Recent Investment Management No-Action Letters- from the Securities Law Home Page News


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Recent Investment Management No-Action Letters

Investment Company Partnerships and Directors; Performance Fees with Non-Qualified Clients

By John M. Baker, Esq.

Feb. 13, 2002 – The staff of the Securities and Exchange Commission has issued few substantive no-action letters in recent months; accordingly to persistent rumors, the slow-down is the result of additional internal reviews required by SEC Chairman Harvey Pitt. Last week, however, the SEC’s Division of Investment Management issued two important letters on investment vehicles.

In the first letter, the SEC staff approved an innovative limited partnership structure for a registered open-end investment company with a corporate general partner. Federated Core Trust II, L.P. (Feb. 6, 2002). Registered investment companies structured as limited partnerships with corporate general partners normally find it difficult to comply with the Investment Company Act of 1940 because the corporate general partner, and the natural persons through whom it acts, may be deemed “directors” under the 1940 Act. In the Federated Core Trust letter, the staff approved an arrangement in which the corporate general partner delegated its authority to manage the business and affairs of the partnership to a partnership board of directors. The Federated Core Trust letter was obtained by my firm, Stradley, Ronon, Stevens & Young, LLP.

In the second letter, the SEC staff allowed an investment adviser to a fund to continue to receive performance fees under Rule 205-3 under the Investment Advisers Act of 1940, even if fund shares are transferred to non-qualified clients who receive the shares by gift or bequest or pursuant to an agreement relating to a legal separation or divorce. Seligman New Technologies Fund II, Inc. (Feb. 7, 2002). Rule 205-3 generally allows an investment adviser to receive performance fees only from “qualified clients” who meet certain net worth requirements. In the case of a client that is an investment company or private investment company, all of the equity owners must be qualified clients, and most advisers receiving performance fees have complied with Rule 205-3 by disallowing even involuntary transfers to non-qualified clients. The new position will simplify estate planning and marital dissolutions. However, the letter was subject to the condition that the client fund will not be able to submit any matter relating to an increase in, or material amendment requiring shareholder vote to, the performance fee provisions of the investment advisory agreement unless all of its equity owners subject to the agreement are qualified clients as of the record date of the vote.

I have placed the Federated and Seligman letters on the FundLaw website, and they may be accessed from

Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  



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Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.