[Federal Register Volume 61, Number 78 (Monday, April 22, 1996)]
[Notices]
[Pages 17737-17741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9770]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-21890; 812-9528]
Baker, Fentress & Company, et al.; Notice of Application
April 15, 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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Applicants: Baker, Fentress & Company (the ``Company''); JALC
Acquisition Corp. (``Acquisition Corp.''); Meadow Lane Associates,
L.P., Purchase Associates, L.P., L.R.K. Savings, L.P., SLSB Partners,
L.P., and Island Drive Partners, L.P. (collectively, the ``LEVCO
Partnerships''); and John A. Levin, Melody L. Prenner Sarnell, and
Jeffrey A. Kigner (collectively, the ``Individual Applicants'').
Relevant Act Sections: Order requested under section 6(c) for an
exemption from sections 2(a)(3)(D), 2(a)(19), and 12(d)(3), under
sections 6(c) and 17(b) for an exemption from section 17(a), and under
section 17(d) and rule 17d-1.
Summary of Application: Applicants request an order to (1) permit the
Company to acquire all of the outstanding securities of John A. Levin &
Co., Inc. (``LEVCO'') and merge LEVCO into Acquisition Corp.; (ii)
permit the Company to implement an incentive compensation plan for
LEVCO and the Individual Applicants; (iii) permit LEVCO to continue to
operate and advise the LEVCO Partnerships, as general partner, and to
make additional contributions to a LEVCO Partnership and to receive
incentive compensation from the limited partners; and (iv) deem limited
partners of the LEVO Partnerships who are not otherwise affiliated
persons of the company to continue to be deemed not to be affiliated
persons if such limited partner owns an interest in the LEVCO
Partnerships of less than five percent.
Filing Dates: The application was filed on March 13, 1995, and amended
on July 24, and December 11 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 SECs 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 May 9, 1996, 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 such notification by writing to the
SEC's Secretary.
Addresses: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, 200 West Madison Street, Suite 3510, Chicago, Illinois
60606, Attn: David D. Peterson, President and Chief Executive Officer;
and John A. Levin & Co., Inc., One Rockefeller Plaza, 25th Floor, New
York, New York 10020, Attn: John A. Levin, President.
For Further Information Contact: Deepak T. Pai, Staff Attorney, at
(202)
[[Page 17738]]
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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Company is registered under the Act as a closed-end
management investment company. Since its inception, the Company has
been internally managed by its officers under the supervision of its
board of directors. The Company is also registered as an investment
adviser under the Investment Advisers Act of 1940, and it actively
solicits investment advisory accounts. Acquisition Corp. is a wholly-
owned subsidiary of the Company, organized for the purpose of acquiring
LEVCO (the ``Acquisition'').
2. LEVCO is a registered investment adviser with an established
investment management business. The Individual Applicants collectively
own approximately 91 percent of the outstanding common stock of LEVCO.
3. Each LEVO Partnership is organized as a limited partnership. The
LEVCO Partnerships are private investment companies relying on the
exclusion from the definition of investment company provided by section
3(c)(1) of the Act. The LEVO Partnerships are advised by LEVCO.
Applicants request that the proposed relief apply to the LEVCO
Partnerships and all subsequently organized private investment
companies that rely on section 3(c)(1) of the Act and that are advised
by NEW LEVCO or an entity controlling, controlled by, or under common
control with NEW LEVCO or in which GP Subsidiary (as defined below) or
another entity controlled by the Company is a general partner.
Applicants also request that the proposed relief apply to the
Individual Applicants and other persons who become similarly situated
in the future.
4. The Company believes that growth by increasing the assets under
management of the Company is in the best interests of the Company and
its stockholders. Consequently, on November 5, 1992, the Company's
board approved the Company providing investment management services to
third parties. The Company anticipates that fees resulting from the
investment management services will enable the Company to achieve part
of its objective to increase its earnings potential, decrease expenses
and to strengthen its ability to retain and attract highly qualified
personnel. However, the Internal Revenue Code of 1986 (the ``Code'')
limits the amount of revenue from investment management services the
Company can receive without jeopardizing its status as a ``regulated
investment company'' under Subchapter M of the Code. Accordingly, the
Company's board approved the organization of a subsidiary to perform
investment management services. Subsequently the opportunity to acquire
LEVCO was presented to the Company.
5. The Company proposes to acquire, through Acquisition Corp., all
of the outstanding stock of LEVCO, along with LEVCO's wholly-owned
broker-dealer subsidiary (``LEVCO Broker Subsidiary'') and another
wholly-owned company (``GP Subsidiary''), which is the general partner
of each of the LEVCO Partnerships. LEVCO will be merged into
Acquisition Corp., with Acquisition Corp. being the surviving entity
(the surviving merged entity is referred to as ``NEW LEVCO''). NEW
LEVCO will be a subsidiary of the Company, and will itself have two
wholly-owned subsidiaries: LEVCO Broker Subsidiary and GP Subsidiary.
All of the outstanding common stock of NEW LEVCO may be transferred to
another wholly-owned subsidiary of the Company (not yet formed)
resulting in NEW LEVCO's being an indirect wholly-owned subsidiary of
the Company.
6. Applicants request relief to: (a) permit the Company to
consummate the Acquisition by (i) exempting the Company from section
12(d)(3) of the Act to permit the Company to acquire and hold 100
percent of the outstanding common stock of NEW LEVCO, and (ii)
exempting the Company and its otherwise non-interested directors from
section 2(a)(19) of the Act, permitting them to continue to be non-
interested directors of the company despite the Company's ownership of
NEW LEVCO; (b) permit NEW LEVCO to implement a performance-based
compensation plan; and (c) permit NEW LEVCO to continue to operate the
LEVCO Partnerships by (i) exempting the general partner and each LEVCO
Partnership from section 17(a) of the Act to permit the general partner
to make additional contributions to or withdrawal of capital from a
LEVCO Partnership, (ii) exempting the Company, NEW LEVCO and certain
limited partners in the LEVCO Partnerships from section 2(a)(3)(D) of
the Act so that the Company and such limited partners will not be
deemed to be affiliated persons of each other, and (iii) permitting GP
Subsidiary under section 17(d) and rule 17d-1 to serve as the general
partner of the LEVCO Partnerships and to receive incentive compensation
in connection with its services to the partnerships.
7. The Acquisition has been negotiated at arms' length and was
approved unanimously by the Company's directors, including all of the
non-interested directors. No director of the Company is an affiliated
person of LEVCO and none will benefit from the Acquisition except
through his/her shareholdings in the Company. The Acquisition also will
be subject to approval by the holders of a majority of the Company's
outstanding common stock. The Company has retained Lazard Freres & Co.
LLC (``Lazard'') as its financial advisor in connection with the
Acquisition. Lazard has rendered an oral opinion regarding the fairness
of the financial terms of the Acquisition to the Company and its
stockholders. Lazards will be asked to provide a written opinion to be
included in the Company's proxy materials.
8. The Company intends that NEW LEVCO adopt an incentive
compensation plan (the ``Bonus Plan'') through which cash bonuses would
be paid to officers and employees of NEW LEVCO if stated performance
goals are reached. The Bonus Plan, which will be subject to approval by
the Company's stockholders, is intended to meet the requirements of
section 162(m) of the Code and thereby preserve NEW LEVCO's ability to
deduct all of its compensation expense for federal income tax purposes.
The Bonus Plan will be administered by a committee of the Company's
board, all of the members of which will be non-interested directors of
the Company and who will not be eligible to participate in the plan
(the ``Compensation Committee''). The Compensation Committee will
consider in its evaluation of the compensation of Company officers any
compensation received by them as officers or employees of NEW LEVCO.
9. Upon consummation of the Acquisition, and subject to approval by
its stockholders, the Company expects to ``externalize'' the management
of its portfolio of publicly-traded securities to NEW LEVCO. Applicants
believe that the cost to the Company of the services to be provided by
NEW LEVCO is expected to be approximately equal to the cost of such
services provided internally, although any element of profit would
ultimately benefit the Company and its stockholders.
10. GP Subsidiary will continue to be general partner of each of
the LEVCO Partnerships. As general partner, GP Subsidiary may be
required from time to time to make additional contributions of
[[Page 17739]]
capital to a LEVCO Partnership in order to enable the Partnership to
continue to be taxed as a partnership rather than a corporation for
federal income tax purposes and may also from time to time desire to
withdraw capital no longer required for that purpose. GP Subsidiary may
receive from the account of each limited partner in a LEVCO Partnership
an incentive allocation which is disproportionate to GP Subsidiary's
percentage of the Partnership's capital. The incentive allocation will
comply with rule 105-3 under the Advisers Act.
Applicants' Legal Analysis
The Acquisition
1. Section 12(d)(3) generally makes it unlawful for any registered
investment company to purchase any security issued by a broker-dealer
or an investment adviser. The section was intended to limit the
exposure of registered investment companies to entrepreneurial risks
peculiar to securities related businesses, and to prevent potential
conflicts of interest and reciprocal practices.
2. Section 6(c) provides that the SEC may exempt any transaction
from any provision of the Act, or any rule or regulations thereunder,
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.
Applicants request an exemption under section 6(c) from section
12(d)(3) to permit the Company to hold a direct or indirect interest in
a company registered as an investment adviser and in a registered
broker-dealer.
3. The Company believes that its continued viability as a closed-
end investment company is dependent upon its continuing ability to grow
by increasing assets under management. The Company also believes that
the development of an investment advisory business is a responsible and
appropriate means of attaining these objectives. The Company believes
that there is no indication that the potential for the type of abuse
intended to be eliminated by section 12(d)(3) is presented by the
proposed Acquisition. Moreover, absent the limitations imposed by the
Code, applicants believe that the Company would be permitted to engage
directly in the activities conducted by LEVCO without the need for
exemptive relief. The Company believes that the standards set forth in
section 6(c) have been met.
4. Section 2(a)(19) defines an ``interested'' person of an
investment company as, among other things, one who is an ``affiliated
person'' of the investment company's investment adviser. Section
2(a)(3) defines an ``affiliated person'' of an entity as one who
controls that entity. Section 10(a) of the Act requires that no more
than 60 percent of an investment company's directors be ``interested''
persons of the investment company. The Company requests an exemption
under section 6(c) from section 2(a)(19) so that the Company's
directors will not be deemed to be ``interested'' persons of the
Company solely because of the Company's ownership of NEW LEVCO. Because
NEW LEVCO will be a wholly-owned direct or indirect subsidiary of the
Company, the directors of the Company may be deemed to control NEW
LEVCO, which will be, after the externalization, the Company's
investment adviser. Thus, all of the Company's directors would be
affiliated with the Company's investment adviser, and, therefore, an
``interested'' person of the Company.
5. The purpose of defining affiliated persons of an investment
company's investment adviser as interested persons is that persons with
ties to the investment adviser may be presumed to have interests that
are diametrically opposed to the interest of the investment company.
The Company contends that because NEW LEVCO will be wholly-owned,
directly or indirectly, by the Company, that disparity of interests
will not be present. The Company therefore believes that the standards
for exemptive relief under section 6(c) have been met.
NEW LEVCO's Operations
6. Section 17(d) of the Act and rule 17d-1 thereunder generally
prohibit an affiliated person of a registered investment company, or an
affiliated person of such a person, from participating in any ``joint
enterprise or other joint arrangement or profit-sharing plan'' in which
the registered investment company or a company controlled by the
registered investment company is a participant. Applicants request an
order under section 17(d) and rule 17d-1 to permit NEW LEVCO to
implement the Bonus Plan pursuant to which performance-based
compensation would be paid to officers and employees of NEW LEVCO. NEW
LEVCO will be a company controlled by an investment company and will be
obligated to make payments pursuant to the Bonus Plan. Participants in
the Bonus Plan will include persons who are affiliated persons of the
Company, all of whom will be affiliated persons of NEW LEVCO, the
Company's investment adviser. Implementation of the Bonus Plan will
therefore require relief under rule 17d-1.
7. Rule 17d-1 provides that in passing upon an application
concerning a joint transaction, the SEC will consider whether the
participation of the controlled company in such profit-sharing plan, on
the basis proposed, is consistent with the provisions, policies and
purposes of the Act, and the extent to which such participation is on a
basis different from or less advantageous than that of other
participants. Applications contend that permitting controlled companies
to implement incentive compensation plans is consistent with the
policies and purposes of the Act if appropriate safeguards are in
place. The Company believes that NEW LEVCO's participation in the Bonus
Plan will not be ``less advantageous'' to NEW LEVCO than participation
will be to the participants. The Bonus Plan will be administered by the
Compensation Committee of the Company's board of directors, all of the
members of which will be non-interested directors of the Company and
who will not be eligible to participate in the Bonus Plan. All awards
to the officers and employees of NEW LEVCO under the Bonus Plan will be
paid in cash, because it is important to the Company that all of the
benefits of direct or indirect equity ownership of NEW LEVCO flow to
the Company's shareholders. Applicants also believe that the Bonus Plan
will enhance the ability of NEW LEVCO to attract and retain highly-
qualified personnel. Thus, the Company believes that the requested
order permitting implementation of the Bonus Plan would be in the best
interests of the Company and its stockholders and meets the standard
for an exemptive order under the Act.
The LEVCO Partnerships
8. Section 17(a) of the Act provides that it is unlawful for an
affiliated person of a registered investment company, acting as
principal, to purchase or sell any security or other property to that
registered investment company or to any company controlled by that
registered company, with certain exceptions. Section 17(b) of the Act
provides that an application for an exemption from section 17(a) shall
be granted if the evidence shows that the terms of the proposed
transaction, including the consideration to paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned and the proposed transaction is consistent with the
policy of the registered investment company
[[Page 17740]]
and with the general purposes of the Act. The Company and the LEVCO
Partnerships request an exemption pursuant to section 6(c) and section
17(b) from section 17(a) so that GP Subsidiary may continue to be the
general partner of the LEVCO Partnerships after consummation of the
Acquisition.\1\ If GP Subsidiary's contribution to or withdrawal of
capital from a Partnership is deemed to be the sale or purchase by the
Partnership (an affiliated person of the Company) of a ``security or
other property'' to GP Subsidiary (a company controlled by the
Company), the prohibition of section 17(a) would apply.
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\1\ Section 17(b) applies to a specific proposed transaction,
rather than an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c), along
with section 17(b), frequently is used to grant relief from section
17(a) to permit an ongoing series of future transactions.
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9. GP Subsidiary, as the general partner of a LEVCO Partnership,
generally would be required to maintain a capital contribution with
respect to such Partnership in the amount of one percent of that
Partnership's aggregate capital to preserve the tax status of the
Partnership. Section 17(a) is intended to prevent overreaching by an
affiliate to cause an investment company or a controlled company to
enter into a transaction with the affiliate which is not fair or
reasonable to the investment company or controlled company. The Company
and the LEVCO Partnerships believe that those risks are not presented
by contributions of additional capital to or withdrawals of capital
from a LEVCO Partnership by GP Subsidiary. Contributions and
withdrawals of capital will be made at the same time and at the same
prices as limited partner interests are issued or redeemed by limited
partners in the LEVCO Partnership. Applicants, therefore, submit that
the standards set forth in sections 6(c) and 17(b) have been met.
General Partner's Incentive Compensation
10. The Company, the LEVCO Partnerships and the Individual
Applicants request an exemption under section 17(d) and rule 17d-1 to
permit GP Subsidiary to receive incentive compensation from the limited
partners in the LEVCO Partnerships, including limited partners who are
affiliated persons of the Company. Certain of the principal
stockholders of NEW LEVCO, who will be officers and directors of the
Company, are, and will continue to be, investors in each LEVCO
Partnership. Other affiliated persons who are limited partners may
include persons who are affiliated solely because they have an interest
in the Partnership that is sufficiently large to trigger an
affiliation. The identifies of limited partners who are affiliated
persons of the Company will change over time, as persons invest in or
withdraw from a LEVCO Partnership. The relief requested is intended to
cover all limited partners in a LEVCO Partnership who are from time to
time affiliated persons of the Company.
11. The arrangements by which GP Subsidiary, a company controlled
by the Company, will receive allocations of Partnership profit and loss
and compensation from a LEVCO Partnership and from the limited partners
in the Partnership, including a share in the profits of the LEVCO
Partnership that would otherwise be allocated to the limited partners,
may be deemed to violate section 17(d) and rule 17d-1.
12. The Company and the LEVCO Partnerships submit that management
of private investment companies, including those with incentive
compensation arrangements complying with rule 205-3 under the Advisers
Act, is common in the investment management business. Applicants state
that the inability to offer such a product to suitable potential
investors would place NEW LEVCO at a competitive disadvantage.
Moreover, applicants believe that the participation of GP Subsidiary in
the operation of the LEVCO Partnerships will not be less advantageous
to GP Subsidiary than to the Partnerships and the limited partners. GP
Subsidiary will be the recipient of the incentive allocation which will
provide GP Subsidiary with a significant reward if the investment
performance of the Partnership is superior. Limited partners who are
affiliated persons of the Company will also have the opportunity to
benefit by investing in a LEVCO Partnership, but only on the same terms
on which otherwise non-affiliated limited partners participate. The
Company believes that the requested relief permitting operation of the
LEVCO Partnerships would be in the best interests of the Company and
its stockholders and meets the standards set forth in rule 17d-1(b).
Limited Partners of the LEVCO Partnerships
13. Section 2(a)(3)(D) of the Act defines an ``affiliated person''
of another person to include any partner or copartner of such other
person. The Company requests an exemption under section 6(c) from
section 2(a)(3)(D) so that limited partners in a LEVCO Partnership who
have an interest in the Partnership of less than five percent and who
are not otherwise affiliated persons of the Company would not, solely
by reason of their status as limited partners in a LEVCO Partnership,
be deemed to be affiliated persons of the Company.\2\ The application
of section 2(a)(3)(D), coupled with an analysis of the relationships
among the Company, GP Subsidiary, the LEVCO Partnerships, and the
limited partners results in the conclusion that the Company and each
limited partner may be deemed to be an affiliated person of an
affiliated person of each other. If this were the case, the limited
partners would be subject to sections 17(a) and 17(d) and rule 17d-1,
which would prohibit or severely restrict certain affiliated and joint
transactions.
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\2\ The Company acknowledges that any persons who are affiliated
persons of the Company for reasons other than their status as
limited partners of a LEVCO Partnership will continue to be
affiliated persons of the Company, notwithstanding issuance of the
requested order.
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14. The relief requested is intended only to relieve the limited
partners (and the Company) of the burden of monitoring for compliance
with section 17 of the Act in connection with the separate business or
investment transactions of the limited partners individually. The
requested relief would not affect the status of the LEVCO Partnerships
themselves. Applicants note that if the LEVCO Partnerships were
organized as corporations instead of limited partnerships, and if a
limited partner acquired less than five percent of the voting
securities of that corporation, applicants assert that none of its
fellow stockholders, including a stockholder that controlled the
corporation, would thereby be deemed affiliated persons of each other
under section 2(a)(3). Applicants believe that the requested relief is
consistent with purposes fairly intended by the policy and provisions
of the Act.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief shall be subject to the following conditions:
1. The Acquisition of LEVCO will not be consummated unless the
Acquisition has been approved by the holders of a majority of the
Company's outstanding common stock.
2. All of the issued and outstanding capital stock of NEW LEVCO
will be owned directly or indirectly by the Company. The Company will
not dispose of capital stock of NEW LEVCO or any intervening corporate
entity if, as a result, the Company would own, directly or indirectly,
50 percent or less of the outstanding capital stock of each
[[Page 17741]]
of NEW LEVCO and any intervening corporate entity unless the Company
disposes of 100 percent of its interest in NEW LEVCO.
3. The Company's board of directors will maintain Audit,
Compensation and Nominating Committees of the board, none of the
members of which will be ``interested persons'' of the Company as
defined in the Act, modified by the Order.
4. The board of directors of the Company will review at least
annually the investment management business of the Company and NEW
LEVCO in order to determine whether the benefits derived by the Company
warrant the continuation of the investment management business and the
direct or indirect ownership by the Company of NEW LEVCO and, if
appropriate, approve (by at least a majority of the directors of the
Company who are not ``interested persons'' of the Company as defined by
the Act giving effect to persons'' of the Company as defined by the Act
giving effect to the request Order) at least annually, such
continuation.
5. The Bonus Plan will be approved and administered by the
Compensation Committee of the board of directors of the Company.
For the Commission, by the Division of Investment Management,
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-9770 Filed 4-19-96; 8:45 am]
BILLING CODE 8010-01-M
