No-Action Letter under:
Investment Company Act of 1940 -
Rule 17a-6

Longleaf Partners Funds Trust

April 9, 2001

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 2000-136926 Longleaf Partners Funds Trust File No. 811-4923

By letter dated March 30, 2001, you request our assurance that we would not recommend enforcement action to the Commission under Section 17(a) of the Investment Company Act of 1940 ("Investment Company Act") if, as described in your letter, Bay View Capital Corporation ("Bay View") sells certain securities to and purchases certain securities from Longleaf Partners Realty Fund ("Realty"), a series of a registered investment company. As described below, Bay View may be deemed to be an affiliated person of an affiliated person of Realty.

FACTS

The Funds and Other Southeastern Accounts

You state that Realty and Longleaf Partners Small-Cap Fund ("Small-Cap," and collectively with Realty, the "Funds") are two of the four series of Longleaf Partners Funds Trust, a registered investment company. You state that Southeastern Asset Management, Inc. ("Southeastern") is registered with the Commission under the Investment Advisers Act of 1940 as an investment adviser and is the investment adviser of the Funds. You state that Southeastern also manages a large number of private or separate accounts ("Southeastern Accounts") but has no proprietary or private accounts in which Southeastern or its employees participate.

The Merging Portfolio Companies

You state that Bay View is a bank holding company whose common stock is listed on the New York Stock Exchange, and Franchise Mortgage Acceptance Company ("FMAC") is a commercial finance company whose stock is traded on NASDAQ. Bay View and FMAC propose to merge. You state that the levels of ownership by the Funds and the Southeastern Accounts of the merging companies are as follows:

	Small-Cap	Realty	Southeastern Accounts	Total
Bay View	12.3%	4.9%	3.2%	20.4%
FMAC	None	8.6%	3.4%	12.0%

You state that pursuant to the merger, Bay View will acquire all of the outstanding common stock of FMAC in exchange, at the election of FMAC shareholders, for 0.5444 shares of common stock of Bay View or $9.80 in cash for each share of common stock of FMAC.¹ Thus, the merger will result in a transaction between Bay View and Realty pursuant to which Bay View will purchase the FMAC shares held by Realty in exchange for shares of Bay View ("Bay View/Realty Transaction").

You state that neither Southeastern nor the Funds had any part in originating the proposed merger, or in subsequent negotiations between Bay View and FMAC with respect to any provisions of the proposed merger, including those relating to the pricing of the shares of FMAC, or the number of shares of Bay View to be exchanged per share of FMAC. You state that Southeastern expects to vote all of the common stock of Bay View and FMAC over which Southeastern has discretionary voting authority, including the shares held by the Funds, in favor of the proposed merger. You state that Southeastern will elect to receive shares of common stock of Bay View in exchange for all of the shares of FMAC which are so held.

ANALYSIS

Section 17(a)(1) of the Investment Company Act, in relevant part, prohibits any affiliated person (a "first-tier affiliate"), or any affiliated person of an affiliated person (a "second-tier affiliate"), of a registered investment company, acting as principal, from knowingly selling any security to the registered investment company. Section 17(a)(2) of the Investment Company Act, in relevant part, prohibits any first- or second-tier affiliate of a registered investment company, acting as principal, from knowingly purchasing any security from the registered investment company. Section 2(a)(3) of the Investment Company Act provides, in relevant part, that:

[an a]ffiliated person of another person means...(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....

The Bay View/Realty Transaction may violate Section 17(a)(1)² because Bay View may be deemed to be a second-tier affiliate of Realty³ and the Bay View/Realty Transaction may be deemed to involve the sale by Bay View of additional Bay View shares to Realty. The Bay View/Realty Transaction also may violate Section 17(a)(2) because it may be deemed to involve the purchase by Bay View of the FMAC shares from Realty.⁴

Section 17(a) was designed primarily to prohibit "a purchase or sale transaction when a party to the transaction has both the ability and the pecuniary incentive to influence the actions of the investment company."⁵ The Commission adopted Rule 17a-6 under the Investment Company Act to exempt from the prohibitions of Section 17(a) transactions between an investment company and its first- and second-tier affiliates, when none of the parties to the transaction, or persons with a financial interest in a party to the transaction, has the potential ability to overreach the investment company.⁶ In particular, as the Commission has stated, the rule provides an automatic exemption from the prohibitions of Section 17(a) for most transactions involving investment companies and affiliated portfolio companies.⁷

The exemption provided by Rule 17a-6 is available only if no "disqualifying person:" (1) is also a party to the transaction; or (2) has, or within six months prior to the transaction had, or pursuant to an arrangement will acquire, a direct or indirect financial interest in a party (except the registered investment company) to the transaction.⁸ Disqualifying persons include the investment adviser to the registered investment company, persons directly or indirectly under common control with the registered investment company, and persons affiliated with those persons.⁹ The Commission has stated its intent that Rule 17a-6's list of disqualifying persons include those persons "who, by virtue of their relation to the investment company, would be in a position to influence the terms of a transaction" and those "persons with the potential ability to overreach the company could not be included in the transaction."¹⁰

You state that the exemption provided by Rule 17a-6 may not be available for the Bay View/Realty Transaction because one disqualifying person (Bay View) is a party to the transaction and another (Small-Cap) has a direct financial interest in a party to the transaction.¹¹ Bay View may be a disqualifying person pursuant to Rule 17a-6(a)(5) because it is affiliated with a person that may be deemed to be under common control with Realty, i.e., Small-Cap (see infra footnote 3). Small-Cap may be a disqualifying person pursuant to Rule 17a-6(a)(4) because it may be deemed to be under common control with Realty. Small-Cap also may be a disqualifying person pursuant to Rule 17a-6(a)(5) because it may be deemed to be an affiliate of Southeastern.¹²

You maintain that the Bay View/Realty Transaction is consistent with the basic purposes of Rule 17a-6 and does not raise the concerns that Section 17(a) was designed to address. You represent that neither Bay View nor Small-Cap has the potential ability to overreach Realty. You acknowledge that Bay View and Small-Cap may be disqualifying persons because Realty and Small-Cap may be deemed to be under the control of their investment adviser, Southeastern. This basis for disqualifying Bay View and Small-Cap assumes that Southeastern may be "in a position to influence the terms of the transaction" to overreach Realty. You represent, however, that Southeastern does not have a direct or indirect financial interest in a party to the Bay View/Realty Transaction. You also represent that the merger between Bay View and FMAC originated independently of Southeastern and the Funds and that neither Southeastern nor the Funds participated in the negotiations between the merging companies.

Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under Section 17(a) of the Investment Company Act if Bay View engages in the Bay View/Realty Transaction as discussed in your letter.¹³ We rely particularly on your representations that: (1) neither Southeastern nor the Funds had any part in originating the proposed merger, or in subsequent negotiations between Bay View and FMAC with respect to any of the provisions of the proposed merger, including those relating to the pricing of the shares of FMAC, or the number of shares of Bay View to be exchanged per share of FMAC; (2) Southeastern does not have a direct or indirect financial interest in any party to the Bay View/Realty Transaction; (3) there are no additional disqualifying persons under Rule 17a-6 that are a parties to the Bay View/Realty Transaction or that have a direct or indirect financial interest in a party to the Bay View/Realty Transaction;¹⁴ and (4) the board of trustees of Realty, including a majority of independent trustees, found that the terms of the Bay View/Realty Transaction were reasonable and fair and would not involve any overreaching of Realty, and that participation in the transaction would be in the best interests of Realty and would be consistent with Realty's investment policies. This response expresses our views on enforcement action only and does not express any legal conclusion on the questions presented. You should note that any different facts or representations may require a different conclusion.

Robin S. Gross
Senior Counsel

Footnotes

1	You state that these elections will be adjusted to assure that at least 85% of the FMAC shares are acquired with Bay View common stock and that not more than 15% of the FMAC shares will be acquired with cash.
2	You have not asked, and we express no view regarding, whether the Funds' participation in the merger of Bay View and FMAC implicates Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder.
3	Bay View may be deemed to be a second-tier affiliate of Realty because Bay View is a first-tier affiliate of Small-Cap which may be a first-tier affiliate of Realty. In particular, Bay View is a first-tier affiliate of Small-Cap pursuant to Section 2(a)(3)(B) of the Investment Company Act because Small-Cap owns more than 5% of the outstanding voting securities of Bay View. Small-Cap and Realty may be deemed to be first-tier affiliates pursuant to Section 2(a)(3)(C) because they may be deemed to be under the common control of Southeastern, their investment adviser. In addition, Bay View may be deemed to be a second-tier affiliate of Realty because Bay View may be a first-tier affiliate of Southeastern, which is a first-tier affiliate of Realty. In particular, you state that Bay View may be a first-tier affiliate of Southeastern pursuant to Section 2(a)(3)(B) because Southeastern, on behalf of the Funds and the Southeastern Accounts, controls, or holds with power to vote, more than 5% of the outstanding voting securities of Bay View. Southeastern is a first-tier affiliate of Realty pursuant to Section 2(a)(3)(E) because Southeastern is Realty's investment adviser.
4	As noted above, Southeastern, on behalf of Realty, will elect to receive shares of common stock of Bay View in exchange for all of the shares of FMAC that are held by Realty.
5	See Investment Company Act Release No. 10886 (Oct. 2, 1979) (proposing, among other things, Rule 17a-8 under the Investment Company Act), citing Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess., at 256-59 (1940).
6	See Investment Company Act Release No. 10698 ("Release No. 10698") (May 17, 1979) (proposing amendments to Rule 17a-6). See also Investment Company Act Release No. 3776 (Sept. 27, 1963) (proposing amendments to Rule 17a-6 and stating that the rule contains conditions that are designed to assure that the exemption is available only when there appears to be no likelihood of overreaching of the investment company).
7	See Investment Company Release No. 3968 (April 29, 1964) (adopting amendments to Rule 17a-6). An affiliated portfolio company is a company that is affiliated with an investment company because the investment company owns 5% or more of its outstanding voting securities.
8	See Rule 17a-6(a)(i) and (ii). Paragraph (b) of Rule 17a-6 addresses the term "financial interest."
9	Under Rule 17a-6(a)(1), a disqualifying person includes an investment adviser to the registered investment company. Under Rule 17a-6(a)(4), a disqualifying person includes a person directly or indirectly under common control with the registered investment company. Under paragraph (a)(5) of the rule, a disqualifying person also includes a person who is affiliated with a person identified in paragraphs (a)(1) - (a)(4).
10	See Release No. 10698.
11	You state that you believe that the Southeastern Accounts, which own interests in a party to the transaction (Bay View), are not disqualifying persons because the accounts are not "persons" under Section 2(a)(28) of the Investment Company Act. You also state that the beneficial owners of the Southeastern Accounts are not disqualifying persons because Southeastern does not control them.
12	Small-Cap may be deemed to be a first-tier affiliate of Southeastern pursuant to Section 2(a)(3)(C) of the Investment Company Act because Small-Cap may be deemed to be controlled by Southeastern.
13	This letter confirms the position that the staff provided orally to Alan Rosenblat of Dechert Price & Rhoads on behalf of Realty prior to the date of the merger between Bay View and FMAC.
14	Telephone conversation between Robin Gross of the staff and Alan Rosenblat of Dechert Price & Rhoads on April 4, 2001.

Incoming Letter

(Only available in PDF format.)

http://www.sec.gov/divisions/investment/noaction/longleaf040901.htm