[Federal Register Volume 60, Number 228 (Tuesday, November 28, 1995)]
[Notices]
[Pages 58698-58700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28933]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IA-1537; 803-096]
Foster Industries, Inc.; Notice of Application
November 20, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Advisers Act of 1940 (the ``Advisers Act'').
-----------------------------------------------------------------------
APPLICANT: Foster Industries, Inc.
RELEVANT ADVISERS ACT SECTIONS: Sections 206A and 205(a)(1).
SUMMARY OF APPLICATION: Applicant is a corporation engaged solely in
the business of investing for the benefit of fifteen natural persons,
ten trusts, and five custodianships. All such natural persons, and the
beneficiaries of the trusts and custodianships, are related to one
family. Applicant requests an order to permit registered investment
advisers to charge it performance-based advisory fees.
FILING DATE: The application was filed on February 27, 1995 and amended
on June 23, 1995, September 19, 1995. Applicants have agreed to file an
additional amendment, the substance of which is incorporated herein,
during the notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's
[[Page 58699]]
Secretary and serving applicant with a copy of the request, personally
or by mail. Hearing requests should be received by the SEC by 5:30 p.m.
on December 15, 1995 and should be accompanied by proof of service on
applicant, in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writer's
interest, the reason for the request, and the issues contested. Persons
may request notification of a hearing by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicant, 681 Andersen Drive, Pittsburgh, PA 15220.
FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563, or Robert A.
Robertson, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicant's Representations
1. Applicant is a Pennsylvania corporation formed as an operating
company in 1918 by four brothers of the Foster Family.\1\ In 1977, the
Foster Family business was sold and the proceeds of sale were retained
by applicant and have been managed since that time by applicant on a
collective basis for the benefit of applicant's shareholders. Since
1977, applicant has been engaged solely in the business of investing
such funds under management as a private investment fund exempt from
registration as an investment company pursuant to section 3(c)(1) of
the Investment Company Act of 1940. Applicant requests an order under
section 206A of the Advisers Act that would permit registered
investment advisers to charge it performance-based advisory fees.
\1\ ``Foster Family'' means (i) all lineal or adopted
descendants of the four founding Foster brothers, (ii) all spouses
of such descendants, and (iii) all in-laws of any founding Foster
brother.
---------------------------------------------------------------------------
2. Applicant is essentially a Foster Family investment vehicle
which, as of December 31, 1994, had total assets of approximately $62.1
million. Applicant has one class of stock outstanding held by thirty
shareholders of record, fifteen of which are individual Foster Family
members, ten of which are irrevocable trusts established for the
benefit of one or more Foster Family members (the ``Trusts''), and five
of which are custodianships established under the Pennsylvania Uniform
Gifts to Minors Act for the benefit of five Foster Family members who
are currently minors (the ``Custodianships''). The assets to be
delivered out of the Trusts and Custodianships to each beneficiary will
be so delivered, in the case of the Trusts, when all of such
beneficiary's ancestors have passed away, and, in the case of the
Custodianships, when the beneficiaries reach the age of majority.
3. All investment decisions are made for applicant by its board of
directors, which consists of nine members, seven of whom are Foster
Family members. Applicant's president and his staff prepare and present
an analysis of each prospective investment to the investment committee
(the ``Investment Committee'') and the board of directors. The
Investment Committee recommends investment proposals favorably reviewed
by it to the board of directors for approval.
4. None of the president, the other officers or directors receive
any compensation determined on the basis of a share of capital gains
upon, or capital appreciation of, all or any portion of the invested
assets of applicant. However, applicant may in the future adopt an
incentive compensation plan for its officers that may provide for
compensation based on profitability. Neither the president, nor any
other officer who is not also a Foster Family member, is the legal or
beneficial owner of any shares of applicant's stock. Each officer and
director is and will continue to be wholly unaffiliated with any
registered investment adviser providing services to applicant.
5. Applicant contemplates entering into performance fee agreements
from time to time with registered investment advisers. Under investment
guidelines to be adopted by the board of directors in connection with
such performance fee agreements, not more than 5% of applicant's assets
will be invested at any one time under any single performance fee
agreement, and not more than 25% of applicant's assets will be invested
under all performance fee agreements at any one time. In addition, the
investment guidelines will require that all performance fee agreements
must meet the requirements of sections (c), (d), and (e) of rule 205-3.
6. Of applicant's thirty shareholders, twelve of the fifteen
individual shareholders and four of the ten Trusts (the ``Qualified
Shareholders'') qualify under the client eligibility requirements of
rule 205-3(b) under the Advisers Act. The remaining three individuals,
six trusts, and five Custodianships (the ``Unqualified Shareholders'')
do not individually satisfy the net worth requirement of rule 205-
3(b).\2\ The Qualified Shareholder hold in the aggregate 91.63% of
applicant's shares, and the Unqualified Shareholders hold the remaining
8.37%. Except for the presence of the Unqualified Shareholders, the
requirements of rule 205-3(b) are satisfied with respect to applicant
and its shareholders in all respects.
\2\ As applicant contemplates entering into several performance
fee agreements with different registered investment advisers, it is
unlikely that Unqualified Shareholders will satisfy the alternative
requirement of rule 205-3(b) of having $500,000 under the management
of each applicant's registered investment adviser.
---------------------------------------------------------------------------
7. Applicant is party to a shareholders' agreement which requires
it to purchase any of its shares tendered for redemption at a price
which generally reflects the fair market value of its investments, less
certain reserves, and subject to its right to distribute to a redeeming
shareholder in partial satisfaction of such obligation such
shareholder's pro rata portion of certain illiquid investments.
Applicant represents that no shareholder will transfer any shares of
applicant other than to applicant or to either one or more Foster
Family members or to one or more trusts or custodianships established
solely for the benefit of Foster Family members where each such trust
or custodianship is either a Qualified Shareholder or has at least one
Qualified Shareholder Foster Family member as a trustee or custodian,
as applicable.
8. Applicant desires that the requested exemptive order be
applicable not only with respect to the current Unqualified
Shareholders but also with respect to any future Unqualified
Shareholder who is either an individual Foster Family member or a trust
or custodianship where such trust or custodianship has at least one
Qualified Shareholder Foster Family member as a trustee or custodian,
as the case may be, and one or more Foster Family members as its sole
beneficiaries. All such Foster Family members, trusts, and
custodianships will comply with the representations set forth in this
application.
Legal Analysis
1. Section 205(a)(1) of the Advisers Act generally prohibits a
registered investment adviser from receiving compensation on the basis
of a share of capital gains in or capital appreciation of a client's
account. Section 206A of the Advisers Act provides that the SEC may
exempt any person or transaction
[[Page 58700]]
from any provision of the Advisers Act if and to the extent that such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Advisers Act.
2. Notwithstanding the general restrictions of section 205(a)(1),
an investment adviser required to register under the Advisers Act may
enter into a performance-based compensation agreement if such contract
meets the requirements of rule 205-3 and if each advisory client meets
certain net worth and sophistication requirements set forth in the
rule. With specific reference to a private investment company such as
applicant, section (b)(2) of rule 205-3 provides that each shareholder
must either have at least $500,000 under management of the investment
adviser or have a net worth at the time the performance-based
compensation agreement is entered into of more than $1,000,000.
3. The client eligibility requirements of rule 205-3 reflect the
SEC's recognition that such requirements were a means of determining
client capacity to understand and bear the risks associated with
performance fee contracts. Applicants state that the considerable
investment expertise and experience of the persons comprising its board
of directors, Investment Committee and senior management group will
enable applicant to more than adequately understand and assess the
method of compensation and attendant risks with respect to any proposed
performance-based compensation agreement.
4. Applicant believes that there is a strong commonality of
interest between the members of the board of directors and Investment
Committee and both the legal and beneficial owners of Unqualified
Shareholder stock. There is a close family relationship between the
beneficial owners of Qualified Shareholder stock and both the legal and
beneficial owners of Unqualified Shareholder stock. By reason of the
ownership of a majority of applicant's stock by the Qualified
Shareholders and their ability to elect the board of directors (which,
in turn, appoints members to the Investment Committee), the analysis of
the merits and risks of entering into any performance fee agreement
will be made for the benefit and protection of the Unqualified
Shareholders my individual Qualified Shareholders who are close family
members of the Unqualified Shareholders (or of the ultimate beneficial
owners thereof, in the case of trusts and custodianships), and by other
directors elected by the Qualified Shareholders. Further, the Qualified
Shareholders making the investment decisions for applicant have
substantial assets invested in applicant and are, therefore, subject to
the same risks as the Unqualified Shareholders. Thus, applicant
believes that granting the requested exemption is appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Advisers
Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28933 Filed 11-27-95; 8:45 am]
BILLING CODE 8010-01-M