SEC Division of Investment Management staff letter: The Ayco Company L.P.

SHEREFF FRIEDMAN HoFFMAN GooDMAN LLP
919 THIRD AVENUE
NEW YORK 10022-9998
TELEPHONE 212 756-9500
FACSIMILE 212 758-9526
TELEX 237328
MAROERY NEALE
DIRECT DIAL NUMBER
212 891-9228
Jack Murphy Esq
Chief Counsel
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street NW
Washington DC 20549
Re The Ayco Company L.P
Investment Advisers Act of 1940 as amended Section 205a3 The Ayco Company L.P Ayco is an investment adviser registered under the Investment Advisers Act of 1940 as amended the IAA Ayco is limited partnership that was established on October 1994 under the Delaware Revised Uniform Limited Partnership Act the Delaware Act It has one general partner Hambre Inc New York corporation the General Partner and currently has 61 limited partners Aycos Partnership Agreement as hereinafter defined allows for additional limited partners to be admitted prior to December 1996 and additional limited partners are scheduled to be admitted in December 1995 It is likely that additional limited partners will be admitted prior to December 1996 Ayco currently has over 10000 advisory clients As required by Section 205a3 of the IAA the advisory contract with each client provides in substance that Ayco will notify the client of any change in its membership within reasonable time after such change We hereby seek the assurance of the Staff of the Securities and Exchange Commission the Commission that it will not recommend enforcement action under the IAA against Ayco if as set forth below Ayco does not include in its contracts with clients the provision required by Section 205a3 with respect to notice of changes in limited partners Discussion of Facts Ayco provides either directly or through subsidiaries financial planning financial education benefit consulting insurance agency and insurance brokerage as well as investment 1q1ti tV IT -VS Dear Mr Murphy

SHEREFF FRIEDMAN HoFFMAN GOODMAN LLP
Jack Murphy Esq
October 25 1995
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advisory services and ancillary sales of products In particular Ayco offers the following advisory services Individual Counseling Services Incidental to Aycos primary business of financial and tax counseling Ayco makes recommendations as to investments suited to the overall personal objectives of the individual client As of July 18 1995 Ayco had 1976 individual counseling clients and 196 corporate clients Asset Management Services Ayco Asset Management division of Ayco provides investment supervisory services It manages equity balanced and fixed income accounts for clients As of July 18 1995 Ayco had 540 asset management clients Money in Motion Program This program is an educational program that focuses on the fundamentals of financial planning for large groups of corporate employees The service may include workbook with customized employee benefit supplement RoadMap software newsletters toll-free answer line two-tape video set and half-day seminar Fees range from $20 to $450 per participant depending on the number of participants in program and components selected As of July 18 1995 Ayco had 7471 individual Money in Motion clients Financial Related Services Financial Related Services provides broad spectrum of financial planning seminars As of July 18 1995 Ayco had 36 Financial Related Services clients As of July 18 1995 Ayco had total of 10219 clients Hambre Inc is Aycos General Partner John Breyo and Barry Hammerling are the sole shareholders of the General Partner each owning 50% interest therein The Amended and Restated Agreement of Limited Partnership dated as of December 1994 the Partnership Agreement of Ayco provides Except as otherwise expressly provided or limited by the provisions of this Agreement the General Partner shall have full and complete authority to manage and control the business and affairs of the Partnership to make all decisions affecting the business and affairs of the Partnership and to take

SHEPEFF FRIEDMAN HOFFMAN GOODMAN LLP
Jack Murphy Esq
October 25 1995
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all such actions as it deems necessary or appropriate to accomplish the purposes of the Partnership being understood that the Limited Partners shall not participate in the management and control of the Partnership emphasis supplied The General Partner owns and will continue to own following admission of new limited partners of Ayco The Partnership Agreement provides for four classes of limited partners although units of only two classes Class and Class are currently outstanding There are currently 59 Class limited partners all of whom are employees of the General Partner who are leased to Ayco The number includes 29 employees who purchased Class limited partnership units in an offering that was completed on June 19 1995 Additional Class limited partnership units may subsequently be offered and sold to other employees from time to time No Class limited partner owns or assuming the sale of Class limited partnership units to additional employees will own 5% or more of Ayco Ayco anticipates that any new limited partners who are subsequently admitted will in the aggregate own less than 20% of Ayco Messrs Breyo and Hammerling are currently the only Class limited partners and own in the aggregate 35% of Ayco Following the admission of additional Class limited partners as anticipated by the Partnership Agreement the Class limited partners will own in the aggregate 29% of Ayco The Partnership Agreement imposes restrictions on the ability of the Class and limited partners to withdraw from Ayco prior to its dissolution and prohibits the transfer or assignment of such limited partnership units without the prior written approval of the General Partner If limited partner terminates his employment with the General Partner the limited partners units will be purchased by Ayco The Travelers Inc holds an option to acquire all of the Class limited partnership units The option is not exercisable until January 1998 If the option is exercised in full the Class limited partnership units will represent 13.02% interest in Ayco The Partnership Agreement provides that Class limited partners will be guaranteed distributions equal to fixed minimum percentage of gross revenues and that the interests of Class limited partners may not be diluted The Partnership Agreement also imposes restrictions on transfer of Class limited partnership units and grants certain rights of first refusal with respect thereto

SHEREFF FRIEDMAN HOFFMAN GoODMAN LLP
Jack Murphy Esq
October 25 1995
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Class limited partnership units will be issued in exchange for Class and limited partnership units of certain limited partners who desire to withdraw from Ayco or terminate their employment with the General Partner but whose interests are not redeemed by Ayco Class limited partners will receive guaranteed distribution and will have priority to have their interests redeemed in full based on the chronological order in which they become Class limited partners Each of Aycos advisory contracts currently provides The Ayco Company L.P limited partnership will notify you of any change in general partner and to the extent required by applicable law of any changes in its limited partners in each case within reasonable time of such change.1 On May 24 1995 Ayco notified its clients of the anticipated admission of 29 additional Class limited partners who were admitted as of June 19 1995 Given the large number of limited partners the potential frequency of their admission and withdrawal and the lack of any ability on the part of the limited partners to participate in Aycos management for the reasons discussed below we hereby seek assurances from the Staff of the Commission that it will not recommend enforcement action against Ayco if it does not include the provision required pursuant to Section 205a3 of the IAA with respect to the provision of notice to clients of changes in limited partners Legal Discussion
Section 205a3 of the IAA provides in pertinent part
No investment adviser unless exempt from registration pursuant to section 203b shall make The language was drafted in anticipation of seeking the no-action assurance requested herein In the event that such assurance is granted Ayco will not in the future provide clients whose contracts contain such provision with notice of changes in limited partners since Section 205a3 of the IAA requires contractual provision but does not itself require actual notice of changes in limited partners In addition Ayco will not include in future contracts any provision pursuant to Section 205a3 of the IAA with respect to notice of changes in limited partners

SHEREFF FRIEDMAN HOFFMAN GooDMAN LLP
Jack Murphy Esq
October 25 1995
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use of the mails or any means or instrumentality of interstate commerce directly or indirectly to enter into extend or renew any investment advisory contract or in any way to perform any investment advisory contract .. if such contract .. fails to provide in substance that the investment adviser if partnership will notify the other party to the contract of any change in the membership of such partnership within reasonable time after such change As limited partnership Ayco is subject to the foregoing requirement and its advisory contracts contain the requisite language We respectfully submit that the mere notice of changes in limited partners is not meaningful information to client of Ayco As described above all current limited partners are employees of Ayco and the offer and sale of Class limited partnership units to an employee is similar to many corporate equity participation programs such as stock option plans If Ayco were organized as corporation rather than as limited partnership it would not be obligated to notify clients each time there was change in share ownership The fact that Ayco is organized as limited partnership does not create for the limited partners as investors in Ayco any greater right to affect the management of Aycos business than they would have as shareholders of an investment adviser organized as corporation As stated in the preceding section the Partnership Agreement vests the right to manage and control the business of Ayco in the General Partner and specifically provides that the limited partners shall not participate in such management and control Indeed under Delaware law it is in the interest of limited partner not to participate in management of limited partnership so as to insulate himself from liability to the creditors of the partnership
Section 17-303a of the Delaware Act provides
limited partner is not liable for the obligations of limited partnership unless he is also general partner or in addition to the exercise of his rights and powers as limited partner he participates in the control of the business
Section 17-303b of the Delaware Act provides that limited partner does not
participate in the control of the business within the meaning of Section 17-303a by virtue

SHEREFF FRIEDMAN HOFFMAN GoODMAN LLP
Jack Murphy Esq
October 25 1995
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Moreover if change in limited partners were significant enough to result in change in control of Ayco Aycos contracts with its clients would be deemed to be assigned within the meaning of Section 202a1 of the IAA.3 Under such circumstances clients would have to be notified and their consent to the assignment solicited We respectfully further submit that the requirement that Ayco notify its clients of any change in limited partners is superfluous in that any limited partner who is principal executive officer of Ayco or member of Aycos investment committee that determines general investment advice to be given to clients must be disclosed in Part II of Aycos Form ADV and any written disclosure statement used in lieu thereof which must be delivered to clients at inception of the advisory relationship and offered annually thereafter subject to the requirements of Rule 204-3 under the IAA Rule 204-1 under the IAA specifies when Form ADV must be amended to reflect changes in advisory personnel disclosed therein In addition Schedule to Form ADV must be completed for any registered investment adviser organized as partnership Notably the schedule does not require disclosure of every limited partner of limited partnership rather only those limited partners who have contributed directly or indirectly through intermediaries 5% or more of the partnerships capital must be identified on Schedule The only limited partners currently reflected on Schedule to Aycos Form ADV are John Breyo and Barry Hammerling Aycos Schedule would have to be amended pursuant to Rule 204-1 under the IAA to reflect the addition of any other limited partner owning 5% or more of Aycos capital We have located nothing in the legislative history of the IAA specifically explaining the purpose of the requirement in Section 205a3 relating to notification of changes in the membership of partnership We believe that it is logical to conclude however that this requirement was not intended to require notification of changes in the roster of limited partners We base this conclusion on the following First there is no investor protection purpose to be served by applying such requirement with regard to limited partners Second we believe that of among other things being an employee of the limited partnership or its general partner Assignment is defined in Section 202a1 of the IAA to include any direct or indirect transfer or hypothecation of controlling block of the assignors outstanding voting securities by security holder of the assignor but if the investment adviser is partnership no assignment of an investment advisory contract shall be deemed to result from the death or withdrawal of minority of the members of the investment adviser having only minority interest in the business of the investment adviser or from the admission to the investment adviser of one or more members who after such admission shall be only minority of the members and shall have only minority interest in the business

SHEREFF FPIEDMAN HOFFMAN GooDMAN LLP
Jack Murphy Esq
October 25 1995
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prior to enactment of the IAA in 1940 investment advisory firms were organized typically as either general partnerships or sole proprietorships although there were several firms organized as corporations Not only does this fact support the argument that the subject requirement was not intended to reach passive non-controlling investors like corporate shareholders or limited partners it also explains the inconsistency of not treating corporate shareholders the same as limited partners assuming no control in either case That is the framers of the IAA did not contemplate that investment advisers would be organized as limited partnerships and fortiori they did not intend to require that advisory clients be bombarded with what in some cases might be hundreds of notices of changes in the identity of non-controlling holders of ownership interests in the adviser Further the Staff of the Commission has given no-action advice that is consistent with our interpretation of the purpose of the notification requirement in Section 205a3 That is in W.R Huff Asset Management Co. L.P pub available August 10 1994 WR_Huff the Staff stated that it would not recommend enforcement action to the Commission under Rule 204-2a12 if W.R Huff Asset Management Co L.P W.RH Delaware limited partnership registered as an investment adviser did not treat certain of its limited partners as advisory representatives for purposes of the recordkeeping requirements of Rule 204-2a12 under the IAA The limited partners in question were individuals each of whom owned less than 5% of WRHs limited partnership interests and was passive investor not involved in WRHs investment decisions In granting the no-action assurance the Staff apparently found persuasive two arguments made by WRH which were repeated in the Staffs letter The first argument was that these limited partners were analogous to an incorporated investment advisers non-controlling shareholders who are not included in the definition of advisory representative unless they also have another relationship with the adviser that is specified in the rule The second argument specifically cited by the Staff was the recent equalization of treatment by the Commission of limited partners and shareholders under the Investment Company Act of 1940 as amended the 1940 Act recognizing that they are similarly situated
Section 2a3D of the 1940 Act defines affiliated
person to include any partner of another person The Commission recently adopted Rule 2a3-1 under the 1940 Act to except limited partners from this defmition ifthe sole reason for the affiliation arises from being limited partner investor We are persuaded that the same reasoning underlying the adoption of Rule 2a3-1 applies in the circumstances you describe footnote omitted

SHEREFF FRIEDMAN HOFFMAN GooDMAN LLP
Jack Murphy Esq
October 25 1995
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We believe that the reasoning that persuaded the Staff in WR Huff should also apply to Aycos request We do not believe that notice of every change in limited partners provides meaningful or necessary disclosure to Aycos clients Clients will be notified and their consent sought in the event of any change in control of Ayco that results in an assignment of advisory contracts They will also be notified through revised disclosure in Part II of Aycos Form ADV or other written disclosure statement of any material changes in advisory personnel To subject Ayco to more onerous notification requirement than would be the case if Ayco were organized as corporation would not seem to produce any tangible benefits to clients Accordingly we respectfully request the Staff to take the position that it will not recommend enforcement action against Ayco if it does not include in its advisory contracts provision otherwise required by Section 205a3 of the IAA with respect to notification of changes in its limited partners Please contact the undersigned at 212 891-9228 with any questions you may have Very truly yours 14/ Marger Neale MKNfs

QEC i4
Our Ref No 95-426-CC
RESPONSE OF THE OFFICE OF CHIEF COUNSEL The Ayco Company L.P DIVISION OF INVESTMENT MANAGEMENT File No 801-48238 Your letter dated October 25 1995 requests our assurance that we would not recommend enforcement action to the Commission under Section 205a of the Investment Advisers Act of 1940 Advisers Act if The Ayco Company L.P Ayco registered investment adviser does not include in its advisory contracts provision obligating it to notify its clients when limited partners withdraw from or new limited partners are admitted to Ayco Ayco is limited partnership organized under Delaware law and currently has more than 10000 advisory clients Ayco has one general partner Hambre Inc Hambre and 61 limited partners The sole shareholders of Hambre John Breyo and Barry Hammerling also are limited partners of Ayco and own in the aggregate 35% of Ayco All of the other limited partners are employees of Hambre who are leased to Ayco Aycos partnership agreement allows for additional limited partners to be admitted prior to December 1996
Section 205a of the Advisers Act provides that it is
unlawful for an investment adviser to enter into extend or renew any investment advisory contract or in any way perform any investment advisory contract if such contract fails to provide that the investment adviser if partnership will notify the other party to the contract of any change in the membership of the partnership within reasonable time after such change ./ You assert that notwithstanding this provision an investment adviser organized as limited partnership should not be required to include provision in its advisory contracts requiring client notification each time limited partner withdraws from or is admitted to the limited partnership In support of your argument you contend that limited partners are passive investors and therefore are in comparable position to corporate shareholders with respect to their right to affect the entitys management You note that the Advisers 1/ You state that Aycos contract provides that Ayco will notify clients of any changes in its limited partners to the extent required by applicable law While we question whether this language technically complies with Section 205 the position we take herein obviates the need to address this issue further 2/ Under Delaware law limited partner is not personally liable for the obligations of the partnership unless in addition to the exercise of his rights and powers as limited partner he participates in the control of the

Act does not require an adviser organized as corporation to include provision in its advisory contracts providing for notice of changes in share ownership notwithstanding that in 1940 numerous advisers were organized as corporations Given the similarity between the status of limited partners and that of shareholders you maintain that advisers organized as limited partnerships also should not be required to notify clients of changes in the identity of limited partners The Commission acknowledged that limited partners and shareholders are similarly situated in rule that equalizes their treatment for purposes of the definition of affiliated person under the Investment Company Act of 1940 1940 Act Although this rule was considered in context outside of the Advisers Act the staff subsequently applied similar reasoning in issuing no-action letter under Advisers Act Rule 204-2 12 to an adviser organized as limited partnership W.R Huff Asset Management Co L.P pub avail Aug 10 1994 Huff Rule 04-2 12 requires that advisers keep such records for business Section 17-303a of the Delaware Revised Uniform Limited Partnership Act You state that Aycos partnership agreement provides that the limited partners shall not participate in the management and control of the partnership 3/ See SEC Supplemental Report on Investment Counsel Investment Management Investment Supervisory and Investment Advisory Services August 17 1939 The legislative history of the Advisers Act offers no guidance with respect to the purposes underlying Section 205a 4/ We reject your argument that the application of Section 205a to limited partnership interests is superfluous because advisers are required to amend Part II of Form ADV to reflect certain material changes in advisory personnel see Rule 204-1b under the Advisers Act and Item of
Part II of Form MV First this argument is not supported
by the statutory language or the legislative history Second while Part II of Form ADV is required to be delivered to clients at the inception of the advisory relationship it only need be offered to existing clients annually Section 205a requires that clients be notified of certain information without requesting it 5/ Rule 2a3-l under the 1940 Act excepts limited partners from the definition of affiliated person under Section 2a ID of that Act which includes any partner of another person provided that the persons status as limited partner is the sole reason for the affiliation Investment Company Act Rel No 19658 Aug 25 1993 -2-

their advisory representatives term defined to include any partner but not any shareholder of the adviser In Huff the adviser argued that it should not have to maintain records of limited partners securities transactions if those limited partners owned less than of the advisers outstanding limited partnership interests and had no other relationship with the adviser As illustrated by the foregoing we believe that generally it is appropriate to treat limited partners comparably to corporate shareholders because of the essentially passive nature of limited partnership interest Therefore we conclude that for purposes of Section 205a an investment adviser organized as limited partnership need not notify clients of changes in its limited partners ./ This position applies to all limited partners including Messrs Breyo and Hanimerling who are also the sole shareholders of Hambre Aycos general partner Of course client consent would be required under Section 205a if disposition of the limited partnership interests of these two individuals or disposition of their interests in Hambre were to result in the assignment of Aycos advisory contracts 7/ Our position is unaffected by the fact that all of Aycos limited partners also are its employees There is nothing in the express language of Section 205a or in the legislative history to indicate that Section 205a was intended to require client notification of changes in partnerships advisory personnel Moreover if Congress had intended that Section 205a apply to personnel changes it seems unlikely that it would have singled out advisers that are organized as partnerships as opposed to some other organizational structure We note nonetheless that Section 206 of the Advisers Act which requires advisers to disclose all material facts to their clients might require advisers to notify their clients of material changes in advisory personnel Capital Gains Research Bureau Inc 375 U.S 180 194 1963 2/ Section 205a of the Advisers Act requires that advisory contracts provide that the adviser will not assign the contract without the clients consent Section 202a of the Advisers Act includes in the definition of assignment any transfer of controlling block of an advisers outstanding voting securities Section 202a also provides that if the investment adviser is partnership no assignment of an advisory contract shall be deemed to result from the withdrawal or admission of minority of the members having only minority interest in the adviser You represent that Ayco will not rely on this less restrictive -3-

Accordingly we would not recommend enforcement action to the Commission under Section 205a if Ayco does not include in its advisory contracts provision obligating it to notify its clients whenever there is change in the identity of Aycos limited partners ./ Because this position is based on the facts and representations made in your letter you should note that any different facts or circumstances might require different conclusion IXCL ana Cayne Attorney provision of Section 202a addressing the assignment of partnerships advisory contracts in connection with the transfer of minority limited partnerships interests and instead Ayco will obtain client consent to the assignment of its advisory contracts whenever change in Aycos limited partners is significant enough to result in change of control ./ Our position applies only to notification of changes in the identity of limited partners An adviser organized as limited partnership continues to be required to include in its contracts notification provision with respect to changes in its general partners -4-