SEC Division of Investment Management staff letter: John W. Henry Co. Inc.

SEP 20 1996
Our Ref No 96-217-CC
RESPONSE OF THE OFFICE OF CHIEF COUNSEL John Henry Co Inc DIVISION OF INVESTMENT MANAGEMENT File No 132-3 By letter dated September 1996 you request assurance that the staff would not recommend that the Commission take enforcement action against John Henry Co Inc JWH Co for failure to register as an investment adviser under Section 203 of the Investment Advisers Act of 1940 Advisers Act f/ or to comply with the provisions of the Advisers Act and the rules thereunder ifJWH Risk Management Inc RMT newly formed affiliate of JWH Co which proposes to register under the Advisers Act or any other JWH Co affiliates which may in the future register under the Advisers Act collectively with RMI the Advisory Affiliates engage in an investment advisory business as more fully described in your letter or ii any Advisory Affiliate under Section 205 of the Advisers Act 2/if the Advisory Affiliate charges fees that are based on capital appreciation in the value of non-securities assets held in an account for providing advice relating to the trading of commodity futures and related options Facts JWH Co engages in the commodity trading advisory business and is registered with the Commodity Futures Trading Commission CFTC as commodity trading advisor CTA and as commodity pool operator CPO JWH Co is also a.member of the National Futures Association NFA Rivil newly formed affiliate of JWH Co will engage initially in the business of providing commodity trading advice but expects thereafter also to provide investment advice regarding securities Other Advisory Affiliates will provide investment advice regarding securities and possibly commodities RMI and as applicable the other Advisory Affiliates will register with the CFTC as CTAs and CPOs and be member firms of the NFA You represent that all of the Advisory Affiliates will 1/ Section 203a of the Advisers Act requires person or entity that meets the definition of investment adviser and that makes use of the U.S mails or any other means or instrumentality of interstate commerce in connection with its business as an investment adviser to register under the Advisers Act unless an exemption from registration is available 2j Section 205 of the Advisers Act prohibits registered investment adviser from charging an advisory fee on the basis of share of capital gains or capital appreciation of the funds or any portion of the funds of client performance fee except in certain limited circumstances

register as investment advisers under the Advisers Act prior to engaging in the business of providing investment advice regarding securities John Henry John Henry controls JWH Co and also will control thC Advisory Affiliates In managing the assets of its clients JWH Co uses proprietary trading systems developed by John Henry to formulate trading decisions The Advisory Affiliates also may utilize the technical trading systems developed by John Henry in making investment decisions for their clients One or more of the Advisory Affiliates may offer an asset allocation service to commodity pools and individual client accounts to determine the portion of assets in clients account to invest in securities and the portion of assets to invest in commodities That portion of clients assets invested in securities will be managed by the Advisory Affiliate while the portion invested in commodities will be managed by JWH Co Clients who subscribe to this asset allocation service will enter into separate agreements with the Advisory Affiliate for allocation and securities trading advice and with JWH Co for futures trading advice Discussion Registration of JWH Co under the Advisers Act You represent that JWH Co does not and will not provide investment advice regarding securities 3/ other than with respect to certain U.S government obligations used as margin for futures trading You believe therefore that JWH Co is excluded from the definition of investment adviser and need not register under the Advisers Act or rely on any exemption from registration 4/ Because John Henry will be involved in the investment advisory activities of the Advisory Affiliates and the Advisory Affiliates will utilize JWH Co personnel in connection with their advisory activities however the contemplated registration and activities of the Advisory Affiliates raise the question whether JWH Co You state that JWIJ Co provides advice on foreign currency forward contracts You believe that such advice does not constitute advice concerning securities so as to bring JWH Co within the defmition of investment adviser You have not requested and we do not express our views regarding whether such forward contracts are securities under Section 202a18 of the Advisers Act 4/ Section 202a1 1E of the Advisers Act excludes from the definition of investment adviser any person whose investment advice is limited to certain types of U.S government securities You represent that any advice provided by JWH Co regarding securities is limited to the types of obligations specified by Section 202a11E You have not requested and we do not express our views regarding whether JWH Co qualifies for this exclusion

could be viewed as doing indirectly that which it could not do directly in violation of
Section 208d of the Advisers Act 5/
You represent that JWH Co and each of the Advisory Affiliates will be oocerated as separate companies will be separately capitalized and will make investment decisions independently of each other You also represent that JWH Co and the Advisory Affiliates will take appropriate steps to assure that sales materials disclosure documents including Forms ADV and brochures 0f the Advisory Affiliates and other public communications make clear that the companies are separate entities having separate registrations under different bodies of law and distinguish clearly the services provided by each company In Thomson the staff concluded that the concerns underlying Section 208d of the Advisers Act are adequately addressed when an unregistered affiliate of registered investment adviser does not provide investment advice ii the unregistered affiliate and each of its employees are deemed associated persons of the registered investment adviser when they have access to investment recommendations made by the registered adviser or information concerning the recommendations prior to the effective dissemination of those recommendations to the clients of the registered adviser and iiithe Commission has access to the unregistered affiliates books and records to the extent necessary to examine the business of the registered adviser You represent that John Henry as the controlling person of JWH Co and the Advisory Affiliates and each JWH Co officer director or employee who has access to the investment recommendations of an Advisory Affiliate or information concerning such recommendations prior to their effective dissemination Associated Employee 6/ will be
Section 208d of the Advisers Act provides that it shall be unlawful for any person
indirectly or through or by any other person to do any act or thing that it would be unlawful for such person to do directly under the Advisers Act In the past the Commission has expressed concern about structural arrangements in which registered investment adviser is merely conduit for advisory services provided by personnel of an unregistered affiliate Thomson Advisory Group pub avail Sept 26 1995 Thomson citing Investment Advisers Act Release No 353 Dec 18 1972 proposing Rule 202-1 under the Advisers Act which would have exempted affiliates of registered adviser from registration if certain conditions designed to ensure that the registered adviser was operated separately from and independently of its unregistered affiliates were met You represent that any individual who as officer director or employee of JWH Co other than an employee whese duties are solely ministerial or clerical and who is not involved in the investment process and does not have access to investment decisions or recommencIatjois of any Advisory Affiliate engages in the business or continued..

deemed by that Advisory Affiliate to be person associated with an investment adviser an Associated Person Although the unregistered affiliate in Thomson also was deemed to be an Associated Person however you maintain that JWH Co should not be deemed an Associated Person because JWH Co does not meet the definition of Associate4i Person 2/ and ii no meaningful regulatory puipose would be served by requiringJWH Co to be treated as an Associated Person You further represent that the Commission will be given access to JWH Co books and records to the extent necessary to examine the businesses of the Advisory Affiliates and that JWH Co will instruct Associated Employees to cooperate fully with the staff in connection with such examinations Perfonnance Fees for Futures Trading Advice For its advice regarding futures trading JWH Co charges its clients performance fee that is computed as percentage of the appreciation in the value of the clients accounts and which includes net gains from trading as well as any appreciation in the value of client holdings of U.S govenunent obligations used as margin for futures trading 9/ You 6/ continued affairs of any Advisory Affiliate will be deemed to be an Associated Employee of that Advisory Affiliate You further represent that each Associated Employee will be subject to the supervision direction and control of that Advisory Affiliate to the same extent as would be required by the Advisers Act if such individual engaged therein as an officer director or employee of the Advisory Affiliate 2/ You note that JWH Co is under common control with an investment adviser but is not person controlling or controlled by an investment adviser Section 202a17 of the Advisers Act defines person associated with an investment adviser as including partner officer or director of the adviser or any person performing similar functions or any person directly or indirectly controlling or controlled by the adviser including the advisers employees You note in this regard among other things that JWH Co will be deemed to be an advisory representative under Rule 204-2a12A which defines advisory representative as including among others controlling persons of the investment adviser and affiliates of such controlling persons who obtain information concerning securities recommendations made by the adviser prior to the effective dissemination of those recommendations Therefore to the extent that JWH Co engages in proprietary securities trading or trades securities for an account in which John Henry has beneficial interest such trading would be subject to reporting under Rule 204-2 regardless of whether JWH Co is deemed to be an Associated Person You state that the imposition othis type of performance fee is standard practice in the managed futures industry You maintain that the fees charged by JWH Co continued..

represent that the fees that the Advisory Affiliates charge for investment advice regarding securities including asset ailocatjon advice will comply with Section 205 of the Advisers Act and Rule 205-3 thereunder You state however that fees charged by the Advisory Affiliates for advisory services relating solely to futures trading may not necessarily .comply with those provisions of the Advisers Act You maintain that performance fees of the type proposed to be charged by the Advisory Affiliates for advice relating solely to the trading of commodity futures and related options should not be subject to the requirements of Section 205 of the Advisers Act or Rule 205-3 thereunder You represent that performance fees charged by the Advisory Affiliates for advice relating to futures trading will be computed in manner that excludes from the fee calculations any realized or unrealized gains or losses on securities held in clients accounts and that the Advisory Affiliate will disclose to the client prior to entering into any such performance fee arrangement that the fee is not computed in accordance with the provisions of Rule 205-3
Section 205 of the Advisers Act in relevant part provides that registered
investment adviser may not enter into any investment advisory contract that provides for compensation to the investment adviser on the basis of share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client The staff has recognized that Section 205 regulates only performance fees based on the value of securities and does not prohibit other types of performance fees IQ/ Rpresentations In connection with your request regarding the status of JWH Co under the Advisers Act you make the following representations continued need not comply with Section 205al of the Advisers Act or Rule 205-3 thereunder because JWH Co is not an investment adviser and therefore is not required to be registered under the Advisers Act in reliance on Section 202a11E Rule 205-3 under the Ad visers Act permits an investment adviser to charge performance fee under certain specified conditions IQ/ EQK Partners jub avail July 13 1988 registered investment adviser may charge fees based on capital appreciation in the value of real estate without complying with Section 205 or Rule 205-3 In Wallace Wagner @ub avail June 28 1990 however the staff indicated that registered investment adviser providing commodity trading advice to commodity pool must comply with Section 205 and Rule 205-3 Upon reconsideration we believe that OKPartners accurately reflects the views of the staff on this issue Therefore this letter should be read to supersede that aspect of the position taken in Wallace Wgp -.5-

each AssocjatJ Employee of an Advisory Affiliate will be subject to the supervision direction and control of such Advisory Affiliate to the same extent as would be required under the Advisers Act if such individual engaged therein as an officer director or employee of the Advisory Affiliate each Advisory Affiliate will deem as an Associated Person each Associated Employee who has access to the investment recommendations of that Advisory Affiliate or infonnation concerning such recommendations prior to their effective dissemination pursuant to Rule 204-2a12 under the Advisers Act each Advisory Affiliate will obtain and maintain on-site personal securities transaction records and records of personal transactions in futures and related options for each of its advisory representatives 11/ each Advisory Affiliate will identify each Associated Employee in its Form ADV to the same extent as would be required under the Advisers Act if the Associated Employee were an officer director or employee of such Advisory Affiliate each Associated Employee of an Advisory Affiliate will be subject to the conflict of interest insider trading and personal securities transaction reporting requirements established by such Advisory Affiliate to the same extent as would be required under the Advisers Act if such individual were an officer director or employee of the Advisory Affiliate JWH Co will not provide investment advice concerning securities without registeriiig under the Advisers Act except as described in your letter and JWII Co will provide the Commission staff access to any books and records of JWH Co which relate to services rendered by JWH Co to clients of any Advisory Affiliate including any documents and records relating to the accounts of such clients or which are required to be maintained by JWI Co pursuant to the Commodity Exchange Act and the rules thereunder j2/ will instruct Associated Employees to cooperate fully with the 11/ You represent in this regard that all persons deemed to be Associated Persons of an Advisory Affiliate as well as JWH Co itself will be advisory representatives of such Advisory Affiliate You state that pursuant to CFIC regulations CPO or CTA must make and retain for five-year period books and records of all trading activity for client accounts and proprietary accounts

staff in connection with such examinations and will promptly produce such books and records to the staff upon request In connection with your request regarding the imposition of performance-based fees you represent that any performance fee charged by an Advisory Affiliate for advice relating to futures trading will not be based on the capital gains or capital appreciation of securities of any type all fees charged by an Advisory Affiliate for investment advice relating to securities will comply with Section 205 of the Advisers Act or Rule 205-3 thereunder and prior to entering into any performance fee arrangement for advice relating to futures trading that does not comply with Section 205 or Rule 205-3 under the Advisers Act an Advisory Affiliate will disclose to the client the fact that the fee is not computed in accordance with the requirements under the Advisers Act Based on the facts and representations set forth in your letter and suniniarized above we would not recommend enforcement action to the Commission under Sections 203 or 208d of the Advisers Act if JWH Co does not register under the Advisers Act or comply with the provisions of the Act or the rules thereunder or ii under Section 205 of the Advisers Act if an Advisory Affiliate charges fees based on capital appreciation in the value of non-securities assets held in an account which do not meet the conditions of Section 205 Rule 205-3 under the Advisers Act for providing advice relating to the trading of commodity futures and related options Different facts or representations may require different conclusion Natalie Bej Attorney

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333 NEW HAMPSHIRE AVE. NW t/1Z t//J/l/1942cYcSD 510 CHARLOTTE PLAZA WASHINGTON DC 20036 CHARLOTTE NC 2824-i TCL 202 662-2200 TEL 7041 348-5100 FAX 202 a62-S400 2i..1504_ 6000 FAX 7041 348-5200 660 SOUTH FIGUROA STRT LOS ANGELES CA 9007 CA6LE ADORESS LABELLUM TEL 213 955-4600 TELEX 129146 667465 FAX 2131 955-4666 FAX 12121 504-6666 DIRECT DIAL 212 504-6285 September 1996 1AA/ 205 208d and Rule 205-3 Jack Murphy Esq Chief Counsel Division of Investment Management Securities and Exchange Commission 450 1ifth Street N.W Mail Stop 10-6 Washington D.C 20549 Re John Henry Co. Inc Dear Mr Murphy On behalf of our clients John Henry Co Inc JWH Co and certain of its affiliates we are writing to request confirmation that the Staff of the Securities and Exchange Commission the Commission will not recommend that the Commission take enforcement action against JWH Co for failure to register under the Investment Advisers Act of 1940 the Advisers Act or to comply with the provisions of the Advisers Act and the rules thereunder including Section 205 and Rule 205-3 if JWH Risk Management Inc RMI newly formed affiliate of JWH Co which proposes to register under the Advisers Act or any other JWH Co affiliate which may in the future register under the Advisers Act collectively with RMI the Advisory Affiliates engages in an investment advisory business as described in this letter and subject to the representations hereinafter set forth or against any Advisory Affiliate for failure to comply with Section 205 and Rule 205-3 if the Advisory Affiliate charges performance fees for advice relating CEP5TEIN\G\DOCS\NyLIBI\CEpSTE

Jack Murphy Esq September 1996 solely to the trading of commodity futures and options thereon which fees do not meet the conditions of Rule 205-3 BACKGROUND JWH Co California corporation controlled by John Henry JWH was incorporated in 1982 to conduct commodity trading advisory business It is registered with the Commodity Futures Trading Commission the CFTC as commodity trading advisor CTA and as commodity pool operator CPO under the Commodity Exchange Act the CEA and is member of the National Futures Association the self-regulatory organization for the futures industry JWH Co serves as the trading advisor of publicly and privately offered commodity pools and as trading advisor to various individual client accounts Currently JWH Co has over $1.3 billion of assets under management and is one of the largest trading advisors in the managed futures industry In managing the assets of its clients JWH Co employs proprietary trading systems developed by JWH These systems use technical trend-following analyses to formulate trading decisions As is standard practice in the managed futures industry JWH Co charges its clients performance fees for its advice regarding futures trading These fees as is typical are computed as percentage of the appreciation in the value of the clients accounts which would include net gains from trading as well as any appreciation in the value of client holdings of U.S government obligations used as margin for futures trading JWH Co.s performance fees need not comply with Rule 205a1 of the Advisers Act and Rule 205-3 thereunder given that JWH Co is not registered under the Advisers Act or required to be so registered JWH Co does not and will not provide investment advice regarding securities other than with respect to certain U.S government obligations used as margin for futures trading.2 Thus JWH Co is not an investment adviser as defined by Section The trading systems are licensed by JWH to Elysian Licensing Corporation ELC another company controlled by JWH and sub-licensed by ELC to JWH Co The U.S government obligations with respect to which JWH Co provides investment advice are limited to U.S Treasury bills which are used by its clients as futures margin However certain clients of JWH Co make their own investment decisions as to the securities in which futures marginis invested or have delegated the authority to make such decisions to person other than JWH Co In such cases futures margin may be invested in securities other than those set forth herein including securities which are not U.S government obligations to the extent permissible under applicable commodities exchange rules and under requirements that may be imposed by futures commission merchants on their customers

Jack Murphy Esq September 1996
202a1 of the Advisers Act3 and does not rely upon Section 203b3 of the Advisers Act which provides an exemption from registration for any investment adviser that during the past twelve months has had fewer than fifteen clients and does not hold itself out generally to the publiŒ as an investment adviser An affiliate of JWH Co Westport Capital Management Corporation is registered with the CFTC as CPO and serves as the general partner of two commodity pools that are privately offered in the U.S Another affiliate Global Capital Management Limited which is also registered as CPO serves as the CPO of two offshore funds.4 These affiliates are each controlled by JWH.5 RMI newly formed Florida corporation is also controlled by JWH It will initially engage in the business of providing commodity trading advice and expects thereafter also to provide investment advice regarding securities In making securities investment decisions for its clients RMI will use technical trading systems developed by JWH These systems will differ substantially from those used by JWH Co but will utilize trend￾following analyses The systems used by RMI in formulating commodity trading decisions will be similar to those used by JWH Co RMI intends to register with the CFTC as CPO and CTA and to become member firm of the NFA because RMI will provide advice regarding futures trading to commodity pools and possibly to individual client accounts Such advice would involve the use of futures contracts for investment and yield enhancement purposes or for hedging or other risk management purposes such as synthetically altering the investment exposures of client accounts RMI will register as an investment adviser under the Advisers Act prior to engaging in the business of providing investment advice regarding securities JWH Co also provides advice on foreign currency forward contracts FX Forwards However we believe that such advice does not constitute advice concerning securities so as to bring JWH Co within the definition of the term investment adviser In this regard we note that JWH Co is not requesting that the Staff provide any assurances regarding whether FX Forwards are securities as defined by Section 202a18 of the Advisers Act or whether JWH Co is an investment adviser as defined by Section 202al of the Advisers Act Neither Westport Capital Management Corporation nor Global Capital Management Limited provides advice concerning securities or commodities Their activities are in each case strictly limited to serving as CPO of commodity poois JWH also controls JWH Investments Inc company that is registered under the Advisers Act However such company is inactive The trading systems used by RMI will be sub-licensed to it by an affiliate of JWH Co other than ELC

Jack Murphy Esq September 1996
Like RMI the other Advisory Affiliates will be controlled by JWH Such affiliates will be registered under the Advisers Act and would provide investment advice regarding securities and possibly commodities subject to obtaining appropriate CFTC registrations and NFA membership They may also use trading systems developed by JWH however those systems may or may not be similar to those used by RMI It Is presently contemplated that one or more of the Advisory Affiliates would offer asset allocation services involving recommendations as to the portion of client assets to be allocated from time to time to JWH Co or to another affiliated or unffihiated commodity trading advisor for futures trading The fees that RMJ and the other Advisory Affiliates will charge their clients for investment advice regarding securities including any asset allocation advice will comply with
Section 205 of the Advisers Act and Rule 205-3 thereunder The fees that the Advisory
Affiliates propose to charge clients for advisory services relating solely to futures trading will not necessarily be computed in maimer that complies with Section 205 and Rule 205-3 However in such cases performance fees will be computed in manner that excludes realized and unrealized gains and losses on securities from the fee calculations and the Advisory Affiliate will disclose to the client prior to entering into any such performance fee arrangement that the fee is not computed in accordance with the provisions of Rule 205-3 JWH Co RMI and the other Advisory Affiliates collectively the JWH Companies will each be operated as separate company Each Advisory Affiliate will be separately capitalized and through its employees will make investment decisions independently of those made by other JWH Companies In addition the JWH Companies will take appropriate steps to assure that sales materials disclosure documents including the Form ADVs of the Advisory Affiliates and other public communications make clear that the JWH Companies are separate entities having separate registrations under different bodies of law and to distinguish clearly the services provided by each company One or more Advisory Affiliates may furnish to certain clients service that will coordinate the securities trading strategies of that particular Advisory Affiliate with the commodity trading strategies of JWH Co The service will involve use of an allocation strategy by the Advisory Affiliate to determine the portion of the assets of client accounts to invest in securities and the portion of the assets to invest in commodities The Advisory Affiliate will manage the securities investments of these clients and make asset allocation decisions and JWH Co will manage their investments in commodities.7 Clients that wish to avail themselves of this service which could include both pools and individual accounts would each enter into one agreement with the Advisory Affiliate to obtain allocation and securities trading advice and second separate agreement with JWH Co for futures trading advice Under no circumstances however will JWH Co be providing advice regarding securities except as discussed at supra

Jack Murphy Esq September 1996
It is anticipated that JWH will be involved in the investment advisory activities of the Advisory Affiliates to the extent that the Advisory Affiliates will generally utilize the personnel of JWI-l Co in connection with their operations and advisory activities However JWH and each other individual who as officer director or employee of JWH Co other than an individual whose duties are solely ministerial or clerical in nature and who is not involved in the investment process and does not have access to the investment decisions or recommendations of any Advisory Affiliate engages in the business or affairs of any Advisory Affiliate an Associated Employee will do so subject to the supervision direction and control of that Advisory Affiliate to the same extent as would be required by the Advisers Act if such individual engaged therein as an officer director or employee of the Advisory Affiliate Thus for example each Associated Employee of an Advisory Affiliate will be subject to the conflict of interest insider trading and personal securities transaction reporting requirements established by that Advisory Affiliate to the same extent as would be required under the Advisers Act if such individual were an officer director or employee of the Advisory Affiliate In this regard JWH as the controlling person of the JWH Companies and each Associated Employee who has access to the investment recommendations of an Advisory Affiliate or information concerning such recommendations of that Advisory Affiliate prior to their effective dissemination will be deemed by the Advisory Affiliate to be person associated with an investment adviser as that term is defined in Section 202a17 of the Advisers Act an Associated Person.8 Pursuant to Rule 204-2a12 under the Advisers Act each Advisory Affiliate will obtain and maintain on-site personal securities transaction records for each of its advisory representatives.9 Each Advisory Affiliate will also identify each Associated Employee in ts Form ADV to the same extent as would be required under the Advisers Act if the Associated Employee were an officer director or employee of the Advisory Affiliate Finally JWH Co will allow the Staff access to its books and records as hereinafter set forth and will instruct Associated Employees to cooperate fully with the Staff We note that under the relevant defmitional provision of the Advisers Act
Section 202a17 JWH Co would not in our view be an Associated Person That
Section explicitly defines the term to include any person controlling or controlled by an
Section 202a17 of the Advisers Act defines person associated with an investment
adviser to include any partner officer or director of the adviser or any person performing similar functions or any person directly or indirectly controlling or controlled by the adviser including the advisers employees registered investment adviser is obligated reasonably to supervise the activities of its associated persons See e.g Sections 203e5 and 204A of the Advisers Act Rule 204-2a12 under the Advisers Act defines an advisory representative as including among others any partner officer or director of the adviser and certain employees and certain other persons who obtain information concerning securities recommendations made by the adviser prior to the effective dissemination of the recommendations

Jack Murphy Esq September 1996 investment adviser Thus we believe it to be implicit that persons under common control with an investment adviser are not Associated Persons absent some other basis for finding Associated Person status Cf Section 202a20 defining the term issuer to include any person under direct or indirect common control with the issuer and the definitions of the term related person in Rule 203b3-1 under the Advisers Act and in the Insructions to Form ADV each defining the term related person to include among others any person under common control In addition as already noted JWH and all natural persons affiliated with JWH Co having information regarding the trading activities of an investment adviser affiliate would be subject to the personal trade reporting requirements of Rule 204-2 under the Advisers Act and would also be subject to supervision by the affiliate as required by the first representation of this letter and consistent with the standard set forth in Section 203e5 of the Advisers Act We believe that in view of the foregoing no meaningful regulatory purpose would be served by requiring JWH Co to be treated as an Associated Person DISCUSSION As discussed below we are of the view that the proposed activities of RMI and the other Advisory Affiliates will not require JWH Co to register under the Advisers Act as an investment adviser or to comply with the provisions of the Advisers Act and the rules thereunder including Section 205 and Rule 205-3 We are also of the view that performance fees charged by the Advisory Affiliates for advice relating solely to the trading of commodity futures and related options should not be deemed subject to the requirements of Section 205 of the Advisers Act and Rule 205-3 thereunder Legal FramewQrk
Section 208d
10 For example to the extent JWH Co engages in proprietary securities trading Or trades securities for an account in which JWH has beneficial interest such trading will be subject to reporting under Rule 204-2 regardless of whether JWH Co is deemed to be an Associated Person See paragraphs a12 and a13 of Rule 204-2 requiring investment advisers to maintain records of securities transactions in which any advisory representative has beneficial interest and defining such term to include controlling persons of the investment adviser and affiliates of such controlling persons which have information regarding the advisers trading activities In addition in the event of any violation of law committed by an Associated Person who is an officer director or employee of JWIT Co the Commission would have the same basis to commeice an enforcement action against and impose sanctions on JWH or an investment adviser affiliate as it would if JWH Co were an Associated Person because JWH as the controlLing person of each affiliate and the relevant affiliate would have the same duties to supervise the Associated Person committing the violation regardless of whether JWH Co itself is treated as an Associated Person

Jack Murphy Esq September 1996
Section 203a of the Advisers Act makes it unlawful for any investment
adviser unless registered the Advisers Act to make use of the mails or any means or instrumentality of interstate commerce in connection with its business as an investment adviser Section 202a11 of the Advisers Act defines an investment adviser to include any person who for compensation engages in the business of advising others either directly or through publications or writings as to the value of securities or as to the advisability of investing in purchasing or selling securities However clause of Section 202a1 excludes from this definition any person whose investment advice concerning securities is limited to advice regarding certain types of U.S government securities Any advice given by JWH Co regarding securities is limited to the types of obligations specified by Section 202a1 lE.H Consequently JWH Co is currently excluded from the definition of the term investment adviser and thus need not register under the Advisers Act Under Section 208d of the Advisers Act it is unlawful for any person indirectly through or by any other person to do any act or thing which it would be unlawful for such person to do directly under the provisions of the Act Among the provisions regulating the conduct of registered investment advisers is Section 205 which provides that registered investment adviser is generally prohibited from charging fee on the basis of share of capital gains upon or appreciation of the funds or any portion of the funds of the ciient Such fees are permissible only if certain conditions specified by Rule 205-3 are satisfied Thus one question raised by the contemplated registration and activities of RMI and the other Advisory Affiliates is whether JWI-i Co company not registered as an investment adviser under the Advisers Act and thus not complying with the provisions of the Advisers Act regulating such entities including Section 205 and Rule 205-3 thereunder could be viewed as doing indirectly that which RMI and the other Advisory Affiliates could not do directly in violation of Section 208d In Richard Ellis Inc pub avail September 17 1981 the Staff considered the applicability of Section 208d to situation where an unregistered foreign company involved in furnishing investment advice proposed to create registered subsidiary to provide investment advice on securities to U.S persons The Staff stated that an unregistered foreign adviser would not be doing indirectly that which it could not do directly in violation of
Section 208d if it provided advice to U.S persons through subsidiary registered under the
Advisers Act that had an existence sufficiently independent of its parent and functioned independently of the parent We are of the view that RMI and the other Advisory Affiliates will exist and operate sufficiently independently and separately from JWH Co so that JWH Co need not register under the Adisers Act As discussed at supra we do not believe that advice concerning FX Forwards should be deemed to constitute investment advice regarding securities

Jack Murphy Esq September 1996
In Ellis the Staff identified circumstances in which registered affiliate of an unregistered foreign adviser would be regarded as having separate independent existence and independent functions so as not to require registration of the unregistered foreign affiliate In this regard the Staff stated that registration would not be necessary where the.registered investment adviser subsidiary is adequately capitalized has buffer between the subsidiarys personnel and the parent such as board of directors majority of whose members are independent of the parent has officers directors and employees who if engaged in providing advice on behalf of the subsidiary are not otherwise engaged in the investment advisory business of the parent makes the decisions as to what investment advice is to be communicated to or used on behalf of its clients and uses sources of investment information not limited to its parent and keeps investment advice confidential until conmiupjcate to its clients These standards have also been applied to registered investment advisers and their affiliates in the domestic context.2 However in the report of the Division of Investment Management entitled Protecting investors Half Century of investment Company Regulation 240 May 1992 Division Report the Staff relaxed the Ellis standards in certain respects and expressed its view that registered investment adviser should be regarded as sufficiently separate and independent from its foreign affiliate if the two companies are separately organized and the registered investment adviser is staffed with personnel capable of providing investment advice subject to certain conditions This approach was first applied in Uniao de Bancos de Brasileiros S.A @ub avail July 18 1992 and has generally been followed in other subsequent no-action letters.3 More recently the Staff further clarified its position as whether an affiliate of registered investment adviser must itself register Thomson Advisory Group L.P pub avail September 26 1995 In Thomson registered investment adviser and its affiliates sought confirmation that planned merger and subsequent reorganization of the companies with another registered investment adviser would not result in Staff recommendation of enforcement action based upon the failure of the general partners of the affiliated investment advisers to register under the Advisers Act It was represented that the general partners of each investment adviser would not be directly involved in giving investment advice but under the proposed structure management and control of each investment adviser partnership would technically reside with their respective unregistered general partners.4 The employees of the See e.g Sentinel Real Estate corporation pub avail November 22 1988 United Asset Management Corporation pub avail November 1981 See e.g Murray Johnstone Holdings Limited et @ub avail October 1994 Kleinwort Benson investment Management Limited pub avail December 15 1993 Actual management and
control of each investment adviser was to be delegated to management boards composed primarily of representatives from other affiliated investment advisers

Jack Murphy Esq Septeiiiber 1996 unregistered general partners would not be prohibited from engaging in the investment advisory activities of the affiliated investment advisers However they would conduct such activities if at all only through their respective registered affiliates and only as Associated Pers�æs of the affiliates The Staff provided the requested no-action relief in Thomson even though the specific criteria identified in Richard Ellis were not satisfied in all respects In this regard the Staff concluded that the concerns underlying the criteria in Ellis and Section 208d of the Advisers Act are adequately addressed when the unregistered affiliate of registered adviser does not provide investment advice ii the unregistered affiliate and each of its employees are deemed Associated Persons of the registered adviser when they have access to the investment recommendations of the registered adviser or information concerning investment recommendations prior to the effective dissemination of th recommendations and iii the Commission has access to the unregistered affiliates books and records to the extent necessary to examine the business of the registered adviser Rule 205-3 As noted above Section 205 of the Advisers Act and Rule 205-3 thereunder taken together prohibit an investment adviser from charging of fee on the basis of share of capital gains or appreciation of the funds or any portion of the funds of client unless certain conditions of the rule are met These conditions generally require that performance fee arrangements are entered into only with clients deemed eligible under the rule such fees are computed in accordance with specified requirements all material information concerning the arrangement including certain specified matters are disclosed to the client and the adviser reasonably believes that the agreement providing for performance fee represents an arms-lengtharrangement and the client or the client together with the clients independent agent understands the proposed method of compensation and its risks The question raised under these provisions is whether the Advisory Affiliates as registered investment advisers are required to comply with Section 205 and Rule 205-3 thereunder with respect to the fees they charge for advice relating solely to futures trading In Wallace Wagner @ub avail June 28 1990 the Staff took the position that where registered investment adviser not registered as CTA would solely provide futures trading advice to particular client the terms of the advisory agreement with that client would nonetheless have to comply with Section 205 of the Advisers Act and Rule 205-3 thereunder

Jack Murphy Esq 10 September 1996
II Applicatipn of SectionW8fcl tp JWJT C.c
Satisfaction of Thomson Criteria
We are of the view that in the case of JWH Co as in Thomson the concerns underlying Section 208d as articulated by the Staff in Ellis and subsequent no-action letters will be adequately addressed without requiring JWH Co to register as an investment adviser As an initial matter we note that each of the three representations set forth in Thomson will be satisfied by JWH Co First as represented below JWH Co will not be giving advice regarding any securities other than certain U.S government securities JWH Co will thus not be an investment adviser as defmed by Section 202a11 of the Advisers Act While it is true that in Thomson each unregistered affiliate was essentially shell entity we believe that this fact was not essential to the Staff in reaching its conclusion Indeed the Staff did not include such representation as one of the specific conditions upon which no-action relief was based but only required that the unregistered affiliates not be engaged in rendering investment advice.5 Moreover to the extent that JWH Co engages in an active business it is fully regulated by the CFTC and subject to the comprehensive regulatory scheme applicable to CTAs and CPOs under the CEA including the rules of the NFA Second JWH and any officer director or employee of JWH Co having access to the investment recommendations of RMI or any other Advisory Affiliate or information concerning those recommendations prior to their effective dissemination will be deemed an Associated Person of RMI or the Advisory Affiliate as the case may be Since these Associated Persons will not engage in investment advisory activities in their capacities as officers directors or employees of JWH Co those activities should not trigger any requirement that JWH Co register as an investment adviser Third the Commission will be given access to JWH Co books and records to the extent necessary to examine the businesses of RMI and the other Advisory Affiliates Underlying Concerns Not Implicat In addition to satisfying the conditions set forth by the Staff in Thomson the arrangements proposed by JWH Co do not in our view give rise to the concerns In its discussion of the required representations the Staff clearly contemplated circumstances where unregistered affiliates of registered investment advisers are actively engaged in business an unregistered ..affiliate of registered adviser is engaged in some other business the would need access only to those books and records regarding transactions relating to the business of the registered adviser Thomson at 14

Jack Murphy Esq 11 September 1996 underlying Section 208d of the Advisers Act As discussed above JWH Co is not an investment adviser as defined by Section 202a11 of the Advisers Act Thus because the activities in which JWH Co engages do not constitute acting as an investmeht adviser RMI and the other Advisory Affiliates will not be serving as means by which JWH Co can circumvent any requirements of the Advisers Act or the rules and regulations thereunder in contravention of Section 208d We have considered the Staffs position in Wagner in reaching this conclusion in view of the possibility that such position could serve as the basis for an argument that JWH Co is violating Rule 208d by establishing RMI and the other Advisory Affiliates as separate entities from JWH Co to avoid the requirement that might be deemed to exist under Wagner that JWH Co not charge performance fees except under the conditions specified in Rule 205-3 For number of reasons however we believe that Wagner is not applicable to the circumstances presented here Under Ellis and as clarified by Thomson the JWH Companies are sufficiently independent and separate to justify separate legal treatment of JWH Co and the other Advisory Affiliates The argument that the Staffs position in Wagner should apply to J\VH Co however presupposes that the affiliates are not sufficiently independent and separate to deserve separate legal treatment In this regard JWH Co.s affiliation with the Advisory Affiliates cannot be viewed as an indirect means for JWH Co to charge performance fees to investment advisory clients that otherwise would be impermissible because under the Thomson criteria JWH Co will not he providing investment advisory services.6 In addition the proposed arrangements involving the JWH Companies are materially different from those considered in Wagner JWH Co as CTA follows accepted industry practice by charging its clients performance fees for futures trading advice This practice is of long standing and antedates the formation of RMI or any other Advisory Affiliate In contrast Wagner involved an existing registered investment adviser that was subject to Section 205 and Rule 205-3 at the time the investment adviser proposed to provide futures trading advice HI Application of Section 205 and Rule 205-3 to Advisory AffiIIat In our view the Advisory Affiliates should not be deemed subject to the requirements of Section 205 and Rule 205-3 with respect to performance fees they charge for advice relating solely to futures trading Unlike the case in Wagner the Advisory Affiliates will be registered CTAs Thus to the extent the Advisory Affiliates provide advisory services relating to futures The Staffs position in Wagner related to the activities of single investment adviser In our view there is no regulatory concern that would warrant the application of this Staff position to the activities of an affiliate of an investment adviser where the Thomson criteria are satisfied

Jack Murphy Esq 12 September 1996 trading their activities will be fully regulated by the provisions of the CEA and the rules and regulations thereunder Moreover in view of the fact that the Advisers Act was not intended to regulate these services because they do not involve advice concerning securities we do not believe that Section 205 should be broadly applied so as to regulate fees charged by dually registered CTAs and investment advisers for futures-related services It is relevant in this regard that the performance fees charged by the Advisory Affiliates for commodity trading advice will as noted above be computed in manner to assure tnat any gains or losses from securities held in clients accounts as futures margin are not considered in determining the fees payable by clients Indeed in an analogous context the Staff did not require compliance with Section 205 and Rule 205-3 by registered investment adviser that proposed to charge performance fees for real estate related advice EQK Partners pub Avail July 13 1988 In EQK although securities would be held in clients accounts it was represented that the performance fees charged for real estate related advice would not be based on the capital gains or capital appreciation of any securities In the case of the Advisory Affiliates it would in our view be more appropriate to follow the position taken by the Staff in EQK rather than that taken in Wagner Such an approach would be consistent with the intended investor protection goals of the Advisers Act and would give due recognition to the CEA as the regulatory framework applicable to the CTA activities of the Advisory Affiliates IV Public Policy Considraijn In our view no public policy concern or regulatory purpose would be served by requiring JWH Co to register as an investment adviser or by requiring the Advisory Affiliates to adhere to Rule 205-3 when charging performance fees for commodity trading advice As represented above to the extent investment advisory services are provided to clients they will all be provided by RMI or another Advisory Affiliate in full compliance with all applicable requirements of the Advisers Act and the rules thereunder including Section 205 and Rule 2053 thereunder To the extent that RMI or another Advisory Affiliate provides advice regarding futures trading their activities will be subject to the regulatory scheme of the CEA and the rules and regulations thereunder as applicable to CPOs and CTAs which includes regulation by the NFA The services provided by JWH Co will also continue to be subject to such rules and regulations Accordingly all activities engaged in by the JWI Companies will be fully regulated and governed by the appropriate agencies and bodies of law Thu.s clients of each of the JWH Companies will receive the full benefits provided by the federal regulatory schemes applicable to investment advice and commodity trading advice with respect to all the services they receive from any of the JWH Companies
No regulatory purpose would therefore be served by requiring JWH Co to register as an investment adviser or by requiring the performance fees of the Advisory Affiliates to comply with Rule 205-3 when they are providing advisory services that relate solely to futures trading In this regard we note tharclients of the JWH Companies will be fully apprised of the separate identities and businesses of those companies because JWEI Co RMI and the

Jack Murphy Esq 13 September 1996 other Advisory Affiliates will each take appropriate steps to assure that communications and disclosures to their respective clients and prospective clients will clearly distinguish the services provided by each company In addition prior to entering into performance fee arrangement relating to futures trading that does not comply with Rule 205-3 the ciient of the Advisory Affiliate will be apprised of that fact Thus any potential for client confusion about which regulatory schemes and protections apply to services provided by JWH Co and which apply to RMI and the other Advisory Affiliates and the various services they render will be avoided REPRESENTATIONS In connection with the request set forth in this letter JWH Co RMI and the other Advisory Affiliates will comply with the following representations Each Associated Employee of an Advisory Affiliate will be subject to the supervision direction and control of such Advisory Affiliate to the same extent as would be required under the Advisers Act if such individual engaged therein as an officer director or employee of the Advisory Affiliate Each Advisory Affiliate will deem as an associated person each Associated Employee who has access to the investment recommendations of that Advisory Affiliate or information concerning such recommendations prior to their effective dissemination Each Advisory Affiliate will in accordance with Rule 204-2a12 under the Advisers Act obtain and maintain on-site personal securities transaction records for each of its advisory representatives as such term is defined by such rule and will also obtain and maintain Ofl Site records of the personal transactions of such persons in futures and related options.7 Each Advisory Affiliate will identify each Associated Employee in its Form ADV to the same extent as would be required under the Advisers Act if the Associated Employee were an officer director or employee of such Advisory Affiliate Each Associated Employee of an Advisory Affiliate will be subject to the conflict of interest insider trading and personal securities transaction reporting requirements established by such Advisory Affiliate to the same extent as would be required under the Advisers Act if such individual were an officer director or employee of that Advisory Affiliate In this regard all persons deemed-to be associated persons of an Advisory Affiliate under the representation set forth in paragraph above also will be advisory representatives of such Advisory Affiliate

Jack Murphy Esq 14 September 1996
JWH Co will not provide investment advice concerning securities except as described herein JWH Co will provide the Staff access to any books nd records of JWH Co which relate to services rendered by JWH Co to clients of any Advisory Affiliate including any documents and records relating to the accounts of such clients or which are required to be maintained by JWH Co pursuant to the provisions of the CEA and the rules thereunder and instruct Associated Employees to cooperate fully with the Staff Such books and records of JWH Co will promptly be produced to the Staff upon request Any performance fee charged by an Advisory Affiliate for advice relating to futures trading that does not comply with Rule 205-3 will not be based upon the capital gains or capital appreciation of any securities All fees charged by an Advisory Affiliate for investment advice relating to securities will comply with Section 205 of the Advisers Act and Rule 205-3 thereunder 10 Prior to an Advisory Affiliate entering into performance fee arrangement with client that does not comply with Rule 205-3 it will disclose to the client the fact that the fee is not computed in accordance with the rule CONCLUSIQj For the reasons described above and subject to the representations set forth above we respectfully request confirmation that the Staff will not recommend that the Commission take enforcement action against JWI-1 Co for failure to register under the Advisers Act or to comply with the provisions of the Advisers Act and the rules thereunder including Section 205 and Rule 205-3 if RMI or any other Advisory Affiliate engages in an investment advisory business as described above or against any Advisory Affiliate for failure to comply with Section 205 and Rule 205-3 if the Advisory Affiliate charges performance fees for advice relating solely to the trading of commodity futures and options thereon which fees do not meet the conditions of Rule 205-3 Pursuant to CFTC regulations CPO or CT.A must make and retain for five year period books and records of all trading activity for client accounts and proprietary accounts See CFTC Rules 1.31 4.23 and 4.33

Jack Murphy Esq 15 September 1996
Please call me at the telephone number noted above if you have any questions concerning this request or if you need any further information We appreciate your consideration of this matter Sincerely David Mitchell