets
of their non-profit paricipants in order to increase the investment power of such paricipants
and.thus provide opportnities that the paricipants would not have had individually. As will
be the case with the Non-Member Paricipants, none of the paricipants, in the case of the
Nation.al Association or the AHA, appeared to be entirely controlled by the National
Association or AHA respectively. .

Section 202(a)(11) of
 the Investment Advisers Act states that an investment adviser is
a "person who, for compensation, engages in the business of advising others.. ." The concept
of "others" would not encompass Non-Member Paricipants which become paricipants of the
Health System Depository. The Letter of Inquiry submitted to the Staff in connection with
the Equitable Capital No-Action Letter suggests that the clear focus of the Investment
Advisers Act is with regard to persons who are in the business of giving advice to the
"public" and that the Investment Advisers Act was not intended to regulate internal
relationships. Although the Staff did not speak to this point directly, the Staff did
 grant
Equitable Capital's request, the Staff s response being based "paricularly on the fact that your
request relates only to Equitable Capital's management of the general account assets of
Equitable and the general account assets of other wholly-owned life insurance subsidiaries of
Equitable. "
As a policy matter, we are of the opinion that the factul circumstaces surounding
the proposed expanion of the Health System Depository are analogous to the facts in the

Equitable Capital No-Action Letter despite the fact that the Non-Member Paricipants would

not be wholly controlled entities of DCNHS. First, the expansion of the Health System

. Depository would allow only charitable health care related intitUtions to.
 paricipate as Non￾Member Paricipants. The Non-Member Paricipants would have the sae chartable goals
and interests as the curent Members and the Health System Depository would be offering the.
Non-Member Paricipants the same choices and cost effciencies as offered to the Members
who would, in tu, contribute to the abilty of such Non-Member Paricipants to preserve the

viabilty of their abilty to provide health care services without the motive of profit.

Paricipation in DCNHS and the Health System Depository would not be open to the public
'.

since paricipation would be limited to entities tht meet cert criteria thus assurng that
their goals and puroses were similar to those of the Members. Second, the magntude of
expenses being charged would remain minial in comparson to the assets invested by the
Non-Member Paricipants and the services provided by the Health System Depository. As
discussed herein, the Sta has permitted some charging of expenses for services provided by
charitable iriitutions for the benefit of other chartable insitutions which do not appear
wholly controlled.
Despite the expansion of the Health System Depository to Non-Member Paricipants,
the Health System Depository would retain a common identity, purose, and interest among
all of its paricipants to provide health care related services without a profit motive. Such
common goals and interests shòuld not trigger the concerns and protections for. which the
Investment Advisers Act was promulgated.
Accordingly, we are of the opinion that the proposed inclusion of Non-Member
Paricipants among the entities to which expenses are charged would not cause DCNHS or the
Health System Depository to be in the "business or' providing advice regarding securities to
"others. "
( c) Neither DCNHS nor the Health System Depository will receive
compensation.
In the AASCU No-Action Letter, the AASCU, which was not registered under the
Investment Advisers Act, was permitted to be reimbursed for its direct expenses of
administering the fund for member universities and educational systems that were not
controlled by the AASCU, and, in addition, for a portion of its indirect costs, according to a
fee schedule. The reimbursement was, according to the AASCU, a necessar incidental cost
to the paricipating institutions of the operation of the investment program. Although the
AASCU did not seek relief under the Investment Advisers Act, the Staff in its response did
not state that registration thereunder was required. In Florida Baptist Investment Services.
Inc. ("FBIS"), (June 30, 1994)(hereinafer the "FBIS No-Action Letter"), although the FBIS
did not request relief under the Investent Advisers Act, the employees of FBIS were
permitted to receive "reasonable compensation for services actuly rendered in the

performance of his or her regular duties" without the Staf addressing the necessity of
registration under the Investment Advisers Act.
On the other hand,
 no-action relief was not granted to the United Methodist
Foundation in United Methodist Foundation of the Baltimore Anual Conference. Inc..
(September 29, 1988) (hereinafter "United Methodist Foundation No-Action Letter") because
the Foundation charged a fee for its investment management services based on a percentage of
the income generated in violation of Section 205(a)(1) of the Investment Advisers Act. In
..

Page 2 i
addition, the United Methodist Foundation was also criticized for the fact that it took custody
of and managed fuds and securties for certn United Methodist Churches.

In Northeastern Pennsylvania Synod of the Evangelical Lutheran Church in America.
(May 2, i 988)(hereinafer "Synod No-Action Letter"), the Sta could not conclude that

reimbursements for expenses that included travel and meal expenses, portions of salares,
supplies, and expenses associated with offce costs and computers were not an economic
benefit and thus, "compensation" under the Investment Advisers Act. However, the issue of
compensation only became relevant because the Staff also came to the conclusion that the
Synod was engaged in the "business or' providing advisory services under the Investment
Advisers Act and therefore would have to register. That conClusion was based on a factual
pattern not present in the case of DCNHS under which the Synod would provide hands-on
advice by assisting each paricipant in evaluating its own financial situation and determining
its own investment objectives and in communcating its decisions to the investment advisers.
Furthermore, the Synod would conduct seminars and meetings on the investment program for
the benefit of the paricipants.
DCNHS's curent and proposed expense allocations and the degree of interaction
between institution and paricipants is more analogous to the AASCU, the FBIS, and the
National Association than to the United Methodist Foundation and the Synod. In the National
Association No-Action Letter, assets from the Trust would pay for investment management
fees, custodian's fees, and whatever out-of-pocket expenses were incurred in creating and
organizing the Trust. As in the AASCU No-Action Letter, the allocation of expenses among
the Members and proposed Non-Member Paricipants is minimal and only for the activities
incidental to the management of the Health System Depository. The charging of costs would
remain minimal even if the proposed indirect costs were also charged. As in the National
Association No-Action Letter, only out-of-pocket costs are proposed to be charged. DCNHS
does not go as far as the FBIS in that it does not seek compensation for services rendered.
DCNHS seeks only to break even. It will not charge
 Members or Non-Member Paricipants
based on the income generated, as did the United Methodist Foundation. Moreover, the
degree of interaction between the paricipants and DCNHS is minimal. A thrd-par
custodian holds the assets. DCNHS does not and will not provide advice on investment
objectives as did the Synod; it merely provides Members and proposes to provide Non￾Member Paricipants the opportity to paricipate in the Health System Depository. As a
chaitable institution, DCNHS does not seek any profit from the provision of services pursuat
to the Health System Depository. Therefore, we are of the opinion that neither the curent
expense allocation nor the proposed expanion of the expenses being charged Members and
Non-Member would constitute compensation for the puroses of the Investent Advisers Act.
Moreover, as discussed above, the Sta has granted no-action relief to charitable entities
which charged similar expenses relating to services provided to other chartable entities.
'.

The definition of investment adviser pursuat to Section 202(a)(1l) of the Investment
Advisers Act sèts out a thee-pronged test: first, the person mus be providing advice
regarding securties, second, the person mus be in the business of providing such advice, and
third, the person must do so for compensation. The United Methodist Foundation No-Action
Letter and the Synod No-Action Letter reflect that the Sta focuses on compenstion issues
only after it determined that the person was "providing advice" and was "in the business of
advising others." As indicated above, it is our opinion that DCNHS will not be providing
advice regarding securities and would not be in the business of advising others regarding
securties if the Health System Depository is expanded to include Non-Member Paricipants.
Consequently, it is our fuher opinion that neither DCNHS nor the Health System Depository
is required to register
 under the Investment Advisers Act, even if the charging of expenses
were considered to create "compensation".
(d) Even if DCNHS and/or the Health System Depositorv were deemed investment
advisers under Section 202( a)(ll) of the Investment Advisers Act. both
DCNHS and the Health System Depository would qualify for. exemotion from
registration oursuant to Section 203(b)( 4) of the Investment Advisers Act.
Section 203 (b)( 4) was
 enacted to exempt certain charitable organizations that are
considered investment advisers under the Investment Advisers Act. To qualify for the Section
203(b)(4) exemption, the entity must: (1) be a charitable organization as defined.under
Section 3(c)(10)(D) of the Investment Company Act and (2) provide advice only to charitable
organizations, funds excluded from the definition of an investment company under Section
3(c)(10)(B) of the Investment Company Act or trsts or other institutions described in Section
3(c)(lO)(B) of the Investment Company Act. DCNHS and the Health System Depository
satisfy both components of the exemption:
First, DCNHS is an Exempt Organization whose benefits and net earings do not inure
to any private shareholder or individuaL. As stated above in the discussion of the Investment
Company Act, we believe tlat DCNHS and the interests of the Health System Depository
satisfy the requirements of Section 3(c)(10)(D) of the Investment Company Act since DCNHS
is a chaitable organzation as defined in such section and the Health System Depository has
no existence apar from DCNHS.
Second, all of the curent Members of DCNHS and all paricipants in the Health
System Depository are charitable organzations as defined by Section 501(c)(3) of the Tax
Code. All proposed paricipants in the services to be offered by DCNS would also be
charitable organizations as so defined such that the advice provided as a service of the Health
System Depository would be provided strictly to charitable organzations.
For these reasons, DCNHS and the Health System Depository, if deemed by the Staff
to be "investent advisers" under Section 202(a)(1 1) of the Investment Advisers Act, would

..

, ., ,. "i

neverteless be exempt from registration according to Section 203(b)(4) of the Investment
Advisers Act as all paricipants in the services offered by both DCNS and the Health
System Depository are Exempt Organzatioii.

Since DCNHS and the Health System Depository would not be providing advice
concernng securities, would not be in the business of providing such advice to others, would
not provide such advice for compensation, and would also quaify for exemption from
registration if found to be an investent adviser we are of the opinion that neither DCNS
nor the Health System Depository would be required to register as an investment adviser
under the Investment Advisers Act upon the expanion of the . Health System Depository.
E. Conclusion

Pursuant to the above analysis of the Staffs position in past No-Action Letters, we are
of the opinion that the proposed allocation of some of the General Services Expenses and the
intended expansion of the Health System Depository to Non-Member Paricipants should not
require that (i) the Interests (interests in DCNHS and the Health System Depository, including
the Investment Program) be registered under the Securities Act or under the Exchange Act, or
(ii) DCNHS or the Health System Depository be registered as a dealer or broker under the
Exchange Act, or as an investment company under the Investment Company Act, or as an
investment adviser under the Investment Advisers Act.
Accordingly, we respectfully request that the Staff advise us that it would not
recommend any enforcement action to the Commission if neither DCNHS or the Health
System Depository registers under the above-mentioned securities laws upon (x) the expansion
of the Health System Depository to other health-care oriented not-for-profit entities and (y)
the implementation of the proposal to charge General Services Expenses to Members and
Non-Member Paricipants. We respectfully request the opportity for a conference in
advance of any adverse determination.
Very trly your,

t~. l;. ~-r
Carla B. Herwtz Esq.
Choate, Hall & Stewar
Y~tJ~
Danel W. Coyne, Esq.
O'Keefe Ashendon Lyons & Ward
30 Nort LaSalle, Suite 4100
Chicago, llinois 60602
(3 12) 621-0400
DSl.36743S.1 '.