SEC Division of Investment Management staff letter: PanAgora Group Trust

19 APR 1994

Our Ref. No. 93-212-CC

The PanAgora Group

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Trust DIVISION OF INVESTMENT MAAGEMENT File No. 132-3

Your letter of April 14, 1993 requests assurance that we

would not recommend enforcement action to the Commission if The

PanAgora Group Trust (the "Group Trust") counts each 401(k) trust

that invests in the Group Trust as a single owner of its outstanding securities for purposes of section 3 (c) (1) of the Investment Company Act of 1940 ("1940 Act"). 1/ You assert that

the Group Trust may count each 401 (k) trust as a single owner

because the 401 (k) trusts would not own voting securities of the

Group Trust and, therefore, would not be required to attribute

their ownership of the Group Trust's securities to the 401 (k)

plan participants under Section 3 (c) (1) (A) . Because we conclude

that any defined contribution plan participant who directs a plan

investment into the Group Trust or one of the unregistered

investment funds comprising the Group Trust (each an "Investment

Fund") is a beneficial owner of the Group Trust's or Investment

Fund's outstanding securities under section 3 (c) (1), we do not reach the issue of whether the Group Trust's outstanding

securities are voting securities for purposes of the attribution

provisions of Section 3 (c) (1) (A) .
PanAgora Asset Management, Inc. ("PanAgora") proposes to

establish the Group Trust as a pooled investment vehicle for tax-

qualified pension, profit-sharing, and stock bonus plans, including 401 (k) plans. PanAgora will be the investment adviser to the Group Trust and the approximately 42 separate Investment

Funds that comprise the Group Trust. 2/ The 401 (k) plans

typically will permit participants to direct the investment of

the assets in their plan accounts. Plan participants may choose

to invest some or all of their plan assets in the Group Trust and

how to allocate those assets among the Investment Funds.

section 3 (c) (1) excludes from regulation under the 1940 Act
private investment companies in which there is no significant

public interest and which are, therefore, not appropriate

subjects of federal regulation. 1/ Under section 3 (c) (1), the

1/ section 3 (c) (1) provides that an issuer whose outstanding

securities are beneficially owned by not more than one

hundred persons and which is not making and does not propose

to make a public offering of its securities is not an

investment company.

1/ Telephone conversation between Edward Young, counsel to PanAgora, and the p.ndersigned (Aug. 4, 1993). 1/ See H.R. Rep. No. 1341, 96th Cong., 2d Sess. 35 (1980). See

generall v Investment Trusts and Investment Companies:

(continued. . . )

existence of over 100 beneficial owners or a public offering

indicates that there is a significant public interest and that

the issuer should be regulated under the 1940 Act.

In determining the numer of beneficial owners for purposes

of section 3 (c) (1), a "company," such as a trust or partnership,

that invests in a private investment company typically is

presumed to be a single beneficial owner unless certain attribution provisions contained in section 3 (c) (1) (A) are applicable. The staff of the Commission has taken the position

that if a "company" that invests in a private investment company

is managed as a device for facili tating individual investment

decisions, then the company's securityholders should be deemed to

be the beneficial owners of the company's investment in the

private investment company. For example, in WR Investment

Partners (pub. avail. Apr. 15, 1992), the staff took the position

that the limited partners of a partnership were the beneficial

owners of the partnership's interest in a pri vatè investment

company because the general partner, which made all of the

investment decisions for the partnership, would consult with the

limited partners about their individual investment objectives and

vary, from investment to investment, each limited partner's

percentage share of profits and losses based on individual circumstances. Similarly, the staff took the position in six Pack (pub. av~il. Nov. 13, 1989) and Tyler Capital Fund, L.P./

South Market Capital (pub. avail. Sept. 28, 1987) that the

partners of a general partnership were the beneficial owners of

the partnership's investment in a private investment company when

the partnership permitted each partner to determine the amount of

his or her contribution to each particular investment, based on

his or her individual investment objectives. lj

J/ ( . . . continued) Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on

Banking and Currency, 76th Cong., 3d Sess. 179-81 (1940). lj See also Merrill Lynch & Co., Inc. (pub. avail. Apr. 23,

1992) (staff granted no-action relief when individual

general partners would not make decisions regarding

allocation of their capital contributions or the

partnership's investments). Rule 203(b) (3)-1 under the

Investment Advisers Act of 1940 ("Advisers Act") reflects a

similar interpretive position. section 203 (b) (3) of the

Advisers Act provides that an investment adviser that has

fewer than fifteen clients and does not hold itself out

generally to the public as an investment adviser is not

required to register. Rule 203(b) (3)-1(b) (2) (ii) provides

that, for purposes of section 203 (b) (3), a general partner

of a limited partnership may count the partnership as a

single cli ent only where "the general partner . . . provides

(continued. . . )
2 l

A participant-directed defined contribution plan (including

both 401 (k) and other types of defined contribution plans) that

permi ts participants to allocate their plan account assets among

various investment alternatives to attain individualized levels

of potential risk and return is designed to facilitate individual

investment decisions. Each participant's retirement benefits

will depend in part on the performance of the participant's investment choices. Solely for purposes of the Section 3 (c) (1) exception, therefore, we would consider a defined contribution plan

participant who decides whether or how much to invest in a

private investment company to be a beneficial owner of the

company's securities. ~ We thus believe that the Group Trust

lj ( . . . continued) investment advice to the partnership based on the investment

objectives of the limited partnership." Thus, under

Rule 203(b) (3)-1(b) (2) (ii), the general partner must provide investment advice to the limited partners as a group, rather

than to the limited partners individually. See Investment

Advisers Act ReI. 956 (Feb. 22, 1986) (proposing

Rule 203 (b) (3) -1): Burr, Egan, Deleage & Co. (pub. avail. Mar. 26, 1987) (general partner required to count each

limited partner as a client when limited partners could

choose between two pools of assets in the same limited

partnership to accommodate their individual tax objectives).

~ Our position does not apply to tax-qualified defined benefit plans or to tax-qualified defined contribution plans that do

not permit participants to decide whether or how much to

invest in particular investment al ternati ves.

We note that our position does not depend on the application

of the section 3 (c) (1) (A) attribution provisions and, therefore, differs from our response to Intel Corporation

(pub. avail. Nov. 18, 1992). In Intel, the staff stated that for purposes of section 3 (c) (1) (A), participants in a voluntary, contributory defined contribution plan hold

outstanding securities of the plan and, therefore, the

plan's ownership of more than 10% of a private investment

company's voting securities should be attributed to the

participants. The staff did not consider whether the

participants should be deemed beneficial owners of a private

investment company' s securities for purposes of

Section 3 (c) (1) independently of the attribution provisions.

Our response also limits the position we took in Morrison &

Foerster (pub. avail. Feb. 18, 1979), In that letter, we

took the general pcsition that employee benefit plan

(continued. . .)
3

and an Investment Fund must count as beneficial owners for

purposes of section 3 (c) (1) all participants in participant-

directed defined contribution plans who invest in the Group Trust

or that Investment Fund. fL~
Richard F. Jackson

Special Counsel

l
~ ( . . . continued) participants would not be deemed the beneficial owners of a

plan · s investment in a private investment company

independently of the attribution provisions. While it is

unclear from that letter what types of employee benefit

plans were intended to be covered, this response explicitly

limits the interpretation of Section 3 (c) (1) in Morrison &

Foerster to employee benefit plans in which p~rticipants do

not decide whether or how mTich to invest in private

investment companies.

4

",
HALE AND DORR
COUNSELLORS AT lAW ~

60 STATE STREET, BOSTON, MASSACHUSETTS 019" l

617-526-6000. FAX 617-526-5000 Sa.: t ion 3 ( c) ( 1) of- the

Investment Company Act

of 1940

April 14, 1993 ......-) .
.....,. --iI ". . '.,,,"
'. ; J.
.'! 1: LA ACJ

Thomas S. Harman, Esq. SECON .3 Cc)(r)

Chief Counsel
RULE Division of Investment Management

Secur i ties and Exchange Commission PUBLIC

450 Fifth Street, N.W. AVAILAILIT c. ) -i-l /?'1

Washington, D. C. 20549

Re: The PanAgora Group Trust

Dear Mr. Harman:

We request that the staff of the Commission take a no-action

position with respect to the applicability of the attribution rule

of Section 3(c) (1) (A) of the Investment Company Act of 1940, as

amended (the "1940 Act"), to certain 401 (K) plans and trusts

("40l(K) Trusts") which may invest in The PanAgora Group Trust

(the "Group Trust"). The Group Trust intends to rely upon the

exception from the definition of an investment company set forth

in Section 3 (c) (1) of the 1940 Act, in the manner descr ibed in this letter. BACKGROUND The Group Trust. The Group Trust is being established by

PanAgora Asset Management, Inc. ("PanAgora") and Boston Safe

Deposit and Trust Company ("BSDlr") as a collective investment

vehicle for employee pension, profit-sharing and stock bonus plans

which meet certain cr i teria contained in the Internal Revenue Code

. of 1986, as amended ("Participating Trusts"). BSDTwill serve as trustee of the Group Trust and PanAgora will serve as investment

manager. The Group Trust will consist of approximately 42

separate investment funds ("Investment Funds"), each with its own

investment objectives and its own universe of eligible portfolio

secur i ties.

Under the terms of the Group Trust i s Agreement of Trust, which consti tutes the fundamental charter document of the Group

Trust, most management powers will be vested in PanAgora as

investment manager and the remaining management powers will be

vested in BSDT as trustee. Participating Trusts, as investors in

W.\SHINGTON, DC BOSTON, MA MANCHESTER, NH l if ALL .\NO DURR IS A PARTNERSHIP I~CLLJOINr. PRO~ESSIONAL Cülll'ORA fi)'"

~ '_.,. r- Thoma s S. Ha rman, Esq.

April 14, 1993

the Group Trust, will have no management powers and no right to

vote on any matter whatsoever. PanAgora will not be subject to

removal as investment manager in any circumstances and its

resignation as investment manager will cause the Group Trust to

terminate. BSDT will be subject to removal by PanAgora upon

60 days' notice and, in the event of BSDT i S resignation or

removal, PanAgora will be autnorized to appoint a successor

trustee.
The Group Trust will rely on Section 3 (c) (1) of the 1940 Act for exemption from registration under that Act. The Group Trust

has at present no beneficial owners of its securities, and it

intends to have not more than 100 beneficial owners of its

securities, as that term is defined in Section 3(c) (1). The Group

Trust is mindful of the staff's posi tion that exemption from

registration is not available under Section 3(c) (11) of the 1940

Act for a group trust unless the trustee acts as its own

investment manager. Accordingly, for the purposes of this letter, the Group Trust is relying solely on Section 3(c) (1) rather than on Section 3(c) (11). . None of the assets of the Group Trùst will be invested in

securities of PanAgora since, among other things, PanAgora is

a closely-held company.

Investment by 40l(K) Plans. Employee retirement plans which

qualify under Section 401 (K) of the Internal Revenue Code of 1986,

as amended (the "Code"), come wi thin the def ini tion of Participa ting Trust and are eligible to invest in the Group Trust.

As was the case in the recent Intel no-action letter (November 18,

1992), those Participating Trusts which are qualified under

Section 401(K) of the Code are expected to be, in part, both

voluntary and contributory. Other Participating Trusts, which are

not organized under Section 40l(K), will be entirely non-voluntary

and non-contr ibutory.

In certain matters involving the investment of the assets of

each 40l(K) Trust, it is expected that the plan fiduciaries of the

401 (K) Trust will be requi red to act upon the instructions of

individual employees ("Employee Participants") within the

limi tations established by the Trust' s agreement of trust, subject

to the right of the Trustees or the sponsoring employer to select

investment vehicles for the 40l(K) Trust and to amend the

agreement of trust.

It is expected that Employee Participants in 401(K) Trusts

will typically be permitted under the terms of their respective

trust instruments to direct the investment of their account

balances (including both the employer i s contr ibutions and the

Thoma s S. Ha rman, Esq.

April 14, 1993

Employee Participants i contr ibutions) in not more than three or

four generic investment alternatives, each with its own stated

investment objectives such as capital preservation, income or

growth ("Generic Investment Alternatives"). The plan fiduciaries

of the 40l(K) Trusts, who will not be affiliated with PanAgora,

will have discretion to select and change the investment vehicles

in which the moneys allocated to the various Generic Investment

Alternatives are to be invested. These non-affiliated plan

fiduciaries will have the power at any time to remove the Group

Trust as an investment vehicle altogether. For so long as the

Group Trust is selected as an investment vehicle by the

non-affiliated plan fiduciaries of such a 40l(K) Trust, one or

more Investment Funds of the Group Trust will be selected by such

plan fiduciaries as an investment vehicle for one or more of the

Generic Investment Alternatives. A typical example might be as

follows:
401(K) Trust Generic Corresponding Investment

Investment Alternatives Funds of the Group Trust

Money-market none
Income none Balanced PanAgora Tactical Asset Alloca t ion Fund Growth PanAgora Active Core Fund In some cases, an Investment Fund may be selected as the sole

investment vehicle for a 401 (K) Trust Gener ic Investment

Alternative. In other cases, a combination of one of the PanAgora

Investment Funds and a non-affiliated investment vehicle may be

selected as investment vehicles for a Gener ic Investment

Alternative. For example, funds allocated to a 40l(K) Trust

growth stock Generic Investment Alternative might be invested 40%

in a PanAgora growth stock Investment Fund and 60% in a Fideli ty or Scudder growth stock fund.

Certain other 40l(K) Trusts may afford each Employee

Participant the opportunity to designate all or specified portions

of his or her account balance for investment in the Group Trust,

where such amounts will be further allocated by the Employee

Participant to one or more of the 42 Investment Funds. Typically,

this selection process would focus on eight or ten of the

Investment Funds since many of the 42 Investment Funds (such as

single-country index funds) are designed t~ be of more interest to

insti tutional investors than to individual investors. The

Trustees will always retain the right to select investment

vehicles other than the Group Trust, or to remove the Group Trust

as a designated investment vehicle for such 401(K) Trusts.

.- .:

Thomas S. Harman, Esq.

April 14, 1993

PROPOSED ACTIVITIES

PanAgora proposes to admi t 401 (K) Trusts as investors in the

Group Trust. For the reasons set forth below, PanAgora proposes

to count each 401 (K) Trust as a single beneficial owner.

DISCUSSION
Section 3(c) (1) (A) of the 1940 Act provides that, for purposes of determining under Section 3 (c) (1) whether an issuer's
secur i ties are beneficially owned by not more than 100 persons, " (b 1 enef icial ownership by a company 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 secur i ties (other than short-term paper)

unless, as of the date of the most re~ent acquisi tion by

such company of secur i ties of that issuer, the value 'of

all secur i ties owned by such company of all issuers

which are or would, but for the exception set forth in

the sub paragraph, be excluded from the defini tion of investment company solely by this paragraph, does not

exceed 10% of the- value of the company' s total assets."

The term "company" is defined in Section 2(a) (8) of the 1940 Act

to include a corporation, partnership, trust, fund or any

organi zed group of persons whether incorporated or not. Since

each Participating Trust must be organized as a trust in order to

meet Internal Revenue Code criteria, each will constitute a

"company" for purposes of Section 3(c) (1) (A) of the 1940 Act.

A Participating Trust should be considered to be a single

benef icial owner of the Group Trust's secur i ties if it meets ei ther of the following tests:

1. It does not own voting securities of the Group Trust; or

2. It does not own 10% or more of the Group Trust' s voting

secur i ties or, if it does, it has invested less than 10% of its

total assets in entities which rely on the Section 3(c) (1)

exemption.
PanAgora believes that both of the foregoing tests will be

satisf ied for the following reasons:

1. Since the Agreement of Trust will provide that the

Participating Trusts have no power to remove or replace the

~ Thomas S. Harman, Esq.
Apr il 14, 1993 investment manager or the trustee, and no power to vote upon or

consent to any other matter relating to the Trust, then the

investments of the Participating Trusts in the Trust will not

constitute "voting securities" within the meaning of

Section 3 (c) (1), and the look-through provisions of Section 3 (c) (1) will be inapplicable.
2. Any 401 (K) Trust that seeks to account for 10% or more

of the aggregate investment in the Group Trust will be required to

certify as to whether or not it has invested 10% or more of its

total assets in the Group Trust and other entities which rely on the Section 3(0) (1) exemption. Each 40l(K) Trust which either is less than a 10% investor in the Group Trust, or has not invested

10% or more of its total assets in the Group Trust and other

entities which rely on the Section 3(c) (1) exemption, will have a

separate and distinct ground for exemption from the application of

the attribution rules, in addition to the ground that it does not

own any voting secur i ties of the Group Trust. PanAgora expects

that most, if not all, of the 40l(K) Trusts will fall into this

ca tegory.
In reaching the foregoing conclusions, PanAgora believes that

those Employee Participants who designate specific Investment

Funds wi thin the Group Trust should receive the same treatment as

those who choose between a limi ted number of Gener ic Investment Alternatives because in both cases investment authority is

ultimately within the control of the unaffiliated plan fiduciaries

and the degree of choice which an Employee Participant may

exercise wi thin the parameters established by the plan fiduciaries

differs only in degree.

Conclusion. In conclusion, we request your concurrence in

our view that Employee Participants in the 401 (K) Trusts should

not be deemed to be holders of "outstanding securities" of the

Group Trust and will not be required to be counted as beneficial

owners of a Section 3(c) (1) entity pursuant to the attribution

rule set forth in Séction 3(c)(1)(A) of the 1940 Act.

Should the staff need any further information, please do not

hesi tate to contact the undersigned at (617) 526-6659.

Sincerely yours,

~~