Our Ref. No. 94-743-CC

.. .. .

18 DEe 1994

Our Ref. No. 94-743-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

La tham & Watkins

DIVISION OF INVESTMNT MAAGEMENT

File No. 132-3

Your letters of November 10, 1994 and December 13, 1994

request that, notwithstanding the position taken by the Division

in PanAgora Group Trust (pub. avail. Apr. 29, 1994), a private

investment company be permitted to treat as one beneficial owner,

for purposes of section 3 (c) (1) of the Investment Company Act of

1940 ("1940 Act"), each participant-directed defined contribution

plan that has made a capital commitment to the company prior to

April 29, 1994.

Section 3 (c) (1) of the 1940 Act excepts from the definition

of investment company any issuer that is not making and does not

propose to make a public offering and whose outstanding voting

securities are beneficially owned by not more than 100 persons (a

"3 (c) (1) entity"). In PanAgora, the staff concluded that, for

purposes of determining compliance with the 100-person limit of

section 3 (c) (1), each participant in a participant-directed

account balance to a 3 (c) (1) entity must be counted as an

defined contribution plan who allocates a portion of his or her

individual beneficial owner of that entity. In a letter to

Edward H. Fleischmn (pub. avail. June 30, 1994), the staff

announced that the effective date of the PanAgora letter would be

delayed until January 1, 1995.

You state that participant-directed defined contribution

plans and other investors may enter into binding contractual

obligations to commit capital over an extended period of time to

3 (c) (1) entities such as leveraged buyout and venture capital

funds. Calls for additional capital can be made several years

after the investor's initial subscription. You assert that

application of the PanAgora position to these arrangements would

cause considerable hardship: to the investing plans, which would

have to withdraw their assets from 3 (c) (1) entities; to the

sponsors of 3 (c) (1) entities, which would have to find new

investors willing to assume the capital commitments made by the

withdrawing plans; and to the entities' other investors, who may

have to invest additional monies to compensate for the monies

wi thdrawn by the plans.

The Division believes that the position taken in PanAgora

should apply regardless of whether a participant-directed defined

contribution plan has made a capital commitment to a 3 (c) (1)

entity or has invested in a 3(c) (1) entity in any other manner.

The PanAgora position is consistent with prior no-action letters

stating that if a "company" (which would include an employee

benefit plan) that invests in a 3 (c) (1) entity facilitates

individual investment decisions, then the company's

securityholders should be deemed the beneficial owners of the

-2­

3 (c) (1) entity's securities.1 Thus, we believe that 3 (c) (1)

entities (including those that require capital commitments), and

the sponsors of participant-directed defined contribution plans

that invest in those entities, should have been aware prior to

the staff's issuance of PanAgora that plan beneficiaries might

have to be counted individually as beneficial owners of the

3 (c) (1) entities' securities.

Nevertheless, the Division recognizes that, prior to the

PanAgora letter, many 3 (c) (1) entities may have believed in good

faith, based on the language of section 3 (c) (1) and on general

language in Intel Corporation (pub. avail. Nov. 18, 1992), that

each qualified plan holding less than iot of the entity's

outstanding voting securities should be counted as a single

beneficial owner. We therefore believe it is appropriate to

allow 3 (c) (1) entities additional time - - until December 31, 1995

-- to comply with PanAgora. This will provide 3(c) (1) entities

with an opportunity to liquidate, in an orderly manner,

investments by participant-directed defined contribution plans

that may cause them to exceed the 100-person limit of section

3(c)(1).

Accordingly, until December 31, 1995, a 3 (c) (1) entity may

count as a single beneficial owner those participant-directed

1 See. e. q., WR Investment Partners (pub. avail. Apr. 15,

1992) (the limited partners of a partnership were the beneficial

owners of the partnership's interest in a 3 (c) (1) entity because

the general partner, which made all the investment decisions for

the partnership, would consult with the limited partners about

their individual investment objectives and vary, from investment

to investment, each limited partner's percentage share of profits

and losses based on individual circumstances); Six Pack (pub.

avail. Nov. 13, 1989) (the partners of a general partnership were

the beneficial owners of the partnership's investment in a

3 (c) (1) entity because the partnership permitted each partner to

determine the amount of his or her contribution to each

particular investment, based on his or her individual investment

objectives); Tyler Capital Fund, L.P./South Market Capital (pub.

avail. Sept. 28, 1987) (the partners of a general partnership

were the beneficial owners of the partnership's investment in a

3 (c) (1) entity because the partnership created a separate sub­

account for each new investment it made and permitted each

partner to contribute on an investment-by-investment basis) .

2 You state that trustees of certain plans, before

require a capital commitment, may survey

investing in funds that

participants to determine the amount that each is willing to

invest. We believe that the no-action letters described in the

preceding footnote clearly indicated how the staff would analyze

such arrangements under section 3 (c) (1), even before PanAgora.

-3­

defined contribution plans that were invested in the entity prior

to April 29, 1994, the public availability date of the PanAgora

letter. In addition, until December 31, 1995, a participant-

directed defined contribution plan that invested in a 3 (c) (1)

entity prior to April 29, 1994 may continue to invest

participants' money in the entity, including money belonging to

participants who had not invested in the entity prior to April

29, 1994.

The staff remains willing to clarify the scope of the

PanAgora position. Our conclusion in PanAgora was based on the

fact that in that case "a defined contribution plan participant

. . . (could) decide () whetyer or how much to invest in a private

investment company . . . ." We might reach a different

conclusion under different circumstances. For example, if a

participant selects a generic investment option, only a portion

of which is directed by the plan trustee to a particular 3 (c) (1)

entity, the rationale for counting each participant separately

might not apply. While we are not taking a position on this

issue at this time, we would welcome requests for interpretive or

no-action relief from parties with these or other facts that are

distinguishable from those presented in PanAgora.

~;~:U~~~~ief Counsel)

3 PanAgora Group Trust (pub. avail. Apr. 29, 1994). Each

of PanAgora' s investment funds could constitute the sole

investment vehicle for one of a plan's generic investment

alternatives. Thus, for example, a plan participant who wished

to invest all of his or her assets in PanAgora' s Tactical Asset

Allocation Fund could do so simply by selecting the plan's

"balanced" generic investment option.

RECD 8.£.0.

NCiV \ 0 1994

CHICAGO 0 ICE

SEARS TOWER. S TE 5800

CHICAGO. ILlINO 60606

TelEPHONE (312)

FAX (312) 993-9767

LONDON OFFICE

ONE ANGel COURT

LONDON EC2R 7HJ ENGLAND

TELEPHONE + 44-71-3744444

FAX + 44-71.3744460

LOS ANGELES OFFICE

633 WEST FIFTH STREET, SUITE 4000

LOS ANGELES, CALIFORNIA 90071-2007

TELEPHONE 1213) 485.1234

LATHAM & WATKINS

ATTORNEYS AT lAW

PENNSYLVANIA AVE.. N.W.. SUITE 1300

WASHINGTON. D.C. 20004-2505

NEW YORK OFFICE

885 THIRD AVENUE. SUITE 1000

NEW YORK. NEW YORK 10022-4802

TELEPHONE (2121 906-1200

TelEPHONE (202) 637-2200

FAX 12121 751-4864

FAX (202) 637-2201

ORANGE COUNTY OFFICE

650 TOWN CENTER DRIVE, SUITE 2000

COSTA MESA, CALIFORNIA 92626-1925

TlX 590775

ElN 62793269

TELEPHONE (714) 540-1235

FAX (714) 755-8290

SAN DIEGO OFFICE

701 .S. STREET, SUITE 2100

PAUL R. WATKINS (1899.1973)

DANA LATHAM (1898-1974)

SAN DIEGO, CALIFORNIA 92101-8197

TELEPHONE (6191236-1234

November 10, 1994

SAN FRANCISCO OFFICE

505 MONTGOMERY STREET, SUITE 1900

FAX 1213) 891-8763

FAX 1619) 696.7419

MOSCOW OFFICE

11311 LENINSKY PROSPECT, SUITE C200

MOSCOW 117198 RUSSIA

TELEPHONE + 7-503956.5555

SAN FRANCISCO, CALIFORNIA 94111-2562

TELEPHONE (4151 391-0600

FAX + 7-503956-5556

FAX 1415) 395-S095 L'

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ACT l~~o M

VIA MESSENGER

SEION 3(c)(I)

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Office of the Chief Counsel

Division of Investment Management

Securities and Exchange Commission AVAILABILIT c,..;~ I c¡ '1

450 Fifth Street, N. W.

Washington, D.C. 20549

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Re: Staff Letter Reqarding the PanAqora Group Trust

Ladies and Gentlemen:

On behalf of the Latham & Watkins Thrift and ProfitSharing Retirement Plans (collectively, the "Plan"), we are

writing to request clarification regarding the effective date of

The PanAgora Group Trust no-action letter (pub. avail. April 29,

1994) (the "PanAgora Letter"). The Plan is a participantdirected, defined contribution plan for which a major commercial

bank serves as trustee and in which the sole participants are

partners, associates, other attorneys and staff of Latham &

Watkins, a large national and international law firm. A substan­

tial majority of the partner-participants in the Plan are

accredited investors within the meaning of Regulation D under the

Securities Act of 1933. In addition to directing numerous

investments in registered investment companies and in entities

outside the scope of the Investment Company Act (the "Act"),

partners who are accredited investors have directed the Plan from

time to time to invest on their behalf in entities that would be

investment companies wi thin the meaning of the Act but for the

exclusion from the definition of "investment company" . set fORh

in Section 3 (c) (1) thereof. However, the Plan has never acquired

more than ten percent of the outstanding voting securities of

such an entity. Consistent with the attribution rules of Section

3 (c) (1) (A) of the Act and with the clear implication of the

staff' s interpretive position set forth in the Intel Corporation

no-action letter (pub. avail. November 18, 1992), prior to the

LATHAM & WATKINS

Office of the Chief Counsel

November 10, 1994

Page 2

release of the PanAgora letter on April 29, 1994 the Plan

believed that it should be treated as a single beneficial owner

of the various Section 3 (c) (1) entities in which it had made

investments .11

In the PanAgora Letter, the staff of the Division of

Investment Management took the position that a participant in any

defined contribution plan who has the ability to direct his or

her account in the plan into an investment in a pooled investment .

vehicle should be counted as a beneficial owner of the pooled

investment vehicle's outstanding securities for purposes of

determining whether the pooled investment vehicle qualifies for

the exclusion from the definition of investment company set forth

in Section 3 (c) (1) .ai Shortly after the interpretive position

set forth in the PanAgora Letter was made public, in response to

widespread concern among legal practitioners in the fields of

employee benefit and investment company law about the implica­

tions of the letter, the staff announced in a letter to Edward H.

Fleischman of the law firm of Rosenman & Colin (pub. avail.

11 The "Plan" actually consists of two substantially simila'

plans that have been separately established for certain

administrative reasons. Although we believe that in light

of their similarity the two plans should be treated as if

they were a single plan for purposes of the issues presented

by this letter, we are not seeking the Staff's concurrence

in that view.

al We believe that the interpretive position taken in the

PanAgora Letter is inappropriate

for at least two reasons.

First, the interpretive position does not take into account

the fact that by the plain wording of Section 3 (c) (1) the

attribution or look-through rules do not apply in the event

that the investing entity owns less than ten percent of the

outstanding voting securities of the entity relying on the

Section 3 (c) (1) exclusion. Second, the interpretive

position does not take into account whether the defined

contribution plan itself is excluded from the definition of

investment company by operation of Section 3 (c) (11) of the

Act. We believe that this exclusion represents a clear

policy choice by Congress that participants in such plans do

not require the protections of the Act and the interpretive

position set forth in the PanAgora letter is inconsistent

with that choice. However, we are pursuing these views

directly in correspondence with the Commission, and we of

course recognize that the staff does not concur with our

position.

LATHAM & WATKINS

Office of the Chief Counsel

November 10, 1994

Page 3

June 30, 1994) that the effective date of the letter would be

delayed until January 1, 1995. The staff also requested that in

the interim interested parties submit written comments about the

applicability of the PanAgora Letter. The purpose of this letter

is to suggest that, for the reasons set forth below, in addition

to the tolling of its effective date, the staff should make the

PanAgora Letter inapplicable to the performance by participantdirected, defined contribution plans of binding, written

contractual arrangements to fund a Section 3 (c) (1) entity entered.

into prior to the public availability of the PanAgora Letter on

April 29, 1994.

In electing to delay the effectiveness of the PanAgora

Letter, the staff alluded to the fact that the delay would afford

participant-directed, defined contribution plans the opportunity

to liquidate in an orderly way their investments in Section

3 (c) (1) entities whose continued exclusion from the Act may have

been jeopardized by such plans' continued investment therein. It

would appear that the staff had in mind in this regard plans that

had completed their investments in Section 3 (c) (1) entities,

which completed investments could be either redeemed by the

Section 3 (c) (1) entity or transferred to another entity which

would be treated as a single beneficial owner. We submit,

however, that based on the investment experience of the Plan as

well as our own experience in the organization and structuring of

leveraged buyout and venture capital funds, in a number of cases

the staff's paradigm is inapplicable. Participant-directed,

defined contribution plans, like other investors in Section

3 (c) (1) entities, frequently have entered into binding contrac­

tual obligations to commit capital to Section 3 (c) (1) entities

that predate April 29, 1994 and that extend well beyond

December 31, 1994. This is the case because leveraged buyout and

venture capital funds do not typically draw down their investors'

entire capital commitment at the time of formation of the fund.

Instead, investors retain control of their capital until a

capital call is made, either as part of a regularly scheduled

series of capital calls or in connection with funding a specific

investment, or both. The duration of the capital call period is

of course the subject of negotiation at the time a given fund is

formed, but in our experience it would not be unusual for parties

to enter into funding arrangements that might continue for as

long as five to eight years. This means that, notwithstanding

the PanAgora Letter, many participant-directed, defined contribu­

tion plans may, prior to April 29, 1994, have entered into

binding contractual capital commitments that well extend into

1999.

LATHAM & WATKINS

Office of the Chief Counsel

November 10, 1994

Page 4

The difficulty of applying the delayed effective date

of the PanAgora Letter under these circumstances is obvious. In

the first place, the already substantially illiquid nature of

these investments is further magnified because any potential

transferee must be persuaded to assume the remaining capital

commitment in addition to acquiring the investment already made.

From the fund sponsor's perspective, the sponsor has in many

cases made representations to its investors that the fund would

have a specified minimum amount of capital available to it over

time to make an adequately diversified pool of investments. The

fund may have closed its initial funding, only to discover that,

due to the inability of participant-directed, defined contribu­

tion plans to continue their participation, the fund does not

have the future capital resources available to it that it

originally anticipated. Investments may previously have been

made in the expectation that future capital would be available to

diversify those original investments, which future capital may

not be available in light of the PanAgora Letter. It is of

course possible that the relevant partnership agreement may

excuse further capital contributions or participation in the

event that such contributions or participation cause the fund no

longer to be excluded from the definition of investment company;

however, the invocation of such a clause, if available, generally

is a matter of considerable dislocation, even hardship, on the

fund sponsor and its other investors. Although it may be

possible to transfer the interest in the fund to another investor

who assumes the capital funding responsibilities of the departing

defined contribution plan, such transfers are invariably complex

and raise serious issues of fairness toward the other investors

who have remained contractually bound to fund the entity from the

outset. The magnitude of this disruption would seem neither fair

nor appropriate in light of the good faith reliance by the

private bar on the Intel Corooration no-action letter referred to

above and on the wording of Section 3 (c) (1), each of which

indicates that attribution is not appropriate when the investing

entity is the beneficial owner of less than ten percent of the

outstanding voting securities of the entity relying on Section

3(c)(1).

In light of the foregoing, we respectfully request that

the interpretive position set forth in the PanAgora no-action

Letter not apply to the performance by participant-directed,

defined contribution plans of binding, written contractual

arrangements to fund Section 3 (c) (1) entities which were entered

prior to April 29, 1994. Such arrangements should be permitted

to play themselves out in accordance with their terms without the

imposition of the hardship and dislocation that would result if

LATHAM & WATKINS

Office of the Chief Counsel

November 10, 1994

Page 5

the PanAgora letter were read to apply to such arrangements after

December 31, 1994.

Please do not hesitate to contact the undersigned at

(202) 637 -223 7 or Randall C. Bassett at the Los Angeles office of

this firm at (213) 485-1234 should you have any questions about

the matters discussed herein.

Very truly yours,

GiiJ~~,

John D. Watson, Jr.

of LATHA & WATKINS

cc: Amy Doberman, Esq.

LATHAM & WATKINS

CHICAGO OFFICE

SEARS TOWER. SUITE 5800

CHICAGO. ILLINOIS 60606

ATTORNEYS AT lAW

1001 PENNSYLVANIA AVE., N.W., SUITE 1300

WASHINGTON, D.C. 20004-2505

TelEPHONE (312) 876-7700

FAX 13121 993.9767

TELEPHONE (2021 637-2200

LONDON OFFICE

ONE ANGel COURT

LONDON EC2R 7HJ ENGLAND

TELEPHONE + 44-71-3744444

FAX (2021 637-2201

TlX 590775

ElN 62793269

FAX + 44-71.3744460

LOS ANGelES OFFICE

NEW YORK OFFICE

885 THIRD AVENUE. SUITE 1000

NEW Yo.RK. NEW YORK 10022-4802

TELEPHONE (212) 906.1200

FAX 1212) 751-4864

ORANGE COUNTY OFFICE

650 TOWN CENTER DRIVE. SUITE 2000

COST A MESA, CALIFORNIA 92626.1925

TELEPHONE 17141 540.1235

FAX (714) 755-8290

SAN DIEGO OFFICE

701 .S. STREET, SUITE 2100

633 WEST FIFTH STREET, SUITE 4000

LOS ANGELES. CALIFORNIA 90071-2007

PAUL R. WATKINS (1899.1973)

TELEPHONE (213) 485-1234

DANA LATHAM (1898.1974)

FAX 12131 891-8763

SAN DIEGO, CALIFORNIA 92101-8197

TELEPHONE (619) 236-1234

FAX (6191 696-7419

December 13, 1994

MOSCOW OFFICE

113/1 LENINSKY PROSPECT. SUITE C200

MOSCOW 117198 RUSSIA

SAN FRANCISCO OFFICE

505 MONTGOMERY STREET, SUITE 1900

TelEPHONE + 7-503956-5555

SAN FRANCISCO, CALIFORNIA 94111-2562

TELEPHONE (4151 391.0600.

FAX + 7-503 956-5556

FAX 1415) 395-S095

.......-.......-.

VIA MESSENGER

Office of the Chief Counsel

Division of Investment Management

Securi ties and Exchange Commission

450 Fifth Street, N. W.

Washington, D. C. 20549

Attention:

Barry A. Mendelson, Esq.

Dear Mr. Mendelson:

The purpose of this letter is to respond to the

comments you gave me in our telephone conversation of last week

regarding certain of the issues raised by our letter to the

Office of the Chief Counsel regarding the PanAgora Group Trust

no-action letter.

First, you have asked that we provide the staff of the

Division of Investment Management with a copy of a limited

partnership agreement providing for a binding contractual

obligation on the part of all limited partners, including a

participant-directed, defined contribution plan, to commit a pre­

determined amount of capital to the limited partnership over a

specified number of years. As you and I discussed, the enclosed

subscription agreement and accompanying partnership agreement

have been redacted so as to maintain the confidentiality of the

sponsor as well as of the limited partners. Nevertheless, to set

the enclosed agreements in context, they pertain to a leveraged

buyout fund in which a substantial majority of the limited

partners are institutional investors. Certain limited partners

are, however, participant-directed, defined contribution plans

that, at the time that the limited partnership was being

organized, offered plan participants who are accredited investors

the opportunity to commit a portion of the assets included in

'''HAM & WATKINS

Office of the Chief Counsel

Attention: Barry A. Mendelson, Esq.

December 13, 1994

Page 2

their plan accounts toward a capital commitment by the plan, as a

1 imi ted partner, in the leveraged buyout fund. For your

convenience, the relevant portions of the partnership agreement

providing for capital commitments are found principally in the

subscription agreement and in Sections 9.03 and 9.04 of the

enclosed partnership agreement.

Second, you asked me how the plan participant knows

that, on a going forward basis, he or she will have assets

available in the participant-directed, defined contribution plan

to fund the participant's capital commitment. Typically, because

only participants who are accredited investors are permitted to

commit assets in their accounts to leveraged buyout funds like

that provided for in the enclosed partnership agreement, such

participants have accumulated sufficient assets in their plan

accounts to ensure the ability to honor their capital calls.

Alternatively, such participants may make significant annual

optional contributions to their plan accounts - - as much as

$30,000 per year -- from which to fund capital commitments on a

going forward basis, and thus they rely on expected future

contributions to fund future capital requiremepts. In any event,

based on our experience in leveraged buyout anü venture capital

funds, the capital commitments made by participant-directed,

defined contribution plans tend to be honored to the same

substantial degree as are the capital commitments made by

traditional institutional investors.

I hope that the foregoing has been responsive to your

concerns. Please do not hesitate to call me if you have any

further questions on this matter.

Very truly yours,

GsÔxJd~9­

John D.Watson, Jr.

of LATHA & WATKINS

Enclosure

cc: Amy Doberman, Esq. (w/encl.)