[Federal Register Volume 62, Number 50 (Friday, March 14, 1997)]
[Notices]
[Pages 12258-12259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6420]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IA-1617; 803-104]
Brac Associates Limited Liability Company, et al.; Notice of
Application
March 7, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Advisers Act of 1940 (the ``Advisers Act'').
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Applicants: Brac Associates Limited Liability Company (``Brac'')
and Lexington Capital Partners, L.P. (``Lexington'').
Relevant Act Sections: Order requested under section 205(e) of the
Advisers Act for an exemption from section 205(a)(1) of the Advisers
Act.
Summary of Application: Applicants are a limited liability company
and a limited partnership that a family formed to facilitate and
simplify the investment of its assets and multiple trusts established
by family members. Applicants request an order to permit registered
investment advisers to charge them performance-based advisory fees.
Filing Dates: The application was filed on August 29, 1996, and
amended on February 12, 1997.
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 Secretary and
serving applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on April 2,
1997, and should be accompanied by proof of service on applicants, 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 who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, c/o Antaeus Enterprises, Inc., Suite 3020, 420 Lexington
Avenue, New York, New York 10170.
FOR FURTHER INFORMATION CONTACT:
Brian T. Hourihan, Senior Counsel, at (202) 942-0526, or Mary Kay
Frech, 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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. Applicants were formed by the Beinecke family to facilitate and
simplify the investment of Beinecke family assets and trusts
established by Beinecke family members. Applicants are excepted from
registration under the Investment Company Act of 1940 under section
3(c)(1). Applicants request an order under section 205(e) of the
Advisers Act granting an exemption from section 205(a)(1) of the
Advisers Act to permit registered investment advisers to charge them a
performance-based advisory fee.
2. Brac and Lexington are essentially Beinecke family investment
vehicles. Brac is a Delaware limited liability company that is owned by
Antaeus Enterprises, Inc. (``Antaeus''), one individual Beinecke family
member, and four irrevocable trusts (the trustees and beneficiaries of
which are all Beinecke family members). Lexington is a Delaware limited
partnership that is owned by Antaeus, four individual Beinecke family
members, fifteen irrevocable trusts and one revocable grantor trust
(the trustees and beneficiaries of which are all Beinecke family
members), and two investment vehicles established by Mr. Robert L.
Bael, a long-term family employee and an executive officer of Antaeus
(together, the ``Bael Partners'').
3. Brac's managing member and Lexington's general partner, Antaeus,
is responsible for making investment decisions for applicants. Antaeus
is an investment management company owned by four trusts established by
William Sperry Beinecke for the benefit of his four children. Antaeus
acts as coordinator and administrator of the Beinecke family assets,
including certain trusts. Antaeus invests in publicly traded and
privately held fixed income and equity securities and investment
partnerships, with a portion of its assets invested in applicants. No
management, performance, or other fee is charged to the members of Brac
or the limited partners of Lexington.
4. Applicants state that they want to participate in investment
opportunities managed by registered investment advisers that seek to
charge applicants a performance-based advisory fee pursuant to rule
205-3 of the Advisers Act. Applicants represent that neither
themselves, Antaeus, any other Beinecke family member who acts as
trustee of any Beinecke trust, any other Beinecke family member who is
a beneficiary of any of the Beinecke trusts, nor any partner, trustee
or beneficiary of the Bael Partners has any relationship with, or is an
affiliate or an interested
[[Page 12259]]
person of, any such registered investment adviser.
5. All current members of Brac and the majority of limited partners
of Lexington, as well as the general partner, have a net worth
exceeding $1,000,000 and thereby satisfy the client eligibility
requirements of paragraph (b) of rule 205-3. However, nine trusts which
are limited partners of Lexington fail individually to satisfy the net
worth requirements of rule 205-3(b) (the ``Non-qualifying Trusts'').\1\
Six of the Non-qualifying Trusts have been established on behalf of six
of the grandchildren of William Sperry Beinecke, whose ages range form
7 to 17. The seventh Non-qualifying Trust is a grantor trust which was
established by a seventh grandchild of William Sperry Beinecke upon
reaching the age of majority. Such grandchildren are the ultimate
beneficiaries of (a) the four trusts which own Antaeus, a corporation
having assets with an estimated market value in excess of $50 million,
and (b) the trusts which are qualifying limited partners of Lexington.
The eighth Non-qualifying Trust is a testamentary trust beneficially
owned by the four adult children of William Sperry Beinecke, each of
whom has assets in excess of $1,000,000. The ninth Non-qualifying Trust
is beneficially owned by the three adult children of Mr. Bael. Each of
the Bael children is expected to be an eventual beneficiary of the
estate of his or her parents to the extent of more than $1,000,000. As
a result of the limited partnership interests held by the Non-
qualifying Trusts, Lexington may not be treated as satisfying the
client eligibility requirements in paragraph (b) of rule 205-3.
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\1\ It is unlikely that the alternative requirement of having at
least $500,000 under the management of the investment adviser will
be satisfied, because applicants invest their assets in multiple
private investment companies.
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6. Applicants request that any relief be applicable not only with
respect to the Non-qualifying Trusts that are currently limited
partners of Lexington, but also with respect to future Beinecke family
trusts and custodianships under the Uniform Gift to Minors Act
(``UGMA'') having Beinecke family members as trustee or custodian, as
applicable, that may become limited partners or members, as the case
may be, of applicants in the future. Such future trusts and
custodianships will comply with the representations set forth in the
application.
Applicants' 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, or any portion thereof. Section 205(e) of the Advisers Act
provides that the SEC may exempt any person or transaction, or any
class or classes of persons or transactions from section 205(a)(1) of
the Advisers Act if and to the extent that the exemption relates to an
investment advisory agreement with any person that the SEC determines
does not need the protection of section 205(a)(1), on the basis of such
factors as financial sophistication, net worth, knowledge of and
experience in financial matters, amount of assets under management,
relationship with a registered investment adviser, and such other
factors as the SEC determines are consistent with section 205.
2. Rule 205-3 provides an exemption from the prohibition against
performance-based compensation in section 205(a)(1) provided the
conditions of the rule are satisfied. Paragraph (b)(1) of rule 205-3
requires each client entering into an investment advisory contract that
provides for such compensation to be: (a) A natural person or a company
who immediately after entering into the contract has at least $500,000
under management of the investment adviser; or (b) a person who the
registered investment adviser reasonably believes, prior to entering
into the contract, is a natural person or a company whose net worth at
the time the contract is entered into exceeds $1,000,000. Paragraph
(b)(2) of the rule provides that the term ``company'' does not include
private investment companies such as applicants unless each of the
equity owners is a natural person or a company, as defined therein,
that meets the eligibility requirements of paragraph (b)(1) of the
rule. A trust is expressly included in the definition of a ``company.''
Applicants believe that a custodianship should be viewed as a type of
trust for this purpose because, under UGMA, a custodian is a fiduciary
whose duties and powers are similar to those of a trustee.
3. The client eligibility requirements of rule 205-3 reflect the
SEC's recognition that certain high net worth clients have the capacity
to bear the additional risks of performance fees, as well as the
ability to protect themselves against the potential abuses of
performance fees. Applicants are unable to rely on the rule because the
Non-qualifying Trusts do not satisfy the $500,000 under management or
the $1,000,000 net worth requirement. However, applicants believe that
exemptive relief is appropriate under and consistent with the purposes
of section 205(a)(1) and complies with the factors specified in section
205(e) of the Advisers Act because: (a) Antaeus, the entity which makes
the investment decisions for applicants, satisfies the net worth
requirement, is financially sophisticated with very substantial
knowledge of and experience in financial matters, and is fully able to
assess the potential risks of performance fees; (b) each trustee of the
Non-qualifying Trusts is a family member of the beneficiaries thereof
who, in addition to possessing a high level of financial sophistication
and very substantial knowledge of and experience in financial matters,
have substantial personal wealth, entitlements or expectancies invested
in applicants, and may reasonably be presumed to be acting in the best
interests of the beneficiaries who are their close family members; and
(c) the beneficiaries of the Non-qualifying Trusts have the financial
means to bear the potential risks of performance fees, because each
satisfies the net worth requirement if his or her entitlements and
expectancies are aggregated for this purpose, and do not have a
relationship with prospective registered investment advisers.
4. Because those executing investment authority for the Non-
qualifying Trusts have such strong and intimate familial relationships
to the beneficiaries, applicants believe that it is not unreasonable to
presume that the commonality of such interest will result in the
decision-maker behaving in the best interests of the beneficiaries.
Except for the requested exemption for the Non-qualifying Trusts and
custodianships, the requirements of rule 205-3 are satisfied in all
respects. Thus, applicants believe that granting the requested
exemption is appropriate under and consistent with the purposes of
section 205(a)(1) and the factors specified in section 205(e).
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-6420 Filed 3-13-97; 8:45 am]
BILLING CODE 8010-01-M