SEC Division of Investment Management staff letter: Wilkie Farr & Gallagher

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WILLKIE FARR & GALLAGHER Roger D. Blanc New York Washingon, DC London Paris 1940 Act/3 (c) (1) June 11, 1996

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::ON . ~ :J (d- ) C l- d-~ Jack W. Murphy, Esq.
Associate Director RULE
Division of Investment Management

Securities and Exchange Commission ~~BI (p1,Jr / f p Stop 10-6

450 Fifth Street, N. W.

Washington, DC 20549

Dear Mr. Murphy:

We represent several clients who have asked for

advice concerning the availability of the exception from

the definition of an investment company provided by section

3 (c) (1) of the Investment Company Act of 1940, as amended II ), as it applies to private (the "1940 Act investment companies that invest. in oth~r private invesgient companies. Accordingly, we are writing to seek your concurrence with our views concerning section 3 (c) (1) of the 1940 Act.

As you know, section 3 (a) of the 1940 Act defines

the term II investment company" to include any issuer engaged . primarily in the business of investing, reinvesting or

trading in securities. Section 3 (c) (1), in turn, excepts

from this definition, II (al ny issuer whose outstanding

securities . . . are beneficially owned by not more than

one hundred persons and which is not making and does not

presently propose to make a public offering of its

securities. II Subparagraph (A) of that section provides

further as follows:

Beneficial ownership by a company shall be deemed to

be beneficial ownership ~y one person, except that, if

the company owns 10 per centum or more of the

outstanding voting securities of the issuer, the

beneficial ownership shall be deemed to be that of the

holders of such company's outstanding securities

(other than short-term paper) unless, as of the date

of the most recent acquisition by such company of

securities of that issuer, the value of all securities

owned by such company of all issuers which are 'or

One Citicorp Center Telex: RCA 233780 153 Eat 53rd Stret RCA 238805 New York, NY 10022-4669 WU 12 7679 212 935 8000 Fax: 212 752 2991

Jack W. Murphy, Esq.

June 11, 1996

would, but for the exception set forth in this

subparagraph, be excluded from the definition of

investment company solely by thi~ paragraph, does not

exceed 10 per centum of the value of the company's

total assets. Such issuer nonetheless is' deemed to be

an investment company for purposes of section

12 (d) (1) .
Section 2 (a) (42) of the 1940 Act defines "voting
securityfl to mean any security presently entitling the owner thereof to vote for the election of directors of a company. The staff (the "Staff") of the Division of Investment Management has construed the right to vote for the election of directors broadly to include, with respect to companies organized as partnerships, the right to (i) remove or replace the general partner, (ii) vote on the

election or removal of the general partner in the event of

the general partner' s death~ insanity or retirement, (iii)

terminate the partnership if one of the initial managing general partners ceases to serve in that role and (i v) take
part in the conduct or control of the limited partnership's

business. . See SEC No-Action Letter, Standish Equity

Investments, Inc. (December 15, 1993). The Staff has also

stated that the definition of "voting security" includes

not only the de jure right to vote for the election of directors but also the de facto power to detefIinethe directors of the issuer. Id. The Staff also has stated

that the statutory definition of "voting security" was not

intended to be rigidly applied and that a limited

partnership interest is a voting security if the limited

partner has an economic interest that gives it the power to

exercise a controlling influence over the partnership. Id.

The Staff has issued several no-action letters to

the effect that the securities of a private investment

company, if certain conditions are met, are not "voting

securities" under section 3 (c) (1). See Standish Equity

Investments, Inc. (December 15, 1993); Robert N. Gordon and

Thomas J. Herzfeld (November 30, 1987); Kohlberg, Kravis,

Roberts & Co. (August 9, 1985); CIGNA & Co. (October 1,

1984) (the "CIGNA Letter"). . It appears from these no-

action letters, particularly the CIGNA Letter, that a

necessary condition to the granting of the no-action

position has been that no investors in the securities of

the private investment company rely on section 3 (c) (1) to except themselves from the definition of an investment

company. This requirement may have been instituted in

response to concerns that the exception provided by section

3 (c) (1) might otherwise be manipulated to permit sham, multi-tiered transactions under which a new company seeking

Jack W. Murphy" Esq.

June 11, 1996

Page 3 ~.

to be excepted from the definition of an investment company

by section 3 (c) (1) would be formed to invest in a company

that is also excepted from the definition of an investment

company by section 3 (c) (1), with a view to skirting the
section's laO-investor limit.
Assuming that a collective entity is not

structured or operated for the purpose of circumventing the

1940 Act, we believe the question whether an investor is

relying on section 3 (c) (1) should not affect the analysis of whether the securities issued by a private investment

company should be regarded as "voting securities" under

section 3 (c) (1), and thus should not have any bearing on
whether 1940 Act registration is required. The reference to "voting securities" in section 3 (c) (1) presumably _ relates to rights that attach to the securities themselves, rather than to external considerations such as whether the securities have been purchased by an entity that is itself

relying on section 3 (c) (1). Obviously, the law must be

interpreted and applied' flexibly to prevent evasion, but to

provide that securities will be deemed to be voting

securities per se on the basis of the identity of their

purchaser rather than on the basis of the purchaser's

ability to exercise de jure or de facto voting rights would

'effectively read the word "voting" out of the statute. '-. ' We request that you concur in our view that a

collective investment vehicle (a "Fund") that beneficially

owns only non-voting securities of a company relying on

section 3 (c) (1) may be treated as one beneficial owner of
the company's securities regardless of whether the Fund itself relies on section 3 (c) (1) . If for any reason you do not concur in our

conclusion, we respectfully request a conference with the

Staff before any adverse written response to this letter.

Should you or any member of the Staff have any questions

concerning the foregoing or need additional informtion or

clarification, please call either me at (212) 821-8206 or

my partner, Jon S. Rand, at (212) 821-825~.
V~YJ~k
Roger D. Blanc

cc: Jon S. Rand, Esq.

S4S.0S

JU~l 2 I 1996

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Our Ref No. 96-91-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Wilkie Farr & Gallagher

DIVISION OF INVSTMNT MAAGEMENT File No. 132-3

Your letter of June 11, 1996 requests' that the staff confirm that a collective investment vehicle (II Fund II) that beneficially owns only non-voting securities of a company relying on Section

3 (c) (1) of the Investment Company Act of 1940 (the 111940 Act")

may be treated as a single beneficial owner of the company's

securities regardless of whether the Fund itself relies on

Section 3 (c) (1) .
The staff previously has issued a numer of no-action

letters with regard to whether securities issued by a private

investment company were "voting securities 111 for purposes of the attribution provisions of Section 3 (c) (1) (A).2 In some of these

letters, either the requesting party represented, or relief was

expressly conditioned upon the representation, that no Fund

investin¥ in the private investment company itself would rely on

3 (c) (1) . You maintain that whether an investor in a private investment campany relies on Section 3 (c) (1) is not relevant to

the determination of whether the private investment company

issues voting securities. You suggest instead that the

representation underscores the staff's concern that multi-tier

structures may be shams or conduits formed or structured for the . purpose of evading the 100-securityhòlder limit 'of Section 3 (c) (1). You seek confirmation from the staff that the determination of whether a private' investment com~ny issues voting securities, and thus whether the attribution provisions of

Section 3 (c) (1) (A) apply, does not depend on whether any investor in the private investment company relies on Section 3 (c) (1) .
We confirm that whether an investor in a private investment'

company relies on Section 3 (c) (1) is not a factor in determining

i/ Section 2 (a) (42) of the 1940 Act defines "voting securityll

as a security entitling the holder to vote for the election of

the directors of a company.

2/ See,~, Standish Equity Investments, Inc. ("Standish

Equi ty" ) (pub. avail. Dec. 15, 1993); Laifer, Inc. (pub. avail.

Jan. 5, 1993); Weiss, Peck & Greer Venture Associates II (pub.

avail. Apr. 10, 1990); Meuse, Rinker, Chapman, Endres & Brooks

("Meuse, Rinker") (pub. avail. May 1, 1989); Indiana Hospital

Ass' n Investment Funds, L. P. (pub. avail. Oct. 15, 1985);

Kohlberg Kravis Roberts & Co., Inc. (pub. avail. Sept. 9, 1985).

3/ See Rogers, Casey & Associates, Inc. (pub. avail. Jun. 16,

1989); Cig~a Corporation (pub. avail. Oct. 1, 1984); see also

Standish Equity, supra; Meuse, Rinker, supra; The MMC Fund, L. P .

(pub. avail. Mar. 31, 1989); Robert N. Gordon and Thomas J.

Herzfeld (pub. avail. Nov. 30, 1987); Kohlberg Kravis, supra.

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whether the private investment company issues voting securities.

Accordingly, if you conclude, based on the definition of voting

security in Section 2 (a) (42), as applied by the Commission and

the staff in prior precedent,4 that an eiit'i"ty issues non-voting

securities, then each investor in that entity may be counted as a

single securityholder. Such an entity may rely on Section 3 (c) (1) if it meets the enumerated conditions of that section.5 Û-m( Eileen M. Smiley

Senior Counsel

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4/ For example, a holder of non-voting securities may be

considered to hold the equivalent of a voting security if the

holder possesses an economic interest in the issuer such that it,

in effect, has the power to exercise control over how the issuer

is managed. See Brief for the Securities and Exchange Commission

amcus curiae at 18, 21, Clemente Global Growth Fund, Inc. v.

T. Boone Pickens, III, et al., 705 F. Supp. 958 (S.D.N.Y. 1989),

appeal docketed, No. 89-7117 (2d Cir. 1989), appeal withdrawn on

consent (discussing circumtances under which limited partnership

interests may be considered voting securities); see also

Devonshire Capital Corp. (pub. avail. Feb. 15, 1976).

5/ As we have previously stated, however, Section 48 (a) of the

1940 Act gives the Commission the authority to "look through" a

transaction or a multi-tiered structure if, despite compliance with the express conditions of Section 3 (c) (1), the structure is a sham or conduit formed or operated for no purpose other than

circumventing the requirements of Section 3 (c) (1) or any other provision of the 1940 Act. See Cornish & Carey Commercial, Inc.

(pub. avail. June 21, 1996).