SEC Division of Investment Management staff letter: Stephen R. Kelly

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MOV 2 9 1993

if rr~k ~U"'%ï ... ~v ~.~~.., ~._! -- . ....~.... .,........ Our Ref. No. 93-491-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Stephen R. Kelly

DIVISION OF INVESTMENT MANAGEMENT File No. 132-3

Your letter dated August 10, 1993 requests our assurance that we would not recommend enforcement action to the Commission under the Investment Advisers Act of 1940 (the "Advisers Act") if" Stephen R. Kelly operates a listing service for land contracts or mortgages ("encumbrances"), as described in your letter, without registering as an investment adviser. Mr. Kelly proposes to publish a newsletter that will list

real estate encumbrances that are available for sale. ii All

encumbrances that meet certain minimum criteria with respect to

value, return, and location will be eligible for listing. ~i

Owners of the encumbrances will submit a representation sheet

(the "Owner's Representation Sheet") describing the underlying

property and the encumbrance in detail, which Mr. Kelly will

summarize for alphabetical listing in the newsletter. ~i Mr.

Kelly will charge subscribers an annual fee. He will receive a

fee from the encumbrance owner only if the encumbrance is sold.

The newsletter will state that the subscribers may contact

Mr. Kelly for additional information. Mr. Kelly will respond to

requests for additional information only by forwarding the

Owner's Representation Sheet. Mr. Kelly will neither discuss the

terms of the encumbrance with a prospective purchaser, nor

provide any advice regar _ing the value or advisability of

purchasing or selling a particular encumbrance. Subscribers will

negotiate transactions directly with the encumbrance owner

without Mr. Kelly's assistance.

Section 202 (a) (11) of the Advisers Act includes in the def ini tion of an investment adviser any person who, for
ii Mr. Kelly also proposes to prepare and distribute a booklet

describing general due diligenc~ ~rocedures to evaluate

encumbrances that will not recommend specif ic encumbrances.

~i Encumbrances must have a minimum value of $50,000, bear a

minimum interest rate of three points above the prime rate,

and relate to property primarily in Michigan. Telephone

conversation between Hugh H. Makens and Jana M. Cayne,

November 3, 1993.

~i Telephone conversation between Hugh H. Makens and Jana M.
Cayne, November 3, 1993. Mr. Kelly also may establish a

pre-recorded "hotline" telephone service that would operate

in the same manner as the newsletter to provide information

about listings that become available for sale between

newsletter publications.

compensation and as part of a regular business, issues or

promulgates analyses or reports concerning securities. ~I The

Division takes the position that the presentation of securities

data or information to subscribers does not constitute an analysis or report within the meaning of Section 202 (a) (11) if (1) the information is readily available to the public in its raw

state; (2) the categories of information are not highly

selective; and (3) the information is not org~nized or presented

in a manner that suggests the purchase, holding or sale of any

securities. 2.1

We would not recommend enforcement action to the Commission

under the Advisers Act if Mr. Kelly operates the listing service

as described in your letter. This position is based on the facts and representations in your letter and the telephone ' conversation, particularly that: (1) the encumbrances are

recorded with county officials and therefore are part of the

public record; (2) the listings in the newsletter will not be

highly selective because all encumbrances that meet certain

minimum cr iter ia are eligible for 1 isting; and (3) the listings

will be displayed alphabetically and therefore will no~ be

organized or presented in a manner that would favor the selection

of any particular encumbrance.

You should note that this expresses the Division's posi tion

on enforcement action only and does not express any legal

conclusion on the question presented.

11i1 ;¿((jì ( Celt i AL_ l' ,j
Jana M. Cayne .
Attorney
~I Section 202(a) (11) (D) of the Advisers Act provides an

exclusion for any publisher of a bona fide newspaper, news

magazine or business publication of general and regular

circulation. We express no opinion as to whether this

exclusion is available to Mr. Kelly in connection with the

publication of his book or the newsletter. See Independent

Drug Wholesalers Group, Inc. (pub. avail. Apr. 16, 1992)

(because of the fact-specific nature of the analysis

required to determine the availability of the publisher's

exclusion to a specific publication, the staff generally

will not express an opinion on whether a publisher must

register under the Act).

2.1 See,~, Investex Investment Exchange, Inc. (pub. avail.

Apr. 9, 1990); Petroleum Information Corporation (pub.

avail. Nov. 18, 1989); Real Estate Financing Partnership

(pub. avail. Apr. 4, 1989).

• 2

28 JUL 1994

P BLI

Our Ref. No. 94-461-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Stephen R. Kelly

DIVISION OF INVESTMENT MANAGEMENT
File No. 132-3

By letter dated July 21~ 1994, you request that we modify

the no-action relief we granted in Stephen R. Kelly (pub. avail.

Nov. 29, 1993). In connection with your original letter, you

represented that Mr. Kelly would select for his listing service

all encumbrances in an amount greater than $50,000 bearing a

interest rate of at least three points above prime. You now

state that, because of changing market conditions, applying this

minimum interest rate criteria is untenable. You therefore

propose to substitute in its place the representation that Mr.

Kelly will list all encumbrances in an amount greater than

$50,000 regardless of interest rate, except those submitted by

persons disqualified by Rule 262 under the Securities Act of

1933, persons who have failed to make payments in accordance with

the contract for participation in the listing service, and those

who, in the past, have made listings that were not bona fide. 1/

We would not recommend enforcement action to the Commission

if Mr. Kelly proceeds with the listing service in accordance with

the representations made as part of your original request, as

modified by letter dated July 21, 1994.

CL e. ÒtL~,~~ Amy Í0. Doberman
Special Counsel

1/ Persons in the last group would be identified by their

failure to accept qualified bids over a sustained period of

time. You state that a person might engage in this conduct

to secure the names of subscribers.

WARNER, NORCROSS & JUDD

ATTORNEYS AT LAW

'AS R. WINQUIST DOUGLAS E. WAGNER
GE L. WHITFIELD ROBERT W. SIKKEL 90 OLD KENT BUILDING RICHARD L. BOUMA SHAUN M. MURPHY DANIEL R.GRAVELYN KEVIN P. McDOWELL .:ON G. KNACK THOMAS H. THORNHILL III LYON STREET. N,W, ""RLES E. McCALLUM .JEFFREY O. BIRKHOLD ROBERT J. JONKER MARK J. WASSINK GRANO RAPIDS, MICHIGAN 49503-2489 DEVIN S. SCHINDLER RICHARD J. SUHRHEINRICH JOHN D. TULLY BLAKE W. KRUEGER JEROME M. SMITH TIMOTHY HILLEGONDS MICHAEL H. SCHUBERT DAVID P. TRUMMEL TELEPHONE (616) 752-2000 VALERIE p. SIMMONS DENNIS J. DONOHUE WILLIAM K. HOLMES FAX (616) 752-2500 & (616) 752-2501 JAMES MOSKAL MICHAEL i. KLEAVELAND R. MALCOLM CUMMING ..OHN G. CAMERON, JR. .JOHN H. MCKENDRY. JR. ROGER M. CLARK PAUL T. SORENSEN ROBERT J. aUCHANAN ELIZABETH M. TOPlIFFE

EDWARD MALINZAK CARL W. DUFENDACH MARK K. HARDER SUSAN N. McFEE JOHN H. LOGIE STEPHEN C. WATERBURY KENNETH W. VERMEULEN JULIE H. SULLIVAN

DONALD J. VELDMAN RODNEY D. MARTIN MARK E. BROUWER MOLLY E. !\cFARLANE MARK R. LANGE I. .JOHN SNIDER II RICHARD E. CASSARO MUSKEGON OFFICE WILLIAM p. DAN I JACK B. COMas ..LEX J. DEYONKER JEFFREY S. SATTERSHALL ANDREW D. HAKKEN 400 TERRACE PLA JEFFREY A. OTT ANDREA J. BERNARD JOHN R. MARQUIS ERIC S. RICHARDS BRIAN S. ::ELTON JOSEPH F. MARTIN CHARLES E. BURPEE P.O. BOX 900 JOHN D. DUNN JOHN H. MARTIN WILLIAWW. HALL MUSKEGON. MICHIGAN 49443.0900 MARTHA W. ATWATER LORI L. GIBSON JAMES H. BREAY BRUCE C. YOUNG TELEPHONE (616) 727-2600 RODRICK W. LEWIS ERNEST M. SHARPE SHANE B. HANSEN i:AX (616) 727-2699 KEVIN G. DOUGHERTY VERNON P. SAPER F'. WILLIAM McKEE SCOTT J. GORSLINE HUGH H. MAKENS MELVIN G. MOSELEY. JR. LOUIS C. RABAUT JOSEPH M. SWEENEY PAUL R. JACKSON OF COUNSEL JAMES .J. RABAUT GORDON R. LEWIS DOUGLAS A. DOZE MAN JAMES P. ENRIGHT

TIMOTHY L. HORNER :.AWSON E. BECKER
PETER L GUSTAFSON
ROBERT J. CHOVANEC .JOHN V. BYL HOLLAND OFFICE RICHARD D. CORNEll. ..R. CONRAD A. BRADSHAW .JANET P. KNAUS CURTIS CENTER R. PAUL GUERRE HAROLD ¡:. SCHUMACHER ROGER H. OETTING KATHLEEN M. HANENBURG CHARLES C. LUNDSTROM J. A. CRAGWALL.. JR. TRACY T. LARSE N SUITE 300 LOREN ANDRULIS STEPHEN R. KR~TSCHMAN SUE O. CONWAY 170 COLLEGE AVENUE KAREN VANDERWERFF W. MICHAEL VAN HAREN SUSAN GELL MEYERS STEVE N R. HEACOCK HOLLAND, MICHIGAN 49423-2920 DAVID A. WARNER JON P. BACHELDER GORDON J. rOF.RING CAMERON S. DELONG TELEPHONE (616) 396-9800 1883.1966 RICHARD A. DURELL FRANK E. BERROtJlN JEFFREY B. POWE~ GEORGE S. NORCROSS FAX (616) 396-3656 MICHAEL L. ROBINSON STEVEN A. PALAZOLO SCOTT D. HUBBARD 1889-1960 NORBERT F. KUGELfl ERIC D. STU8ENVOLL 1895.1982 EUGENE E. SMARY STEPHEN B. GROW SIEGEL W. JUDD July 21, 1994

Ms. Dorothy M. Donohue
Assistant Chief Counsel ::N lgf!~-f~~Ò RUL
Division of Investment Management PULIO United States Securities and Exchange Commission AVPf4I f;,")~;.....Ç:4r.' --~." '~./:.. 450 5th Street, N.W. Washigton, D,C. 20549

Re: Stephen R. Kelly - Ref. No. 93-491-File No. 132-3

Dear Ms. Donohue:

On November 2ü, 1993, the Office of Chief Counsel of the Division of Investment Management issueà a nC'-action letter relaIIng to Mr. Kelly's proposeJ listing service foi land contracts anà mortgages. Durig the course of conversations relating to structuring an acceptable proposal, the staff raised the concern that there must not be an improper or biased process for selecting which encumbrances were advertised and which were not permitted to advertise. Footnote 2 of that letter reflects a condition that the mortgage bear a minimum interest rate of three points above the prime rate. At the time it seemed like a good idea. On reflection, it does not work! Mr. Kelly collected data on all the 263 land contracts fied in Michigan's three largest counties for the montli of May 1994. These contracts were then i.creened to eliminate all contracts not meeting the requirement prohibiting listing of encumbrances without a minimum value of $50,000, and 55 contracts were eligible. When Mr. Kelly applied the second screen, eliminating all contracts without an interest rate of three points above the prime rate, the number of remaining mortgages was three. This was clearly an unintended consequence by both the staff and ourselves. In a rising market, the test does not work.

Ms. Dorothy M. Donohue
July 21, 1994

Accordingly, we seek relief from the condition that all encumbrances must bear a minimum interest rate of three points above the prime rate. We ask that the requirement be deleted. Alternatively, to address the concern about openness of the listing service, we propose to accept all eligible encumbrances over $50,00 regardless of interest rate, except those known to be submitted by persons disqualified under Section 262 of Regulation A (those with "bad boy" disqualers), those who have failed to make payments in accordance with the contract for participation in the listing service or those who have not made bona fide listings on the service, but rather listed for the apparent reason of securing the names of subscribers. This latter group would be identified by the failure to accept what are perceived to be qualifying bids over a sustained period of times. We believe that this plan would assure the openness of the service sought by the staff, while at the same time providing a reasonable number of encumbrances in the listing service.

As additional background, we advise you that Mr. Kelly has incorporated his service under the name OysterCom, Inc., that that finn is now registered as an investment adviser under the Michigan Unifonn Securities Act, and that the newsletter for the listing service has been designated the Lad Contract & Mortgage Marketplace. He has not commenced publication for the resons stated above.

Your assistace in modifying the reuirements of the November 29, 1993, no action letter would be grc.tly appreciated. If we ca provide any further infonnation, please advise. aj cc: Amy Dobennan. Steven R. Kelly

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WARNER, NORCROSS & JUDD ..
~ ATTORNEYS AT LAW

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Der Mr. Hanan:
Reference is made to our prior corrspndence and telephone converstions in this matter. TIs leter wil superse our letter of June 24, 1993. The purpse of this letter is to reuest the concurrnce of the Division of Investment Management (the "Division") with our opinion that as the result of operations describe below, Mr. Stephen R. Kelly wil not be deemed an investment adviser within the meang of Section 202(a)(l1) of the Investment Advisers Act of 1940 (the" Advisers Act") and your detennination that the Division would not remmend enforcment action under the Advisers Act if Mr. Kelly were to oprate in the maner describe below without registerig as an investment adviser under the Advisers Act. We reresent Stephen R. KeJJy. Mr. Kelly is a professiona appraser of commercial rel estte for various institutional and corprate clients. Mr. Kelly is also a licensed re estate broker. During the cours of his employment and through professional

acquaintances and friends, he freuently learns of trnsactions involving the sale of rel estate

Mr. Thomas S. Hanan
August 10, i 992

which are structure with a partial cash payment with the residual indebtedness for the property

evidenced by a land contract or a mortgage (the "encumbrance"). From time to time he has approached the hofder of such land contracts and mortgages, inquiring as to their desire to sell the encumbraces at a discount. Upon finding willig sellers he has contemplated purchasing certin encumbraces for his personal accunt..,~ '. .

. , ri'
Recntly friends of Mr. Kelly have inquire about these investments. He has contemplated introucing these friends to encumbranCe holders. As word of mouth circulates regarding these investments, more inquiries have oen reived and Mr. Kelly is now considerig establishig a business which would involve the following:
Mr. Kelly would contact encumbrace owners offerig to list their encumbrances, fitting cert preetennined, criteria as to value, return, and loction in a newsletter.

Encumbrances must not be in defaUlt and must have an outstading balance of at least $50,00. To enter a listing, an encumbrance owner would complete an Owner's Representation Sheet, makg representations regarding the property underlying the encumbrace and describing the tenns on which the encumbrance was available for sale. Owners would then pay a fee for the listing. Presently, it is contemplated that the fee would be a fixed amount based either on a fee -; for tho...d...!~_Qf ll~tiJlg'y~nt._or simply a flat amount, and would be contigent upon the

r' sae of the encumbrace. Mr. Kelly would conduct no indepndent investigation of the

underlying rel estate nor of the encumbrace documentation. The listing would be for a spific time period, and is done on an exclusive basis only. Thus, any saes of the

encumbrance durig the listing period would require payment of the fee. The fee is payable upon reipt of a finn offer by the encumbrance holder. A triple fee penalty would apply to any

"off the reord" saes.
Mr. Kelly wil then circulate a newsletter to a clientele of subscribers. Subscriptions to this newsletter wil be on an annual flat fee basis. The freuency of circulation has not ben established, but it is anticipated to be monthly or bi-monthly. The letter wil contain genera inonnation about re estate activities or news in Michigan, and a setion with summares of the Owners Reresentation Shees. In this newsleter Mr. Kelly wil offer no advice about any spifc encumbrace, and wil advise the subscribers that they ar respnsible for peñonning due dilgence about each encumbrace in which they might have an interest, and tht the subscriber negotiate dirly with the encumbrace owner without assistace from Mr. Kelly. It is also contemplated that a boklet may be prear for subscribers, advising them on typica due dilgence proures use to evaluate encumbraces. This boklet would be

preare solely to help the subscriber to indepndently evaluate an encumbrace and not with a view toward encouragig purchase or favoring one encumbrace over anoth~r.

Mr. Thomas S. Hanan
August 10, 1992

While not presently contemplated, it is possible that a "hotline" telephone service ? may be established to provide additional listings between newsletter publications. Ths service would be included within the cost of the newsletter or would reuire a flat fee enhancement of the original newsletter cost. If a subscriber has an interest in a spifc encumbrace, the subscriber wil contact Mr. Kelly and reive the Owners Representation Sheet which wil conta more detaed data and the name and JT~a.'1S of contact of the encumbrace owner. Mr. Kelly wil not combine or group subscribers to purchase any spifc

encumbrace, nor reommend that they do so. He wil not fonn nor assist in fonning a pol for such subscribers in conjunction with the newsletter services. Mr. Kelly wil not assist

sub!'rribers in negotiating or concluding trasactions, nor engage in cleag or trasferrg

encumbraces. He wil not handle or assist others in handlig encumbraces or funds of subscribers, nor original or service encumbraces. He wil not offer advice or reommendations on spifc encumbrances.

If a subscriber purchases an encumbrace, the subscriber and the encumbrace owner wil have agre by contract to rert the trasaction to Mr. Kelly. He would then recive payment from the seller. The communications between Mr. Kelly and his subscribers would remain impersonal and would not develop into person to person relationships as par of the subscription procss. Mr. Kelly reresents that the publication wil be a genuine newsletter, intended for broad circulation, and that its cirulation wil ocur at least monthly or bi-monthly.

Commenta wil relate only to the re estate market in general, and not to spific encumbraces. Mr. Kelly wil not trde in any encumbraces purchased by his subscribers. He wil not persnal investment advice. The hotlie service wil parel the infonnation offere in the newsleter without any remmendations. The encumbraces ar a matter of public rerd. To preserve the seurity interest

of the holder, encumbraces ar rerded with county officials in the county in which the property is locted. These rerds ar redily avaiable to any interested persn.

The categories of inonnation provided about the encumbraces ar not highly selective, but rather reresent basic inonnation designed to identify the encumbrace, the underlying property and the tenns of the encumbraces. Viraly.~ Ìhs inçnnation is avaiable in the public reord.

Mr. Thomas S. Hanan
August 10, 1992

Finaly, the infonnation wil be presented without remmendation, and no effort wil be made to favor or give priority to one listing over another based on any investment criteria. The system is a listing service only, with all inonnation about spifc encumbraces provided by encumbrace holders within the liitations of a prescribe fonnat. Mr. Kelly wil

not give advice as to any spifc encumbrace.
The encumbraces did not originate in trasactions involving the sae of a security, but rather in the context of a security interest in conjunction with the sae of re estate. Only the secondary marketing raises securities issues. Except for limitations impose by state re estate licensing and state and federa securities laws and practical liitations impose by financing and staffing avaiable to a sta-up organition, it is not intended that there wil be restrictions based on geographica loction, typ of rel property or encumbrace, or price of encumbraces to be listed. Listings wil be made geographically, chronologically, by typ of encumbrance, or some similar meas. It is not anticipated that other than isolated senda purchases or saes would be made using the newsletter. Rather, Mr. Kelly believes that most purchasers wil be buying with an investment intent, though no such condition would be imposed on trasactions intiated thrugh th( newsletter. For the purpses of this letter we ask that the Division assume that the

encumbraces describe herein ar seurities.
ISSUE
Would the foregoing activities of Mr. Kelly reuire registration as an investment adviser personaly or for any entity fonned for the purpse of conducting the business as

describe above?

STATE OF APPLICABLE LAW

Secion 202(a)(lI) of the Investment Advisers Act of 1940 (the "1940 Act")

defines an investment adviser as any person who, for compensation, engages in the business of advising others, either dirtly or thrugh publications or writig, as to the value of seurities

or as to the advisabilty of investing in, purchasing or sellg seurities, or who, for

compensation and as par of a regular business, issues or promulgates analyses or rerts

concerng seurities.

Mr. Thomas S. Harman
August 10, 1992

The Division has issued a series of letters addressing situations with some characteristics similar to those presented in this letter. The system described herein has ben develope afer consideration of the letters issued to Investex Investment Exchange, Inc. (April 9, 1990), £T Parners, L.P., UniVu System (August 7, 1992), and Datastre International, Inc. (March 15, 1993), These letters address far more complex and wide-rechig systems than those describe above. Nonetheless, some essential pricipals ar common to all situations. The Division generally has taen the position t~at information relating to seurities does not constitute an analysis or repon if three tests ar met. ,.

( .' 1. The information provided is redily available to the public in its neW state; i
2. The categories of inormation are not highly selective; and,

3. The information is not organ or presented in a maner that suggests

purchase, holding or sae of any securities.
Based on the facts stated above, we believe Mr. Kelly's system would now meet all of these criteria. The foregoing newsletter does not advise as to the value of the securities. It is simply a listing service, and wil counsel that an investment not be made without due dilgence by the purchaser and price negotiation. The material that is published wil not constitute analyses and probably is not a ren, though that term is not defined. Based on the foregoing, it would appr that registration is not reuire of Mr.

Kelly or any affilated entities acting in the capacities set fonh above. We ask your concurrence in this conclusion. A reuest for an interpretive opinon has ben fiOO concurrntly with the Division of Maret Regulation, inquirig whether the foregoing activities would reuire registration as a broker-dealer. A copy of that letter has ben previously furnshed for your inormation. Very tnl~ yours,

-'j ~. I 1/ '. "'l i
. / ¡. ~ j I ,,/ '. ' i

Hugh H. Makens

aj cc: Mr. Stephen K. Kelly