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Investment Company Act of 1940 - Section 2(a)(42) and 17(a)
Wells Fargo Alternative Asset Management, LLC - Interpretive Letter

January 26, 2005

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

IM Ref. No. 2004324951
Wells Fargo Alternative Asset Management, LLC
File No. 801-60419

Your letter dated January 24, 2005 requests that we concur with your interpretation of Section 2(a)(42) of the Investment Company Act of 1940 (the "Investment Company Act") that certain units of beneficial interest held in certain sub-trusts of a Bermuda Unit Trust, as described below, are not "voting securities" for purposes of Section 17(a) of the Investment Company Act.

Facts

You state that Wells Fargo Alternative Asset Management, LLC ("WFAAM") is an investment adviser registered under the Investment Advisers Act of 1940. You state that WFAAM is the managing member of several Delaware limited liability companies ("LLCs") and is the investment adviser to several offshore trusts ("Offshore Funds") and to Wells Fargo Bank, N.A. as trustee of two common trust funds ("CTFs") (the LLCs, the Offshore Funds and the CTFs are referred to collectively as the "Private Funds"). You state that each of the Private Funds is excluded from the definition of investment company pursuant to Section 3(c) of the Investment Company Act, and offerings of shares of, or interests in, each of the Private Funds are not registered under the Securities Act of 1933 in reliance on certain exemptions.

You state that each Private Fund seeks to achieve its investment objective by investing substantially all of its assets in certain sub-trusts that have elected to be classified as partnerships for federal tax purposes (each, a "Trust") of HFR Umbrella Trust ("Umbrella Trust"), a Bermuda Unit Trust. You state that the trustee of the Umbrella Trust and each Trust is Butterfield Trust (Bermuda) Limited ("Trustee"), a wholly owned subsidiary of the Bank of N.T. Butterfield & Son Limited. The investment manager of the Trusts and the Umbrella Trust is HFR Asset Management, L.L.C. ("HFR"), which is responsible for selecting independent investment managers ("sub-managers"), each of which in turn employs a distinctive investment strategy to manage the investments of each Trust. You state that HFR and the sub-managers are unaffiliated with WFAAM.

You state that WFAAM intends to act as the investment adviser to a new, registered open-end investment company (the "Registered Fund"). You state that the Registered Fund will invest in certain of the Trusts.

You state that ownership in each of the Trusts is conveyed in units of beneficial interest (the "Units"). You state that the Units include no voting rights whatsoever, and that therefore the Unit holders are not able to exercise any voting power with respect to the Trusts.1 You also state that the Private Funds and the Registered Fund will not be the only investors in the Trusts. You state, however, that none of the Private Funds or the Registered Fund will contribute the bulk of the assets of any Trust.2

You state that the Private Funds invest in the Trusts pursuant to a series of letter agreements between HFR and WFAAM and that these agreements provide that HFR is solely responsible for the selection and compensation of the Trusts' sub-managers.3 Furthermore, you state that the Registered Fund's investment in the Trusts will be on terms that are substantially similar to and, in all circumstances, no less advantageous than the Private Funds' investments in the Trusts.r

You state that the Trusts do not have directors and that the only entities "performing similar functions" are the Trustee, HFR as investment manager, and the sub-managers. You state that the Trusts have elected to be classified as partnerships for federal tax purposes.

You state that Bermuda law and the trust deeds do not confer any power on the Unit holders to exercise any rights to vote on the election or removal of the Trustee or HFR or exercise any control over the Trusts, either legally or economically. You state that the trust deeds of the Umbrella Trust and each Trust provide explicitly that all voting rights shall be exercised in such manner as HFR, as investment manager, may direct and no holder shall have any right to interfere or complain. You further state that the trust deeds reserve to HFR the right to remove the Trustee, and solely either HFR or the Trustee (with HFR's written consent) may appoint a new trustee. You represent that the trust deeds do not confer any power on the Unit holders to appoint or remove a trustee. You represent that no Unit holders will have the right or power to elect or terminate HFR as investment manager. You further represent that Bermuda law and the trust deeds do not confer any power on the Unit holders to take part in the conduct or control of the Trusts' business. You state that, as with the Private Funds, the investor agreement between HFR and the Registered Fund will provide that HFR is solely responsible for the selection and compensation of the Trusts' sub-managers. You represent that, therefore, if the Registered Fund or Private Funds were dissatisfied, their sole remedy would be to redeem their interest in the Trusts.

You request our concurrence that the Units are not "voting securities" as defined in Section 2(a)(42) of the Investment Company Act in connection with your determination of whether the Registered Fund will be an affiliated person of any Trust in which the Registered Fund will invest. In particular, you seek to obtain assurances that will allow you to determine that the prohibitions against principal transactions between a registered investment company and its affiliated persons would not apply to the Registered Fund's purchase and redemption of Trust Units.5

Legal Analysis

Section 2(a)(42) of the Investment Company Act defines "voting security" to mean any security presently entitling the owner to vote for the election of directors of a company. Section 2(a)(12) of the Investment Company Act defines "director" as "any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated. . . ."

The Commission has taken the position that the holder of non-voting securities may be considered to hold the equivalent of a voting security if the holder possesses an economic interest in the issuer such that the holder, in effect, has the power to exercise control over how the issuer is managed.6 The Commission also stated that the statutory definition of "voting security" is not intended to be rigidly applied to require the sort of formal voting that would occur in electing directors of a corporation.7

In the context of limited partnership interests, we have broadly construed a limited partner's present entitlement to vote for the election of "directors" to include the right to: (1) remove or replace the general partner, (2) vote on the election or removal of the general partner in the event of the general partner's death, insanity or retirement, (3) terminate the partnership if one of the initial managing general partners ceases to serve in that role, and (4) take part in the conduct or control of the limited partnership's business.8 We have stated that a limited partnership interest is a voting security if the limited partner has an economic interest that gives it the power to exercise a controlling influence over the partnership.9 We also have stated that the definition of "voting security" includes not only the formal legal entitlement to vote for the election of directors but also the de facto power to determine, or influence the determination of, the identity of the issuer's directors.10

You contend that the test articulated above can also be applied effectively to the Trusts. We agree. You state that the Trusts do not have directors or a general partner, and that the only entities performing similar functions are the Trustee, HFR, and the sub-managers. You contend that the Units in the Trusts are not "voting securities" within the meaning of Section 2(a)(42). You represent that Unit holders will not have any of the rights or powers articulated above. In particular, you assert that no Unit holder will have the right to remove or replace the Trustee, HFR, or the sub-managers. You represent that no Unit holder will have the right to vote on the election or removal of the Trustee, HFR, or the sub-managers. You represent that no Unit holder will have the right to terminate any of the Trusts. You further represent that no Unit holder will have the right to take part in the conduct or control of any Trust's business.

You also represent that none of the Private Funds or the Registered Fund will have the de facto power to determine or influence the election, removal, or replacement of the Trustee, HFR, or the sub-managers. You represent that none of the Private Funds or the Registered Fund will have an economic interest that gives it the power to exercise a controlling influence over any of the Trusts. You also represent that none of the Private Funds or the Registered Fund will contribute the bulk of the assets of any of the Trusts.11

We agree that the interests in a Trust that are to be held by a Private Fund or a Registered Fund as described above would not constitute "voting securities" as defined in Section 2(a)(42) of the Investment Company Act for purposes of Section 17(a) of the Investment Company Act.12 Our position is based on all of the facts and representations that are set forth in your letter. You should note that any different facts or representations may require a different conclusion.

Sara P. Crovitz
Senior Counsel

Kenneth C. Fang
Senior Counsel


Endnotes


Incoming Letter

Investment Company Act of 1940
Section 2(a)(3)
Section 2(a)(42)

January 24, 2005

VIA MESSENGER

Douglas J. Scheidt, Esq.
Chief Counsel
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0506

Re: Investment Company Act of 1940, Sections 2(a)(3) and 2(a)(42)

Dear Mr. Scheidt:

On behalf of our client, Wells Fargo Alternative Asset Management, LLC ("WFAAM"), we respectfully request that the staff of the Commission concur with our interpretation of Section 2(a)(42) of the Investment Company Act of 1940 ("1940 Act") for purposes of Section 17(a) of the 1940 Act as applied to certain non-voting interests held in certain sub-trusts of a Bermuda Unit Trust, as described below.

Facts

WFAAM is an investment adviser registered under the Investment Advisers Act of 1940, as amended ("Advisers Act"), and organized as a Delaware limited liability company. WFAAM is the managing member of several Delaware limited liability companies ("LLCs"), and is the investment adviser to several offshore funds ("Offshore Funds") and to Wells Fargo Bank, N.A. as trustee of two common trust funds ("CTFs"). The LLCs, the Offshore Funds, and the CTFs are referred to below collectively as the "Private Funds." Each of the Private Funds is excluded from the definition of investment company pursuant to Section 3(c) the 1940 Act. Offerings of shares or interests in each of the Private Funds are not registered under the Securities Act of 1933 in reliance on Rule 506 of Regulation D (with respect to the LLCs), Regulation D and Regulation S (with respect to the Offshore Funds), or Section 3(a)(2) (with respect to the CTFs) thereunder.

Each Private Fund seeks to achieve its investment objective by investing substantially all of its assets in certain sub-trusts that have elected to be classified as partnerships for federal tax purposes (each, a "Trust") of HFR Umbrella Trust ("Umbrella Trust"), a Bermuda Unit Trust. The trustee of the Umbrella Trust and each Trust is Butterfield Trust (Bermuda) Limited ("Trustee"), a wholly owned subsidiary of the Bank of N.T. Butterfield & Son Limited. The investment manager of the Trusts and the Umbrella Trust is HFR Asset Management, L.L.C. ("HFR"), which is responsible for selecting independent investment managers ("sub-managers"), each of whom in turn employs a distinctive investment strategy to manage the investments of each Trust. HFR and the sub-managers are unaffiliated with WFAAM.

In addition to serving as the managing member of the Private Funds, WFAAM also intends to act as the investment adviser to a new, registered open-end investment company (the "Registered Fund"). The Registered Fund will invest directly in a variety of securities, and will also invest in certain of the Trusts. As a result, the ownership by any Private Fund or the Registered Fund of interests in one or more of the Trusts may equal or exceed 5% of the interests in such Trust.

Ownership in each of the Trusts is conveyed in units of beneficial interest (the "Units"). The Units include no voting rights whatsoever. Consequently, holders of the Units, including the Private Funds and, in the future, the Registered Fund, are not able to exercise any voting power with respect to the Trusts. We have attached as Appendix 1 to this no-action request a legal opinion (the "Opinion") from Bermuda counsel, Appleby Spurling Hunter, concluding that, as a matter of Bermuda law, the Units do not confer any voting rights on their holders.

The Private Funds and the Registered Fund will not be the only investors in the Trusts; HFR may accept investments from other entities that are not affiliated with WFAAM or Wells Fargo Bank, N.A. None of the Private Funds or the Registered Fund will contribute the bulk of the assets in any Trust, with the possible exception of brief periods during the initial funding of a new Trust, during which the Private Funds or the Registered Fund may be part of the initial group of investors.

The Registered Fund's investment in the Trusts will be on terms substantially similar to and, in all circumstances, no less advantageous than the Private Funds' investments in such Trusts. The Registered Fund, like the Private Funds, will not have any power to elect or terminate HFR as investment manager. Thus, if the Registered Fund or Private Funds were dissatisfied with HFR as investment manager, their sole remedy would be to redeem their interests in the Trusts.

The Private Funds invest in the Trusts pursuant to a series of letter agreements between HFR and WFAAM. These agreements provide that HFR is solely responsible for the selection and compensation of the Trusts' sub-managers. The agreements also provide, among other things, that HFR will assist each adviser, managing member or trustee, as applicable, of each Private Fund in determining appropriate asset allocation strategies among the Trusts, by making asset allocation recommendations that are consistent with each Private Fund's investment objective, strategies and restrictions. HFR monitors the Trusts' trading activity to ensure that the investment parameters of each Private Fund are followed. HFR provides each Private Fund with performance information concerning each Trust and maintains records supporting the calculation of the investment managers' performance in managing the Trusts.

As discussed more fully below, in the absence of the relief requested, the Registered Fund and the Private Funds may be prohibited from purchasing and redeeming the Units by Section 17(a) of the 1940 Act because it is anticipated that the respective ownership of the Registered Fund, on the one hand, and one or more of the Private Funds individually, on the other hand, in one or more of the Trusts may equal or exceed 5% of the interests in such Trust. The Registered Fund, and WFAAM and the Private Funds, therefore may be considered "affiliates" of such Trusts under Section 2(a)(3). Section 17(a) prohibits an affiliated person of a registered investment company from knowingly purchasing and selling securities or other property from or to the investment company in the absence of an exemptive order issued by the Commission, and, without the no-action assurance requested herein, the Registered Fund may be prohibited from purchasing and redeeming Units in such Trusts.

Discussion

Section 2(a)(42) of the 1940 Act defines "voting security" to mean any security presently entitling the owner thereof to vote for the election of directors of a company. Section 2(a)(12), in turn, defines "director" as "any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated ".

Section 2(a)(3) of the 1940 Act defines an affiliated person of another person as:

(A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or more of the outstanding voting securities of such other person; (B) any person 5 per centum or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; . . . [and] (E) if such other person is an investment company, any investment adviser thereof . . . .

Section 17(a) of the 1940 Act, in relevant part, makes it unlawful for any affiliated person of a registered investment company (a "first-tier affiliate") or any affiliated person of such a person (a "second-tier affiliate"), acting as principal, knowingly to sell to or purchase from such company any security or other property. Section 17(a) was intended to protect investment company shareholders from loss in the value of their shares as a result of self-dealing or overreaching by insiders.1

If the Registered Fund and any Trust were deemed to be "affiliated persons" because the of Registered Fund's ownership of 5% or more of such Trust's Units, the Registered Fund would be prohibited by Section 17(a) of the 1940 Act from making any additional purchases or redemptions of Units of such Trust. Accordingly, the requested no-action relief is necessary to ensure that the Registered Fund will continue to be able to purchase and redeem Units in any Trust in which it has acquired a 5% or more2 ownership interest.

We believe that, because the Units in the Trusts are not "voting securities" within the meaning of Section 2(a)(42), neither the Registered Fund nor the Private Funds would be considered "affiliated persons" of the Trusts within the meaning of Section 2(a)(3) simply because the Registered Fund and/or a Private Fund acquires 5% or more of the Units of a Trust. The staff of the Division of Investment Management has previously taken a no-action position with respect to whether certain limited partnership interests are "voting securities" under Section 2(a)(42) in the context of whether a limited partnership qualified for the exception from the definition of "investment company" under the former two-part attribution test in Section 3(c)(1) of the 1940 Act.3 In Standish Equity Investments, Inc. (pub. avail. Dec. 15, 1993) ("Standish"), a limited partnership seeking to rely on Section 3(c)(1) had prospective limited partners who were not individuals and who were expected to purchase more than 10 percent of the interests in the limited partnership. Under Section 3(c)(1) as it then existed, if a limited partner owned 10 percent or more of the limited partnership's interests, that limited partner's beneficial ownership would be deemed that of its shareholders or participants. This "look-through" provision might result in the limited partnership having more than 100 owners, thus disqualifying it from relying on the Section 3(c)(1) exception.4

In Standish, however, the limited partnership argued that its interests were not "voting securities" within the meaning of Section 2(a)(42) because the limited partners (i) would not be permitted to assign their interests, (ii) would not be permitted to elect, remove, or replace the general partner, and (iii) would not have the power to amend the limited partnership agreement without the consent of the general partner. Further, the limited partners would not be permitted to participate in the conduct or control of the limited partnership or its business. Rather, the general partner would manage and control the limited partnership and its business, and make all investment decisions related to the conduct of the partnership's business. In addition, the limited partners would not have the economic power or interest to exert a controlling influence over the limited partnership. A dissatisfied limited partner's sole remedy would be to withdraw from the limited partnership.

The staff, in agreeing that the interests did not constitute "voting securities," construed the right to vote for the election of directors broadly to include, with respect to companies organized as partnerships, the right to (i) remove or replace the general partner, (ii) vote on the election or removal of the general partner in the event of the general partner's death, insanity or retirement, (iii) terminate the partnership if one of the initial managing general partners ceases to serve in that role or (iv) take part in the conduct or control of the limited partnership's business.5a The staff also has stated that the definition of "voting security" includes not only the de jure right to vote for the election of directors but also the de facto power to determine or influence the election, removal or replacement of the directors of the issuer.6 The staff has further stated that the statutory definition of "voting security" was not intended to be rigidly applied and that a limited partnership interest is a voting security if the limited partner has an economic interest that gives it the power to exercise a controlling influence over the partnership.7

Unit holders will not have any of the rights or powers articulated above. The instant case involves Units in the Trusts, which are sub-trusts of a Bermuda Unit Trust, rather than interests in a limited partnership, as was the case in Standish, or interests in a general partnership, as was the case in other relevant precedents. The precedent is nevertheless applicable to the Trusts because, like limited and general partnerships, the Trusts are pooled investment vehicles in which investors invest passively. The situation presented here is an easier case because unlike the limited and general partnerships in the applicable precedent, the Units include no voting rights whatsoever, as described below.

Although the Trusts have elected to be classified as partnerships for federal tax purposes, they are trusts under Bermuda law. The Trusts do not have directors and the only entities "performing similar functions" are the Trustee, HFR as investment manager, and the sub-managers. The trust deeds and Bermuda law do not confer on the holders of the Units any power to exercise any rights to vote on the election or removal of the Trustee or HFR or exercise any control over the Trusts, either legally or economically. The trust deeds of the Umbrella Trust and the Trusts provide explicitly that all voting rights shall be exercised in such manner as HFR, as investment manager, may direct and no Unit holder shall have any right to interfere or complain. In particular, no Unit holder has the right or power to remove or replace the Trustee or HFR, or to vote on the election or removal of any Trustee or HFR. The trust deeds reserve the right to remove the Trustee to HFR, and solely either HFR or the Trustee (with HFR's written consent) may appoint a new trustee. Bermuda law and the trust deeds do not confer any rights on the Unit holders to terminate any of the Trusts. Bermuda law and the trust deeds do not confer any power on the Unit holders to take part in the conduct or control of the Trusts' business.8

Similarly, no Unit holder will have the right to remove or replace or vote for the removal of the sub-managers. As is the case with the Private Funds, the investor agreement between HFR and the Registered Fund will provide that HFR is solely responsible for the selection and compensation of the sub-managers. Thus, if the Registered Fund or Private Funds were dissatisfied, their sole remedy would be to redeem their interests in the Trusts. Neither the Private Funds nor the Registered Fund will have the de facto power to determine or influence the election, removal or replacement of the sub-managers.

Finally, the Private Funds and the Registered Fund will have no de facto power to determine or influence the election, removal or replacement of the trustees of the Trust and HFR or otherwise have the power to exercise a controlling influence over the Trust. None of the Private Funds or the Registered Fund will have an economic interest that gives it the power to exercise a controlling influence over any of the Trusts. The Private Funds and the Registered Fund will not be the only investors in the Trusts and, except for certain periods of the initial funding of a new Trust during which the Private Funds or the Registered Funds may be part of the initial group of investors, neither the Private Funds nor the Registered Fund will contribute the bulk of the assets in any Trust.

Because the Units should not be considered voting securities under Section 2(a)(42), we believe that neither the Registered Fund nor the Private Funds should be considered "affiliates" of the Trusts under Section 2(a)(3) if their ownership interest in one or more Trusts equals or exceeds 5%. We further believe that the prohibitions on affiliated transactions set forth in Section 17 of the 1940 Act would not apply with respect to the ownership interests held by the Registered Fund and the Private Funds in the Trusts.

The proposed investment by the Registered Fund in the Trust will not result in the self-dealing or overreaching that Section 17(a) was designed to prevent. The regulation is meant to minimize or prevent participation by a fund in a transaction on a basis different from or less advantageous than that of another participant. The Trusts are managed by independent sub-managers unaffiliated with WFAAM and the Registered Fund. The Registered Fund's investment in the Trusts will be on terms that are substantially similar to and, in all circumstances, no less advantageous than the Private Funds' investment in the Trusts. In fact, because the Registered Fund will be an open-end management investment company and, therefore, will be subject to the Commission policy requiring such a company to invest no more than 15% of its assets in illiquid securities, the Registered Fund will be able to redeem its interests in most Trusts on a more frequent basis than the Private Funds. In all cases, however, the Registered Fund will be able to redeem its interests at least as frequently as the Private Funds.

Request for No-Action Position

In view of the foregoing, we respectfully request that the staff concur with our interpretation that the Units in the Trusts held by the Registered Fund and the Private Funds are not "voting securities" within the meaning of Section 2(a)(42). If for any reason you do not concur with our conclusion, we respectfully request a conference with the staff before any adverse written response to this letter. Should you or any member of your staff have any questions concerning the foregoing or need additional information or clarification, please call either R. Charles Miller at (202) 778-9372 or Cary J. Meer at (202) 778-9107.

Sincerely,

Cary J. Meer

cc: Wells Fargo Alternative Asset Management, LLC


Attachment


Endnotes


http://www.sec.gov/divisions/investment/noaction/wells012605.htm


Modified: 01/31/2002