[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]



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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'').

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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.
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    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.
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    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