Securities and Exchange Commission (“SEC”).
Notice of Application for Exemption under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”).
The Charles Talbot Fund (the “Fund” or “Applicant”).
Relevant Advisers Act Sections:
Exemption requested under section 205(e) of the Advisers Act from section 205(a)(1) of that Act.
Summary of Application:
Applicant requests an order under section 205(e) of the Advisers Act to permit registered investment advisers to charge it performance-based advisory fees notwithstanding the prohibition set forth in section 205(a)(1) of the Act.
The application was filed on October 28, 2003, and amended on March 12, 2004, and amended further on May 7, 2004.
Hearing or Notification of Hearing:
An order granting the application will be issued unless the SEC orders a hearing. Interested persons may request a hearing by writing to the SEC's Secretary and serving the Applicant with a copy of the request, either personally or by mail. Hearing requests should be received by the SEC by 5:30 p.m., on November 30, 2004, and should be accompanied by proof of service on Applicant, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons may request notification of a hearing by writing to the SEC's Secretary.
Secretary: SEC, 450 Fifth Street, NW., Washington, DC 20549. Applicant: The Charles Talbot Fund, 46775 Ann Arbor Trail, Plymouth, Michigan, 48170.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Marilyn Barker, Senior Counsel, or Jennifer L. Sawin, Assistant Director, Division of Investment Management, Office of Investment Adviser Regulation, at (202) 942-0719.End Further Info End Preamble Start Supplemental Information
The following is a summary of the application. The complete application may be obtained for a fee at the SEC's Public Reference Branch.
1. Applicant is a Michigan limited partnership formed in 1978 for general investment purposes so as to facilitate and simplify the investment of assets owned by the Talbot family. Applicant represents that the Fund is the Talbot family's principal investment vehicle, and is exempt from registration as an investment company under section 3(c)(1) of the Investment Company Act of 1940 (the “Investment Company Act”).
2. Charles F. Talbot, Jr., is the Fund's general partner. Mr. Talbot is compensated for services as general partner by pro rata participation in the gain or loss of the partnership. He is reimbursed for actual hours spent in the partnership business such as accounting. The Fund has no other executives or employees.Start Printed Page 65478
3. Applicant represents that Mr. Talbot is solely responsible for making the investment decisions for the Fund. At present, Mr. Talbot owns more than 90 percent of the Fund's capital.
4. The Fund's limited partners currently consist of Mr. Talbot's wife, three of Mr. Talbot's adult children and one of their spouses, eight of Mr. Talbot's grandchildren, and a small partnership (“BIF”) whose partners currently consist of Mr. Talbot and one of his adult children. Mr. Talbot's children acquired their interests in the Fund with assets received as gifts from Mr. Talbot's parents; Mr. Talbot's grandchildren acquired their interests as gifts from Mr. Talbot or from him and his former spouse. Mr. Talbot's daughter acquired her interest in the BIF partnership as a gift from Mr. Talbot.
5. Applicant represents that the partners of the Fund will be limited to Mr. Talbot, his siblings, spouse, direct lineal descendants by birth or adoption, spouses of such persons, estates of such persons, and trusts established by or for the benefit of such persons (collectively, “Family Members”), as well as partnerships whose partners consist only of Family Members.
6. Applicant states that it wants to participate in investment opportunities managed by registered investment advisers that seek to charge it a performance-based advisory fee pursuant to rule 205-3 under the Advisers Act. Applicant represents further that neither it nor any of its partners has any relationship (other than a present investment relationship) with, or is an affiliate or an interested person of, any registered investment adviser that would seek to charge it a performance fee pursuant to rule 205-3.
7. Applicant represents that the Fund is a “qualified purchaser” as defined in section 2(a)(51)(A)(ii) of the Investment Company Act  and satisfies the net worth requirement for a “qualified client” as set forth in rule 205-3(d)(1) under the Advisers Act. Applicant represents further that Mr. Talbot is a “qualified client” as defined in rule 205-3(d)(1) under the Advisers Act.
8. Applicant states that, of Mr. Talbot's children and grandchildren, only one is a “qualified client.”
Applicant's Legal Analysis
1. Section 205(a)(1) of the Advisers Act generally prohibits a registered investment adviser, unless exempt from registration pursuant to section 203(b) of the Act, from entering into, extending, renewing, or performing under any investment advisory contract that provides for compensation based upon “a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client,” commonly referred to as performance-based compensation or a performance fee.
2. Rule 205-3(a) under the Act provides an exemption from the prohibition in section 205(a)(1) provided each client entering into an investment advisory contract that provides for performance-based compensation is a “qualified client.” Under rule 205-3(b), each equity owner of a “private investment company” is considered a client for purposes of rule 205-3(a). Applicant asserts that the Fund is a private investment company.
3. Because a number of the Fund's limited partners are not qualified clients, the Fund may not be treated as meeting the requirements of rule 205-3(a).
4. Applicant requests an order under section 205(e) of the Advisers Act granting an exemption from section 205(a)(1) of the Act so as to permit registered investment advisers to charge the Fund performance fees. Applicant asks that the relief requested be applicable to any Family Members that are not qualified clients and that are now or may later be admitted as partners in the Fund or the BIF partnership.
5. Section 205(e) of the Advisers Act provides that the Commission, by order upon application, may exempt any person, or any class or classes of persons, from section 205(a)(1) of the Act, if and to the extent that the exemption relates to an investment advisory contract with any person that the Commission determines does not need the protection of section 205(a)(1), on the basis of such factors as financial sophistication, net worth, knowledge of and experience in financial matters, and such other factors as the Commission determines are consistent with section 205.
6. Applicant asserts that exemptive relief to permit the Fund to be charged performance fees is appropriate and consistent with the purposes of 205(a)(1) of the Advisers Act. Applicant asserts that the request for relief complies with the factors specified in section 205(e) of the Act. Applicant states that Mr. Talbot, the sole investment decision-maker for the Fund, is a qualified client meeting the net worth requirement of rule 205-3(d)(1)(ii)(A) under the Act. Applicant asserts that Mr. Talbot is financially sophisticated, has substantial knowledge of and experience in financial matters, and is fully able to assess the potential risks of performance fees. Applicant further asserts that Mr. Talbot has a father's or grandfather's love for his family and may be reasonably presumed to act in the best interests of the Family Members.
7. Applicant further asserts that Mr. Talbot's children have substantial experience and are financially sophisticated, which provides an extra layer of protection for their interests as well as those of their children.Start Signature
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland,
1. Section 3(c)(1) generally excepts from the definition of investment company under the Investment Company Act any issuer whose outstanding securities are beneficially owned by not more than 100 persons and which is not making, and does not presently propose to make, a public offering of its securities.Back to Citation
2. Applicant represents that Mr. Talbot is the general partner of, and is solely responsible for the investment decisions for, the BIF partnership.Back to Citation
3. Applicant asserts that limiting partnership in the Fund to Family Members will assure that the Fund will continue to be a qualified purchaser under section 2(a)(51)(A)(ii).Back to Citation
4. Rule 205-3(d)(1) includes, as “qualified clients,” a natural person who or a company that immediately after entering into the contract has at least $750,000 under the management of the investment adviser; a natural person who or a company that the investment adviser reasonably believes, immediately prior to entering into the contract, to have a net worth exceeding $1.5 million or to be a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act at the time the contract is entered into; and certain personnel of the investment adviser.Back to Citation
5. Under rule 205-3(d)(3), a private investment company is a company that would be defined as an investment company under section 3(a) of the Investment Company Act of 1940 but for the exception provided from that definition by section 3(c)(1) of such Act.Back to Citation
[FR Doc. E4-3148 Filed 11-10-04; 8:45 am]
BILLING CODE 8010-01-P