SEC Division of Investment Management staff letter: Long-Term Capital Management, L.P.

28 APR 1994

Our Ref. No. 94-49-CC

Long-Term capital
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Management, L. P.
DIVISION OF INVESTMENT MAAGEMENT File No. 132-3 Your letter of January 24, 1994, requests our assurance that

we would not recommend enforcement action to the Commission if

Long-Term Cap i tal Management, L. P. ( "LTCM" ) does not treat

certain holders of involuntary and non-contributory beneficial

interests in trusts which are formed by LTCM' s principals and

invest in entities relying on section 3 (c) (1) as holders of

"outstanding securities" of a trust for purposes of section

3 (c) (1) (A) of the Investment Company Act of 1940 (111940 Actll).
You state that LTCM serves as investment adviser to

companies relying on the exception from the definition of

investment company in section 3 (c) (1) of the 1940 Act (113 (c) (1) Companyll or 113 (c) (1) Companies"). certain principals of LTCM wish to form trusts for estate planning purposes. Each trust

will invest in a 3(c)(1) Company. You state that a trust may

acquire more than 10% of the outstanding voting securities of a

3 (c) (1) Company; in addition, the principal asset of each trust

initially will be its interest in a 3(c)(1) Company.

The beneficiaries of a trust will be the principal forming

the trust, his or her relatives, and/or charitable organizations.

You state that the beneficial interests of the relatives and

charitable organizations will be involuntary and noncontributory;

that is, these beneficiaries will not elect whether to

participate in the trust, and will not make any contribution to

the trust ("Involuntary Beneficiaries"). You also state that the

Involuntary Beneficiaries will not be able to direct the

investment decisions of the trust or transfer their interests in

the trust. 1/

section 3 (c) (1) excludes from the definition of investment company "any issuer whose outstanding securities
(excluding 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. II section 3(c) (1) (A) sets out a two part test to determine when an issuer's securi ties are beneficially owned by not more than 100 persons. First, an investing entity, and not the holders of its outstanding securities, will be counted as one beneficial owner of a 3 (c) (1) Company if the investing entity owns less than 10% of the outstanding voting securities of the 3 (c) (1) Company. Secóhd, even if an investing entity owns more than 10% of the outstanding voting securities of a 3 (c) (1) Company, the investing enti ty' s security holders will not be counted as beneficial 1/ Your request and our response are limited to the beneficial interests in a trust not held by the principal forming the

trust or any trustee of the trust.

owners of the 3 (c) (1) company so long as not more than 10% of the investing entity's total assets are invested in the 3 (c) (1) Company and any other 3 (c) (1) companies. In International Brotherhood of Teamsters v. Daniel, 439

U.S. 551 (1979), the Supreme Court held that an employee's

interest in an involuntary, noncontributory pension plan was not

a security within the meaning of the Securities Act of 1933

("1933 Act") or the Securities Exchange Act of 1934. In

Securities Act Release No. 6188 (Feb. 1, 1980) ("Release 6188"),

the staff applied the Court's reasoning in Daniel to other types

of employee benefit plans and took the position that the

registration and antifraud provisions of the 1933 Act did not

apply to interests in involuntary, noncontributory plans;

involuntnry! contributory plans; and voluntary, noncontributory

plans. In Kodak Retirement Income Plan (pub. avail. Feb. 29,

1988), the staff stated that employee-participants in an

involuntary, noncontributory defined benefit plan were not

holders of outstanding securities of the plan, and were not

as beneficial owners of a 3 (c) (1) Company

under the attribution rules. 21

required to be counted

You believe that the rationale of Daniel and Release 6188

applies outside the context of employee benefit plans.

Therefore, you believe that, because the Involuntary

Beneficiaries do not choose to become beneficiaries of a trust,

and do not contribute assets to the trust, the Involuntary

Beneficiaries' interests in a trust are not securities. Thus,

the Involuntary Beneficiaries are not holders of outstanding

securities of- the trust for purposes of section 3 (c) (1) (A) and

they should not be counted as beneficial owners of a 3 (c) (1) Company. We would not recommend enforcement action to the Commission

if, as described in your letter, LTCM does not treat certain

holders of involuntary and non-contributory beneficial interests

in trusts which are formed by LTCM's principals and invest in

3 (c) (1) Companies as holders of outstanding securities of the trusts for purposes of section 3 (c) (1) (A). This position is 21 See àlso Intel Corporation (pub. avail. Nov. 18, 1992); Sunkist Master Trust (pub. avail. June 5, 1992).

• 2

based on the facts and representations in your letter; any

different facts or representations may require a different

conclusion. This letter expresses the Division's position on

enforcement action only and does not express any legal

conclusions on the issues presented.
/): Ír t2~
~nica L. Parry ~~
Senior Counsel

• 3

SIMPSON THACHER & BARTLETT
A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATlG.NS

425 LEXINGTON AVENUE

NEW YORK, N.Y. 10017-3909

(212) 455- 2000 LONDON
HONG RONG
WRITER'S DIRECT DIAL NUMBER TELECOPIER: 455-2502 TOKYO TELEX: 129158 COLUMBUS BY MESSENGER January 24, 1994

AC1 J~ ~Oi.a

Re: Long-Term Capital Management, L.P. SECTION '3 (C)(I") Investment Company Act of 1940 RULE
Section 3(c)(l)
~~;;¡BIL L/ 12i ! 9.
Thomas S. Haran, Esq.

Chief Counsel
Division of Investment Mauagement
Securties and Exchange Commission
Mail Stop 5-2

450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Harman:

We are wrting on behalf of our client, Long-Term Capital Management, L.P. no enforcement ("L TCM"). We request advice from the staff of the Commission that

action will be récommended if, as more fully described below, cerin holders of

involuntary and non-contrbutory beneficial interests in certin trsts formed by principals

ofLTCM (the "Prncipals") are not treated by LTCM as holders of "securties" of such trsts for puroses of Section 3(c)(1) of the Investment Company Act of 1940, as amended (the "1940 Act"). For your convenience, enclosed are seven additional copies of this letter.

-2- January 24, 1994 Thomas S. Harman, Esq.

1. F actual Background

L TCM is a recently formed firm which engages in an investment management business. L TCM relies upon the exemption from registration as an investment adviser under the Investment Advisers Act of 1940, as amended, set forth in Section 203(b )(3) thereof. L TCM proposes to act as investment adviser for various investment vehicles which will rely upon the exclusion from the definition of "investment company" under the 1940 Act set forth in Section 3(c)(l) thereof (individually, a "3(c)(l) Fund" and collectively, the "3(c)(1) Funds").i For their personal estate and chartable planning purposes, the Prncipals wish to form trsts (individually, a "Trust" and collectively, the "Trusts") to invest in the 3( c)(1) Funds alongside other investors in the 3( c)( 1) Funds.

The beneficia~ owners of the interests in each Trust will consist of the Principals, relatives of the Pricipals and/or various chartable organizations selected by the Principals. The subject of this letter is limited to those beneficial interests in a Trust ("Beneficial Interests") that are not held by the Principal forming the Trust or by any trstee of the Trust.

Each Beneficial Interest in a Trust wil be involuntary, meaning that the beneficiar holding the Beneficial Interests will not elect whether or not to participate in the Trust. In addition, each Beneficial Interest in a Trust wil be non-contrbutory, meaning that all 11 Section 3(c)(1) of the 1940 Act excludes from the definition of "investment company" any issuer whose outstading securties (other than short..tenn paper) are beneficially owned by not more than 100 persons and which is not makg and does not presently propose to make a public offerig of its securties. L TCM represents, and the staff may assume for purses of this letter, that, assuming receipt of the relief requested herein, each 3( c)(1) Fund will meet the requirements of the Section 3(cXl) exclusion.

-3- January 24, 1994 Thomas S. Harman, Esq. contrbutions to the Trust will be or have been made as a gift or chartable donation by the Principal forming the Trust. Beneficial Interests in each Trust wil also be non￾transferable except upon the death, bankptcy, dissolution or similar event with respect to a beneficiary. Finally, no holder of a Beneficial Interest will have any right to direct the investment decisions of the Trust, remove the Trust's trustee (except in limited circumstances such as the trstee's insanity or incompetency, a breach of the trstee's

fiduciary duty or similar events) or otherwise participate in the management of the Trust.
II. Legal Discussion

Based upon the foregoing and for the reasons set fort below, we are of the opinion that Beneficial Interests in the Trusts are not "securties" for puroses of the 1940 Act and, therefore, that the beneficiaries holding Beneficial Interests in the Trusts are not holders of "outstanding securities" of the Trusts who may be required to be counted as beneficial owners of the Section 3( c)( 1) Funds in which the Trusts invest for puroses of
Section 3( c)( 1) of the 1940 Act.
Section 3( c)( 1 )(A) of the 1940 Act provides that for the puroses of determining
under Section 3(c)(l) whether an issuer's securties are beneficially owned by not more than 100 persons:

-4- January 24, 1994 Thomas S. Harman, Esq.
"beneficial ownership by a companyd shall be deemed to be beneficial ownership by one person, except that, if the company owns 10% or more of the outstanding voting securities of the issuer, the beneficial ownership shall be deemed that of the holders of such company's outstanding securities (other that short-term paper) unless, as of the date of the most recent acquisition by such company of securities of that issuer, the value of an securties owned by such company of an issuers which are or would, but for . tlie exception set forth in the subparagraph, be excluded from the definition of investment company solely by this paragraph, does not exceed 10% of the value of the company's total assets." The staff of the Commission has also taen the position that where a company is formed priarily for the purose of investing in an issuer relying upon the Section

3(c)(1) exclusion, each holder of such company's outstanding securties should be treated as a beneficial owner of securties of the issuer. See, ~ Merrll Lvnch & Co.. Inc. (pub. avaiL. April 23, 1992). Indeed, where the company itself relies upon the Section 3( c)(1) exclusion, the staff has required that the company limit its investment in the issuer to no more than 40% of its total assets. See. ~ Handv Place Investment Parershio (available July 19,1989); CMS Communications Fund. L.P. (available April 17, 1987).

Weare advised by L TCM that, although the possibility is considered unlikely, a Trut may acquire more than 10% of the voting securties of a 3( c)(1) Fund. In addition, at least initially, the principal asset of each Trust will be its investment in a 3(c)(l) Fund. Accordingly, a question arses as to whether holders of Beneficial Interests in a Trust 2: The ter "company" is defined in Section 2(a)(8) of the 1940 Act to include a corpration, parership, trst or any organied group or persons whether

incorprated. or not. Therefore, a Trut formed by a Principal would be considered

the 1940 Act. a "company" for the puroses of Section 3(c)(1) of

January 24, 1994
Thomas S. Harman, Esq. -5 should be considered beneficial owners of securties of a 3( c)( 1) Fund in which the Trust invests. In International Brotherhoo of Teamsters v. Daniel, 439 U.S. 551 (1979), the Supreme Cour held that an interest in a noncontrbutory and involunta pension plan does not constitute a "securty" under either the Securties Act of 1933, as ;uended (the "1933 Act") or the Securties Exchange Act of 1934, as amended (the "1934 Act"). The Supreme Court in Daniel applied the test set forth in Securties and Exchange Commission v. W.J. Howev Co.. 328 U.S. 293 (1946), to determne whether the parcipants' interests in the pension plan in question constituted an "investment contract"

and thus came within the definition of a securty under the 1933 Act and 1934 Act. Under the Howev test, an investment contract must involve the investment of money in a common enterprise with profits to come solely from the efforts of others. Loking separately at.each element of the test, the Cour concluded th an employee's not comport with the parcipation in a noncontrbutory and involuntary pension plan doe

commonly held understanding of an investment contract. DanieL. 439 U.S. at 559. In SEC Release No. 33-6188 (Februar 1, 1980) (the "Release"), the staff, applying the Cour's reasoning in Daniel to other tyes of plans. took the position that the interests of employees in (i) involunta, noncontrbutory plans, (ü) involuntary, contrbutory plans, and (ii) volunta, noncontrbutory plans are not securties and that the registration and antifraud provisions of the 1933 Act will not be interpreted to apply to interests in such plans. Based on the reasoning set fort in the Danel case, the staff acknowledged that where a plan is noncontrbutory, the "investment of money" aspect of an investent

January 24, 1994
-6 Thomas S. Harman, Esq. contract is generally not present and that where a plan is involuntary, the plan parcipants may not make an investment decision in which they "choose to give up a specific consideration in return for a separable financial interest with the characteristics of a securty," a factor which the Supreme Court relied on in the Daniel decision. See Daniel, 439 U.S. at 559. In Kodak Retirement Income Plan (pub. avaiL. Feb. 29, 1988) the staff adopted the reasoning of Daniel and the Release in the context of the 1940 Act's definition of a securty. In Kodk, counsel requested the staff s concurence with counsel's view that

parcipants in a noncontrbutory and involunta pension plan are not holders of "securities" and are therefore not required to be counted as beneficial owners of a Section 3(c)(I) entity in which the plan invests. In its reply, after sumarzing Daniel and the Release, the staff concluded:
We believe it is appropriate to apply the reasoning of Daniel and the Release to the issue presented. Accordingly, we concur in your view that the employee-paricipants in (the plan) are not holders of outstanding securties of (the plan) and, therefore, are not required to be counted as beneficial owners of a Section 3( c)( 1) entity under the attbution role set fort in

the (1940) Act. Section 3(c)(l)(A) of

The position of the staff in Kodak has been confired in subsequent no-action letters. See Sunst Master Trost (pub. avaiL. June 5, 1992) and Intel Corooration (pub. avaiL. Nov. 18, 1992)ë 11 It is instrctive in this regard that in Intel the staff concluded that while beneficial

interests in an involuntaiy and non-contrbutoiy pension plan were not securties for the 1940 Act, interests in a volunta and contrbutory 401(k) plan purses of

were securties for puroses of the 1940 Act.

January 24, 1994
Thomas S. Harman, Esq. -7
Weare of the opinion that the rationale of DanieL, the Release and Kodak in the context of trsts for pension plans should be applied in the context of a Beneficial

Interest in a Trust. Because Beneficial Interests in a Trust are involuntary and non￾contrbutory, they do not involve the investment of the beneficiary's funds in the Trust or an investment decision by a beneficiar as to whether an investment should be made. in

the Trust. Furthermore, holders of Beneficial Interests have no right to participate in the investment decisions of the Trust. As such, the Beneficial Interests in the Trusts are not "investment contracts" under the Howev test. Therefore, they are not "securties" for puroses of the 1940 Act and the holders of Beneficial Interests in a Trust are not holders of outstanding securities of the Trusts. We also believe that this result is consistent with the puroses of Section 3( c)( 1) and that no policy would be served by looking though to the holders of Beneficial Interests in a Trust for puroses of Section 3( c)( 1). The attbution rules under Section 3(c)(1) of the Act are designed to prevent circumvention of the 100-person limitation through use of -an entity formed to act as a conduit for a broader investor parcipation in an unregistered investment company. However, the Trusts will not be formed for the purse of circumventing this limtation. The Trusts are essentially estate and chartable planning devices for the Principals, not capital-raising devices or vehicles for increasing investor paricipation in the 3( c)( 1). Funds. Furhermore, in light of the identities of the beneficiares, their relationships to the Principals and the prohibition on trnsfers, there is

no interest on the par of the public in the Trusts that requires protection through

registrtion under the Act. Therefore, we believe no purose would be served in

January 24, 1994
Thomas S. Harman, Esq. -8 applying the attbution rules of Section 3( c)( 1) to the holders of Beneficial Interests in the Trusts.

We are aware that the staff has indicated in previous no-action letters that under some circumstances holders of beneficial interests of a trst may be counted as beneficial owners of a Section 3( c)( 1) entity in which the trst invests. See, ~ Nemo Capital Parers, L.P. (pub. avaiL. July 28, 1992); Handv Place Investment Partership (pub. avaiL.

July 19, 1989); Rosenberg Capital Management (pub. avaiL. Feb. 18, 1979). These letters contain statements in a generalized context to the effect that the beneficial ownership of securties of a 3( c)(1) entity by a trst shall be deemed to be the beneficial ownership by one person unless the trust owns 10% or more of the outstanding voting securties. However, none of these letters specificaHy addresses the issues raised in this letter and we believe that these no-action letters are distinguishable on their facts since none of these letters were limited to beneficial interests which are involuntary and non￾contrbutory and where the beneficiaries have no participation in the investment decisions of the trst. In addition, Nemo Capital Parters and Handv Place involved trsts with identical or overlapping beneficiaries, and in order to avoid double counting, the attbution rules were invoked to reduce the number of beneficial owners of a Section

3(c)(1) entity rather than to increase the number. As a result, we believe that these letters should be understo to be limited by the principles set f6rth in Kodak and related authorities in the context of trsts which are involunta and non-contrbutory pension plans and that these authorities remain the appropriate precedents with regard to the issues raised by this letter.

January 24, 1994
Thomas S. Harman, Esq. -9
III. Conclusion

For the foregoing reasons, we respectfully request that the staff advise us that no enforcement action wil be recommended if, as described above, holders of Beneficial Interests in the Trusts are not treated by L TCM as holders of "securties" of the Trusts who may be required to be counted as beneficial owners of the Section 3( c)( 1) Funds in
Section 3(c)(1) of the 1940 Act. If
for any which the Trusts invest for puroses of

reason you do not concur in the views expressed herein, we respectfully request the opportnity to confer with you by telephone or in person prior to any wrtten response to this letter. If you have any questions regarding this request, please call, collect, Thomas this office. H. Bell, (212) 455-2533, or Andrew R. Keller, (212) 455-3577, of

Very trly yours,
~JU1~~ ~
SIMPSON THACHER & BARTLETT