[Federal Register Volume 61, Number 105 (Thursday, May 30, 1996)]
[Notices]
[Pages 27116-27118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13547]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21980; 812-10104]


THC Partners; Notice of Application

May 23, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANT: THC Partners.

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from all provisions of the Act.

SUMMARY OF APPLICATION: Applicant requests an exemption from all 
provisions of the Act. Applicant is a private family-controlled special 
purpose investment vehicle whose interests are owned by the family and 
certain other persons.

FILING DATES: The application was filed on April 23, 1996 and amended 
on May 23, 1996.

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 June 17, 1996, 
and should be accompanied by proof of service on the 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, N.W., Washington, D.C. 
20549. Applicant: 4200 Texas Commerce Tower, 600 Travis, Houston, Texas 
77002.

FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Alison E. 
Baur, Branch Chief, at (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

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 general partnership organized in 1977. 
Applicant's partners consist of the maternal heirs of Howard R. Hughes, 
Jr. (``Howard Hughes''), including trusts established for family 
members of maternal heirs and estates of deceased maternal heirs 
(collectively, the ``Hughes Maternal Heirs'') and partners and former 
partners of Andrews & Kurth, L.L.P. (``Andrews & Kurth''), a Houston 
law firm, including trusts established for Andrews & Kurth family 
members and heirs of deceased Andrews & Kurth partners (collectively, 
``A&K''). Applicant's assets presently consist of common stock of The 
Hughes Corporation (``THC'') and limited partnership interests in 
Howard Hughes Properties, L.P. (``HHPLP'') (collectively, ``Hughes''). 
Hughes was formed to hold, manage, and develop the assets of the estate 
of Howard Hughes (the ``Hughes Estate'') including casinos, a large 
military aircraft manufacturer, and widespread real estate holdings.
    2. Howard Hughes dies in April 1976 unmarried and childless. A 
complex estate battle began when 32 wills were offered for probate, and 
California, Nevada, and Texas each claimed domicile for purposes of 
subjecting Howard Hughes' assets to death taxes. Andrews & Kurth 
represented Howard Hughes and various of his companies for over 50 
years. William R. Lummis, son of Annette Gano Lummis, Howard Hughes' 
aunt, and a senior partner at Andrews & Kurth, left the firm shortly 
after Howard Hughes' death to undertake management of the Hughes Estate 
and serve as executive officer of Hughes.
    3. The Hughes Maternal Heirs, claiming through Annette Gano Lummis, 
the beneficiary holding the largest single interest in the Hughes 
Estate, did not possess the resources to finance the long, complicated, 
multi-jurisdictional legal defense of their claim. The Hughes Maternal 
Heirs and A&K formed applicant to prosecute and defend the claims of 
the Hughes Maternal Heirs. In return for the contribution of their 
interests in the Hughes Estate, the Hughes Maternal Heirs collectively 
received 66\2/3\% of the interests in applicant. In return for 
undertaking to defend, or cause to be defended, and otherwise to 
provide the financial resources to further applicant's purposes, A&K 
received a 33\1/3\% interest in applicant. In 1983, the last of the 
final, non-appealable orders establishing ownership of the Hughes 
Estate was issued that decreed that applicant was the beneficiary of 
approximately 71% of the Hughes Estate's assets. Other than through 
gifts and testamentary dispositions, applicant has not changed 
composition since its inception. As of the date of the filing of this 
application, the Hughes Maternal Heirs owned 67.279% of the interests 
in

[[Page 27117]]

applicant and A&K owned 32.721%. Currently, there are 86 Maternal Heirs 
and 124 members of A&K.\1\
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    \1\ The method chosen by Andrews & Kurth to determine the 
relative interests of each of its partners in the firm's interest in 
the Partnership resulted in an allocation to every person who was a 
partner of the firm from 1976 to 1983.
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    4. Applicant is internally managed by three of the general partners 
(the ``Managing Partners'') who receive no compensation. The current 
Managing Partners are Platt W. Davis, III (``Davis''), Frederick R. 
Lummis, Jr. (``Frederick Lummis''), and Milton H. West, Jr. (``West''). 
Davis holds interests in applicant both as a donee of his mother, an 
original Hughes Maternal Heir, and as a legatee under the will of 
Annette Gano Lummis. Frederick Lummis is William Lummis' brother. West 
has been a partner of Andrews & Kurth for over 50 years and was the 
partner in charge of the firm's representation of Howard Hughes. The 
Managing Partners originally were selected through informal discussions 
among the Hughes Maternal Heirs and A&K. The Managing Partners are 
elected at large from among applicant's partners every three years and 
were most recently elected in 1995. A committee nominates proposed 
Managing Partners for election but partners holding interests 
aggregating 10% or more may propose competing slates. Election is by 
secret written ballot. Currently, the Managing Partners receive no 
compensation for their services.
    5. Hughes has entered into a merger agreement with The Rouse 
Company (``Rouse'') that will result in Rouse acquiring all of Hughes 
(the ``Rouse Transaction''). After consummation of the Rouse 
Transaction, applicant's assets will consist of: (a) Cash consideration 
of approximately $85 million; (b) approximately 9 million shares of 
Rouse (approximately 20% of the outstanding Rouse shares); and (c) 
contingent rights to receive additional Rouse shares based on the 
future cash flow generated from, and appraised value of, certain 
properties acquired by Rouse in the mergers (the ``Earn-Out Rights''). 
The properties subject to the Earn-Out Rights consist of undeveloped 
land, rental properties, and interests therein held in four discrete 
business units in Las Vegas and Los Angeles. The earn-out periods range 
from 5 to 14 years.
    6. Applicant proposes to incur administrative expenses in an amount 
not to exceed \1/4\ of 1% of assets following consummation of the Rouse 
Transaction (the ``Administrative Expense Cap''). Any compensation paid 
to the Managing Partners will be within the Administrative Expense Cap.
    7. Applicant contemplates continuing its existence after the 
consummation of the Rouse Transaction for several reasons. First, 
applicant believes that it can coordinate sales of Rouse shares in the 
future by arranging block trades and thereby avoid the disruptive 
effect of the uncoordinated sale of a large amount of stock by various 
partners acting independently.\2\ Second, applicant believes that 
significant cost savings can be achieved through the joint investment 
of the cash received in the Rouse Transaction which would be invested 
by the Managing Partners in shares of a number of registered open-end 
investment companies. Third, applicant believes that issues involved in 
the determination of the amount of the Earn-Out Rights can be more 
effectively managed by applicant than by its partners individually. 
Fourth, applicant, on behalf of its partners, is presently involved in 
a controversy with the Internal Revenue Service and anticipates that 
litigation of the matter will ensue (the ``Federal Tax Proceedings''). 
The Internal Revenue Service (``IRS'') has questioned applicant's 
partners' reporting of their income relative to applicant's formation 
and operation for its tax year 1987 and subsequent years. 
Administrative proceedings with respect to these allegations recently 
have been concluded without resolution of the matter. The IRS may issue 
a notice of final partnership administrative adjustments which would be 
a predicate to institution of litigation by applicant.
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    \2\ The Partnership is contractually restricted from selling 
more than 50% of such shares for a period of one year after 
consummation of the Rouse Transaction.
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Applicant's Legal Analysis

    1. Section 3(a)(3) of the Act defines investment company to include 
any issuer that is engaged in the business of investing, reinvesting, 
owning, holding, or trading in securities, and owns or proposes to 
acquire investment securities having a value exceeding 40% of the value 
of such issuer's total unconsolidated assets. Applicant submits that it 
has been exempt from registration under the Act because its business 
has primarily consisted of its interests in THC and HHPLP, both 
majority-owned operating companies engaged in real estate development. 
Upon the consummation of the Rouse Transaction, however, applicant will 
become an ``investment company'' as that term is defined in section 
3(a)(3) of the Act.
    2. Applicant was established as a joint venture between the Hughes 
Maternal Heirs and A&K to pursue the Hughes Maternal Heirs' interest in 
the Hughes Estate. Applicant contends that since establishing a 70% 
interest in the Hughes Estate, applicant has operated as a privately 
owned and family-controlled special purpose entity to which the Act was 
not intended to apply. Applicant represents that it has not sought, and 
will not seek, new public or private investors. In addition, each of 
the partners is related to either the Hughes Maternal Heirs or A&K.
    3. Section 3(c)(1) of the Act excepts from the definition of 
investment company any issuer whose outstanding securities are 
beneficially owned by not more than 100 persons and which is not 
making, and does not presently propose to make, a public offering of 
its securities. Applicant asserts that the SEC may exempt private 
investment companies that have more than 100 beneficial owners under 
section 6(c) of the Act.\3\ Applicant contends that its request for a 
conditional order under section 6(c) of the Act is consistent with 
relief granted to other private investment companies substantially 
owned and controlled by a single family.\4\ Applicant asserts that it 
will continue to operate as a private investment vehicle not intended 
to be within the scope of the Act.
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    \3\ See Maritime Corporation, 9 SEC 906, 909 (1941).
    \4\ See, e.g., Pitcairn Group L.P, Investment Company Act 
Release Nos. 21525 (Nov. 20, 1995) (notice) and 21616 (Dec. 20, 
1995) (order); Heber J. Grant & Company, Investment Company Act 
Release Nos. 20040 (Jan. 27, 1994) (notice) and 20091 (Feb. 23, 
1994) (order); and Bessemer Securities Corporation, Investment 
Company Act Release Nos. 18529 (Feb. 5, 1992) (notice) and 18594 
(Mar. 3, 1992) (order).
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    4. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the 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 Act. 
Applicant believes that the requested exemption meets these standards.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief shall 
be subject to the following conditions:
    1. Applicant will provide each partner annual financial statements 
audited by an accounting firm of recognized national standing.
    2. The Partnership shall not issue interests to a new investor who 
is not

[[Page 27118]]

a member of the Hughes' Maternal Heirs or A&K and will not permit the 
assignment or transfer of any interest therein except by bequest, gift, 
or operation of law, and in the case of gifts, only to persons who are 
members of the donor's family.
    3. Applicant will have a ten-year duration from the date of the 
granting of the order unless earlier terminated pursuant to the terms 
of the restated partnership agreement or unless it: (a) ceases to be an 
investment company as such term is defined in the Act; (b) qualifies 
for a statutory exception from such definition under the Act; (c) 
obtains an amended exemptive order permitting it to continue as an 
exempt entity; or (d) registers as an investment company under the Act.
    4. Applicant shall not have elected any new Managing Partner 
without the approval of a majority in interest of the partners, and 
such new Managing Partner must be a partner of applicant.
    5. Applicant shall not knowingly make available to any broker or 
dealer registered under the Securities Exchange Act of 1934, any 
financial information concerning applicant for the purpose of knowingly 
enabling such broker or dealer to initiate any regular trading market 
in any units of partnership interest.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-13547 Filed 5-29-96; 8:45 am]
BILLING CODE 8010-01-M