Investment Company Act of 1940 – Section 7(b)
Washington Capital Joint Master Trust
September 25, 2006
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Our Ref. No. 2006291121
Washington Capital Joint Master Trust
File No. 132-3
Your letter dated September 20, 2006 requests our assurance that we would not recommend enforcement action to the Commission against Washington Capital Management, Inc. (“Washington Capital”) or The Bank of New York Trust Company, N.A. (“BONY”) under section 7(b) of the Investment Company Act of 1940 (the “1940 Act”) if the Washington Capital Joint Master Trust (“Trust”) does not register as an investment company under the 1940 Act, under the circumstances described below.
Facts
You state that the Trust is organized as a trust under the laws of the state of Washington pursuant to a declaration of trust (“Declaration of Trust”). You state that Washington Capital serves as investment manager and depositor to the Trust, and that BONY serves as trustee to the Trust. You state that the Trust has no board of trustees and that the Trust currently has nine separate portfolios (“Portfolios”). You state that ownership interests in the Trust are composed of units of non-voting beneficial interests representing an investor’s allocated proportionate, undivided shares of a particular Portfolio (“Units”). You state that a holder of Units in any Portfolio (“Unitholder”) owns Units of that Portfolio, and is not otherwise deemed to own Units in any other Portfolio of the Trust, unless that Unitholder has specifically made an investment in another Portfolio.1
You assert that the Trust is analogous to a registered mutual fund organized as a “series company.” You state that, like a series company, the assets of each Portfolio are separately held, managed, administered, valued, invested, distributed, audited, and accounted for, and each Portfolio is otherwise dealt with as a separate entity pursuant to the Declaration of Trust.2 You state that, under the Declaration of Trust, each Portfolio is a separate trust account in which Unitholders’ monies are commingled and invested as a single Portfolio. You represent that the Declaration of Trust provides that the assets and liabilities of each Portfolio are separate from the assets and liabilities of any other Portfolio, and the Units represent ownership in the property of a discrete Portfolio, the assets of which can only be applied to discharge claims against that Portfolio, and cannot be applied to discharge claims against any other Portfolio.3 You represent that the Trust will operate, and will hold itself out to others as operating, consistent with the terms of the Declaration of Trust.4 You assert that separate Portfolios within the Trust save audit, legal, and compliance expenses that would otherwise be used to create and maintain separate investment funds.
You represent that Washington law is silent on whether each Portfolio is treated or recognized as a separate legal entity. You represent that Washington law defers to the terms of a declaration of trust as to whether to recognize separate portfolios of a trust as separate legal entities for the purposes set forth in this letter.5 As noted above, you represent that the Declaration of Trust provides that the assets of each Portfolio may be applied to discharge the expenses, losses, liabilities and damages solely of that Portfolio, and not any other Portfolio of the Trust. Accordingly, you represent that the specific terms of the Declaration of Trust and the deference under the laws of the state of Washington to the provisions of particular trust instruments would preclude any person that has a claim against a particular Portfolio from attaching the assets of any other Portfolio.6 You also represent that you have issued a legal opinion concluding that, based upon the laws of the state of Washington, each Portfolio should be treated as a separate trust entity under Washington law, and that creditors of one Portfolio should be prohibited from attaching those claims to the assets of any other Portfolio.7
Each Portfolio seeks to rely on an exception from the definition of investment company set forth in section 3(c) of the 1940 Act. You are concerned that, should the Portfolios be viewed collectively, the Portfolios and the Trust may not be entitled to rely on any particular exception from the definition of investment company under the circumstances described herein.
Analysis
Section 7(b) of the 1940 Act prohibits, in relevant part, any depositor or trustee for any investment company, organized or otherwise created under the laws of the United States or of a state, without a board of directors, from, among other things, offering, selling, or delivering after sale, any security or interest in a security unless the company is registered under the 1940 Act. Section 3(a)(1) of the 1940 Act generally defines the term “investment company” to include any issuer of securities that engages in an investment company business as described in section 3(a)(1). Section 3(c) of the 1940 Act provides a number of exceptions from the definition of investment company.8
You request that we concur in your view that the Trust is not or should not be viewed as a single issuer for purposes of determining whether the Trust is an investment company as defined in section 3(a)(1) of the 1940 Act. You note that we previously provided similar no-action relief in Coutts Global Fund (pub. avail. Dec. 7, 1994) (“Coutts”) to an Irish umbrella fund that complied with the limits set forth in the exception from the definition of investment company in section 3(c)(1) of the 1940 Act, on a sub-fund by sub-fund basis. Each sub-fund in Coutts had assets and liabilities that were separate from the assets and liabilities of any of other sub-fund, and issued units of beneficial interest representing ownership in the property of a discrete trust (i.e., a subfund), the assets of which could only be applied to discharge claims against that trust, and could not be applied to discharge claims against any other trust.
You acknowledge that there are differences between your facts and those addressed in Coutts. In particular, Coutts involved a foreign issuer that received relief under section 7(d) of the 1940 Act, rather than an issuer organized under the laws of the United States, such as the Trust. Also, in Coutts, each sub-fund complied with the limits of section 3(c)(1) of the 1940 Act, and did not rely on various exceptions from the definition of investment company, such as the exceptions set forth in sections 3(c)(7) or 3(c)(5) of the 1940 Act. You also acknowledge that under Irish law, each sub-trust was a separate trust having a common trustee, while Washington law is silent on whether each Portfolio is treated or recognized as a separate legal entity.
You contend, however, that those differences should not matter. You represent that, consistent with the Irish sub-funds in Coutts, the Declaration of Trust provides that the assets and liabilities of each Portfolio are separate from the assets and liabilities of any other Portfolio, and the Units represent ownership in the property of a discrete Portfolio, the assets of which can only be applied to discharge claims against that Portfolio, and cannot be applied to discharge claims against any other Portfolio. You represent that the Trust will operate, and will hold itself out to others as operating consistent with the terms of the Declaration of Trust. You have opined that each Portfolio should be treated as a separate trust entity under Washington law, and that creditors of one Portfolio should be prohibited from attaching those claims to the assets of any other Portfolio. Finally, you believe that it makes no difference in the analysis whether an issuer is a U.S. or foreign issuer.
You, therefore, contend that the principles for treating each sub-fund as a separate issuer should apply to the Trust.9 We agree. On the basis of the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against Washington Capital or BONY under section 7(b) of the 1940 Act if the Trust does not register as an investment company under the 1940 Act, under the circumstances described above. This response expresses our views on enforcement action only and does not express any legal conclusions 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.10
Kenneth C. Fang
Senior Counsel
1 You state that, as of August 31, 2006, there were a total of 71 Unitholders in the Portfolios. You state that the smallest number of Unitholders in any Portfolio is five and the largest number of Unitholders in any Portfolio is 40.
2 Telephone conversation between Kenneth C. Fang of the staff and Brendan N. O’Scannlain of Stoel Rives LLP, counsel to the Trust, on September 25, 2006 (“September 25 Telephone Call”).
3 Id.
4 Id.
5 Id.
6 See Wash. Rev. Code ยง 11.97.010 (2006).
7 See September 25 Telephone Call.
8 See, e.g., section 3(c)(1) (excepting any issuer whose outstanding voting securities are beneficially owned by not more than one hundred persons, and that is not making, and does not propose to make, a public offering of its securities); section 3(c)(7) (excepting any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers (as defined in section 2(a)(51) of the 1940 Act) and that is not making, and does not propose to make, a public offering of its securities); and section 3(c)(5)(C) (excepting any person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate).
9 You note that we have taken the position on several occasions that each series of a series investment company is or should be treated as a separate issuer under other sections of and rules under the 1940 Act. See, e.g., Principal Investors Fund Inc. (pub. avail. May 13, 2005) (“each series of a series investment company is a separate investment company for purposes of the limitations set forth in section 12(d)(1)(B)”); Fundtrust (pub. avail. Jan. 7, 1986) (section 12(d)(1)(F)); Salomon Brothers Inc. (pub. avail. May 26, 1995) (sections 2(a)(3) and 17(a)); The One Group (pub. avail. May 23, 1995) (section 10(f)); PaineWebber Series Trust (pub. avail. Dec. 14, 1987) (section 5(b)(1)).
10 In particular, we likely would take a position different from that expressed herein if the Trust operates or holds itself out to others as operating in a manner that is inconsistent with the terms of the Declaration of Trust. Similarly, we likely would take a position different from that expressed herein if, under the laws of the state of Washington: (i) each Portfolio were not treated or recognized as a separate trust entity, or (ii) a person that has a claim against a particular Portfolio could attach the assets of any other Portfolio to satisfy that claim. In addition, you do not ask about, and we express no opinion on, instances in which integration principles would require that two or more Portfolios be viewed as a single issuer. See, e.g., Welsh, Carson, Anderson & Stowe (pub. avail. June 18, 1993) and Shoreline Fund L.P. (pub. avail. Apr. 11, 1994).
Incoming Letter
The Incoming Letter is in Acrobat format.
http://www.sec.gov/divisions/investment/noaction/2006/washcap092506.htm
