SEC Division of Investment Management staff letter: Kavilco, Inc.

APR - 4 1996

Our Ref. No. 95-607-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Kavilco, Inc. DIVISION OF INVESTMENT MAAGEMENT File No. 811-06027

Your letter dated October 9, 1995 requests our assurance

that we would not recommend enforcement action to the Commission

under Section 17 (f) of the Investment Company Act of 1940 ("1940

Act") .l if Kavilco, Inc. ("Kavil,co"), a registered closed-end

investment company, maintains a checking account in the manner

described below.

Kavilco operates a checking account at West One Bank, from

which it pays operating expenses and shareholder dividends and

distributions. The account is funded with wire transfers from

Kavilco's custodian, the Charles Schwab Trust Company ("CSTC"),

which is a trust company registered under the laws of California.

.You represent that CSTC meets the definition of a bank in section

2 (a) (5) of the 1940 Act and has the qualifications prescribed in Section 26 (a) (1) of the 1940 Act. 2J Kavilcocurrently has only two officers, who are the only authorized signatories for checks

drawn on that account: the Chief Financial Officer, who manages

its Seattle, Washington office, and the President/Chief Executive

Officer, who resides in Kasaan, Alaska. Kasaan is located in a

remote part of the state, accessible only by float plane or boat.

Kavilco states that it can take several weeks or longer under

adverse conditions for mail or other deliveries to reach the

President.
Section 17 (f) provides in pertinent part that if an

investment company employs a bank as custodian for its securities

and similar investments then all of its cash assets must also be

kept in the custody of a bank or banks. Section 17 (f) also';:'~ provides, however, that an investment company 'using a bank

custodian may maintain bank checking acc9unts with an aggregate

balance that does not exceed the amount of the company's figelity

bond maintained pursuant to Section 17 (g) of the 1940 Act. . 'The

Commission has set forth g~idelines that should be followed by an

investment company that establishes and maintains a checking account. 1/ Those guidelines are intended to ensure that the

.l Section 17 (f) requires every management investment company

to place its securities and similar investments in the

custody of (1) a bank or..banks qualified under Section

26 (a) (1) of the 1940 Act, (2) a company that is a member of a national securities exchange, or (3) the investment. company itself. ;.

2J Telephone conversation between David Baca of Davis Wright

Tremaine and Jana Cayne of the staff, April 3, 1996.

1/ Investment Company Act Release No. 6863 (Jan. 29, 1972) ~

investment company can meet shareholders' expectations that cash

held by the fund will be given a similar degree of protection to

that given its portfolio securities.

Kavilco states that it will comply with all of those

guideiines except, with respect to certain checks, the guideline

that checks should include the signatures of at least two persons

designated by resolution of the fund's board of directors.

Kavilco maintains that if the President (the only employee who

would be qualified to sign company checks besides the Chief

Financial Officer) is required to sign each check, including

checks for operating expenses , it will be impossible for Kavilco

to regularly pay its operating expenses on a timely basis.

Kavilco proposes to revise its checking account agreement to

require two signatures on checks that are written for an amount

in excess of $10,000, for dividends or distributions to

shareholders, or under circumstances in which time constraints

would not prohibit Kavilco from paying its expenses in a timely

fashion. For all other checks, Kavilco proposes to.obtain only

one signature, that of the Chief Financial Officer, under the

following procedures: a list identifying each check to be

issued, indicating the payee, amount, and date of the check,

would be sent to the President by facsimile transmission; the

checks would' be sent out only after the President reviews the

list and faxes back his approval. lj In addition, Kavilco will

provide to the President each month a list, prepared by the

independent consultant responsible for reconciling Kavilco' s bank

statements, of all checks written against the checking account.

Kavilco represents that it will maintain copies of the faxed

approvals and monthly lists of checks pursuant to Rule 31a￾2 (a) (2) under the 1940 Act. 2/ On the basis of the facts' and representations in your letter

and in your telephone conversations with the staff, we would not

recommend that the Commission take any enforcement action under

section 17 (f) of the 1940 Act if Kavilco obtains one signature

for certain checks in the manner described above. Because this

lj Telephone conversation between David Baca, and Robert

Bagnall and Jana Cayne, January 3, 1996.

'
2/ Telephone conversation between David Baca, and Robert Bagnall and Jana Cayne, February 20, 1996. Rule 31a-2 (a) (2) requires an investment company to preserve certain records

for a period not less than six years from the end of the

fiscal year in which the transaction occurred, the first two

years in an easily accessible place.

• 2

') posi tion is based on the facts and circumstances set forth in your letter, you should note that any different facts or

circumstances might require a different result.

~~ULJ1 - L~LvfytL ana M. Cayne I . ttorney ' / !

• 3

DAVIS WRIGHT TREMAINE
LAw OFFCES

2300 FIRT INTRSATE TOWER' 1300 SW FIFI AVENUE' POR1ùD, OR 97201.5682 (503) 241.2300 . FAX: (503) 778.5299 ~-""""'.,.~..-"..Y...,.L......-,.. ,'''_ .:
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DAVI C. BACA ~
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( r; Diect Une: (503) 778.5306 L

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VIA UPS

Securities and Exchange Commission

Division of Investment Management

Office of the Associate Director-Chief Counsel

450 Fifth Street NW

Washington, D. C. 20549

Re: Kavilco, Inc.
Our File No. 25537\17

Ladies and Gentlemen:

We represent Kavilco, Inc. (the "Company"). The Company

is an Alaskan native corporation, registered as a closed-end

investment company under the Investment Company Act of 1940 (the

"40 Act"). On behalf of the Company, we request your concurrence

with our opinion that policies concerning a checking account

maintained by the Company will satisfy the requirements of section 1 7 (f) of the 4 0 Act. In particular, we request your concurrence that, under the limitations set forth in this letter, certain

checks drawn on the checking account must bear the signature of

only one officer of the Company.

1. Backqround.

The Company operates one Checking account at West One Bank. The Company pays operating expenses and shareholder dividends and distributions out of the checking account. The

account is funded with wire transfers from the Company's custodian,

the Charles Schwab Trust Company.

An examination conducted by the Division of Investment

Management, Examinations Branch found certain deficiencies with

respect to the operation by the Company of the checking account.

A copy of the July 31, 1994 letter from the Examinations Branch to

the Company is enclosed for your reference. In particular, the

examination raised còiicerns about the use of non-preprinted checks, the authority of a single officer of the Company to sign checks,

J the need to notify the depository bank of the Company's checking account guidelines, and the need for further precautions in separating the functions of reconciling the bank account from writing and signing checks. ANCHORAGE' BEU.VU . BoISE' HONOLULU . Lo ANGELE' RICHLAD' SAN FRACIO' SEATI . SHAGHA . WASHINGTON, D.C. i

\
\ i
Securities and Exchange Commission

October 9, 1995

The Company and its directors have agreed to remedy each

of the deficiencies noted in the examination, other than strict

adherence to the two-signature requirement. A copy of the

Company's response, dated August 31, 1995, is enclosed for your reference. The Company is unable to comply wi th one of the

guidelines (the "Guidelines") contained in Investment Company Act

Release No. 6863 (the "Release") concerning two signatures because

of certain unique characteristics of the Company and its

operations. The majority of the shareholders of the Company are

Alaska nati ves or their descendants, and reside in locations

scattered across Alaska.

The Company currently operates with only two officers; a

Chief Financial Officer who manages the Company's office in

Seattle, Washington, and the President/Chief Executive Offic~r of

the Company, who resides in Kasaan, Alaska. Kasaan is located in

a remote part of the state, accessible only by float plane or boat

when the weather conditions permit. In practice, therefore, the

ability of the Company to obtain the signature of both officers on

checks is severely impaired. It can take several weeks or even

longer under adverse conditions for mail or other deliveries to

reach the President. A requirement that the President countersign

every check, including all checks for operational expenses, would

make it impossible for the Company to regularly pay its operating

expenses on a timely basis. The company tried to implement a dual

signature policy about 10 years ago. It was unable to pay its

bills in a timely manner, and relations with entities providing

services to the company were strained.

The Company's other two employees both work at the

Company's principal office in Seattle. The employees are the Chief

Financial Officer and his administrative assistant. The

administrative assistant is ,charged with preparing checks for

payment, and maintaining the checking accounts. After discussions

with the Company's auditors, the Company believes it would be

inappropriate and contrary to prudent internal control procedures

for the administrati ve assistant to be a co-signatory on the

checking account. The Company has discussed this situation with

its auditors but has been u~ble to devise any system that would

comply both with prudent internal control requirements and item 4

of the Guidelines.

2 . Proposed Additional Precautions.

The Company is now in complete compliance with each of

the other Guidelines. The Company proposes to revise its checking

account agreement with West One to require two signatures on every

Securities and Exchange Commission

October 9, 1995

check in excess of $10,000, and would undertake with th~ Division

to obtain the signatures of two officers authorized by the

directors on every check in excess of $10,000, and on every check

for dividends or distributions to shareholders. The Company would

also undertake with the Division to obtain two signatures on all

checks where time constraints would not prohibit the Company from

paying its expenses in a timely fashion, and would further

undertake to provide to the President each month a listing of all checks wr i tten on the checking accounts, prepared by the independent consultant responsible for reconciling the Company's

bank statements.
The Company believes that with these safeguards in place, the board and other officer of the Company will be able to monitor actual expenditures from the Company's checking accounts,

minimizing the possibility of a defalcation. These policies would further limit the risk to the Company to checks of smaller

denomination and written within a relatively short period of time.

The Company has discussed these procedures with its auditors, and

believe that they comply with normal internal control procedures.

3. Leqal Analvsis.

We note that the Guideline 4 of the Release provides that

"checks written on such an account should require the signatures of

at least two persons designated by resolution of the board of

directors" (emphasis added). While a two-signature requirement is

under most circumstances good practice, and an appropriate way to

comply with the Guidelines, we do not believe that the Guidelines

by their terms impose an absolute requirement that two signatures be obtained on each check. Guideline 10 provides that each checking account should also include "other controls as are

necessary in the circumstances of the particular company," and the

Company believes that by adopting the policies and procedures

outlined below will have enacted adequate controls and precautions

to protect the shareholders of the Company, consistent wi th

Guideline 10 and the Guidelines read as a whole.

4. Conclusion.

'
Based on the foregoing, we respectfully request your

concurrence with our conclusion that enactment of the policies and

guidelines referred to in this letter, assuming compliance with all other Guidelines contained in the Release, will consti tute compliance with Section 17(f) of the Act, and that the Division

will not recommend that any enforcement action be taken against the ) Company if it adopts these policies and operates the checking

accounts as discussed.

Securities and Exchange Commission

October 9, 1995

Seven additional copies of this letter are enclosed. If

you have any questions or desire additional information, please

contact me at (503) 778-5306. In addition, if the general

counsel's office should reach a conclusion different from that set

forth in this letter, we request the opportunity to confer with you

prior to the transmission of a written response.

We would appreciate it if you would acknowledge receipt

of this letter by returning a file stamped copy in the enclosed

self-addressed return envelope.

Very truly yours,

DAVIS WRIGHT TREMINE
¿~.: QJ David C. Baca

DCB: mg
Enclosures c: Mr. Scott Burns

f: \2\25537\ 17\sec2. L t r
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