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U.S. Securities and Exchange Commission

Investment Company Act of 1940 - Section 3( c)(7) and 2(a)(51)(A)(iv)
McDermott Will & Emery

July 26, 2007

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20077261413
McDermott, Will & Emery
File No. 132-3

Your letter dated July 23, 2007 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the "Commission") under section 7 of the Investment Company Act of 1940 (the "Act") against private investment funds that qualify for the exclusion from the definition of investment company set forth in section 3(c)(7) (such private investment funds hereinafter "Section 3(c)(7) Funds") if the trustee (the "Trustee") of several large family trusts (the "Trusts"), who is a qualified purchaser under section 2(a)(51)(A)(iv) of the Act, and the spouse of the Trustee (the "Spouse"), who is not a qualified purchaser, invest jointly in such Section 3(c)(7) Funds.

You state the following: The Trustee has management authority over all of the Trusts. The Trustee is the sole, mandatory income beneficiary of the Trusts and a discretionary principal beneficiary of certain of the Trusts. The Trusts collectively have investments substantially in excess of $100 million. In conjunction with investments in the Trusts and otherwise, the Trustee and the Spouse periodically are offered the opportunity to invest in Section 3(c)(7) Funds.

Section 3(c)(7) of the Act excludes an issuer from the definition of investment company provided, in pertinent part, that the outstanding securities of the issuer are owned exclusively by persons who, at the time of acquisition of such securities, were "qualified purchasers." As relevant here, section 2(a)(51)(A)(iv) of the Act defines qualified purchaser to include: "any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments." You contend that the Trustee is a qualified purchaser because the Trustee invests on a discretionary basis not less than $25 million in qualifying investments held in the Trusts.1

You argue that, in other contexts, qualified purchaser status has been attributed to a spouse. You point to the American Bar Association Section of Business Law letter (pub. avail. Apr. 22, 1999) in which the staff stated that it would not recommend that the Commission take any enforcement action under section 7 of the Act if a knowledgeable employee and his or her spouse who is not a knowledgeable employee (or a qualified purchaser) invest jointly in a Section 3(c)(7) Fund.2 Specifically, the staff stated:

Furthermore, we take the position that a knowledgeable employee and his or her spouse who is not a knowledgeable employee (or a qualified purchaser) may invest jointly in a Section 3(c)(7) Fund. Section 2(a)(51)(A)(i) includes as a qualified purchaser any natural person who owns $5 million in investments and that person's spouse if they invest jointly. Therefore, a spouse who is not a qualified purchaser can hold a joint interest in a Section 3(c)(7) Fund with his or her qualified purchaser spouse. Although Section 2(a)(51)(A)(i) and Rule 3c-5 both pertain to persons who have the financial sophistication to understand and evaluate the risks associated with purchasing securities of an investment pool that is not regulated under the [Act], Rule 3c-5, unlike Section 2(a)(51)(A)(i), does not expressly permit a knowledgeable employee to invest in a Section 3(c)(7) Fund with his or her spouse who is not a knowledgeable employee (or qualified purchaser). We believe that it would be consistent with Congress's intent to apply the spousal joint interest position in Section 2(a)(51)(A)(i) to Rule 3c-5. (citation omitted)

You argue that the same reasoning should apply to the Trustee and his Spouse. You argue that the rationale for permitting a spouse to invest jointly in a Section 3(c)(7) Fund with his or her spouse who is a qualified purchaser (or, in effect, a "deemed" qualified purchaser, as in the case of a knowledgeable employee) does not depend on the reason why the qualified spouse has that status.

We agree. As with section 2(a)(51)(A)(i) and rule 3c-5,3 section 2(a)(51)(A)(iv) pertains to persons who have the financial sophistication to understand and evaluate the risks associated with purchasing securities of an investment pool that is not regulated under the Act. We believe that it is consistent with Congress's intent to apply the spousal joint interest position in section 2(a)(51)(A)(i) to section 2(a)(51)(A)(iv). Thus, we would not recommend that the Commission take enforcement action under section 7 of the Act against a Section 3(c)(7) Fund if the Trustee invests jointly with his Spouse in such Section 3(c)(7) Fund under the circumstance described above. This letter expresses the Division's position on enforcement action only and does not purport to express any legal conclusion on the issues presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.

Sara Crovitz
Senior Counsel


Endnotes


Incoming Letter

The Incoming Letter is in Acrobat format.


http://www.sec.gov/divisions/investment/noaction/2007/mcdermott072607-3c7.htm


Modified: 07/27/2007