Alert July 22, 2008

SEC Staff Denies No-Action Relief for “3(c)(1) Plus Fund”

The staff of the SEC’s Division of Investment Management denied no-action relief that would have permitted a single fund not registered under the Investment Company Act of 1940, as amended (the “1940 Act”), to have no more than 100 beneficial owners who were not qualified purchasers at the time of purchase within the meaning of the 1940 Act, i.e., they did not meet specified investment ownership tests, and a potentially unlimited number of investors who were qualified purchasers.  The relief was sought to allow the combination of an existing unregistered fund relying on Section 3(c)(1) of the 1940 Act, which generally limits a relying fund’s beneficial owners to 100 investors, with another fund relying on Section 3(c)(7) of the 1940 Act, which generally limits a relying fund’s owners to qualified purchasers and to certain fund insiders.  As described in the request for relief, the two funds share essentially the same investment objectives, and have overlapping portfolios and substantially similar portfolio risk/return characteristics, such that the two funds would be subject to integration under the 1940 Act but for Section 3(c)(7)(E) of the 1940 Act, which provides that a Section 3(c)(1) fund will not be integrated with a Section 3(c)(7) fund.  The request for relief asserted that combining the two funds would result in reduced expenses compared to those they would experience in continued side‑by‑side operation.  In declining to grant relief, the SEC staff noted that its 1992 study of investment company regulation, which recommended Congress adopt what became Section 3(c)(7) of the 1940 Act, rejected the idea of amending Section 3(c)(1) to permit an unlimited number of sophisticated investors.  The SEC staff also cited the reason given in the 1992 study that “the 100 investor limit in the current private investment company exception reasonably reflects the point at which federal regulatory concerns are raised if any unsophisticated investors are involved ….  In comparison, pools owned exclusively by sophisticated investors do not present these concerns, regardless of the number of investors.”