SEC Division of Investment Management staff letter: Washington Capital Joint Master Trust

Investment Company Act of 1940 – Section 7(b) Washington Capital Joint Master Trust

September 25, 2006

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 2006291121 Washington Capital Joint Master Trust File No. 132-3

Your letter dated September 20, 2006 requests our assurance that we would not recommend enforcement action to the Commission against Washington Capital Management, Inc. (“Washington Capital”) or The Bank of New York Trust Company, N.A. (“BONY”) under section 7(b) of the Investment Company Act of 1940 (the “1940 Act”) if the Washington Capital Joint Master Trust (“Trust”) does not register as an investment company under the 1940 Act, under the circumstances described below.

Facts

You state that the Trust is organized as a trust under the laws of the state of Washington pursuant to a declaration of trust (“Declaration of Trust”). You state that Washington Capital serves as investment manager and depositor to the Trust, and that BONY serves as trustee to the Trust. You state that the Trust has no board of trustees and that the Trust currently has nine separate portfolios (“Portfolios”). You state that ownership interests in the Trust are composed of units of non-voting beneficial interests representing an investor’s allocated proportionate, undivided shares of a particular Portfolio (“Units”). You state that a holder of Units in any Portfolio (“Unitholder”) owns Units of that Portfolio, and is not otherwise deemed to own Units in any other Portfolio of the Trust, unless that Unitholder has specifically made an investment in another Portfolio. 1

You assert that the Trust is analogous to a registered mutual fund organized as a “series company.” You state that, like a series company, the assets of each Portfolio are separately held, managed, administered, valued, invested, distributed, audited, and accounted for, and each Portfolio is otherwise dealt with as a separate entity pursuant to the Declaration of Trust. 2 You state that, under the Declaration of Trust, each Portfolio is a separate trust account in which Unitholders’ monies are commingled and invested as a single Portfolio. You represent that the Declaration of Trust provides that the assets and liabilities of each Portfolio are separate from the assets and liabilities of any other Portfolio, and the Units represent ownership in the property of a discrete Portfolio, the assets of which can only be applied to discharge claims against that Portfolio, and cannot be applied to discharge claims against any other Portfolio. 3 You represent that the Trust will operate, and will hold itself out to others as operating, consistent with the terms of the Declaration of Trust. 4 You assert that separate Portfolios within the Trust save audit, legal, and compliance expenses that would otherwise be used to create and maintain separate investment funds.

You represent that Washington law is silent on whether each Portfolio is treated or recognized as a separate legal entity. You represent that Washington law defers to the terms of a declaration of trust as to whether to recognize separate portfolios of a trust as separate legal entities for the purposes set forth in this letter. 5 As noted above, you represent that the Declaration of Trust provides that the assets of each Portfolio may be applied to discharge the expenses, losses, liabilities and damages solely of that Portfolio, and not any other Portfolio of the Trust. Accordingly, you represent that the specific terms of the Declaration of Trust and the deference under the laws of the state of Washington to the provisions of particular trust instruments would preclude any person that has a claim against a particular Portfolio from attaching the assets of any other Portfolio. 6 You also represent that you have issued a legal opinion concluding that, based upon the laws of the state of Washington, each Portfolio should be treated as a separate trust entity under Washington law, and that creditors of one Portfolio should be prohibited from attaching those claims to the assets of any other Portfolio. 7

Each Portfolio seeks to rely on an exception from the definition of investment company set forth in section 3(c) of the 1940 Act. You are concerned that, should the Portfolios be viewed collectively, the Portfolios and the Trust may not be entitled to rely on any particular exception from the definition of investment company under the circumstances described herein.

Analysis

Section 7(b) of the 1940 Act prohibits, in relevant part, any depositor or trustee for any investment company, organized or otherwise created under the laws of the United States or of a state, without a board of directors, from, among other things, offering, selling, or delivering after sale, any security or interest in a security unless the company is registered under the 1940 Act. Section 3(a)(1) of the 1940 Act generally defines the term “investment company” to include any issuer of securities that engages in an investment company business as described in section 3(a)(1). Section 3(c) of the 1940 Act provides a number of exceptions from the definition of investment company. 8

You request that we concur in your view that the Trust is not or should not be viewed as a single issuer for purposes of determining whether the Trust is an investment company as defined in section 3(a)(1) of the 1940 Act. You note that we previously provided similar no-action relief in Coutts Global Fund (pub. avail. Dec. 7, 1994) (“Coutts”) to an Irish umbrella fund that complied with the limits set forth in the exception from the definition of investment company in section 3(c)(1) of the 1940 Act, on a sub-fund by sub-fund basis. Each sub-fund in Coutts had assets and liabilities that were separate from the assets and liabilities of any of other sub-fund, and issued units of beneficial interest representing ownership in the property of a discrete trust ( i.e. , a subfund), the assets of which could only be applied to discharge claims against that trust, and could not be applied to discharge claims against any other trust.

You acknowledge that there are differences between your facts and those addressed in Coutts. In particular, Coutts involved a foreign issuer that received relief under section 7(d) of the 1940 Act, rather than an issuer organized under the laws of the United States, such as the Trust. Also, in Coutts, each sub-fund complied with the limits of section 3(c)(1) of the 1940 Act, and did not rely on various exceptions from the definition of investment company, such as the exceptions set forth in sections 3(c)(7) or 3(c)(5) of the 1940 Act. You also acknowledge that under Irish law, each sub-trust was a separate trust having a common trustee, while Washington law is silent on whether each Portfolio is treated or recognized as a separate legal entity.

You contend, however, that those differences should not matter. You represent that, consistent with the Irish sub-funds in Coutts, the Declaration of Trust provides that the assets and liabilities of each Portfolio are separate from the assets and liabilities of any other Portfolio, and the Units represent ownership in the property of a discrete Portfolio, the assets of which can only be applied to discharge claims against that Portfolio, and cannot be applied to discharge claims against any other Portfolio. You represent that the Trust will operate, and will hold itself out to others as operating consistent with the terms of the Declaration of Trust. You have opined that each Portfolio should be treated as a separate trust entity under Washington law, and that creditors of one Portfolio should be prohibited from attaching those claims to the assets of any other Portfolio. Finally, you believe that it makes no difference in the analysis whether an issuer is a U.S. or foreign issuer.

You, therefore, contend that the principles for treating each sub-fund as a separate issuer should apply to the Trust. 9 We agree. On the basis of the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against Washington Capital or BONY under section 7(b) of the 1940 Act if the Trust does not register as an investment company under the 1940 Act, under the circumstances described above. This response expresses our views on enforcement action only and does not express any legal conclusions on the issues presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion. 10

Kenneth C. Fang Senior Counsel

1 You state that, as of August 31, 2006, there were a total of 71 Unitholders in the Portfolios. You state that the smallest number of Unitholders in any Portfolio is five and the largest number of Unitholders in any Portfolio is 40.

2 Telephone conversation between Kenneth C. Fang of the staff and Brendan N. O’Scannlain of Stoel Rives LLP, counsel to the Trust, on September 25, 2006 (“September 25 Telephone Call”).

Id .

Id .

Id .

See Wash. Rev. Code � 11.97.010 (2006).

See September 25 Telephone Call.

See, e.g. , section 3(c)(1) (excepting any issuer whose outstanding voting securities are beneficially owned by not more than one hundred persons, and that is not making, and does not propose to make, a public offering of its securities); section 3(c)(7) (excepting any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers (as defined in section 2(a)(51) of the 1940 Act) and that is not making, and does not propose to make, a public offering of its securities); and section 3(c)(5)(C) (excepting any person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate).

9 You note that we have taken the position on several occasions that each series of a series investment company is or should be treated as a separate issuer under other sections of and rules under the 1940 Act. See , e.g. , Principal Investors Fund Inc. (pub. avail. May 13, 2005) (“each series of a series investment company is a separate investment company for purposes of the limitations set forth in section 12(d)(1)(B)”); Fundtrust (pub. avail. Jan. 7, 1986) (section 12(d)(1)(F)); Salomon Brothers Inc. (pub. avail. May 26, 1995) (sections 2(a)(3) and 17(a)); The One Group (pub. avail. May 23, 1995) (section 10(f)); PaineWebber Series Trust (pub. avail. Dec. 14, 1987) (section 5(b)(1)).

10 In particular, we likely would take a position different from that expressed herein if the Trust operates or holds itself out to others as operating in a manner that is inconsistent with the terms of the Declaration of Trust. Similarly, we likely would take a position different from that expressed herein if, under the laws of the state of Washington: (i) each Portfolio were not treated or recognized as a separate trust entity, or (ii) a person that has a claim against a particular Portfolio could attach the assets of any other Portfolio to satisfy that claim. In addition, you do not ask about, and we express no opinion on, instances in which integration principles would require that two or more Portfolios be viewed as a single issuer. See, e.g. , Welsh, Carson, Anderson & Stowe (pub. avail. June 18, 1993) and Shoreline Fund L.P. (pub. avail. Apr. 11, 1994).

Incoming Letter

The Incoming Letter is in Acrobat format.

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700 5 W I-iflli Avenue. Suile 2500
I'oilland, Orego!l 97204 inaiti 503.224.3380 lax 503.220.2480 www.stoel.co~ii Via Facsimile atzd UPS Douglas J. Scheidt, Esq. Associate Director and Chief Counsel Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 Re: Washington Capital Joint Master Trust Dear Mr. Scheidt:
On behalf of our client, Washington Capital Management, Inc., we hereby request that the Staff of the Division of Investment Management (the "Staff") of the Securities and Exchange Commission (the "Commission") confirm that the Staff would not recommend that the Corninission take any enforcement action against Washington Capital Management, Inc, or Bank of New York Trust Company, N.A. if Washington Capital Joint Master Trust (the "Trust") does not register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), under the circumstances described below. We are requesting relief under
Section 7(b) of the 1940 Act.

1. Background
   The Trust is organized as a trust under the laws of the state of Washington and is qualified and tax-exempt as a group trust under the provisions of IRS Revenue Ruling 81-1 00. The Trust's investors are exclusively pension, profit sharing, or other retirement plans qualified under
   Section 401 (a) of the Internal Revenue Code of 1986, as amended (the "Code"), investing
   through trusts that are tax-exempt under Section 501(a) of the Code, government plans,1 and ' The term "government plan" means, in accordance with Code section 401 (a)(24), (i) a governmental plan within the meaning of Code section 414(d), (ii) an eligible deferred compensation plan within the meaning of Code section 457(b), or (iii) the Government of the United States, the government of any State or political subdivision thereof, or any agency or any Oregon Wasliingion Caiiiornia Utah Idaho

certain individual retirement account^.^ ~ccordin~l~, the Trust is subject to applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The investment manager for the Trust is Washington Capital Management, Inc., a Washington corporation, and an investnlent adviser registered with the Coinmission under the Investnlent Advisers Act of 1940 ("Investment Manager"). The Investment Manager established the Trust in 1982 and should therefore be considered the depositor of the Trust. The Trust does not have a board of trustees or board of directors. The Trust's trustee is The Bank of New York Trust Company, N.A. (the "Trustee"). The Trustee serves as a "directed trustee" under ERISA and is subject to removal with or without cause by the Investment Manager. The Trustee holds legal title to the assets of the Trust and executes directions for the purchase and sale of assets received from the Investment Manager. The Trust relies on an exemption from the registration requirements for an investment company under Section 3(c)(l) of the 1940 Act. The Trust has established 9 separate investment funds, or portfolios. The separate portfolios consist of a small cap growth fund, a mid cap growth fund, a large cap value fund, a fixed illcome fund, a short term income fund, two mortgage income funds, a real estate equity fund, and a balanced fund composed of units of the other investment funds established by the Trust. Ownership interests in the 'Trust are composed of units of non-voting beneficial interests representing a11 investor's allocated proportionate, undivided shares of one or more investment funds ("Units"). Holders of Units in any investment fund owl1 Units in that investment fund only, and are not otherwise deemed to own Units in any other investment fund of the Trust unless the holder has specifically made an investment in such investment fund. As of August 3 1, 2006, there were 71 investors in the Trust's investment funds. The number of investors in each of the Trust's investment funds varies, and several investors are invested in more than one investment fund. The smallest number of investors in any investment fund is five and the largest number of investors in any investment fund is 40. instrumentality of the foregoing, who enters into a trust or contract to satisfy an obligation to provide a benefit under a plan described in Code Section 8 18(a). The individual retirement accounts ("IRA") includes an IRA under Code Section 408(a), a deemed IRA under Code Section 408(q), or a Roth IRA under Code Section 408A, provided such IRA is tax exempt under applicable provisions of the Code.

11. Discussion
    A. Prior Commission No-Action Letter
    In the Coutts Global Fund no-action letter (publicly available April 1 1, 1994), the Staff took a no-action position in the case of an "umbrella" trust that sponsored or issued separate investment funds or portfolios ("sub-funds") under the trust, and counted investors on a sub-fund by sub￾fund basis, subject to certain conditions. The trust at issue in Coutts Global Fund was an Irish "umbrella unit trust," similar to a domestic series company or master trust, that offered units of beneficial interests in 14 sub-funds. As with the Trust, the units of beneficial interests issued by the Irish umbrella trust represented an undivided share in the property of a discrete sub-fund. In addition, under Irish law, each sub-fund was treated as a separate legal trust having a common trustee. Only the assets of a particular sub-fund could be applied to discharge claims of that sub￾fund, and those assets could not be applied to discharge claims of any other sub-fund. The Staff agreed not to recommend any enforcement action if the umbrella trust's investment manager applied the 100-beneficial-owner limit on a sub-fund-by-sub-fund basis, subject to integration principles that inay require two or more sub-funds with similar investment strategies, portfolio investments, and risk-return profiles to be collapsed and treated as a single issuer. The Coutts Global Fund umbrella trust was a foreign issuer privately offering units of beneficial interests to investors in the United States. The Commission has interpreted the Section 3(c)(l) 100 shareholder limit to apply to foreign funds making a private offering in the United ~tates.~ Accordingly, each sub-fund in the Coutts Global Fund umbrella trust was limited to having no more than 100 U.S. investors, subject to integration principles. B. Washington State Law Treatment oj'Trusts and Separate Investment Funds Issued by a Trust Although the issuer in Coutls Global was a foreign issuer, the principles for treating each sub-fund as a separate issuer for purposes of Section 3(c)(l) apply to a domestic master trust or series company. The Trust is analogous to a "series company", and Units of each separate series or sub-fund represent an undivided share only in the property of that particular fund only and not the property of any other investment fund in the Trust. Under the terms of the Trust's Declaration of Trust, each investment fund in the Trust is a separate trust account in which investors' money is commillgled and invested as a single fund. Each investment fund is separately held, managed, administered, valued, invested, distributed, audited, accounted for, and Release No. IA-2333 (December 2,2004) at note 226.

otherwise dealt with as a separate entity. The beneficial interest held by an investor represents the investor's allocated proportionate undivided share of an investment fund. The Trust's Declaration of Trust also provides that the assets of each investment fund may be applied to discharge the expenses, losses, liabilities and damages (each a "claim") solely of that investment fund, and not of any other investment fund in the Trust. There is a common trustee and investors in a particular investment fund have no ownership or other interest in any other investment fund offered by the Trust. Washington law is silent, specifically, on whether each separate investment fund is treated or recognized as a separate entity. However, Washington law provides that the trustor of a trust, by the provisions of the trust, may alter any or all of the privileges and powers granted by Washington statutes governing the powers of a trustee, and may add privileges and powers to those granted by stat~te.~ oreo over, Washington law provides that if any specific provision of the cited Washington statutes governing a trust conflict with the provisions of the trust, the provisions of the trust contr01.~ Accordingly, we believe State law defers to the terms of the trust instrument as to whether to recognize separate investment funds of a trust as separate entities. Although Washington law does not specify whether a person having a claim against an investment fund offered by a trust would have recourse against any other iiivestinent fund offered by such trust, we believe the specific terins of the Trust and Washington law's deference6 to the provisions of the Trust would preclude any person having a claim against a particular investment fund from attaching the assets of any other investment fund of the Trust. Although the Staff has not publicly applied the reasoning in Coutts Global Fund to grant similar relief to a domestic master trust or series company, it would be inconsistent from a policy standpoint to allow a foreign umbrella trust privately offering its securities in the United States to count investors on a sub-fund by sub-fund basis but not a domestic master trust with an identical structure governed by State law that we believe recognizes separate investment funds as similar to sub-funds in an umbrella trust under Irish law.
111. Issue
Assuming that the Staffs reasoning in Coutts Global Fund applies to a domestic master trust or series company, the issue not addressed in Coutts Global Fund is whether each sub-fund in a R.C.W. 11.97.010 Id. Id.

master trust or separate series of a series company may rely on different exclusions from the definition of an illvestment company under Section 3(c) of the 1940 Act. The Trust is considering the creation of additional investment funds under the Trust open only to investment by "qualified purchasers" as defined in Section 2(a)(5 1) of the 1940 ~ct.~ In addition, one or more of the Trust's three investment funds that invest in real estate interests may qualify for an exclusion from the definition of an investment company under Section 3(c)(5)(~).~ The remaining investment funds in the Trust would continue to rely on Section 3(c)(l), subject to integration principles. We ask that the Staff concur in our view, based on the reasoning articulated in Coutts Global Fund, that each of the Trust's separate investment funds may rely on different exceptions to the definition of an investment company under Section 3(c) of the 1940 Act rather than requiring all of the Trust's separate investment funds to rely on the same exception (e.g.,Section 3(c)(l), which each of the sub-funds in the Coutts Global Fund umbrella trust relied on).9 We are aware Any such investment funds open only to qualified purchasers would rely on the exclusion from the definition of any investment company under Section 3(c)(7). Section 3(c)(7) of the 1940 Act excepts froin the definition of an investment company (and, accordingly, an exemption from registration under the 1940 Act) any issuer with outstanding securities owned exclusively by "qualified purchasers," as defined in Section 2a-5 1 of the 1940 Act, and that is not malting or proposing to make a public offering of securities. Unlike Section 3(c)(l), the exception under Section 3(c)(7) has no limitation on the number of purchasers in the fund (although certain issuers with a class of equity securities held by 500 or more persons are required to register the securities under Section 12(g)(l) of the Securities Exchange Act of 1934). Under Section 3(c)(7)(E) of the 1940 Act, an issuer relying on the exception under
Section 3(c)(l) and an issuer relying on the exception under Section 3(c)(7) established by the
same promoter will not be integrated for purposes of determining whether the outstanding securities of the Section 3(c)(l) issuer are owned by more than 100 persons or whether the outstanding securities of the Section 3(c)(7) issuer are owned by persons that are not "qualified purchasers." "his exception is primarily relied on by entities engaged in purchasing mortgages and other liens on or interests in real estate, subject to certain conditions such as not being engaged in the business of issuing redeemable securities. The Coutts Global Fund letter did not specifically address whether each sub-fund could rely on a different exception to the definition of an investment company under Section 3(c) of the

September 20, 2006 of the Staffs long line of no-action letters articulating i~itegration principles and its announcement that it will no longer respond to letters dealing with issues of integration unless they present novel or unusual issues 10 Accordingly, we are not requesting the Staff to provide no-action relief with respect to whether any of the Trust's separate investment funds or portfolios would be integrated. If the Trust creates additional investment funds that rely on different exceptions from the definition of an investment company under Section 3(c) of the 1940 Act (rather than relying on the same exception (e.g., Section 3(c)(l) for each separate fund)), the Trust is at risk, in the absence of contrary authority, that the Commission could integrate some of the Trust's investment funds by disallowing each portfolio's reliance on separate exceptions under Section 3(c) of the 1940 Act, and causing the 100 investor limit of Section 3(c)(1) to be exceeded (assuming the Trust's total number of investors exceeds 100 at the time). Based on the Staff's reasoning in Coutts Global Fund, we believe separate sub-funds or portfolios in a domestic master trust or series company (in which each investment fund is recognized under state law as a separate entity) such as the Trust, should be allowed to rely on different exceptions to the definition of an investment company under Section 3(c) of the 1940 Act rather than requiring each separate investment fund to rely on the same exception (e.g.,
Section 3(c)(l j).
The Investment Manager could achieve its desired result and organize, for example, a separate trust for each sub-fund or group of sub-funds relying on the same exemption under the 1940 Act. It could also organize any of the real estate-related investment funds as separate legal entities (a limited partnership or limited liability company, etc.) that rely on the exception to the definition of an investment company under Section 3(c)(5)(C) (assuming their investments qualify). For many of the same reasons offered by counsel to Coutts Global Fund, however, requiring all the sub-funds of a domestic trust or series company to rely on the same exception to the definition of an investment company would penalize the use of an efficient format such as the Trust. Using one trust to hold, manage and administer the assets of the separate investment funds in the Trust results in efficiencies for investors, the Investment Manager and the Trust's service providers, 1940 Act. Our review of subsequent no-action letters and releases from the Commission did not uncover or reveal any extension or application of the reasoning in Coutts Global Fund to any similar circumstance. lo See Shoreline Fund L.P. (pub. avail. April 11, 1994).

and limits expenses. For example, if additional separate trusts or entities were created by the Investment Manager, the Investment Manager would have to file multiple Form 5500 reports with the U.S. Department of Labor each year. Adding such additional trusts or entities would require additional audit, legal and compliance expenses to create and maintain each of the investment funds organized as separate legal entities. In addition, Trust investors who are currently invested in multiple funds in the 'Trust would be required to execute and maintain separate legal and investment documents for each separate trust or other entity in which they are invested. Finally, creating multiple separate trusts would result in additional fees for recordkeeping and other services payable by each separate trust to the trustee. The Staffs recommendation not to take any enforcement action if separate sub-funds in a master trust rely on different exceptions from the definition of an investment company under Section 3(c) would be consistent with the Commission's and the Division of Investment Management's practice of regulating each sub-fund in a domestic series company as a separate investment company.'' If the Staff grants the requested relief to treat separate investment funds in a domestic inaster trust as distinct and separate-as the Staff did in the case of an Irish umbrella trust in Coutts Global Fund--then we believe it would be consistent to allow each investment fund in the Trust to rely on its own exclusion froin the definition of an investment company under Section 3(c). Given the harsh consequences if the Section 3(c)(l) 100 investor limitation is exceeded (resulting in violation of several sections of the 1940 Act), we are requesting relief under Section 7(b) of the 1940 Act and your concurrence that each of the Trust's separate investment funds may rely on different exclusions from the definition of an investment company under Section 3(c) of the 1940 Act (such as Sections 3(c)(l), 3(c)(7) and 3(c)(5)(C)), subject to integration principles. If you should have any questions concerning the above matter, please feel free to call me at (503) 294-9886. Sincerely yours, Brendan N. 0'Scaiinlain Stoel Rives LLP " See Coutts Global find, n. 5 (citing as an example Rule 17a-7 under the 1940 Act). Portlnd2-4532882.6 0040504-00001