SEC Division of Investment Management staff letter: Edward H. Fleischman

.- .,.......,... ..". .... ."--;--"-'._ UNITED STATES SECURmES AND EXCHNGE COMMISSION

WASHINGTON. D.C. 20549
DIVISION 01"
INVESTMENT MANAGEMENT
June 30, 1994 .~ ~

"Am! ---- C:.
Edward H. Fleischan, Esg.

Rosenman' Colin SEON )ec/ú) 575 Madison Ave. RULE New York, N. Y. 10022-2585

PUBLIC
Re: C; /30/9 y The PanAgora Group Trust No-Action Let\VSLABILITY Dear Mr. Fleichn:

Your letter to the Division of Investment Management dated

June 24, 1994 notes widespread concern among practitioners in the

fields of both employee benefits and investment company law about

the implications of our recent letter to The PanAgora Group Trust

(pub. avail. Apr. 29, 1994) (the "PanAgora letter"). In the

PanAgora letter, the staff stated that for purposes of the

exception for private investment companies set forth in Section

3 (c) (1) of the Investment Company Act of 1940, we would consider a defined contribution plan participant who decides whether or

how much to invest in a private investment company to be a

beneficial owner of the company's securities. The group trust

described in the Pangora letter and any investment fund

comprising the group trust, therefore, would be required to count

as beneficial owners all participants in participant-directed

def ined contribution plans who invest in that trust or investment

fund.
In your letter, you ask the staff to clarify the

applicability of the PanAgora letter to private investment

companies in which participant-directed defined contribution

plans invest under circumstances or conditions that differ from

those presented in the PanAqora letter. You offer to provide the

staff, and to elicit other interested parties to provide the

staff, with information relevant to the requested clarification.

You also ask that, with respect to existing arrangements

under which defined contribution plan participants have directed

plan investments into private investment companies that have not

counted the individual participants as beneficial owners, we

delay the effectiveness of our response in the PanAqora letter

for a reasonable time. You believe that this would allow those

private investment companies to liquidate, in an orderly manner,

investments that may cause them to violate the. requirements of

Section 3 (c) (1).
We have determined to delay the effective date of the

PanAqora letter response until January 1, 1995. We also would

consider information that interested parties submit in writing to

help clarify the applicability of the PanAqora letter to facts

different fram those presented in that letter. Any request for

clarification should fully describe the facts to be distinguished

from those presented in the PanAqora letter and analyze from a

leqal and policy perspective whether, under those different

facts, defin contribution plan participants who direct their

plan investments in a private investment company should be

treated as beneficial owners for purposes of Section 3 (c) (1). Sincerely, ~~¿.~ Richard F~ackson Special Counsel

Office of Chief Counsel

2

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ROSENMAN & COLIN
575 MADISON AVENUE. NEW YORK. NY 10022-2585

'-ELEPHONE 12121 gAO-aBOO SA"'UE~ 1 ROSEN"'AN (1696-'973) c~eLE ROCOKAY NEwyOPK RA~PH I' CO~IN (1900-19SS) 'T£LECOPIER l2!21940-B776 IZIZI 935-0679 WASHINGTON OI'I'CE TE~EX "Z7571 ROSCO~ (ITT) 971SZ0 RCI'~C NYK (w uJ June 24, 1994 1300 19'" STREET, N. W. WASHINGTON, D. C. 20036 TE~EPHONE (2DZ) 463-7177 EDWARD H. FLEISCH MAN TEL. ,Z121 940-6640 Division of Investment Management

Securi ties and Exchange Commission

450 5th street, N.W.

Washington, D.C. 20549

Attn: Barbara Green, Esq.,

Deputy Director

Re: Staff Letter concerning The PanAgora

Group Trust

Ladies and Gentlemen:

We refer to the letter (the "PanAgora Letter") dated and

publicly available April 29, 1994 from Richard Jackson, Special

Counsel in the Division, concerning the PanAgora Trust. We have

no authorization to speak for any firm or organization other than

Rosenman & Colin, but we can assure you, on the basis of

inquiries we have made among active practitioners in the fields

of both employee benefits and investment company law, of the

widespread concern evoked by the PanAgora Letter.

The PanAgora Letter concludes that a participant in any

defined contribution plan who has the ability to direct his or

her balance in the plan into an investment in the group trust

and/or one or more of the funds comprising that group trust would

be considered a beneficial owner of the securities of that group

trust and of each fund in the group trust into which he or she

has directed a portion of his or her balance under the plan.

Thus, each such participant would be considered as one person for

the purposes of determining whether or not the group trust and/or

the respective separate investment funds will qualify for the 100

securityowner exemption provided by Section 3 (c) (1) of the Investment Company Act of 1940 (the "Act"). While written in

response to an inquiry from an undivided group trust with no

expressed limitations on participants' authority to make

" t
Division of Investment Management

June 24, 1994

investment decisions, this conclusion could equally extend to

investments in other forms of collective investment vehicles if

indicia associated with participant direction of investments are

present.
As you know, the staff letter to Intel corporation (the

"Intel Letter"), dated and publicly available November 18, 1992

(and included on the SEC List of Significant staff Letters dated

March 11, 1993), which addressed the attribution analysis under
Section 3 (c) (1) (A) of the Act, assumed (without deciding) that,
unless Section 3 (c) (1) (A) made the general rule of Section 3 (c) (1) inapplicable, a plan with participant direction would only be considered as one person for the purposes of Section 3(c)(1). It is our experience that a number of disparate collective

investment vehicles have chosen to utilize the exemption from the definition of "investment company" provided by Section 3 (c) (1) of the Act and, in rel iance upon the Intel Letter, have accepted

qualified plans as investors in such vehicles. Furthermore, it

is our experience that a number of such vehicles, in accepting

the entry of qualified plans into participation, have made no

inquiry as to whether those qualified plans allow or prohibit

participant direction of investments. Immediate and across-the￾board application of the PanAgora conclusion without taking into

account differences among categories of collective investment

vehicles and the terms governing operation of their constituent

investors would have the effect of leaving many such investment

vehicles in a putatively non-exempt status, to the severe

detriment not only of the vehicles themselves but of the

participating employee "securi tyowners". We, therefore,

respectfully request that the staff clarify the applicability of

the PanAgora Letter to investment vehicles of various categories

other than undivided group trusts and/or governed by terms

placing varying limitations upon participant direction of

investments therein. This would allow investment vehicle

sponsors and other interested parties an opportunity to provide

the staff with additional information and argument upon which to

make a more informed decision on these issues. This Firm will be

pleased to provide the staff with such information as we can, and to el ici t from other interested parties additional information, relevant to such clarification. We also respectfully request that, at least with respect to

vehicl~s that have already accepted participant-directed plans as

investors in reliance upon the implicit approval of the Intel

Letter, the staff announce a delay in the application of the

PanAgora conclusion for a reasonable time. This would allow the

orderly liquidation of investments that may be impermissible

, .. T ..
Division of Investment Management

June 24, 1994

under the PanAgora Letter as clarified by the staff, and would

avoid placing collective investment vehicles or their

"securityowners" at risk of economic loss or law violation for

actions taken in good faith based upon prior staff interpretation of the statute. We shall very much appreciate your prompt attention to these

requests.
Very truly yours,

ROSENM & COLIN
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