[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