There was very little overlap in the portfolio holdings. Among other things, one fund could use leverage and employ certain option and short-sale strategies while the other could not. June 18, 1993), the SEC did not integrate institutional funds being managed side-by-side with retail funds due to differences in the structure and operations of the funds, their portfolio composition and potential risk and returns. In the Welsh, Carson, Anderson & Stowe No-Action Letter (pub. 26, 1985), the SEC did not integrate a fund that was offered to tax exempt investors, and did not engage in short sales or write uncovered calls, with a fund that was offered to taxable investors and engaged in short sales and other leverage transactions. For example, in Oppenheimer Arbitrage Partners LP No-Action Letter (pub. There have been several No-Action Letters where integration has not been found. Do the funds have the same investment objectives, the same types of portfolio securities, and, particularly, similar portfolio risk return characteristics?.Would an interest in one fund be considered materially different from an interest in a second partnership by a reasonable investor qualified to purchase both?.Are the offerings made for the same general purpose?.Is the same type of consideration to be received?.Are the offerings made at or about the same time?.Do the offerings involve issuance of the same class of security?.Are the different offerings part of a single plan of financing?.Guidance on integration, however, can be found in a number of SEC No- Action letters, which set forth the following tests which may lead to a finding that integration exists: There is no statute that addresses fund integration, and the SEC has not adopted any rule that outlines the triggers for integration. – And if neither fund can fit within the exemption, then both are required to register as investment companies with the SEC. Consequently, once the investment adviser takes in the first investor in the second fund, neither fund will comply with section 3(c)(1). In our above example, if the manager launches the same type of fund, ( e.g., a second global macro fund) after the number of investors in the first fund reaches 100 and is closed, the SEC may, under certain circumstances, treat both funds as one 3(c)(1) fund. The trap that ensnared the manager lies in the concept of integration, or treating two or more like funds as one and counting the aggregate number of investors to determine whether they exceed 100. The firm’s records identify 90 shareholders in the first fund and 80 shareholders in the second fund. The principals review Section 3(c)(1) again and see the investment company exemption is available to funds that have no more than 100 shareholders and whose interests are not sold in a public offering. A month later, the manager is notified of an investigation by the Securities and Exchange Commission (“SEC”) looking into allegations as to whether the manager’s funds should have been registered with the SEC as investment companies whether the firm should have been registered with the SEC as an investment adviser whether the firm or its principals violated a half dozen federal securities laws, which collectively could subject the manager and its principals to thousands of dollars in fines and penalties, not to mention disgorgement of the investment management and performance fees. Unfortunately, one day the manager receives a letter from a lawyer representing one of the fund’s shareholders alleging that the manager has been unlawfully operating two unregistered investment companies, rendering the investment management agreements illegal, and demanding that you return forthwith the $14 million in investment management and performance fees you earned for the past 3 years in the new fund. The manager has earned $3 million in investment advisory fees and $11 million in performance fees. Over the next three years, the new fund’s shareholders see their original investment more than double in value. Let’s assume that to accommodate new investors, the investment manager seeks to create another fund believing that it, too, is exempt from registration pursuant to Section 3(c)(1). If the number of investors investing and seeking to invest in the fund surpasses 100, the investment manager is faced with making some critical decisions. If the fund (a) has no more than 100 investors and (b) and is not sold in a public offering, it will be exempt from investment company registration pursuant to Section 3(c)(1) of the Investment Company Act of 1940.Īs the fund gains traction and the performance track record grows (hopefully in positive territory), demand for the fund may increase. For those financial professionals who wish to launch their first private fund, many begin their investment management business as an exempt adviser.
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