[Federal Register Volume 59, Number 150 (Friday, August 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19089]


[[Page Unknown]]

[Federal Register: August 5, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IA-1430; 803-92]

 

Valmora Partners, L.P.; Notice of Application

July 29, 1994.
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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APPLICANT: Valmora Partners, L.P.

Relevant Act Section: Sections 206A and 205(a)(1).

Summary of Application: Applicant is a limited partnership that a 
family formed to facilitate investments of family trusts and 
custodianships, and it requests an order to permit registered 
investment advisers to charge it performance-based advisory fees.

Filing Date: The application was filed on April 29, 1994 and amended on 
July 29, 1994.

Hearing or Notification of Hearing: An order granting the applicant 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's 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 August 23, 1994 
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, NW., Washington, DC 20549. 
Applicant, c/o Marsh Operating Company, Suite 3400, 1999 Bryan Street, 
Dallas, Texas 75201.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Staff Attorney, at 
(202) 942-0574, 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 Texas limited partnership that a particular 
family formed to facilitate and simplify investments of multiple family 
trusts and custodianships. Applicant is excepted from registration 
under the Investment Company Act of 1940, under section 3(c)(1). 
Applicant requests an order under section 206A of the Advisers Act that 
would grant an exemption from section 205(a)(1) of that Act to permit 
registered investment advisers to charge it performance-based advisory 
fees.
    2. Applicant's general partners, Tom F. Marsh, is responsible for 
making investment decisions for applicant. Mr. Marsh is the chief 
executive officer and the sole owner of March Operating Company 
(``MOC''), an oil and gas exploration and production company. Mr. 
Marsh's wife, his mother, one of his brothers, MOC, two long-term 
family employees, fifteen trusts established under Texas law, and four 
custodianships established under the Texas Uniform Gifts to Minor's Act 
(the ``UGMA'') are the limited partners of applicant. Thus, each of the 
limited partners is either: (a) A Marsh family member;\1\ (b) an entity 
wholly-owned by Mr. Marsh; (c) a long-term family employee;\2\ or (d) a 
trust or custodianship having Marsh family members as beneficiaries and 
a Marsh family member or a long-term family employee as trustee or 
custodian. The trustee or custodian makes the decision for each of the 
relevant entities to invest in applicant.
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    \1\The term ``family member,'' as used herein, means: (i) Mr. 
Marsh; (ii) Mr. Marsh's mother; (iii) Mr. Marsh's brothers; (iv) Mr. 
Marsh's children; (v) any and all of the spouses and issue (lineal 
and adopted) of individuals in categories (i), (iii), and (iv); and 
(vi) siblings of spouses referred to in (v).
    \2\The term ``long-term family employee,'' as used herein, 
means: a senior-level manager with five or more years' employment by 
one or more (a) Marsh family members, and/or (b) entities in which 
Marsh family members own beneficially more than 25%.
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    3. Applicant is essentially a family investment vehicle, and no 
management, performance, or other fee is charged to the limited 
partners. Mr. Marsh acts as applicant's general partner without any 
compensation. Applicant reimburses MOC for direct costs it incurs in 
providing certain administrative and support services to applicant, 
such as preparing applicant's financial statement and making and 
keeping its books and records.
    4. Virtually all of applicant's assets consist of limited 
partnership interests of privately placed investment limited 
partnerships. These limited partnerships are not registered as 
investment companies in reliance on section 3(c)(1) of the Investment 
Company Act, and they are charged performance-based advisory fees by 
investment advisers. Neither applicant, nor any Marsh family member or 
long-term family employee who acts as trustee or custodian of any of 
the trusts or custodianships that are limited partners of applicant is 
an affiliated person of any adviser.

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 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. Rule 205-3 provides an exemption from the prohibition against 
performance-based compensation in section 205(a)(1) provided that the 
conditions of the rule are satisfied. Paragraph (b)(1) of the rule 
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 
a private investment company such as applicant unless each of its 
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 within the definition of ``company.'' 
Applicant believes 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. Mr. Marsh, his wife, his mother, his brother, MOC, the long-term 
family employees, and five of the fifteen trusts qualify under the 
client eligibility requirements of rule 205-3(b). The remaining ten 
trusts and the four custodianships (the ``non-qualifying trusts'') do 
not individually satisfy the requirements of the rule. Thus, applicant 
requests an exemption under section 206A from section 205(a)(1) to let 
it invest in privately placed limited partnerships that are managed by 
registered investment advisers that charge performance fees. Applicant 
requests that the relief also cover applicant in the event that trusts 
and custodianships formed in the future having family members or long-
term family employees as trustee or custodian may become limited 
partners of applicant. Such future trusts and custodianships will 
comply with the representations set forth in the application.
    4. 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 perceived additional risks of performance fees, as well as 
the ability to protect themselves adequately against the potential 
abuses of performance fees. Applicant is unable to rely on the rule 
because the non-qualifying trusts do not meet the $500,000 under 
management or $1,000,000 net worth requirement. However, applicant 
believes that exemptive relief from section 205(a)(i) is appropriate 
because: (a) the individuals charged with making the investment 
decisions for applicant and the non-qualifying trusts satisfy the net 
worth requirements, are financially sophisticated, and are fully able 
to assess the potential risks of performance fees; (b) the trustees and 
custodians of the non-qualifying trusts are either close family members 
or long-term family employees, have substantial assets invested in 
applicant and are therefore subject to the same risks as the 
beneficiaries; and (c) the net worth of each beneficiary of the non-
qualifying trust exceeds $1,000,000. Applicant believes the 
beneficiaries of the non-qualifying trusts are wealthy investors who, 
together with the trustees and custodians, can understand the effect on 
their investment of performance-based compensation and bear the 
potential risks of such fees.
    5. Because those exercising investment authority for the non-
qualifying trusts have such intimate and strong familial relationships 
to the beneficiaries, applicant believes 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(b) are satisfied in all 
other respects. 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. 94-19089 Filed 8-4-94; 8:45 am]
BILLING CODE 8010-01-M