SEC Division of Investment Management staff letter: Trusts under the Will of Marion Searle

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March 29, 2005

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20051131132 Trusts under the Will of Marion Searle File No. 132-3

Your letter dated March 25, 2005 requests that we concur with your view, as more fully explained below, that Marion Searle (the "Settlor") is a qualified purchaser under section 2(a)(51) of the Investment Company Act of 1940 (the "1940 Act").

BACKGROUND

You represent that fifteen testamentary trusts (the "Trusts") were created pursuant to the Will of Marion Searle, dated August 13, 1958, following the death of the Settlor on September 30, 1959. 1 The investments of each Trust, as defined in rule 2a51 1(b) under the 1940 Act, are currently valued at between $1.5 million and $5 million. 2 The Investments of the Trusts, in the aggregate, totaled in excess of $26 million in January 1996 and currently total well in excess of that amount. At the time of the Settlor's death in 1959, her estate was valued at approximately $3.5 million, at least $3,215,000 of which constituted Investments. You also represent that the assets of the Trusts are managed by common co trustees (the "Trustees"). You represent further that the Trustees are qualified purchasers under section 2(a)(51) of the 1940 Act.

You indicate that the Trustees wish to invest each Trusts' assets in 3(c)(7) Funds (as defined below) but are concerned that the 3(c)(7) Funds would reject the Trusts' investments if the Settlor is not a qualified purchaser (as defined below). You represent that none of the Trusts was formed for the specific purpose of acquiring the securities offered by a 3(c)(7) Fund.

ANALYSIS

Section 7(a) of the 1940 Act prohibits an investment company organized or otherwise created under the laws of the United States or of a state and having a board of directors from, among other things, offering or selling any security (or engaging in certain other activities) by use of the mails or any means or instrumentality of interstate commerce unless the company is registered under the 1940 Act. Section 3(c)(7) of the 1940 Act excludes from the definition of investment company any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of the securities, are qualified purchasers, and which is not making and does not propose to make a public offering of its securities (a "3(c)(7) Fund"). 3

Section 2(a)(51)(A) creates four categories of qualified purchasers that are eligible to invest in 3(c)(7) Funds "based on minimum standards of financial sophistication." 4 As relevant here, section 2(a)(51)(A)(iii) defines as a qualified purchaser:

any trust 5 . . . that was not formed for the specific purpose of acquiring the securities offered, as to which the trustee or other person authorized to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is [a qualified purchaser]. 6

You represent that none of the Trusts was formed for the specific purpose of acquiring the securities offered by a 3(c)(7) Fund. You also represent that the Trustees are qualified purchasers under section 2(a)(51). You believe that the Settlor also should be deemed to be a qualified purchaser.

We have previously stated in Meadowbrook Real Estate Fund (pub. avail. Aug. 26, 1998) (the "Meadowbrook Letter") that the settlor of a section 2(a)(51)(A)(iii) trust must be a qualified purchaser at the time that the settlor contributed assets to the trust (the "settlor requirement"). 7 We also stated in the Meadowbrook Letter that there may be other situations in which a settlor would have, at the appropriate time, the requisite financial sophistication to appreciate the risks presented by a 3(c)(7) Fund, thereby satisfying the purpose of the settlor requirement. For example, a trust that was worth $5 million in 1996, after the effective date of the National Securities Markets Improvement Act of 1996 (the legislation that added sections 3(c)(7) and 2(a)(51)(A)(iii) to the 1940 Act), arguably could be viewed as a proxy for the wealth of the settlor at the time that the settlor contributed assets to the trust on the theory that, if a settlor contributed enough assets to a trust for the trust to be worth $5 million in 1996, then the settlor probably was worth at least $5 million (in 1996 dollars) at the time that the settlor contributed assets to the trust (the "Meadowbrook Principle").

You essentially propose an alternate method for determining whether the Settlor is a qualified purchaser. You contend that the Settlor's wealth in 1959 (when she contributed the assets to the Trusts), measured in 1996 dollars, exceeds by a significant margin the $5 million qualified purchaser threshold. In particular, you state that the Settlor's $3,215,000 of Investments in 1959 dollars at the time of her death almost certainly would, based on changes in relevant Consumer Price Index figures, convert into in excess of $5 million in 1996 dollars. 8 You state that the Settlor's $3,215,000 of Investments in 1959 dollars would appear to be equivalent to approximately $17,330,000 in 1996 dollars based on changes in the Index.

You also note that in January 1996 the Investments of the Trusts were valued in excess of $26 million. You contend that the fact that the Settlor's wealth was divided at her death among a series of trusts as opposed to concentrated in one trust should not diminish the applicability of the Meadowbrook Principle.

Based on the foregoing facts and representations, we concur with your view that the Settlor is a qualified purchaser under section 2(a)(51) of the 1940 Act. Any different facts or representations may require a different conclusion.

John L. Sullivan Senior Counsel

Endnotes

1 You represent that no person other than the Settlor contributed any assets to any of the Trusts.

2 Rule 2a51 1(b) generally defines investments as, among other things, certain securities, real estate, commodities and interests therein, financial contracts, and cash and cash equivalents ("Investments").

3 The exclusion provided by section 3(c)(7) reflects Congress' recognition that financially sophisticated investors are in a position to appreciate the risks associated with certain investment pools and do not need the protection of the 1940 Act. S. Rep. No. 293, 104th Cong., 2d Sess. 10 (1996) ("Generally, these investors can evaluate on their own behalf matters such as the level of a fund's management fees, governance provisions, transactions with affiliates, investment risk, leverage, and redemption rights.").

4

Id.

5 Section 2(a)(51)(A)(iii) applies specifically to any trust that is not covered by clause (ii) of section 2(a)(51)(A). Clause (ii) of section 2(a)(51)(A) provides that a qualified purchaser is a company that owns not less than $5 million in Investments and that is owned directly or indirectly by or for 2 or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefit of such persons.

6 Clause (i) of section 2(a)(51)(A) generally provides that a qualified purchaser is a natural person who owns not less than $5 million in Investments. Clause (iv) of section 2(a)(51)(A) provides that a qualified purchaser is a person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25 million in Investments.

7

See also American Bar Association Section of Business Law (pub. avail. Apr. 22, 1999) ("ABA Letter"). This position reflects Congress' intent that the person whose assets are at risk - and not only the person making the investment decision - should be able to appreciate the risks presented by an investment pool that is not subject to regulation under the 1940 Act. It would be consistent with this intent to require that the settlor be a qualified purchaser (i.e., financially sophisticated) at the time that the settlor makes the decision to contribute assets to the trust. ABA Letter; Meadowbrook Letter.

8 You note that the Department of Labor's Consumer Price Index - All Urban Consumers (U.S. City Average) all items (the "Index") factor average for 1959 was 29.1, and the comparable number for 1996 was 156.9.

Incoming Letter

March 25, 2005

1940 Act/2(a)(51)(A)(iii)

Douglas J. Scheidt, Esq. Associate Director and Chief Counsel Division of Investment Management U.S. Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0504

Re: Trusts Under the Will of Marion Searle

Dear Mr. Scheidt:

This letter is submitted on behalf of fifteen testamentary trusts (the "Trusts") that were created pursuant to the Will of Marion Searle, dated August 13, 1958 (the "Will"), following Marion Searle's (the "Settlor's") death on September 30, 1959. This letter respectfully requests that the staff of the Division of Investment Management (the "Division") concur with our view that the Settlor is a "qualified purchaser" under Section 2(a)(51) of the Investment Company Act of 1940, as amended (the "Investment Company Act").

I. Factual Background

The Trusts were created pursuant to the Will following the Settlor's death on September 30, 1959, at which time separate Trusts of equal value were created for the benefit of each of the Settlor's surviving grandchildren, the spouse of each of the Settlor's grandchildren and each of the Settlor's great-grandchildren. 1 The Will provides that the income and principal from each Trust may, in the trustees' discretion, be distributed to the beneficiary of the Trust during his or her lifetime (or in some cases to other lawful descendants of either the beneficiary or the Settlor), and that any undistributed net income will be accumulated and added to principal. The Will provides for per capita distribution of the assets of the Trusts to the lawful descendants of the Settlor upon the Trusts' termination.

Today, the assets of the Trusts are managed by common co-trustees, including a corporate trustee, Harris Trust and Savings Bank, and three individual trustees, none of whom is a member of the Searle family (the "Family"). Harris Trust and Savings Bank owns and invests on a discretionary basis, for its own account or the accounts of other qualified purchasers, more than $25,000,000 of investments, as defined in Rule 2a51-1(b) under the Investment Company Act ("Investments"). Each of the individual trustees, either individually or together with his spouse, owns more than $5,000,000 of Investments. All of the trustees of the Trusts, therefore, are qualified purchasers under Section 2(a)(51)(A)(i) or 2(a)(51)(A)(iv) for purposes of Section 3(c)(7) of the Investment Company Act.

The Investments of each Trust are currently valued at between $1,500,000 and $5,000,000. The Investments of the Trusts, in the aggregate, totaled in excess of $26,000,000 in January 1996 and currently total well in excess of that amount. The assets of the Trusts consist primarily of direct and indirect interests in a diversified portfolio of financial investments. The Will allows great latitude in the administration of the Trusts, providing that the trustees of each of the Trusts have the power to invest and reinvest the Trust in any commodities, stocks, bonds, mortgages, interests in common trust funds established by a corporate trustee or any investment company, notes or other securities or property of any kind or nature, real or personal, notwithstanding such investments may not be prescribed by law or rule of court for the investment of trust funds and irrespective of the extent of diversification of the Trust. None of the Trusts was formed for the specific purpose of acquiring the securities offered by a 3(c)(7) Fund, as defined below.

At the time of the Settlor's death in 1959, her estate was valued at approximately $3,500,000, at least $3,215,000 of which constituted Investments. 2 The Settlor's Investments at the time of her death included 51,100 shares of G. D. Searle & Co. common stock then valued at approximately $2,200,000 based on a stock price of $43 per share. 3 Additionally, in the years prior to her death, the Settlor had made a number of contributions to other trusts and charities, including contributions of G. D. Searle & Co. common stock and other Investments to trusts and charities in December 1957 valued when made (for gift tax purposes) at approximately $2,510,000, and contributions of G. D. Searle & Co. common stock and other Investments to trusts and a charity in 1958 valued when made (for gift tax purposes) at approximately $438,000. The Settlor also made contributions of Investments to trusts and charities prior to 1957.

The Trustees wish to invest each Trust's assets in securities of entities that rely upon the exception from the definition of investment company that is provided by Section 3(c)(7) of the Investment Company Act ("3(c)(7) Funds"), but are concerned that the 3(c)(7) Funds would reject the Trusts' investments if the Settlor is not a qualified purchaser.

II. Legal Analysis

Section 3(c)(7) of the Investment Company Act excludes from the definition of investment company any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of the securities, are qualified purchasers, and which is not making and does not propose to make a public offering of its securities. This exclusion expands investment opportunities for financially sophisticated investors who possess "minimum standards of financial sophistication" necessary to understand and evaluate the risks associated with certain investment pools and who therefore do not require the protections of the Investment Company Act. 4

Section 2(a)(51)(A) of the Investment Company Act establishes objective tests to determine an investor's financial sophistication (and qualified purchaser status). Section 2(a)(51)(A) creates four categories of qualified purchasers:

any natural person (including any person who holds a joint, community property, or other similar shared ownership interest in an issuer that is excepted under Section 3(c)(7) with that person's qualified purchaser spouse) who owns not less than $5,000,000 in investments, as defined by the Commission;

any company that owns not less than $5,000,000 in investments and that is owned directly or indirectly by or for two or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefit of such persons;

any trust that is not covered by clause (ii) and that was not formed for the specific purpose of acquiring the securities offered, as to which the trustee or other person authorized to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is a person described in clause (i), (ii), or (iv); or

any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments.

We believe that the Settlor should be considered a qualified purchaser under Section 2(a)(51). Section 2(a)(51)(A)(iii) grants qualified purchaser status to a trust that owns less than $5,000,000 of Investments, but only if both the trustee and the settlor are qualified purchasers. The trustee's status under Section 2(a)(51)(A)(iii) is determined when the trustee makes the decision to acquire securities issued by an investment pool relying on Section 3(c)(7) (a "Section 3(c)(7) Fund"). 5 As described above, each of the corporate and individual co-trustees of the Trusts is a qualified purchaser, and the Trusts therefore satisfy the first element required by Section 2(a)(51)(A)(iii).

In contrast, the settlor must have been a qualified purchaser at the time the settlor contributed assets to the trust in order for the trust to be considered a qualified purchaser under Section 2(a)(51)(A)(iii). 6 In the context of a deceased settlor, the Division has stated that the settlor must have been a qualified purchaser at least once when he or she contributed assets to the trust. A settlor who was a qualified purchaser at the time he or she initially funded a trust, but was not a qualified purchaser at the time he or she made subsequent contributions, would still be considered a qualified purchaser for purposes of the settlor requirement. Similarly, a settlor who was not a qualified purchaser at the time that he or she initially funded a trust, but was a qualified purchaser when the settlor made later contributions, also would meet the requirement. 7

Again in the context of a deceased settlor, the Division has stressed that the person whose assets are at risk - the settlor - should be able to appreciate the risks presented by investing in an investment pool that is not subject to regulation under the Investment Company Act. 8 A settlor's decision to contribute assets to a trust whose governing documents permitted such types of investments (without necessarily specifically authorizing investment in a Section 3(c)(7) Fund) can be considered to be an implied authorization of the trust's investment in a Section 3(c)(7) Fund. 9 Accordingly, the settlor should have, at the appropriate time, the requisite financial sophistication to appreciate the risks presented by a Section 3(c)(7) Fund and thereby satisfy the purpose of the requirement that the settlor be a qualified purchaser. 10 In the

Meadowbrook no-action letter, the Division noted that:

a trust that was worth $5 million after the effective date of the National Securities Markets Improvement Act of 1996 (the legislation that added Sections 3(c)(7) and 2(a)(51)(A)(iii) to the Investment Company Act) arguably could be viewed as a proxy for the wealth of the settlor at the time that the settlor contributed assets to the trust on the theory that, if a settlor contributed enough assets to a trust for the trust to be worth $5 million, then the settlor probably was worth at least $5 million (in 1996 dollars) at the time that the settlor contributed assets to the trust. 11

In the case of the Settlor, the Will provides for a wide range of permissible investments for the Trusts, which, as suggested above, can be viewed as an implied authorization by the Settlor of the Trusts' investments in a Section 3(c)(7) Fund.

We believe that several strong arguments exist for the Settlor to be considered to have been a qualified purchaser at the time the Trusts were funded. First, Meadowbrook suggests that the value of a trust may be considered a proxy for the wealth of a deceased settlor at the time the settlor contributed assets to the trust. The Investments of the Trusts were valued in excess of $26,000,000 in January 1996 and currently are collectively valued well in excess of that amount. Relying on Meadowbrook 's reasoning, we believe that the $26,000,000 aggregate value of the Trusts in 1996 should support a presumption that the Settlor was worth in excess of $5,000,000 (measured in 1996 dollars) at the time the Trusts were funded, and therefore was a qualified purchaser when she contributed assets to the Trusts. The fact that the Settlor's considerable wealth, measured by the standards of her time, was divided at her death among a series of trusts as opposed to concentrated in one trust should not diminish the applicability of the Meadowbrook "proxy" reasoning. The key determination under Meadowbrook should be whether the amount of Investments placed in trust by an individual is sufficiently great to suggest that the individual had the requisite financial sophistication to be considered a qualified purchaser at the time the assets were placed in trust. A single trust valued at greater than $5,000,000 in 1996 or later dollars should be no more indicative of the settlor's wealth and financial sophistication upon contributing assets to a trust than a group of trusts collectively valued at the same amount. Stated differently, if the Settlor had formed and contributed assets to a single trust under her Will as opposed to fifteen separate trusts, Meadowbrook clearly would support the conclusion that the Settlor is a qualified purchaser. To treat this situation differently because separate trusts, rather than a single trust, were created would seem to be inconsistent with the Meadowbrook rationale.

Separately, the Settlor's $3,215,000 of Investments in 1959 dollars at the time of her death almost certainly would, based on changes in relevant Consumer Price Index ("CPI") figures, convert into in excess of $5,000,000 in 1996 or 2005 dollars. We note that the Department of Labor's CPI - All Urban Consumers (U.S. City Average) all items factor average for 1959 was 29.1 and the comparable number for 1996 was 156.9. 12 The Settlor's $3,215,000 of Investments in 1959 would appear to be equivalent to approximately $17,330,000 in 1996 dollars based on changes in this Index. Thus, although the Settlor did not technically possess Investments in excess of $5,000,000 as of the time of her death in 1959, the Settlor's wealth in 1959 (when she contributed the assets to the Trusts), measured in 1996 dollars, exceeds by a significant margin the $5,000,000 qualified purchaser threshold. To disregard changes in the CPI over such a long period would result in the application of a much more rigorous qualified purchaser standard to the Settlor than was contemplated by the drafters of the National Securities Markets Improvement Act of 1996 ("NSMIA"). Indeed, the Meadowbrook letter references determination of a deceased settlor's worth in terms of "1996 dollars," suggesting that the Division recognizes the relevance of considering changes in the CPI when applying the $5,000,000 qualified purchaser test to deceased persons. 13 The Settlor, in her time, was an individual who possessed sufficient wealth to meet all of the narrative descriptions of a qualified purchaser set forth in the Congressional Record and elsewhere. We believe that qualified purchaser status should not hinge on something as technical as the $5,000,000 threshold in this situation, when policy considerations support a qualified purchaser finding and sufficient time has passed between the funding of the Trusts and the enactment of the qualified purchaser provisions in 1996 to render the strict dollar threshold component of the test somewhat diminished irrelevance.

Finally, as described above, in the years prior to her death in 1959, the Settlor made several contributions to trusts and charities, including contributions of G. D. Searle & Co. common stock and other Investments in December 1957, valued when made (for gift tax purposes) at approximately $2,510,000, and contributions of G. D. Searle & Co. common stock and other Investments in 1958, valued when made (for gift tax purposes) at approximately $438,000. The Settlor thus appears to have had in excess of $5,000,000 of Investments prior to her 1957 contributions, and therefore would have been a qualified purchaser even under the 1996 test applied without CPI adjustment. Had the Settlor made additional contributions to these 1957 trusts as of the date of her death rather than contributing to new trusts created under her Will, under Meadowbrook , she would have been considered a qualified purchaser for purposes of such contributions, notwithstanding that she may have owned less than $5,000,000 of Investments at the time of her death. It would seem incongruous indeed for the Settlor to be considered a qualified purchaser in late 1957 but to have relinquished such status by 1959, due primarily to her by that time having contributed, in the course of customary and prudent estate planning, much of her then-considerable wealth to charities and trusts other than those that she funded at the time of her death. To find that her numerous inter vivos gifts prior to funding the Trusts caused her to relinquish qualified purchaser status applies the $5,000,000 test so mechanically as to be inconsistent with the test's fundamental rationale. After all, while the transfers and contributions resulting from the Settlor's estate planning activities during the several years before her death may have reduced the value of her Investments below $5,000,000, they would not have lessened her financial sophistication, and in fact help to illustrate precisely how financially sophisticated the Settlor was.

Congress enacted Sections 3(c)(7) and 2(a)(51)(A) of the Investment Company Act with the intention of facilitating capital formation in the United States by expanding investment opportunities in private investment funds to qualified purchasers with the requisite financial sophistication to appreciate the risks presented by these funds. Congress implemented objective tests to measure an investor's financial sophistication on the basis of the amount of Investments owned. We believe that several separate rationales exist, as described above, for the conclusion that, at the time the Trusts were created and funded, the Settlor possessed precisely the financial sophistication that Congress considered necessary for qualified purchaser status.

III. Request For Relief

If the staff of the Division (the "Staff") concurs in our view that the Settlor is a qualified purchaser for purposes of Section 3(c)(7) as of the time the Trusts were funded, we request confirmation from the Staff that it would not recommend enforcement action to the Securities and Exchange Commission if the Trusts are treated as qualified purchasers under Section 2(a)(51)(A)(iii) of the Investment Company Act, which grants qualified purchaser status to a trust that owns less than $5,000,000 of Investments if both the trustee and the settlor are qualified purchasers.

If for any reason the Staff does not concur with the views expressed herein, we respectfully request the opportunity to confer with the Staff prior to any formal response to this no-action request. If you have any questions regarding this no-action request, please call the undersigned at (312) 853-7324.

Very truly yours,

Andrew H. Shaw

cc: John L. Sullivan, Esq.

Endnotes

1 No person other than the Settlor contributed any assets to any of the Trusts.

2 The valuation of the Settlor's estate at the time of her death includes the value of the assets contributed to the Trusts.

3 G. D. Searle & Co. was at all relevant times a reporting person pursuant to Section 13 or 15(d) of the Exchange Act and thus its stock fell within the definition of Investments under Rule 2a51-1(b).

4 S. Rep. No. 293, 104th Cong., 2d Sess. 10, 24 (1996).

5 Meadowbrook Real Estate Fund LLC, SEC No-Action Letter (August 26, 1998) (hereinafter "Meadowbrook letter").

6

Id. ; American Bar Association Section of Business Law, SEC No-Action Letter (April 22, 1999) (hereinafter "ABA letter").

7 Meadowbrook letter.

8 ABA letter; Meadowbrook letter.

9 Meadowbrook letter.

10 ABA letter.

11 Meadowbrook letter.

12 Available at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

13 Meadowbrook letter

http://www.sec.gov/divisions/investment/noaction/searle032905.htm

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Modified: 04/01/2002