Investment Company Act of 1940 - Section 3( c)(10)
Investment Advisor Act of 1940 - Section 203(b)(4)

American Bible Society
June 1, 2004

By letter dated June 1, 2004, you state that the American Bible Society ("ABS") proposes to permit certain foreign bible societies ("FBSs") to invest in ABS's general fund ("General Fund"). The FBSs have not applied for recognition by the Internal Revenue Service ("IRS") as "charitable organizations" and therefore do not meet the definition of "charitable organization" provided in Section 3(c)(10)(D)(iii) of the Investment Company Act of 1940 ("Investment Company Act").¹ You request our assurances that if ABS implements its proposal we would not recommend enforcement action to the Commission: (i) against ABS under Section 7 of the Investment Company Act if the General Fund is not registered as an investment company under the Investment Company Act; (ii) against ABS, or its trustees who serve on ABS's Investments Committee ("Committee Members"), under Section 203(a) of the Investment Advisers Act of 1940 ("Advisers Act") if none of them registers as an investment adviser under the Advisers Act; or (iii) against ABS, or its Committee Members, under Sections 15(a) or 17A of the Securities Exchange Act of 1934 ("Exchange Act") if none of them registers as a broker, dealer, or transfer agent under the Exchange Act.

Facts

You state that ABS is a New York corporation that operates exclusively for religious, charitable and educational purposes. ABS's mission is to make a bible available to every person in a language and format that each can understand and afford. ABS also engages in biblical research and translation and produces biblical literature in both electronic and paper versions. ABS is an organization described in Section 501(c)(3) of the Internal Revenue Code (a "501(c)(3) entity")² and a charitable organization as defined in Section 3(c)(10)(D)(iii) of the Investment Company Act.

You state that ABS invests its assets through its General Fund for the purpose of funding its operations.³ You state that ABS's Investments Committee oversees the management of the General Fund by: (a) promulgating guidelines and objectives for the General Fund; (b) making hiring decisions with respect to approximately ten registered investment advisers to invest the assets in the General Fund in accordance with those guidelines and objectives; (c) determining the allocation of investment assets among the selected investment advisers; and (d) meeting at least eight times annually to monitor the investments of the General Fund and review the investment advisers' performance. You state that ABS pays each of the General Fund's investment advisers an advisory fee based on a percentage of the General Fund's assets. You state that the Committee Members do not receive commissions or other special compensation based on the number or the value of donations collected for the General Fund.

You state that ABS partners with various FBSs to distribute bibles worldwide. You state that ABS and all of the FBSs are members of the United Bible Societies ("UBS"), an organization of over 100 bible societies that are associated for the purpose of facilitating consultation, mutual support and cooperation in their common mission to distribute bibles worldwide. You state that all of these FBSs are nonprofit, nongovernmental organizations that currently do not engage, and that do not intend to engage, in any business in the United States other than investing in the General Fund. You state that these FBSs are organized and operated exclusively for religious, charitable, and educational purposes, not for the purposes or benefit of any private shareholder or individual, and that no substantial part of their activities consists of carrying on propaganda or otherwise attempting to influence legislation. In addition, you state that these FBSs do not participate in or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office. Accordingly, although these FBSs have not applied for recognition by the IRS as 501(c)(3) entities, you state that they are organized and operated in a manner consistent with the requirements of Section 501(c)(3) of the Internal Revenue Code.⁴

ABS proposes to permit FBSs to invest those assets as to which they have immediate, unencumbered, unrestricted, and exclusive use, benefit, and enjoyment in the General Fund under certain conditions. ABS will permit an FBS to invest in the General Fund if, as further described in your letter, at the time that the FBS invests in the General Fund, and at all times while the FBS holds interests in the General Fund, the FBS is:

• a member in good standing of the UBS, and in compliance with the UBS's constitution and practices;
   
• in good standing in its own jurisdiction as a nonprofit, nongovernmental organization;
   
• operated in a manner that is consistent in all material respects with the requirements of Internal Revenue Code Section 501(c)(3);
   
• organized and operated exclusively for religious, charitable and educational purposes through the publication, translation and distribution of bibles;
   
• not organized or operated for the purposes or benefit of any shareholder or natural person and does not assign, encumber, or transfer its interest in the General Fund to any other person; and
   
• not engaging in any business in the United States except investing in the General Fund. (All of such requirements are collectively referred to as "ABS's Eligibility Requirements.")
   

In addition, you state that, before an FBS makes an initial investment in the General Fund, the FBS will certify to ABS, and ABS will verify, that the FBS complies with ABS's Eligibility Requirements. You state that ABS will check with UBS to verify that each FBS is a member in good standing and will check with the appropriate foreign jurisdictions to verify that each FBS is a nongovernmental, nonprofit, charitable organization in good standing with its jurisdiction of organization. You state that each FBS that is invested in the General Fund will recertify to ABS, on an annual basis, that it is in compliance with ABS's Eligibility Requirements and will submit annual programmatic and financial reports to ABS describing the FBS's purposes and operations, and the use of any income from assets invested in the General Fund. You state that each participating FBS will agree that any income received from the FBS's investment in the General Fund will be used exclusively for the FBS's religious, charitable, and educational purposes and for bible distribution, translation and related activities. You state that ABS will review each FBS's recertification, and check with the UBS and relevant foreign jurisdiction, to verify that each FBS invested in the General Fund continues to meet ABS's Eligibility Requirements. You represent that if ABS were to determine that any FBS that invested in the General Fund no longer satisfied all of ABS's Eligibility Requirements, ABS immediately would redeem that FBS's interest in the General Fund at its net asset value current as of the time of the redemption and transmit the proceeds of that redemption to the FBS. In your view, these procedures effectively will ensure that only FBSs that are organized and operated as bona fide charitable organizations consistent with the requirements of Section 501(c)(3) of the Internal Revenue Code will be permitted to invest in, and remain invested in, the General Fund. (An FBS meeting all of ABS's Eligibility Requirements is an "Eligible FBS.")

Under ABS's proposal, no Eligible FBS would make any investment decisions with respect to assets that it invests in the General Fund, and no Eligible FBS would pay a separate investment advisory fee to the General Fund's investment advisers in connection with such investment. Each Eligible FBS, however, would reimburse ABS for its pro rata share of ABS's direct, out-of-pocket expenses incurred in administering the General Fund, including accounting, legal and office expenses, and compensation for staff services attributable to administering the General Fund.

You state that ABS will notify Eligible FBSs of the existence of this investment arrangement and the terms on which Eligible FBSs may participate. You state that ABS will enter into this arrangement only with Eligible FBSs that elect to participate. You state that ABS will not actively solicit any FBS to participate in the arrangement, offer this arrangement to any other entity or person, advertise the arrangement through general appeals for participation, or make any qualitative statements about the value of participating in the arrangement.

Analysis

You state that ABS maintains the General Fund exclusively to invest ABS's assets. Section 3(c)(10)(B)(i) of the Investment Company Act excludes from the definition of "investment company:" a pooled income fund, collective trust fund, collective investment fund, or similar fund maintained by a charitable organization exclusively for the collective investment and reinvestment of . . . assets of the general endowment fund or other funds of one or more charitable organizations.

Consequently, you state that the General Fund is excluded from the definition of investment company, and is not registered as such, under the Investment Company Act.

ABS and the Committee Members may be deemed to provide advisory services to, or to act as brokers, dealers, or transfer agents on behalf of, the General Fund.⁵ Because the General Fund is excluded from the definition of investment company under Section 3(c)(10)(B) of the Investment Company Act, however, you state that ABS and the Committee Members currently are exempted from registration as investment advisers under the Advisers Act.⁶ You also state that they are deemed not to be brokers, dealers, or transfer agents under the Exchange Act⁷ and, consequently, are not registered as such under the Exchange Act.

The proposed investment by Eligible FBSs in the General Fund may cause the General Fund to fall within the definition of investment company under the Investment Company Act because the General Fund may no longer be deemed to be "maintained by a charitable organization exclusively for the collective investment and reinvestment of . . . assets of . . . one or more charitable organizations."⁸ If the General Fund may not rely on the charitable organization exclusion from the definition of investment company provided by

Section 3(c)(10)(B), ABS and the Committee Members may be required to register as investment advisers under the Advisers Act and as brokers, dealers, or transfer agents under the Exchange Act because the exemptions on which they rely are linked to the exclusion from the definition of investment company in the Investment Company Act.

You therefore request our assurances that, if ABS implements its proposal, we would not recommend enforcement action to the Commission: (i) against ABS under Section 7 of the Investment Company Act if the General Fund is not registered as an investment company under the Investment Company Act;⁹ (ii) against ABS, or any of the Committee Members, under Section 203(a) of the Advisers Act if none of them registers as an investment adviser under the Advisers Act;¹⁰ or (iii) against ABS, or any of the Committee Members, under Sections 15(a) or 17A of the Exchange Act if none of them registers as a broker, dealer, or transfer agent under the Exchange Act.¹¹

Charitable organizations have been excluded from the definition of investment company since the Investment Company Act was enacted.¹² In addition, we previously have taken the position that we would not recommend enforcement action to the Commission against pooled investment vehicles established by charitable organizations if the pooled vehicles did not register as investment companies under the Investment Company Act provided that: the charitable organizations qualify as recipients of tax-deductible contributions under the Internal Revenue Code; donors receive written disclosures about the pooled vehicles; and no person receives commissions or special compensation based on the amount of gifts transferred to the pooled vehicles.¹³ Congress amended the Investment Company Act to codify these positions as part of the Philanthropy Protection Act of 1995.¹⁴ The Philanthropy Protection Act similarly amended the Securities Act of 1933 and the Exchange Act.

The FBSs have not applied for recognition by the IRS as 501(c)(3) entities, but you argue that they nevertheless are charitable organizations that are organized and operated in a manner consistent in all material respects with the requirements of Section 501(c)(3) of the Internal Revenue Code. You state that the IRS, upon application, may designate organizations, including foreign entities, as qualified for tax-exempt status under Section 501(c)(3), but that the FBSs have not applied for such designation because it would serve no useful purpose other than to permit Eligible FBSs to invest in the General Fund without jeopardizing the reliance by ABS, the General Fund, and Committee Members on the various exemptions from the registration requirements of the federal securities laws. You state that the FBSs do not want to incur the expense of applying for United States tax-exempt status under Section 501(c)(3) because they do not engage, and do not intend to engage, in any business in the United States except for their proposed investment in the General Fund. You argue that we should treat Eligible FBSs as equivalent under the federal securities laws to charitable organizations, as defined in Section 3(c)(10)(D) of the Investment Company Act. In addition, you state that ABS has designed and will implement verification procedures to effectively ensure that only FBSs that comply with ABS's Eligibility Requirements are permitted to invest and hold interests in the General Fund.

Conclusions

1. We would not recommend enforcement action to the Commission under Section 7 of the Investment Company Act against ABS solely because Eligible FBSs invest in the General Fund, but ABS does not register the General Fund as an investment company under the Investment Company Act.
    
2. We would not recommend enforcement action to the Commission under Section 203(a) of the Advisers Act against ABS or any of the Committee Members solely because they provide investment advice to the General Fund, in which Eligible FBSs invest, but they do not register as investment advisers under the Advisers Act.
    

Our positions are based particularly on your representations that: (i) ABS has designed and will implement verification procedures to effectively ensure that only FBSs that comply with ABS's Eligibility Requirements are permitted to invest and hold interests in the General Fund; (ii) Eligible FBSs are not engaged, and do not intend to engage, in any business in the United States, except for their proposed investment in the General Fund; and (iii) ABS will redeem an FBS's interest in the General Fund at its net asset value current as of the time of the redemption, and promptly transmit the proceeds of the redemption to the FBS, as soon as practicable after ABS determines that the FBS does not satisfy ABS's Eligibility Requirements or is not a bona fide charitable organization. Our response expresses our views on enforcement action only and does not express any conclusions on the interpretive or other legal issues presented. You should note that any different facts or representations may require different conclusions.

3. The Division of Market Regulation has asked us to inform you that the Division would not recommend enforcement action to the Commission under Section 15(a) of the Exchange Act against ABS or its Committee Members if ABS and its Committee Members permit Eligible FBSs to deposit funds available for future bible distribution into the General Fund without ABS and its Committee Members registering as broker-dealers in accordance with Section 15(b) of the Exchange Act. In taking this position, the Division notes that neither ABS nor its Committee Members will receive any compensation that is transaction-based, performance-based, based on the number or value of donations collected for the General Fund, or based on the return from the investment of the Eligible FBSs' funds. The Division notes further that securities transactions by or for the General Fund will not be effected through any broker-dealer for which a Committee Member is, or has been, an associated person or in which any Committee Member holds, or has held, an ownership interest. The Division also has asked us to inform you it would not recommend enforcement action to the Commission under Section 17A of the Exchange Act if ABS and its Committee Members permit Eligible FBSs to deposit funds available for future bible distribution into the General Fund, as set forth in your letter, without registering as transfer agents under Section 17A(c) of the Exchange Act. These responses only express the Division's position on enforcement action and do not purport to express any legal conclusions on the questions presented. You should note that any different facts or representations may require different conclusions.
    

Endnotes

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¹ Section 3(c)(10)(D)(iii) of the Investment Company Act defines "charitable organization" as "an organization described in . . . section 501(c)(3) of the Internal Revenue Code of 1986." Section 501(c)(3) of the Internal Revenue Code of 1986 (the "Internal Revenue Code") exempts certain entities from federal taxation if they, among other things, are "organized and operated exclusively for religious, charitable . . . or educational purposes," if none of the organization's earnings inures to any private shareholder or individual, and if the organization does not attempt to influence legislation as a substantial part of its activities or participate in political campaign activity. An entity desiring to be recognized by the IRS as a charitable organization under Section 501(c)(3) of the Internal Revenue Code must file an application with the IRS, and the IRS must approve the application. See IRS Publication 4220, "Applying for 501(c)(3) Tax-Exempt Status," available at http://www.irs.gov/pub/irs-pdf/p4220.pdf.

² See IRS Publication 78, "Cumulative List of Organizations," available at http://www.irs.gov.

³ You state that ABS also receives gifts and contributions through various charitable gift vehicles, such as charitable gift annuities, pooled income funds and charitable remainder trusts. You state that ABS maintains these assets in accounts separate from the General Fund.

⁴ See supra note 1.

⁵ You have not asked for guidance, and we are providing you with none, with respect to any issues relating to services provided directly to ABS or to other accounts maintained by ABS.

⁶ Section 203(b)(4) of the Advisers Act exempts from the registration requirements of the Advisers Act, in pertinent part:

any investment adviser that is a charitable organization as defined in section 3(c)(10) of the Investment Company Act of 1940, or is a trustee, director, officer, employee or volunteer of such a charitable organization acting within the scope of such person's employment or duties with such organization, whose advice, analysis or reports are provided only to one or more of the following:

(A) any such charitable organization;

(B) a fund that is excluded from the definition of investment company under

Section 3(c)(10)(B) of the Investment Company Act of 1940.

⁷ Among other things, Section 3(e)(1) of the Exchange Act provides, subject to

Section 3(e)(2) of the Exchange Act, that:

a [Section 3(c)(10)(D)] charitable organization, or any trustee, director, officer, employee, or volunteer of such a charitable organization acting within the scope of such person's employment or duties with such organization, shall not be deemed to be a "broker", "dealer", "municipal securities broker", "municipal securities dealer", "government securities broker", or "government securities dealer" for purposes of [the Exchange Act] solely because such organization or person buys, holds, sells, or trades in securities for its own account in its capacity as trustee or administrator of, or otherwise on behalf of or for the account of -

(A) such a charitable organization; [or]

(B) a fund that is excluded from the definition of an investment company under

section 3(c)(10)(B) of the Investment Company Act of 1940[.]

Section 3(e)(2) of the Exchange Act provides that:

[t]he exemption provided under paragraph (1) shall not be available to any charitable organization, or any trustee, director, officer, employee, or volunteer of such a charitable organization, unless each person who . . . solicits donations on behalf of such charitable organization from any donor to a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the Investment Company Act of 1940, is either a volunteer or is engaged in overall fund raising activity of a charitable organization and receives no commission or other special compensation based on the number or the value of donations collected for the fund.

⁸ Section 3(c)(10)(B)(i).

⁹ Section 7 of the Investment Company Act generally requires any U.S. investment company to register with the Commission.

¹⁰ Section 203(a) of the Advisers Act generally prohibits any investment adviser, unless registered under the Advisers Act, or prohibited from registering or exempted from the requirement to register under that Act, from engaging in interstate commerce in connection with its business as an investment adviser.

¹¹ Section 15(a) of the Exchange Act generally prohibits any broker or dealer from using interstate commerce to effect any transactions in securities unless such broker or dealer is registered as such under the Exchange Act. Section 17A(c) of the Exchange Act generally prohibits any transfer agent from using interstate commerce to perform the function of a transfer agent with respect to registered securities unless such transfer agent is registered as such under the Exchange Act.

¹² When the Investment Company Act was enacted, Section 3(c)(12) (renumbered as 3(c)(10) pursuant to the 1970 Amendments to the Investment Company Act) excluded from the definition of investment company:

[a]ny company organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

¹³ See Pooled Income Funds, Investment Company Act Release No. 11016 (Jan. 10, 1980). See also Northeastern Pennsylvania Synod of the Evangelical Lutheran Church in America (pub. avail. Mar. 31, 1988) (all participants were tax-exempt under Section 501(c)(3) of the Internal Revenue Code); Catholic United Investment Trust (the "Trust") (pub. avail.

Feb. 24, 1983) (the Trust was an organization exempt from taxation under Section 501(c)(3) of the Internal Revenue Code); California Student Loan Finance Corp. ("CSLFC") (pub. avail. June 22, 1981) (CSLFC received and maintained a ruling from the IRS that it was exempt from federal income tax as a charitable organization under Section 501(c)(3) of the Internal Revenue Code); American Council on Education (pub. avail. Dec. 15, 1972) ("applicable Internal Revenue Code and Treasury Department restrictions and regulations . . . make registration under the federal securities laws appear unnecessary").

¹⁴ Pub. L. No. 104-62, 109 Stat. 682 (1995). See The Philanthropy Protection Act of 1995: Hearings on H.R. 2519 Before the Subcomm. on Telecommunication and Finance of the House Comm. on Commerce, 104th Cong., 1st Sess. 2-9 (1995) (statements of Chairman Jack Fields, Congressman Edward J. Markey, and Barry P. Barbash, Director of the Division of Investment Management, SEC).

Incoming Letter

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/investment/noaction/abs060104.htm