SEC Division of Investment Management staff letter: Michael Tannenbaum — SEC — US

UNITED STATES

SECURITIES-AND ..EXCHANGE-GOMMISSION

WASHINGTON. D.C. 20549

DIVISION OF

INVESTMENT MANAGEMENT
Ac: INUt.C;íflb'7r ¿oHf'IIArV AGr

SECTION '7 êC) C"I)
January 5, 1993
RULE
PUBLIO
A V AIn. J /I tV u ¡: rl '- ( s-- 1'9 q. :s / Mr. Michael Tannenbaum

Newman Tannenbaum Helpern Syracuse & Hirschtritt

900 Third Avenue

New York, NY 10022-4775

Re: Laifer Inc.

Dear Mr. Tannenbaum:

Your letter of November 6, 1992 requests that the staff of

the Division of Investment Management state that it would not

recommend enforcement action to the Commission if Hill top

Partners, L. P. (the "Partnership") did not attribute ownership of

the Partnership to the owners of the two limited partners that

each hold more than 10% of the interests in the Partnership, as

generally required by Section 3 (c) (1) of the Investment Company

Act. You argue that the limited partnership interests are not

"voting securities," and, therefore, that the attribution

provisions of Section 3 (c) (1) should not apply. We decline to grant your request. In a telephone

conversation with the undersigned on December 14, you stated that

if one were to count the beneficial owners of the limited

partnerships that own more than 10% of the interests in the

Partnership as owners of the Partnership, it would be safe to

assume that there would now be more than one hundred beneficial

owners of the Partnership. As a matter of policy, the staff does

not grant retroactive no-action relief. See Pajolo AG (pub.

avail. Oct. 14, 1988). Because you are seeking relief with

respect to a Partnership that arguably now has more than the one

hundred shareholders permitted by Section 3 (c) (1), a no-action position would involve granting retroactive relief.

We further note that under the terms of the Partnership

agreement, the limited partners have the right to vote on the

election or removal of the general partner in the event of the

general partner's death, insanity or retirement. The staff has

taken the position in the past that an interest that gives the

right to name a new general partner is a voting security. See

Weiss, Peck & Greer Venture Associates II, L.P. (pub. avail. Apr.

10, 1990); Horsley Keogh Venture Fund, Limited Partnership (pub.

t
2 avail. April 27, 1988); Kohlberg, Kravis, Roberts & Co. (pub.

avail. Sept. 9, 1985); CIGNA Corporation (pub. avail. Oct. 1,

1984) .
Sinc~lY , /'. /~

Eli Nathans
Special Counsel

'.
NEWMAN TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT ebb THIRD AVENUE

NEW YORK, NEW YORK 10022-4775

(212) 826 - 0800
NEIL E. e::TWINOF"F"
F'RANK J. MACCHIAROLA
ROBERT E. HELPERN SPECIAL COUNSEL .JOEL S. .. llSCHTRITT YOLANDA ~ANES" HERBERT BOCKSTEIN 6 ARTHUR ..OWENSTEIN" MARTIN A. STOLL STUART e. NEW"AN. PHILIP L. SHARF"STEIN° COUNS£L RALPH A. SICILIANO VINCENT oJ. SYRACUSE CABLE ADDRESS: NEWTAHN MICHAEL G. TANNENBAUM TELECOPIER: f212i 371-1084 JOHN C:URRANo

LOUIS GC:.DBERGo

ARNOLD P. KLING
ELLIOT R. LEVINE °
RICHARD S. MURAO

DAVID A. PELLEGRINO
MICHAEL SERRES o l.EMB£J; OF' N. Y. AND NEW .JERSEY eAR November 6, 1992

MEliBEIi OF N. Y. AfrO FLORIDA BAR

~ MEMBER OF" N. Y. AND MISSOuRI eAR o MEMBEP OF" N. Y. AND CONNECTICUT BAR Mr. Thomas S. Harmon

Chief Counsel

Division of Investment Management

Securi ties and Exchange Commission

450 5th street, N. W.

Mail stop 10-6

Washington, D. C. 20549

Dear Mr. Harmon:

On behalf of our client, Laifer Inc., we request that

the Staff of the Division of Investment Management ("Staff") of

the Securlties and Exchange Commission take a no-action position

with respect to the applicability of the attribution rule of

Section 3 (c) (1) of the Investment Company Act of 1940 ("Act") to
holders of 1 imi ted partnership interests in Hill top Partners,

L.P. ("Hilltop" or the "Partnership"), a collective investment

Delaware limited partnership organized by Laifer Inc.

In light of the Staff i s recent Investment Company Study

(IIStudyll), and its proposed amendments to Section 3 (c) (1), we

NEWMAN TANNENBAUM HELPERN SYRACUSE & HIRSCHTRIT

---ScuxLties and Exchange-Comm~ss~on

November 6, 1992

would like the opportunity to discuss this letter in light of the

proposed amendments.

Facts
Laifer Inc. is a newly formed Delaware corporation, and

the general partner (the "General Partner") of Hilltop. Laifer

Inc., through its President and principal stockholder, Lance

Laifer, solely manages the Partnership, and is solely responsible

for all investment and distribution decisions, and communications

with the limited partners of Hilltop. Laifer Inc. is a recently

registered Investment Advisor.

Hilltop was established as a Delaware limited partnership on April 7, 1992. The General Parter t s investment objective for the Partnership is to achieve significant total investment return, comprised of capital appreciation and income, consistent with preserving the nominal capital of the Partnership and its purchasing power primarily through the purchase and sale of various debt and equity interests. The General Partner primarily plans on making both long and short investments in

distressed securities, highly leveraged companies and special

situations through corporate and high yield bonds, equities, bank

debt, trade debt, convertible securities and options. In WP5-495

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NEWMAN TANNENBAUM HELPERN SYRACUSE & HIRSCHTRIT

SecurH: i~~ l'Y.cangeCommi-sion
November 6, 1992

addition, the General Partner also manages individual client

accounts in excess of $15.5 million.

On May 22, 1992, the Partnership closed its initial

offering (hereinafter the nlni tial Closing") wi th the sale of approximately $6,200,000 of Limited Partnership Interests. Since

the Initial Closing, an additional $3,100,000 of Limi ted

Partnership Interests have been sold and $110,000 of Limited Partnership Interests has been redeemed. The Partnership currently has an aggregate of $9,120,000 of Limited Partnership Interests outstanding. The General Partner along with family membrs of its President currently hold approximately $1.32 million (14.5%) of Limited Partnership Interests sold. Two unaffiliated investors, a limited partnership and a general partnership, subscribed for $2 million and $1.9 million of Limited Partnership Interests (the "Investors") 1, respectively, in the Initial Closing and currently hold approximately 22l and

21l of the outstanding Limi ted Partnership Interests, respeeti vely . The Partnership intends to accept subscriptions and hold additional closings on a quarterly basis.

1 Investor have on CCl principal who is i co-geI'll partner of the genI'll partnership en i control( ing holder of the genral partner of the li.ited partnersip. Howver, Investori have repented to the Geril Pirtner that the two entitles ire not comly controlled or affiliated in an other-.. In adition, Invtori hive IllO repesented to the GeI'll Pirtner thlt IS of Janry 1, 1993, thee will

be no cc pr I nc I pa la.
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NEWMAN TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT Secur i t_i~saJ'd-Ex~h_aJ)~EL C~Ol1J$i.n Novemer 6, 1992

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Under the Limited Partnership Agreement entered into by

the General Partner on behalf of the Partnership and the Limited

Partners (hereinafter the "Partnership Agreement"), the Partnership is managed, and the business of the Partnership is

controlled, by the General Partner, who makes all policy and

investment decisions relating to the conduct of the Partnership i s business. Such decisions are made by the General Partner in its sole discretion. Furthermore, under the Partnership Agreement the limited partners are not given the right to vote on the election or removal of the General Partner, except in the event

of death, insani ty or retirement and will have no right or authority to act for or bind the Limited Partnership. Under certain circumstances limited partners will have a right to transfer their Limited Partnership Interests, however, such right may be arbitrarily withheld by the General Partner. Unless otherwise allowed in the sole discretion of the General Partner, the i imi ted partners, pursuant to the Partnership Agreement, may only redeem their interest commencing on December 31, 1993 upon ninety (90) days prior notice, and, subsequently, only annually therea fter . Limited Partnership Interests were offered pursuant to

Rule 506 under the Securities Act of 1933, as amended (the

"Securities Act"), and not in such other manner as would have

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NEWMAN TANNENBAUM HELPERN SYRACUSE & HIRSCHTRIT

. . Se.c-I"i-~ie~n~G~rl(je--GGmm-i-s&Ìn ,.., ~ ._. .. November 6, 1992

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involved a "public offering" within the meaning of Section

3 (c) (1) of the Act and Section 4 (2) of the Securities Act. Al though under the terms of the Partnership Agreement a limited

partner may, under certain limited circumstances, sell or otherwise dispose of its Limited Partnership Interests, each limited

partner acknowledges under the Partnership Agreement that such

interests have not been registered under the Securities Act, as

amended and that such interests cannot be sold or otherwise

disposed of unless they are registered thereunder or unless an

exemption therefrom is available, as evidenced by an opinion of

counsel for the transferor. The General Partner may withhold its

consent to any sale or other disposition by a limited partner of

a Limited Partnership Interest.

For purposes of this request, the Staff should assume

that (1) there will be no public offering of Limited Partnership

Interests; (2) the total numer of i imi ted partners holding

interests in the Partnership, will always be less than 100;

(3) each limited partner including Investor has substantial business activities outside of its investment in Hilltop; (4) no

limited partner including Investor is an investment company

registered under the 1940 Act; and (5) no limited partner was

formed for the purpose of investing in Hilltop.

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NEWMAN TANNENBAUM HElPERN SYRACUSE & HIRSCHTRITT SeS\Hi ies .anu~-e~.~i'':eSGmm~:ion 't' ~ ~ .. Nove:ber 6, 1992

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Discussion
Section 3 (c) (1) of the Act provides in pertinent part,

that the term "investment company" shall not include:

Any 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. For purposes of this paragraph: (A) Beneficial ownership by a company shall be deemed to be beneficial ownership by one person, except that, if the company owns 10 percent or more of the outstanding voting securities of the issuer, the beneficial ownership shall be deemed to be that of the holders of such company' s outstanding securities (other than short-term paper) . . . . Given the above-stated facts and assumptions, the

Section 3 (c) (1) exemption will be applicable to each Hilltop

Limi ted Partnership Interest if such ownership is not attributed ~ to "the holders of ... outstanding securities" of any company

WP5-495

NEWMAN TANNENBAUM HELPERN SYRACUSE & HIRSCHTRIT

and Exchange Commission

~ovember 6, 1992

... Securities

owning 10% or more of the limited partnership's "voting securities" . It is our opinion that the Section 3 (c) (1) attribution rule does not apply because the interests in the limited partnerships do not constitute "voting securities" within the meaning of

section 3 (c) (1).
"Voting security" is defined by Section 2 (a) (42) of the Act to mean "any security presently entitling the owner or holder

thereof to vote for the election of directors of a company." As

the staff has noted in nuierous no-action letters, a limited

partner's interests in a partnership is not a voting security if

the limited partner has no right to influence the limited

partnership's management or remove or replace its general partner. (SH, ~, CM Communications Fund, SEC No-Action Letter (1987 Transfer Binder) Fed. Sec. L. Rep. (CCH) !78,427 (Mar. 18, 1987); Kohlberg Kravis , Roberts , Co., SEC No-Action

Letter (1985-1986 Transfer Binder) Fed. Sec. L. Rep. (CCH)

!78,143 (Aug. 9, 1985) ("KK"); Cigna Corp. ("Cigna") , SEC

No-Action Letter (Sept. 1, 1984) (LEXIS, Fedsec Library, No Act

file); Sarofim Trust Co., SEC No-Action Letter (1982-1983

Transfer Binder) Fed. Sec. L. Rep. (CCH) !77,305 (Aug. 26. 1982);

Krehbiel , Hubbard, SEC No-Action Letter (Oct. 19, 1981) (LEXIS,

Fedsec Library, No Act file); Maine Hut. Save Bank, SEC No-Action

Letter (Oct. 9, 1979) (LEXIS, Fedsec Library, No Act file). This

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NEWMAN TA"'~ENBAUM HELPERN SYRACUSE & HIRSCHTRIT

Seci r it; es nd--Ey.chanqe-Oin..i-sion November 6, 1992

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standard has also been adopted by the courts as the dispositive

standard in determining what constitutes a voting security under

Section 2 (a) (42) of the Act. See Bancroft Convertible Fund. Inc.
v. zico Investment HOlding. Inc., civ. Act. No. 87-870, Slip. Op.
April 16, 1987 (Dist. ct.). In Bancroft, the Court noted that "(w)hatever rights and interests zico' s Class B non-voting stock may have, it does not have the power under Zico's articles of

association to vote for the election of Zico' s directors. Accordingly, the Court found that zico' s Class B voting shares were not voting securities.

As noted above, under the Partnership Agreement, the

limited partners have no right to "influence" the management of

the Partnership, whether by voting, removing or replacing the

General Partner or otherwise. In fact, the only act of governance in which a limited partner may participate is in the event

of death, insanity, or retirement of the General Partner. In that event, il limited partners must agree to a successor general partner or else the Partnership dissolves. We bel ieve that this factor distinguishes Hilltop from the limited partnership agreement in Horsley Keogh Venture Fud ("Horsley") (publicly available April 27, 1988).

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NEWMAN TANNENBAUM H£LPERN SYRACUSE & HIRSCHTRITT SecuritIe~anà . E'XIfane~"'mm-Ission. Nove:ber 6, 1992

Paqe 9

In Horsley, the 1 imi ted partnership agreement provided

that certain action by the general partner require the consent of

the 1 imi ted partners. A boio-thirds maj ori ty of the 1 imi ted

partnership interests was required to extend the term of the partnership to dissolve the partnership, or to amend the limited

partnership agreement. In addition, the limited partnership

agreement provided that without the prior written consent or

ratification of all the limited partners, the general partner

shall have no authority to do any act in contravention of the

partnership agreement or which would make it impossible to carry

on the ordinary business of the partnership, to confess a

judgment against the partnership, to possess partnership property

or assign its rights in specific partnership property for other

than a partnership purpose, to admi t a person as a general

partner of the Partnership, or to exceed certain investment

limitations set forth in the partnership agreement. The partnership agreement also provides that the general partner has no

authori ty to transfer its general partnership interest or

wi thdraw as the general partner without the consent of the

1 imi ted partners.
Under the Partnership Agreement, the 1 imi ted partners of Hill top have none of the rights Horsley I imi ted partners were

granted. Significantly, Hilltop limited partners cannot vote to WP5-495

NEWMAN TA"~ENBAUM HELPERN SYRACUSE & HIRSCHTRIT

See"d-r-i-ties nan~xclcao~-oii~~ion November 6, 1992

dissol ve the Partnership nor can they vote to extend the term of the Partnership. Only in the death, insanity or retirement of the General Partner can the Limited Partners vote to replace the vaca ted General Partner. In such a case, all limited partners must approve the new general partner. This furter distinguishes Hill top from Horsley. This unanimous requirement further attenuates or dilutes any control or influence of individual

Hill top limited partners, particularly in light of the fact that

the General Partner and family members of its President own

approximately 14.5% of the Limited Partnership Interests sold.

We also recognize that in Pierce, Lewis & Oolan

(available April 21, 1972) and in several subsequent no-action

requests, the Staff took the position that although limited

partnership interests are generally not voting securities, such

interests may be deemed functionally equivalent to voting securities if the limited partner has the power to exercise a

controlling influence because of economic power.
(~ st,
Nautilus Trust, SEC No-Action Letter (Feb. 1, 1982) (LEXIS,

Fedsec library, NoAct file); Engelberger Partnership, SEC no-

Action Letter (Dec. 7, 1981) (LEXIS, Fedsec library, NoAct file).

~ ~ M.A. Hanna Co., 42 S.E.C. 477 (1964): C&S Inv. Funds,

SEC No-Action Letter (June 13, 1977) LEXIS, Fedsec library, No

Act file); Hudgins, Hurley Capital Management Corp., SEC No \I -495

NEWMAN TA"J\ENBAUM HELPERN SYRACUSE & HIRSCHTRIT Secur-ltl-caf3..~!ld Exçhange ~oinis_s_l-m__ November 6, 1992

Action Letter, Mar. 17, 1972) (LEXIS, Fedsec library, No Act

file): L. Marvin Moorehead, SEC No-Action Letter (Jan. 30, 1975)

(LEXIS, Fedsec library, NoAct file).

The concern that economic interest created a ~ facto voting security because of the control element, stated by the staff in such letters as Pierce, Lewis & Dolan and L. Marvin Moorehead, while valid under Section 3 (c) (1) generally, does not apply in the present case. Under the Partnership Agreement wi thdrawal , redemption and transfer rights are severely restricted, and in certain cases may be arbitrarily denied by the general partner. Accordingly, any influence that a limited partner may exert over the Partnership wi th a threatened

wi thdrawal or request for redemptions is not evident in the

instant case, since the earliest date for redemption of Limited

Partnership Interests is December 31, 1993. At that time, it is

anticipated that Investors will hold a significantly lower

percentage of outstanding Limi ted Partnership Interests. Al though Investors each currently own approximately 22\ of the

Limited Partnership Interests of Hilltop, that numer will

diminish as subsequent closings occur and the General Partner

accepts additional subscriptions. In addition, any economic

"control" Investor, or an other limited partner may exercise will

likely be diluted or mitigated by the approximately 14.5\ Limited

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NEWIiAA TANNENBAUM HELPERN SYRACUSE & HIRSCHTRIT

se~r-~Ue~ha~GGl'ssi(h"'
November 6, 1992

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Partnership Interests held by the General Partner and family members of its President.

Finally, the concern noted in the Staff's Rogers, Casey , Associates, Inc. ("Rogers") no-action letter ( (1989-1990 Transfer Binder) (CCH) !79,320, at 79,191 (June 16, 1989)) is also not at issue in the present case. Not only is a limited partner's right to withdrawal severely limited, but he cannot seek to amend or renew the Partnership Agreement at regular intervals. Relatedly, the state law backdrop in Rogers is similar to Hilltop. Hilltop, like the limited partnerships in Rogers is a Delaware limited partnership. The Partnership Agreement insures that all limited

partnership interests including Investors remain truly passive.

As noted in former Staffers Lemke and Lins' dispositive article

on section 3 (c) (1) "... a significant but passive economic

interest should not be viewed as the equivalent of a voting

security. " (See Lemke and Lins, Private Investment ComDanies under Section 3 (cl (ll of the Investment Company Act of 1940, The Business Lawyer, Vol. 44 (Feb. 1989) at p. 418.) Accordingly, we believe that since Hilltop Limited

Partnership Interests are not voting securities, the attribution

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NEWMAN TANHNBAUM HELPERN SYRACUSE & HIRSCHTRITT --securi-t-i-es--and-Exchange--Commiss-i-on Novemer 6, 1992

provisions of Section 3 (c) (1) do not apply. This conclusion is consistent with the line of no-action letters including KK where the Staff has held that entities which owned more than 10% of the outstanding non-voting securities of a company would be deemed to be a single holder of that company' s securities under Section 3(c)(1). In the present situation, the limited partners, like those in the above-referenced letters, lack the abili ty to control or influence the Limited Partnership. We also recognize that the Staff is concerned that the

exemption under Section 3 (c) (1) might be manipulated to permit sham, multi-tiered transactions under which a new company exempt

from the definition of an investment company by virtue of Section

3 (c) (1) would be formed to invest in a company which is also exempt from the definition of an investment company under the Act

by virtue of Section 3 (c) (1) . This concern apparetly prompted the Staff to require, as a condition to the no-action position

taken in such letters as KK, Robert N. Gordon, Thomas J.

Herzfeld ((1987-1988 Transfer Binder) Fed. Sec. L. Rep. (CCH)

!78,539 (Nov. 30, 1987) ("Gordon")) and Cigna, tht no limited

partner in the limited partnerships at issue would rely on

Section 3 (c) (1) to exempt itself from the definition of investment company". To alleviate this concern, we would be prepared

to represent as noted above, that (i) no liaited partner

\IS -495

NEWMAN TANNENBAUM HE:PERN SYRACUSE & HIRSCHTRIT

----ecurities-and-Exchange--CommissionNovemer 6, 1992

Paqe 14

including Investors have been formed for the purpose of making

investments in Hilltop; and (ii) that each limited partner,

including Investors, have substantial business activities in

addition to the investments in Hilltop.

We are unable to represent that no limited partner itself

relies on Section 3 (c) (1) to exempt itself from the definition of

.. investment company". It is the General Partners' understanding that Investors rely on that exemption. Many prior no-action letters in this area did not expressly require the representations that no limited partner itself could not rely on
Section 3(c)(1). In addition, the anti-pyramiding concerns of
Section 12 (d) (1) of the Act are not implicated here as Hilltop is
not a registered investment company. As the Court noted in Clemente Global Growth Fund. Inc. v. Pickens (1988-1989 Transfer Binder) Fed. Sec. L. Rep. (CCH) !94,183 (S.D.N.Y. 1989), the purose of Section 12 (d) (1) is "to prevent control of registered

investment companies by other investment companies." .l at 91,655. Given Hilltop's recent formation, it is clear Investors were not formed for the purpose of investing in Hilltop. In addition, Investors have substantial business activities in addition to their investment in Hilltop. In fact, as discussed below, Investors are each a Qualified Institutional Buyer ("QIB") as defined in Rule 144A. We have been informed that Investors' ~-495

NEWMAN TAN~£NBAUM HELPERN SYRACUSE & HIRSCHTRITT Secur lt~i~~i;.~kclLangecomms.s.on Novemer 6, 1992

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interest in Hilltop represents an insignificant percentage of

their total assets. Given these facts, we believe that the

abuses to which that Section 3 (c) (1) representation protects are

not at issue in Hilltop.
Accordingly, we believe that the present facts are similar

to those set forth in the KK and Gordon letters where the staff

stated it would not recommend enforcement action under Section

3 (c) (1) with regard to institutional investors who may purchase

over 10 percent of a partnerships i imi ted partnership interest. As noted above, we have made similar representations regarding

limited partner status and their lack of control of the Limited

Partership. These representations as well as the present facts

indicate that Hilltop Limited Partnership Interests are not ~ facto voting securities. In addition, Hilltop goes further to establish the lack of economic control of its liaited partnership interests. As mentioned previously, the General Partner and family members of its President hold approxaately 14.5\ of Hilltop Limited Partnership Interests. Since uner the Partnership Agreement, the Limited Partners i one act of governance

(~, in the event of death, insanity or bankrptcy) requires

unanimous consent, it is quite remote that any limited partner

will have the voting power to influence Hilltop. Finally, as in

KK and Gordon, the composition of the Hilltop Limited Partners

WP5.495

NEWMAN TANNENBAUM HELPERN SYRACUSE & HIRSCHTRIT

Securi ties and Exchange Commia~ion -NoveÈeru 6; i-9-9-2

does not raise the "sham multi-tiered transactions" concerns,

inherent in Section 3 (c) (1) and 12 (d) (1) of the Act. Request for NO-Action Position

For the reasons set forth above, we respectfully request that the staff concur in our view that (1) even if a

limited partner acquires a 10 percent (10%) or greater interest

in Hilltop such limited partner will be treated as a single

security holder of purposes of Section 3 (c) (1) of the Act because the limited partner will not be subject to the attribution

provisions of Section 3 (c) (1) because the interests held by

limited partner do not constitute voting securities, and (2) that

in such case, provided that there is no public offering of

interests in Hilltop, the Partnership will not be deemed an

"investment company" wi thin the meaning of the Act by reason of

the applicability of Section 3 (c) (1) because the securities issued by Hilltop will not be beneficially owned by more than 100 persons. i;:1-::~ k~ ~ i NEWI TANENBAJ HELPERN ~

SYRACUSE & HIRSCHTRITT

WPS-495