SEC Division of Investment Management staff letter: H.E.B. Investment and Retirement Plan (H.E. Butt Grocery Company)

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H.E.B. Investment & Retirement Plan H.E. Butt Grocery Company

May 18, 2001

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20001171143 H.E.B. Investment and Retirement Plan File No. 132-3

Your letter dated April 10, 2001, requests our assurance that we would not recommend enforcement action to the Commission under Section 7(a) of the Investment Company Act of 1940 ("Investment Company Act") against funds that are excepted from the definition of "investment company" by Section 3(c)(7) of the Investment Company Act ("Section 3(c)(7) Funds") if the H.E.B. Investment and Retirement Plan ("Plan") invests in such funds. FACTS

You state that the Plan is a qualified defined contribution plan that provides retirement benefits for the participating employees and beneficiaries ("Plan participants") of the H.E. Butt Grocery Company ("Company"). You also state that the aggregate amount of investments owned by the Plan as of March 30, 2001, was approximately $800,000,000. You represent that the Company and the Plan participants contribute to the Plan, and the Plan qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended, with respect to the Plan participant contributions. You state that Plan participants may allocate their account value as they elect among six investment options that are managed and invested by the eight trustees of the Plan. The investment options are the Aggressive Fund, the General Fund, the Conservative Fund, the Stocks-only Fund, the Bonds-only Fund, and the Money Market Fund (collectively, "Investment Options"). You state that investment decisions for the Investment Options are made by the Plan trustees, through an investment committee consisting of five of the trustees. You state that the Plan trustees have invested portions of the Aggressive Fund and the General Fund in investments that are excepted from the definition of "investment company" by Section 3(c)(1) of the Investment Company Act ("Section 3(c)(1) Funds"). 1 You also state that the Plan trustees are responsible for making the initial decision to invest Plan assets in a Section 3(c)(1) Fund and subsequent decisions regarding the amount and the duration of the investment. You represent that the Plan participants' investment discretion is limited to allocating their accounts among the Investment Options. You represent that the Plan trustees have managed the Plan according to the representations set forth in The Standish, Ayer & Wood, Inc. Stable Value Group Trust (pub. avail. Dec. 28, 1995) ("Standish Ayer") in order to ensure that a Section 3(c)(1) Fund may treat the Plan as a single beneficial owner for purposes of the one hundred-person limit of Section 3(c)(1). 2

You state that the Plan trustees now propose to invest a portion of the Aggressive and General Funds in Section 3(c)(7) Funds. You ask us to conclude, analogous to our Section 3(c)(1) position in Standish Ayer, that a Section 3(c)(7) Fund in which an Investment Option of the Plan invests may treat the Plan, and is not required to treat each Plan participant, as a qualified purchaser for Section 3(c)(7) purposes. ANALYSIS

The National Securities Markets Improvement Act of 1996 3 ("NSMIA") added Section 3(c)(7) to the Investment Company Act. Section 3(c)(7) excepts from the definition of "investment company" any issuer whose outstanding securities are owned exclusively by persons who, at the time of the acquisition of the securities, are qualified purchasers, and which is not making and does not propose to make a public offering of its securities. Section 2(a)(51)(A)(iv) defines "qualified purchaser" to include "any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments." 4 You assert that the Plan will meet the definition of "qualified purchaser," as defined in Section 2(a)(51) and required by Section 3(c)(7), because the Plan owns and invests on a discretionary basis not less than $25 million in investments and will be acting for its own account. You state that most of the Plan participants will not meet the "qualified purchaser" definition. The Commission, when adopting rules to implement Section 3(c)(7), discussed the circumstances under which a pension or other type of employee benefit plan that owns and invests on a discretionary basis not less than $25 million of investments in the aggregate could be considered to be a qualified purchaser. 5 The Commission stated that a defined benefit retirement plan would be a qualified purchaser with respect to investments made by plan trustees if (1) plan participants are not permitted to decide whether or how much to invest in particular investment alternatives, and (2) the decision to invest in a Section 3(c)(7) Fund is made by the plan trustee or other plan fiduciary that makes investment decisions for the plan. The Commission indicated, however, that a Section 3(c)(7) Fund should treat Section 401(k) plans differently from such defined benefit plans when a Section 401(k) plan allows an employee to direct the investment of his or her account balance to specified investment alternatives that are made available through the plan (a "participant-directed plan"). In that case, a Section 3(c)(7) Fund should "look through" the participant-directed plan to the plan's participants for purposes of determining whether each investor in the Section 3(c)(7) Fund is a qualified purchaser. The Commission also noted in the Adopting Release the staff's positions in The PanAgora Group Trust (pub. avail. Apr. 29, 1994) ("PanAgora") and Standish Ayer that, taken together, provide guidance regarding the circumstances under which a participant-directed plan that operates in a manner resembling a defined benefit plan may, for certain purposes, be treated like a defined benefit plan. Briefly, in PanAgora, the staff looked through a participant-directed plan and concluded that each participant in the plan who allocates a portion of his or her account to a particular Section 3(c)(1) Fund should be treated by the
fund as a single beneficial owner for purposes of the one hundred-person limit of Section 3(c)(1). In PanAgora, each plan participant could attain individualized levels of potential risk and return and make individual investment decisions by allocating his or her plan account assets among various investment alternatives, including by investing entirely or partially in a Section 3(c)(1) Fund. We took the position that, for purposes of determining compliance with the one hundred-person limit of Section 3(c)(1), each plan participant in a participant-directed plan who invests through the plan in a generic investment option consisting of a Section 3(c)(1) Fund, and who decides whether or how much to invest in the Section 3(c)(1) Fund, should be treated as a single beneficial owner of the Section 3(c)(1) Fund's securities. 6

In Standish Ayer, we took the position that a participant-directed plan that offers its plan participants generic investment options that, in turn, may invest a portion of their assets in a Section 3(c)(1) Fund, could be treated as a single beneficial owner of the Section 3(c)(1) Fund's securities when, among other things, the decision as to whether and how much to invest in a Section 3(c)(1) Fund would be made solely by a plan fiduciary, and no representation would be made to plan participants that any specific portion of the relevant generic investment option would be invested in any particular Section 3(c)(1) Fund. In Standish Ayer, the plan was managed so that plan participants would be unaware of how much an investment option invested in any particular Section 3(c)(1) Fund. Our position in Standish Ayer recognized that a participant-directed plan may operate in a manner resembling a defined benefit plan under certain circumstances. In the Adopting Release, the Commission affirmed our position in PanAgora but stated that it was not endorsing the analysis set forth in Standish Ayer for purposes of Section 3(c)(7). 7 The Commission did not reject the staff's analysis in Standish Ayer. Instead, the Commission requested that we reconsider whether the position taken in Standish Ayer is consistent with the position reflected in PanAgora for purposes of Section 3(c)(1) and consider whether the position taken in Standish Ayer is appropriate in the context of Section 3(c)(7). 8 As a result, before considering your specific request, we must first reconsider the application of Standish Ayer in the context of Section 3(c)(1), including its consistency with PanAgora. Standish Ayer is Consistent with PanAgora

The staff has taken the position that, for purposes of the one hundred-person limit of Section 3(c)(1) of the Investment Company Act, a partnership will constitute only one beneficial owner (provided that the attribution provision does not apply 9 ) when the partnership is managed as a common investment vehicle, rather than as a device for facilitating individual investment decisions. 10 In contrast, the staff also has taken the position that for Section 3(c)(1) purposes it will look through a partnership and treat each individual partner as a beneficial owner of a Section 3(c)(1) Fund's securities, regardless of the applicability of the attribution provision, when the partnership is managed as a device for facilitating individual investment decisions of the partners, instead of as a common investment vehicle. 11 Consequently, when a partnership holds a Section 3(c)(1) Fund's securities, the beneficial owner of those securities for Section 3(c)(1) purposes will be deemed to be the partnership if the partnership decides whether and how much to invest in the Section 3(c)(1) Fund; when the individual partners, however, have the ability to determine whether or how much of a partnership's capital will be invested in a Section 3(c)(1) Fund, the Section 3(c)(1) Fund should "look through" the partnership, and treat the individual partners as the beneficial owners of the Section 3(c)(1) Fund's securities for purposes of Section 3(c)(1). In both PanAgora and Standish Ayer, we considered the prior no-action positions issued in the context of partnership investments in Section 3(c)(1) Funds, and we applied a similar analysis. 12 In PanAgora, we concluded that the individualized nature of the plan participant's investment decisions required each plan participant to be treated as a beneficial owner for Section 3(c)(1) purposes; plan participants could elect to invest all or a portion of their assets in certain investment alternatives that could consist entirely of a particular Section 3(c)(1) Fund. 13 In Standish Ayer, in contrast, the participant-directed plan was not managed to facilitate a participant's decision to invest in any particular Section 3(c)(1) Fund, and we viewed the plan as a single beneficial owner of a Section 3(c)(1) Fund for Section 3(c)(1) purposes. 14 Each plan participant in Standish Ayer made a decision to invest in generic investment options that, in turn, could invest in unspecified Section 3(c)(1) Funds. Because of these distinctions, we continue to believe that Standish Ayer is consistent with PanAgora, as well as consistent with the prior no-action positions issued in the context of partnership investments in Section 3(c)(1) Funds. The Standish Ayer Position is Appropriate for Purposes of Section 3(c)(7)

The Commission has adopted the analysis set forth in PanAgora for purposes of Section 3(c)(7). 15 Consequently, a Section 3(c)(7) Fund should "look through" a participant-directed plan in which each plan participant may invest through the plan in a generic investment option consisting of a Section 3(c)(7) Fund and may determine whether or how much to invest in the Section 3(c)(7) Fund. 16 Under such circumstances, each plan participant investing in the Section 3(c)(7) Fund is acting for his or her own account and must meet the definition of qualified purchaser. 17 As noted above, however, with respect to a participant-directed plan operated in a manner resembling that of a defined benefit plan, the Commission directed us to consider whether the position taken in Standish Ayer is appropriate in the context of Section 3(c)(7). 18 We believe that it is. Specifically, we believe that applying the Standish Ayer analysis in the Section 3(c)(7) context is consistent with the Commission's statements regarding the treatment of defined benefit plans as qualified purchasers. In the Adopting Release, the Commission stated that a retirement plan that owns and invests on a discretionary basis not less than $25 million of investments in the aggregate should be treated as a qualified purchaser if (1) plan participants are not permitted to decide whether or how much to invest in particular investment alternatives, and (2) the decision to invest in a Section 3(c)(7) Fund is made by the plan trustee or other plan fiduciary that makes investment decisions for the plan. In our view, a participant-directed plan that can make all of the representations made in Standish Ayer meets those factors. Accordingly, we believe that such a plan that owns and invests on a discretionary basis not less than $25 million of investments in the aggregate would, like a defined benefit plan, meet the definition of qualified purchaser because it is acting for its own account. We also note that our position is consistent with Congress's treatment of certain operating companies as qualified purchasers. 19

We also believe that applying the Standish Ayer analysis in the context of Section 3(c)(7) is consistent with the purpose of Section 3(c)(7). The exception provided by Section 3(c)(7) reflects Congress's recognition that financially sophisticated investors are in a position to appreciate the risks associated with certain investment pools and do not need the protections of the Investment Company Act. 20 Under a plan operated in accordance with Standish Ayer, a plan trustee or other fiduciary would make specific investment decisions for an investment option on behalf of all of the plan participants who had selected the investment option, and such a plan would not facilitate the individual investment decisions of the individual plan participants. As previously noted, the Commission has acknowledged that a defined benefit plan would be a qualified purchaser with respect to investments made by plan trustees when, among other things, the decision to invest in a Section 3(c)(7) Fund is made by the plan trustee or other plan fiduciary. The Commission's approach ensures that, in the context of a defined benefit plan, the person or persons making the investment decision would be in a position to appreciate the risks of investing in a Section 3(c)(7) Fund. We believe that it is appropriate to apply a similar approach to a participant-directed plan operated in a manner resembling a defined benefit plan. 21

Accordingly, based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under Section 7(a) of the Investment Company Act against the Section 3(c)(7) Funds in which the Plan invests a portion of its assets if those Section 3(c)(7) Funds treat the Plan as a qualified purchaser for Section 3(c)(7) purposes. We rely upon your representation that the Plan will own and invest on a discretionary basis not less than $25 million in investments and was not formed for the specific purpose of acquiring the securities offered by any Section 3(c)(7) Fund. 22 We also rely upon your representation that the Plan is a Section 401(k) plan, subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), and the Plan trustees, who are fiduciaries subject to the fiduciary provisions of ERISA, 23 make all of the investment decisions for the Plan. We further rely upon your representations which, we believe, ensure that the Investment Options are not used to facilitate the individual investment decisions of Plan participants into any Section 3(c)(7) Fund. These representations include:

other than the Plan trustees acting in their capacity as Plan fiduciaries, 24 a Plan participant's investment discretion will be limited to allocating his or her account among a number of Investment Options, each of which has an identified generic investment objective; the decision to invest the assets of an Investment Option in a Section 3(c)(7) Fund (both initially and subsequent to the initial investment), and to withdraw the assets from the Section 3(c)(7) Fund, and the amount of assets invested, will be made solely by one or more Plan fiduciaries, without direction from or consultation with any Plan participant other than the Plan trustees acting in their capacity as Plan fiduciaries; immediately following each purchase of any Section 3(c)(7) Fund's securities by an Investment Option, at least 50% of the assets of the option will consist of securities or property other than securities of the Section 3(c)(7) Fund; 25

no representation will be made to Plan participants that any specific portion of their contributions to or account balances under the Plan, or any specific portion of the relevant Investment Option, will be invested in the Section 3(c)(7) Fund. If the Plan delivers any information to Plan participants that mentions an investment in a Section 3(c)(7) Fund, it will be accompanied by a disclaimer to the effect that no assurances can be given that the Investment Option will continue to invest its assets, or the same portion of its assets, in the Section 3(c)(7) Fund.

Our position is based upon the facts and representations set forth in your letter. Any different facts or representations may require a different conclusion. Brent J. Fields Senior Counsel

Endnotes

1 Section 3(c)(1) of the Investment Company Act generally excepts from the definition of investment company "[a]ny issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities." Section 3(c)(1) is intended to except from regulation under the Investment Company Act private companies in which there is no significant public interest and which are therefore not appropriate subjects of federal regulation.

See Small Business Investment Incentive Act of 1980, H. Rep. No. 1341, 96th Cong., 2nd Sess. (1980), reprinted

in 1980 U.S.C.C.A.N. 4800, at 4817. 2

See

infra note 14 (setting forth the Standish Ayer representations). 3 Pub. L. No. 104-290 (1996) (codified in various sections of the United States Code). 4 Section 2(a)(51)(A) of the Investment Company Act also generally defines "qualified purchaser" to include: (1) any natural person who owns not less than $5 million in investments; (2) certain family-owned companies that own not less than $5 million in investments; and (3) any trust that does not meet the definition of family-owned company in Section 2(a)(51)(A)(ii) and that was not formed for the specific purpose of acquiring the securities offered by the Section 3(c)(7) Fund, and the trustees and settlors of which are qualified purchasers. 5

See Privately Offered Investment Companies, Investment Company Act Release No. 22597 (Apr. 3, 1997), 62 FR 17512 (Apr. 9, 1997) ("Adopting Release"). 6 In contrast, a Section 3(c)(1) Fund could treat a defined benefit plan as a single beneficial owner of the fund's securities under certain circumstances. See Owens-Illinois, Inc. (pub. avail. June 24, 1994). 7

See Adopting Release, supra note 5, at § II.A.8. 8

Id . 9 Under the Section 3(c)(1)(A) attribution provision, as amended by NSMIA, a "company" is treated as a single beneficial owner unless the company owns ten percent or more of the outstanding voting securities of the Section 3(c)(1) Fund, and the company is, or but for the exceptions in Sections 3(c)(1) or 3(c)(7) would be, an investment company. Under Section 2(a)(8) of the Investment Company Act, a "company" is defined as "a corporation, a partnership, an association, a joint-stock company, a trust, a fund, or any organized group of persons whether incorporated or not." The purpose of the attribution provision is to "ensure that an investment company issuer cannot evade the requirements of the [Investment Company Act] simply by using one or more other companies to purchase blocks of its securities and, in turn, sell those companies' securities to investors." See H. Rep. No. 1341, supra note 1, at 4817. NSMIA amended the attribution provision to simplify the way in which a Section 3(c)(1) Fund may count the number of its beneficial owners for purposes of the one hundred-person limit. 10

See Merrill Lynch & Co., Inc. (pub. avail. Apr. 23, 1992), in which the staff took the position that a general partnership should be treated as a single beneficial owner for Section 3(c)(1) purposes when, among other things, the affairs of the partnership, including its proposed holdings in Section 3(c)(1) Funds, would be administered solely by its managing general partner, and the individual partners would neither make decisions regarding the allocation of the partnership's capital among the Section 3(c)(1) Funds nor have discretion or input with respect to the allocation of their capital contributions among the Section 3(c)(1) Funds. See

also Handy Place Investment Partnership (pub. avail. July 19, 1989). 11

See Six Pack (pub. avail. Nov. 13, 1989), in which, despite the representation of Six Pack (the general partnership) that it would at all times own less than ten percent of the outstanding interests of any Section 3(c)(1) Fund (and thus the attribution provision would not apply), the staff concluded that Six Pack was not managed as a common investment vehicle, but rather as a device for facilitating the individual investment decisions of the five general partners, because each partner was permitted to determine the amount of his or her contribution to each particular investment made by the general partnership based upon his or her specific investment objectives. See

also WR Investment Partners Diversified Strategies Fund, L.P. (pub. avail. Apr. 15, 1992) ("WR Investment Partners"); Tyler Capital Fund, L.P./South Market Capital (pub. avail. Sept. 28, 1987) ("Tyler Capital Fund"). 12 In PanAgora, we considered Merrill Lynch & Co., Inc., supra note 10, WR Investment Partners, supra note 11, and Tyler Capital Fund, supra note 11. In Standish Ayer, in addition to WR Investment Partners and Tyler Capital Fund, we also considered Six Pack, supra note 11. 13 The positions in both PanAgora and Standish Ayer were taken independent of the applicability of the attribution provision ( i.e. , among other things, it was assumed that the plans would not own ten percent or more of the outstanding voting securities of a Section 3(c)(1) Fund). See

supra note 9. 14 Our position in Standish Ayer was based upon a number of representations made by Standish Ayer, including, among other things, that: (1) a plan's investment in a Section 3(c)(1) Fund would be made with assets directed by plan participants to a generic investment option ( i.e. , an account with an identified generic investment objective); (2) the decision to invest (both initially and subsequently) and to withdraw assets from a Section 3(c)(1) Fund would be made solely by a plan fiduciary, without direction from or consultation with any plan participant; (3) immediately following each purchase of securities of a Section 3(c)(1) Fund by a generic investment option, at least 50% of the assets of the generic investment option would consist of securities or property other than units of the Section 3(c)(1) Fund; (4) no representation would be made to plan participants that any specific portion of their contributions or account balances, or any specific portion of the generic investment option, would be invested in a Section 3(c)(1) Fund; and (5) if a plan delivers any information to the plan participants mentioning an investment in a Section 3(c)(1) Fund, it would be accompanied by a disclaimer that no assurance can be given that the generic investment option would continue to invest in the Section 3(c)(1) Fund. 15

See Adopting Release, supra note 5, at § II.A.8. 16 In particular, such a participant-directed plan would not be a qualified purchaser as defined in Section 2(a)(51)(A)(iv) of the Investment Company Act because it would not be acting for its own account. 17 A Section 3(c)(7) Fund or a person acting on its behalf must have a reasonable belief that a person purchasing the Section 3(c)(7) Fund's securities meets the definition of qualified purchaser in Section 2(a)(51)(A) of the Investment Company Act. See Rule 2a51-1(h) under the Investment Company Act. 18

See Adopting Release, supra note 5, at § II.A.8. 19

See Section 2(a)(51)(A)(iv) of the Investment Company Act (the definition of qualified purchaser includes a company, acting for its own account, that owns and invests on a discretionary basis not less than $25 million in investments, regardless of whether the company's shareholders qualify as qualified purchasers). 20

See S. Rep. No. 293, 104th Cong., 2d Sess. 10 (1996) ("Generally, these investors can evaluate on their own behalf matters such as the level of a fund's management fees, governance provisions, transactions with affiliates, investment risk, leverage, and redemption rights."). 21

See Adopting Release, supra note 5, at § II.A.8. We note that the Commission indicated in the Adopting Release that, under Rule 2a51-1(g) under the Investment Company Act, a "qualified institutional buyer" ("QIB") as defined in Rule 144A under the Securities Act of 1933, generally will be deemed to be a qualified purchaser for purposes of Section 3(c)(7). Rule 144A generally defines a QIB as, among other things, (1) certain institutions that own and invest on a discretionary basis $100 million of securities of issuers that are not affiliated with the institution, and (2) certain employee benefit plans and trusts that hold assets of employee benefit plans. See Rule 144A under the Securities Act of 1933. The Commission also stated in the Adopting Release that, despite the inclusion of employee benefit plans as QIBs, "[a] self-directed employee benefit plan (such as a "401(k)" plan) generally would not be considered to be a qualified purchaser for purposes of rule 2a51-1; rather, an employee could invest in a Section 3(c)(7) Fund through a self-directed plan only if the employee is a qualified purchaser. [Rule 2a51-1(g)] therefore is not available to a self-directed plan." See Adopting Release, supra note 5, at § II.A.1. The Commission further stated in the Adopting Release that "Rule 2a51-1(g)(1)(ii) provides that a plan will not be deemed to be acting for its own account if investment decisions with respect to the plan are made by the beneficiaries of the plan. In other words, the investment decision must be made by a qualified purchaser." Id . at § II.A.1. n.33. We note that these statements by the Commission address situations in which a benefit plan that meets the QIB definition permits plan participants to make investment decisions to invest directly in Section 3(c)(7) Funds, or in investment options that are Section 3(c)(7) Funds. We believe that, consistent with the wording of Rule 2a51-1(g), when "investment decisions [are] made solely by the fiduciary, trustee or sponsor of such plan," as in the present case, a plan can qualify as a qualified purchaser under Rule 2a51-1(g). 22 Among other things, Rule 2a51-3 under the Investment Company Act provides that a company shall not be deemed to be a qualified purchaser under Section 2(a)(51)(A)(iv) of the Investment Company Act if the company was formed for the specific purpose of acquiring the securities offered by a Section 3(c)(7) Fund. 23 The fiduciary standards under ERISA generally require that a fiduciary discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries and (1) for the exclusive purpose of "providing benefits to participants and their beneficiaries" and "defraying reasonable expenses of administering the plan," (2) "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims," (3) "by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so," and (4) "in accordance with the documents and instruments governing the plan . . . ." See 29 U.S.C. § 1104. You represent that, in meeting their fiduciary duties, the Plan trustees, when making investment decisions, will, among other things, consider the cash flow requirements of the Plan. See , e.g. , GIW Indus., Inc. v. Trevor, Stewart, Burton & Jacobsen, Inc. , 895 F.2d 729 (11th Cir. 1990). 24 You state that certain Plan trustees may also be Plan participants (per a telephone conversation between Brent J. Fields of the staff and William G. Lee of Vinson & Elkins L.L.P. on April 25, 2001). 25 Similar to Standish Ayer, the 50% limitation is intended to ensure that a Plan participant's decision to allocate assets to an Investment Option is not the substantial equivalent of an investment in a Section 3(c)(7) Fund. As we noted in Standish Ayer, by incorporating the 50% representation into our response, we do not suggest that a higher percentage investment necessarily would mean that a Plan's participants must be treated as the owners of the securities of an underlying Section 3(c)(7) Fund. Further, consistent with our statements in the Section 3(c)(1) context in Standish Ayer, we will not respond to no-action requests that involve a plan's generic investment option seeking to invest more than 50% of its assets in a Section 3(c)(7) Fund if the request does not otherwise differ materially from the facts described in Standish Ayer or your incoming letter.

Incoming Letter

April 10, 2001

E-Mail: wlee@velaw.com Web: www.velaw.com Writer's Phone: (713) 758-2180 Writer's Fax: (713) 615-5312

Mr. Doug Scheidt Associate Director and Chief Counsel Division of Investment Management Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549

Re: The H.E.B. Investment and Retirement Plan Dear Mr. Scheidt: On behalf of our client, H. E. Butt Grocery Company, a Texas corporation (the "Company"), we respectfully request that the staff of the Division of Investment Management provide advice that the staff will not recommend any enforcement action to the Securities and Exchange Commission (the "Commission") under Section 7(a) of the Investment Company Act of 1940, as amended (the "1940 Act"), against funds that are excepted from the definition of "investment company" by section 3(c)(7) of the 1940 Act ("Section 3(c)(7) Funds") if investments in Section 3(c)(7) Funds are made from time to time by the trustees of the H.E.B. Investment and Retirement Plan (the "Plan") out of the "aggressive" fund and the "general" fund of the Plan. BACKGROUND The Company, a Texas corporation with headquarters in San Antonio, Texas, adopted the Plan to provide retirement benefits for the Company's participating employees and their beneficiaries. The Plan is a qualified defined contribution plan. Contributions to the Plan are made by both the Company and its participating employees. With respect to employee contributions, the Plan qualifies under section 401(k) of the Internal Revenue Code of 1986, as amended. The aggregate amount of assets in the Plan as of March 30, 2001 was approximately $800,000,000. Accordingly, the Plan is a "qualified institutional buyer" for purposes of Rule 144A under the Securities Act of 1933. Currently, participants in the Plan are permitted to elect among six investment options, each of which is a fund administered by the eight individual trustees of the Plan. The trustees are appointed by the Board of Directors of the Company. Investment decisions for the six investment options are made by the investment committee of the trustees of the Plan, currently consisting of five of the trustees, all of whom are currently "accredited investors" as such term is defined in Rule 501(a) under the Securities Act of 1933. This investment committee is appointed by management of the Company from the persons serving as trustees of the Plan. The six investment funds are identified by the investment objective pursued with respect to the particular fund. There is an "aggressive" fund, a "general" fund, a "conservative" fund, a stocks only fund, a bonds only fund, and a money market fund (each of such investment funds, together with any similar investment fund hereafter added to the Plan, is hereinafter referred to as an "Investment Option," and all of such investment funds are hereinafter referred to collectively as the "Investment Options." Participants are permitted to allocate their account value among the various Investment Options in such percentages as they may elect. Participants do not pick individual investments, but only pick Investment Options with specified investment objectives. The decisions about particular investments to be made with funds held with respect to each Investment Option
are made exclusively by the investment committee of the trustees. Historically, the trustees have invested a portion of the aggressive fund and a portion of the general fund in private equity and venture capital fund investments which were structured to be exempt from registration under the Investment Company Act of 1940 (the "1940 Act"), pursuant to section 3(c)(1) ("Section 3(c)(1) Funds"). In connection with such investments, the trustees have made representations that the Plan should be counted as a single "beneficial owner" for purposes of determining the one hundred person limit of section 3(c)(1). They represented the Plan as such because the trustees have managed the Plan in accordance with the standards set forth in The Standish, Ayer & Wood, Inc. Stable Value Group Trust no-action letter (available December 28, 1995) ("Standish Ayer"). Each of the aggressive fund and the general fund has over $25 million in investments under management, and the trustees have at all times invested at least 50% of the assets of each of these funds in investments other than Section 3(c)(1) Funds. As was the case in Standish Ayer, "a Plan participant's discretion [is] limited to allocating his or her account among a number of generic investment options; the decision to invest in [a particular investment, such as a Section 3(c)(1) Fund or, in the future, a Section 3(c)(7) Fund], and the amount of assets invested, [is] solely within the discretion of a Plan fiduciary." In offering participants in the Plan the option to allocate account balances among the various funds, there is no representation "that any specific portion of [the participants'] contributions to or account balances under the Plan, or any specific portion of the relevant generic investment option, will be invested in [any particular investment, including any Section 3(c)(1) Fund or, in the future, a Section 3(c)(7) Fund];" in fact, there is no indication as to whether or not any particular investments in private investment companies will be made. In short, the investment committee of the Plan's trustees make the initial decision to invest in a private investment company as well as all subsequent decisions regarding the amount and the duration of that investment. For the reasons stated above, the trustees have felt comfortable representing the Plan as a single "beneficial owner" for the purposes of investing in Section 3(c)(1) Funds. The trustees would like the Plan also to be able to invest in Section 3(c)(7) Funds. In particular, certain statements made by the Commission in SEC Release No. 40-22597 (April 3, 1997) (1997 CCH Fed.Sec.L. Rep. ¶85,929) suggest that a question may exist as to whether the staff's analysis in Standish Ayer should be applied in the context of Section 3(c)(7). The Commission states in footnote 79 of the Release that "the Commission is not endorsing the analysis set forth in the Standish Ayer letter for the purposes of section (3)(c)(7) [and] has requested the staff to
consider whether the position taken in Standish Ayer is appropriate in the context of section 3(c)(7) . . . ." Accordingly, under the current structure of the Plan and current interpretations of sections 3(c)(1) and 3(c)(7) of the 1940 Act, there is uncertainty as to whether the Plan can make any further investments in Section 3(c)(7) Funds. As discussed below, we believe that a determination that the Plan is a qualified purchaser for purposes of section 3(c)(7) of the 1940 Act is consistent with the purposes of the federal securities laws and the protection of investors. We believe that the Plan is essentially the same as a plan in which investments are not subject to any participant direction and should receive the same treatment as such a plan. Before advising our client to proceed with any investments, though, we respectfully request that the staff provide advice that the staff will not recommend any enforcement action if the Plan acts as if it were a qualified purchaser eligible to make an investment in a Section 3(c)(7) Fund. ANALYSIS Section 3(c)(7) of the 1940 Act provides in relevant part that the term "investment company" shall not include "any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities." Any person who "owns and invests on a discretionary basis, not less than $25,000,000 in investments" may be considered a "qualified purchaser" as defined in section 2(51)(A), and natural persons may be considered as "qualified purchasers" if they own "not less than $5,000,000 in investments." The requirements of section 3(c)(7), particularly the definition of a "qualified purchaser," ensure that employee benefit plans such as the Plan will be able to invest in Section 3(c)(7) Funds only if the Plan itself is considered a qualified purchaser. If Section 3(c)(7) Funds must "look through" to the plan participants for purposes of determining whether each participant is a qualified purchaser, the $5 million requirement for each individual guarantees that all such standard retirement plans will be unable to invest in companies structured to take advantage of this exemption. The Plan, for example, meets the definition of "qualified purchaser," but most of the Plan participants would not meet the definition individually. In Release No. 40-22597, the Commission seems to suggest dividing pension and retirement plans into three categories for the purposes of determining under what circumstances a pension or other type of employee benefit plan that holds $25 million or more of investments in the aggregate could be treated as a qualified purchaser. The first of these categories is a plan that allows plan participants to invest in a Section 3(c)(7) Fund "offered as an investment option." For such a plan, the "critical issue . . . is not whether the
employee is directing his or her investments through a 401(k) plan or a similar intermediary, but whether the employee owns the requisite amount of investments." Footnote 79 indicates that this approach is analogous to the approach taken with respect to section 3(c)(1) in The PanAgora Group Trust letter (available April 29, 1994). The second category is a plan which "owns $25 million or more of investments that is not subject to participant direction." In such cases, "the plan would be a qualified purchaser with respect to investments made by the plan trustee." The final category, which most closely tracks the structure of the Plan, is a plan that owns $25 million of investments and that allows participants to select among investment objectives but does not "permit participants to decide whether or how much to invest in particular investment alternatives." The Commission does not provide in the Release how such plans should be treated for purposes of section 3(c)(7), but requests that the staff consider whether the position in Standish Ayer is appropriate in the context of section 3(c)(7). We believe that a determination that the Plan should be treated as a qualified purchaser for purposes of section 3(c)(7) of the 1940 Act is consistent with the purposes of the federal securities laws and the protection of investors. In essence, the securities laws are designed to provide unsophisticated investors with all material information about their investments and to protect unsophisticated investors while allowing sophisticated investors and persons with the economic power to fend for themselves to enter into exempt transactions without the information and protection which is required for unsophisticated investors. The PanAgora Group Trust letter is consistent with this philosophy as it requires all participants in the plan to be separately counted and qualified as investors where the participants are the persons making investment decisions. On the other hand, in situations where sophisticated and experienced trustees with substantial investment experience and acumen who regularly invest a substantial portfolio are the ones making the investment decisions, it seems appropriate in light of the underlying purposes of the federal securities laws, including the 1940 Act, to count the plan for which such persons are investing as one investor and to determine its qualifications on the basis of the plan, or fund of the plan, as a whole. We think that a situation such as the Plan, where individual participants pick funds with general investment objectives, but where the actual investments within the fund are made by sophisticated and experienced trustees with substantial investment experience and acumen who regularly invest a substantial portfolio, should be treated in the same manner as a plan where participants have no influence in investments at all. We think the purposes of the securities laws, including the 1940 Act, will be upheld if the Plan is viewed as
a qualified purchaser permitted to participate in Section 3(c)(7) Funds, at least so long as the investments are made by the trustees of the Plan out of funds of the Plan with $25 million or more in investments held in each such fund. As additional basis for the requested no action position, the Plan wishes to make the following additional representations:

The Plan will own and invest on a discretionary basis not less than $25 million in investments, and will be acting for its own account. The Plan was not formed for the specific purpose of acquiring securities offered by any Section 3(c)(7) Fund. The Plan is a Section 401(k) plan, subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), and the Plan's investment decisions are made by Plan trustees, subject to the fiduciary provisions of ERISA. The Plan will comply with the following representations that are designed to ensure that the Plan will not be managed to facilitate the Plan participants' decisions to invest in Section 3(c)(7) Funds:

other than Plan trustees acting in their capacity as Plan fiduciaries, a Plan participant's investment discretion will be limited to allocating his or her account among a number of Investment Options, each of which has an identified generic investment objective; the decision to invest assets of an Investment Option in a Section 3(c)(7) Fund (both initially and subsequent to the initial investment), and to withdraw assets from the Section 3(c)(7) Fund, and the amount of assets invested, will be made solely by one or more Plan fiduciaries, without direction from or consultation with any Plan participant other than the Plan fiduciaries acting in their capacity as Plan fiduciaries; immediately following each purchase of any Section 3(c)(7) Fund's securities by an Investment Option, at least 50% of the assets of the Investment Option will consist of securities or property other than securities of the Section 3(c)(7) Fund; no representation will be made to Plan participants that any specific portion of their contributions to or account balances under the Plan, or any specific portion of the relevant Investment Option, will be invested in any particular Section 3(c)(7) Fund. If the Plan delivers any information to Plan participants that mentions an investment in a particular Section 3(c)(7) Fund, it will be accompanied by a disclaimer to the effect that no assurances can be given that the Investment Option will continue to invest its assets, or the same portion of its assets, in the Section 3(c)(7) Fund; and in meeting their fiduciary duties, the Plan trustees, when making investment decisions, will, among other things, consider the cash flow requirements of the Plan.

For the reasons set forth above, we respectfully request assurance that the staff will not recommend any enforcement action against the Plan or the Section 3(c)(7) Funds in which it invests if the Plan represents itself as a "qualified purchaser" for the purposes of investing in a Section 3(c)(7) Fund. If any additional information is needed with respect to the matters set forth herein, please contact the undersigned at (713) 758-2180. In the event that the staff is not inclined to respond favorably to this request, we would appreciate the opportunity to discuss the staff's concerns before receiving its written response. Very truly yours, VINSON & ELKINS L.L.P. By:_________________________ William G. Lee

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Modified: 10/30/2001