APR 2 7 1995
 '~LIC 

Our Ref. No. 95-110-CC 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Goldman, Sachs & Co. 

DIVISION OF INVESTMNT MAAGEMENT File No. 132-3 

Your letter dated April 24, 1995 seeks our concurrence that
 

a finance subsidiary organized as a business trust under the
 

Delaware Business Trust Act ("DBTA"), 1./ or a similar business
 

trust statute in another state, that issues non-voting preferred
 

trust certificates (" Preferred Trust Certificates") as described
 

in your letter, may rely on the exemption for finance
 

subsidiaries under Rule 3a- 5 under the Investment Company Act of


1940 (the "Investment Company Act"). 2./ 

You state that a finance subsidiary established as a
 

business trust issuing Preferred Trust Certificates, and the
 

related transaction, will comply fully in all respects with Rule
 3a- 5, except that the transaction will involve the issuance of 

non-voting Preferred Trust Certificates by a business trust
 

instead of non-voting preferred stock by a corporation. Business
 

trusts are "creatures of contract" in that they are created by a
 

trust instrument under which property is held and administered by
 

a trustee for the benefit of persons who are or may become the
 

beneficiaries of the trust. A Delaware business trust may issue
 

Preferred Trust Certificates having rights, preferences and
 

limitations, including voting rights or the express denial of
 

voting rights, equivalent to those of the preferred stock of a
 

corporation. All of the ownership interests in the business
 

trust will be evidenced by one or more classes of Preferred Trust
 

Certificates and a single class of trust certificates owned by
 

the parent company or a company controlled by the parent. All of
 

the interests in the business trust other than the non-voting
 

Preferred Trust Certificates will be owned by the parent company
 

or a company controlled by the parent company. á/
 

1./ Del. Code, Title 12, §§ 3801 et seg.
 

l/ Generally, Rule 3a- 5 exempts from the definition of


investment company a subsidiary that is organized to finance
 

the operations of its parent company or companies controlled
 

by its parent company, provided such companies are not


themselves investment companies under Section 3 (a) of the 

Investment Company Act. Under paragraph (b) (1) of Rule
 

3a- 5, "(a) \ finance subsidiary' shall mean any corporation


(i) (a) 11 of whose securities other than debt securities or non-voting preferred stock . . . are owned by its parent
 

company or a company controlled by its parent company."
 

á/ You believe that there are several reasons why business
 

trusts were not included in the definition of finance
 

subsidiary in Rule 3a-5. You state that when Rule 3a-5 was
 

adopted in 1984, no parent company, to your knowledge, had
 (continued. . . ) 
In the release adopting Rule 3a- 5, the Commission stated
 

that it was appropriate to exempt a finance subsidiary from all
 

provisions of the Investment Company Act where neither its
 

structure nor its mode of operation resembles that of an
 

investment company. ~/ The Commission stated that it found this
 

to be the case where the primary purpose of the subsidiary is to
 

finance the business operations of its parent or other
 

subsidiaries of its parent, and where any purchaser of the
 

finance subsidiary's debt instruments ultimately looks to the
 

parent for repayment and not to the finance subsidiary.
 

You state that, as in the case of a finance subsidiary
 

organized as a corporation, the business trust will be formed for
 

the primary purpose of financing the operations of the parent or
 

its other subsidiaries, and at least 85% of the proceeds from the
 

offering of the Preferred Trust Certificates will be invested in
 

or loaned to the parent or its controlled companies consistent
 with the requirements of Rule 3a- 5. The Preferred Trust 

Certificates issued by the business trust would (1) be nonvoting except for limited circumstances that are effectively the
 

same as those pursuant to which non-voting preferred stockholders
 

in a corporation issuing securities in reliance of Rule 3a-5
 

would have voting rights; (2) have a liquidation preference that
 

is akin to the liquidation preference of preferred stock; (3)
 

entitle holders to priority for periodic distributions that is
 

akin to the rights of holders of preferred stock; and (4) will
 

benefit from a parent's guarantee in compliance with Rule 3a-5.
 

Based on the facts and representations in your letter, we
 

would not recommend enforcement action to the Commission if a
 

finance subsidiary organized as a business trust under the DBTA,
 

or a similar business trust statute in another state, that issues
 

á/ ( . . . continued) proposed to use a business trust as a finance subsidiary, so
 

the Commission would not have considered whether to include
 

business trusts within the scope of the rule. In addition,
 

at the time the rule was adopted, finance subsidiaries were
 

commonly established to offer their securities to
 

institutional investors. At that time, some state
 

investment laws applicable to institutional investors were
 

generally more restrictive as to investments in securities
 

issued by non- corporate issuers. The existence of these
 

state law restrictions, therefore, made it less likely that
 

the Commission would have considered whether business trusts
 

should be included in the rule's definition of finance
 subsidiary. 

~/ Investment Company Act Release No. 14275 (Dec. 20, 1984)
 (adopting Rule 3a-5) . 

- 2 ­
Preferred Trust Certificates as described in your letter, relies
 on the exemption for finance subsidiaries under Rule 3a- 5. 2/ 

Because this position is based on the facts and representations
 

made in your letter, you should note that any different facts or
 

circumstances might require a different conclusion.
 

~~ - .. 

Alison E. Baur
 

Senior Counsel
 

2/ See also Andrews & Kurth L. L. P. (pub. avail. Apr. 5, 1994)
 

(staff granted no-action relief so that a finance subsidiary
 

organized as a limited partnership could rely on Rule 3a5); (Lehman Brothers Inc. (pub. avail. Mar. 8, 1994) (staff
 

granted no-action relief so that a finance subsidiary
 

organized as a limited liability company could rely on the
 

rule); Inco Limited (pub. avail. Mar. 4, 1994) (same);
 

Merrill Lynch & Co. (pub. avail. Mar. 2, 1994) (same).
 

- 3 ­
Investment Company Act of 1940
 

Rule 3a-5
 

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.0. lie I April 24, 1995
 ¡ l,',1)i1 i t.y i+ d-~( q5~._w..~..._~_... ,..;._..i......._~~._~~__"""'P--_.-..._­

Office of the Chief Counsel,
 

Division of Investment Management,
 

Securities and Exchange Commission,
 

450 Fifth Street, N. W. ,
 

Washington, D.C. 20549.
 

Attention: Alison E. Baur, Esq.
 

Re: Business Trusts as Finance Subsidiaries
 

Pursuant to Rule 3a-5
 

Ladies and Gentlemen:
 

We are writing on behalf of Goldman, Sachs & Co.,
 

in connection with transactions under consideration by their
 

clients, to request confirmation that the staff of the
 

Division of Investment Management (the "Staff") interprets
 

Rule 3a-5 under the Investment Company Act of 1940 to be
 

available for (x) a finance subsidiary established as a
 

business trust under the Delaware Business Trust Act (Dela.
 

Code, Title 12, §§ 3801 et sea.) or a similar business trust
 

statute in another state (y) issuing non-voting preferred
 

trust certificates ("Preferred Trust Certificates"), as
 

further described below.
 

Under paragraph (b) (1) of Rule 3a-5,
 

"A ' finance subsidiary' shall mean any corporation
 

(i) All of whose securities other than debt
 
Office of the Chief Counsel,
 

Division of Investment Management -2 ­

securities or non-voting preferred stock meeting


the applicable requirements of paragraphs (a) (1) 

through (a) (3) or directors' qualifying shares are
 

owned by its parent company or a company controlled by its parent company". (Emphasis added)
 

The term .corporation" is not defined. By contrast, and as
 

discussed further in Part B below, under paragraph (b) (2) "A
 

, parent company' shall mean any corporation. partnership or 

joint venture . . ." (emphasis added) which in turn 

satisfies certain other conditions. Similarly, the term 

"preferred stock" is not defined.
 

In our view, for the reasons discussed further
 

below, construing a business trust to be the equivalent of a
 

corporation, and non-voting Preferred Trust Certificates to
 

be the equivalent of non-voting preferred stock, is consistent with the fundamental purpose of Rule 3a- 5 as enunciated
 

in the proposing and adopting releases. * Our request for 

interpretive advice is premised on the assumption that the
 

finance subsidiary established as a business trust issuing
 

Preferred Trust Certificates, and the related transaction,
 

will fully comply in all respects with Rule 3a-5, except
 

that the transaction will involve the issuance of non-voting
 

Preferred Trust Certificates by a business trust instead of
 

non-voting preferred stock by a corporation.
 

* Release No. IC-14275 (December 14, 1984) (the "Adopting 

Release"); Investment Company Act Release No. 12679
 

(September 22, 1982).
 
Office of the Chief Counsel,
 

Division of Investment Management -3 ­

A. Background - - Description of Business Trusts 

and Assumptions
 

Business trusts are "creatures of contract" in the
 

sense that they are created by a trust instruent under
 

which property is held and administered by a trustee for the
 

benefit of such persons who are or may become the beneficiaries of the trust. Beneficial ownership interests are
 

commonly evidenced by trust certificates. Several states
 

have adopted statutes in recent years pursuant to which
 

beneficial owners of business trusts that conform to the
 

statutes' requirements are entitled to the same limitation
 

of personal liability extended to stockholders of private
 

corporations. One such statute is the Delaware Business
 

Trust Act ("DBTA").
 

Because the business trust statutes differ
 

somewhat from state to state, and the area will continue to
 

additional states consider adoption of business
 

trust statutes, it will be helpful to frame our request for
 

interpretive advice based upon the DBTA, as an example.
 

However, the principles involved, and we believe your
 

interpretive position, should be equally applicable to
 

business trusts entitled to limited liability under similar
 

statutes in other states.
 

evolve as 


The DBTA provides substantial flexibility as to
 

the terms under which a Delaware business trust may be
 

established and operated as well as the terms of the beneficial ownership interests in a Delaware business trust.
 

DBTA § 3801 (a) defines a "business trust" to mean:
 
Office of the Chief Counsel, 

Division of Investment Management -4­

Dan unincorporated business association which
 

(i) is created by a trust agreement under which
 

property is or will be held, managed, administered, controlled, invested, reinvested and/or
 

operated, or business or professional activities
 

for profit are carried on or will be carried on,
 

by a trustee or trustees for the benefit of such
 

person or persons as are or may become entitled to
 

a beneficial interest in the trust property . . .
 

and (ii) files a certificate of trust pursuant to
 

Section 3810 of this Chapter."
 

DBTA § 380i (b) defines the term "beneficial owner" to mean
 

"any owner of a beneficial interest in a business
 

trust, the fact of ownership to be determined and
 

evidenced (whether by means of registration, the
 

issuance of certificates, or otherwise) in
 

conformity to the applicable provisions of the
 

governing instrument of the business trust."
 

Pursuant to DBTA Section § 3803 (a), beneficial
 

owners of Delaware business trusts are "entitled to the same
 

limitation of personal liability extended to stockholders of
 

private corporations for profit." 

DBTA § 3806 (a) provides that the business and
 

affairs of a Delaware business trust shall be managed by or
 

under the direction of its trustees. DBTA § 3806 (a) goes on
 

to provide, however, that
 

" (t) 0 the extent provided in the governing

instrument of a business trust, any person
 

(including a beneficial owner) shall be entitled
 

to direct the trustees in the management of a
 

business trust."
 

As to the terms of the beneficial ownership
 

interests in a Delaware business trust, DBTA § 3806 (b)
 
Office of the Chief Counsel, 

Division of Investment Management - 5­

provides that a Delaware business trust's governing
 

instrument' 

"may contain any provision relating to the . . .
 

rights, duties and obligations of the . . .
 

beneficial owners . . . which is not contrary to
 

any provision or requirement of this Chapter and,
 

without limitation:
 

(1) may provide for classes, groups or series of
 

. . . beneficial owners, or classes, group or
 

series of beneficial interests, having such
 

relative rights, powers and duties as the
 

governing instrument may provide, and may
 

make provision for the future creation in the
 

manner provided in the governing instrument
 of additional classes, groups or series of . 

. . beneficial owners or beneficial
 

interests, having such relative rights,
 

powers and duties as may from time to time be
 

established, including rights, powers and
 

duties senior or subordinate to existing
 

classes, groups or series of . . . benef icial
 owners or beneficial interests i 

(2) may establish or provide for the establishment of designated series of . . . beneficial
 

owners or beneficial interests having
 

separate rights, powers or duties with
 

respect to specified property or obligations
 

of the business trust or profits and losses
 

associated with specified property or
 obligations . , 

(4) may grant to (or withhold from) all or
 

certain . . . beneficial owners, or a
 

specified class, group or series of . . .
 

beneficial owners, the right to vote,
 

separately or with any or all other classes,
 

groups or series of . . . beneficial owners,
 

on any matter, such voting being on a per
 
Office of the Chief Counsel,
 

Division of Investment Management - 6­

capita, numer, financial interest, class, 

group, series or any other basis . . .".
 

Accordingly, we believe that a Delaware business trust may
 

issue Preferred Trust Certificates having rights, 

preferences and limitations, including voting rights or the 

express denial of voting rights, equivalent to those of the 

preferred stock of a corporation. 

Our request for interpretive advice is premised on 

the assumptions that a business trust relying on Rule 3a-5 

would be established as, and have the attributes, set forth 

below: 

(a) The business trust will be established
 

pursuant to a declaration of trust or trust agreement
 

(in either case, the "Trust Agreement" for such
 

business trust) with a bank or trust company, as
 

trustee (the "Trustee"), who is independent from the
 

parent company (the "Parent") that causes the business
 

trust to be established as its financing vehicle.
 

(b) The ownership interests in the business trust
 

will be evidenced by one or more classes of Preferred
 

Trust Certificates and a single class of trust
 

certificates owned by the Parent or a company
 

controlled by the Parent (in either case, the "Parent
 

CertificateD and, together with the Preferred Trust
 

Certificates, the "Certificates"). Accordingly, all of
 

the interests in the business trust other than the
 

non-voting Preferred Trust Certificates will be owned
 

by the Parent or a company controlled by the Parent.
 
Office of the Chief Counsel, 

Division of Investment Management -7­

The Parent Certificate will represent approximately 3%
 

of the aggregate ownership interest in the business
 

trust, with the remaining ownership interest
 

represented by the Preferred Trust Certificates. Both
 

the Preferred Trust Certificates and the Parent
 

Certificate will,' on their face, specify the payment
 

entitlements evidenced thereby with respect to
 

distributions of principal and interest or other income
 

on the business trust's assets.
 

(c) Investors in the Preferred Trust Certificates
 

will have limited liability like that of stockholders
 

in a corporation in reliance on DBTA § 3803 (a) or a
 

similar provision in another state's business trust
 

statute. 

(d) At least 85% of the proceeds raised by the
 

business trust from issuance of Preferred Trust
 

Certificates will be invested in or loaned to the
 

Parent or companies controlled by the Parent (the
 

securities evidencing such investments or loans
 

collectively, the "Parent Securities") .
 

(e) The Preferred Trust Certificates and the
 

Parent Certificate will receive as distributions on
 

periodic distribution dates specified in the Trust
 

Agreement their pro rata shares of payments received by
 

the business trust on the Parent Securities, except
 

that, in the event of a default or partial payment by
 

the Parent on the Parent Securities, the payment
 

entitlement of the Parent as the holder of the Parent
 
Office of the Chief Counsel,
 

Division of Investment Management - 8­

Certificate will be subordinated to the payment
 

entitlement of the investors as holders of the
 

Preferred Trust Certificates. Similarly, if on
 

liquidation of the business trust* the proceeds from
 

sale or other liquidation of the business trust's
 

assets were not sufficient to fully satisfy the payment
 

entitlements of the Preferred Trust Certificates and
 

the Parent Certificate with respect to principal, the
 

payment entitlement with respect to principal of the
 

Parent as the holder of the Parent Certificate will be
 

subordinated to the payment entitlement of the
 

investors as holders of the Preferred Trust
 

Certificates. The Trust Agreement will provide that
 

the Trustee is required to distribute to
 

Certificateholders, on the periodic distribution dates
 

specified in the Trust Agreement, amounts received by
 

the Trustee on the Parent Securities. 

(f) As a result of the subordination of the
 

Parent Certificate as described in paragraph (e), 

above, the Preferred Trust Certificates will have a
 

preference, both as to periodic distributions and upon
 

liquidation, over such distributions with respect to
 

any interests in the business trust other than the
 

* Ordinarily the business trust would not be liquidated
 

prior to payment of the Parent Securities at their
 

maturity and distribution of such payment to holders of
 

Preferred Trust Certificates and, on a subordinated
 

basis, the Parent Certificate.
 
Office of the Chief Counsel,
 

Division of Investment Management -9 ­

Preferred Trust Certificates that is akin to the
 

preference of preferred stock issued by a corporation.
 

(g) The Parent will select the initial Trustee
 

and, subject to eligibility requirements specified in
 

the Trust Agreement, will have the right to replace the
 

Trustee unless and until a default on one or more
 

Parent Securities occurs. Thereafter, only holders of 

the Preferred Trust Certificates will have the right to
 

replace the Trustee. Similarly, any other consensual
 

rights vested by the Trust Agreement in holders of
 

Certificates will be exercised only by the Parent as
 

holder of the Parent Certificate prior to the
 

occurrence of a default under the Parent Securities
 

subject to the Parent being precluded from amending or
 

consenting to any waiver of the terms of the Trust
 

Agreement that would be materially adverse to holders
 

of Preferred Trust Certificates. Accordingly, the
 

Preferred Trust Certificates will be non-voting except
 

for limited circumstances that are effectively the same
 

as those pursuant to which non-voting preferred
 

stockholders in a corporation issuing securities in
 

reliance on Rule 3a-5 would have voting rights.
 

(h) The Parent will guarantee distribution by the
 

Trustee to holders of the Parent Trust Certificates, in
 

accordance with the terms of the Trust Agreement, of
 

amounts received by the Trustee on the Parent
 

Securities. Such Parent guarantee in favor of holders
 

of Preferred Trust Certificates will be in compliance
 

with Rule 3a- 5. 
Office of the Chief Counsel,
 

Division of Investment Management -10­

B. Discussion
 

Based on and subj ect to the description in Part A,
 

permitting a finance subsidiary established as a business
 

trust and issuing Preferred Trust Certificates to rely on
 

Rule 3a-5 is, in our view, consistent with the basic
 

purposes of Rule 3a-5. The considerations relevant to this 

view are essentially the same as those bearing on the
 

question of whether a limited liability company issuing nonvoting preferred member interests, or a limited partnership
 

issuing non-voting preferred partnership interests, should
 

be permitted to rely on Rule 3a-5. The Staff previously has
 

taken the position that finance subsidiaries organized as
 

limited partnerships or limited liability companies issuing
 

non-voting preferred partner interests or preferred member
 

interests but otherwise complying with the requirements of
 

Rule 3a-5 may rely on the exemption for finance subsidiaries
 

under Rule 3a- 5. See Andrews & Kurth L. L. P. (pub. avail. 

AprilS, 1994) i Lehman Brothers Inc. (pub. avail. March 8,
 

1994) i Inco Limited (pub. avail. March 4, 1994) i and Merrill
 

Lynch & Co. (pub. avail. March 2, 1994).
 

Th~ basic purposes of Rule 3a-5 are succinctly
 

outlined in the Adopting Release, as follows:
 

"As stated in the proposing release, the
 

Commission believes that it is appropriate to
 

exempt a finance subsidiary from all provisions of
 

the (1940) Act where neither its structure nor its
 

mode of operation resembles that of an investment
 

company. We have found this to be the case where
 

the primary purpose of the subsidiary is to
 

finance the business operations of its parent or
 

other subsidiaries of its parent which are not
 
Office of the Chief Counsel,
 

Division of Investment Management -11­

investment companies. We have also found this to
 

be the case where any purchaser of the finance
 subsidiary's debt instruents ultimately looks to 

the parent for repayment to the finance subsidiary. The rule, therefore, describes a situation
 

where the finance subsidiary is essentially a
 

conduit for the parent to raise capital for its
 

own business operations or for the business
 

operations of its other subsidiaries."
 

As in the case of a conventional finance subsidiary in corporate form, the business trusts in the cases we
 

are describing will be formed for the primary purpose of
 

financing the operations of the Parent or its other subsidiaries, and the proceeds of the Preferred Trust
 

Certificates will be on-loaned or invested in securities of
 

the Parent or its controlled companies in compliance with
 

the requirements of Rule 3a- 5. A business trust finance
 

subsidiary will be "essentially a conduit for the Parent to
 

raise capital" to the same extent as a conventional
 

corporate finance subsidiary. Holders of Preferred Trust
 

Certificates will have recourse to the guarantor/Parent's
 

credi t in the same manner r and to the same extent, as
 

holders of preferred stock of a finance subsidiary established as a corporation. The Preferred Trust Certificates
 

will be non-voting, except for limited voting rights equivalent to the voting rights as described above generally
 

available to holders of otherwise non-voting preferred
 

stock. 

We note that, where paragraph (b) (1) specifies 

that a finance subsidiary will be a corporation, as quoted
 

above, paragraph (b) (2), in contrast, provides "a 'parent
 
Office of the Chief Counsel,
 

Division of Investment Management
 - 12­

company' shall mean any corporation, partnership or ioint
 

venture . . ." (emphasis added) which in turn satisfies
 

certain other conditions. The discussion in Part II. C of 

the Adopting Release indicates that partnerships and joint
 

ventures were included in the definition of "parent company"
 

in response to the request of commentators on the Rule, as
 

initially proposed, in order that the definition be expansive enough to permit projects with multiple sponsors to
 

rely on the Rule. We have found no indication that the more
 

expansive definition of parent company should be read to
 

imply a deliberately restrictive definition of finance
 

subsidiary. 

Al though business trusts have existed for many
 

years, long pre-dating the adoption of Rule 3a-5, we do not
 

believe that the existence of business trusts at the time
 

Rule 3a-5 was adopted should be a significant factor in the
 

Staff's consideration of whether Rule 3a- 5 may properly be
 

interpreted to permit finance subsidiaries established as
 

business trusts to rely on the Rule. First, and most
 

important, consideration of the eligibility of a business
 

trust as a finance subsidiary was not an issue in 1984
 

because, at that time, no parent company (at least to our
 

knowledge) had proposed to use a business trust as a finance
 

subsidiary. The reasons for the current interest in using
 

business trusts as finance subsidiaries arise out of the
 

interplay of financial reporting and tax considerations
 

which do not, we believe, implicate the basic purposes of
 

Rule 3a- 5. Second, legal investment statutes in some states
 

applicable to certain types of institutional investors have
 

been revised in recent years to broaden such institutional
 

investors' ability to purchase securities issued by business
 

trusts. See, g.g., Sections 1192 and 1192.8 of the
 
Office of the Chief Counsel,
 

Division of Investment Management
 -13­

California Insurance Code and Section 653c of the
 

Pennsylvania Insurance Law. When Rule 3a-5 was adopted in
 

1984, state legal investment laws applicable to institutional investors were generally more restrictive with
 

respect to investments in securities issued by non-corporate
 

issuers than they are today, making it less likely that the
 

eligibility of a business trust as a finance subsidiary was
 

a relevant consideration in 1984. This is relevant because
 

finance subsidiaries established pursuant to exemptive
 

orders prior to the adoption of Rule 3a-5 and in reliance on
 

Rule 3a- 5 thereafter were commonly established in connection
 

with the offering of securities targeted to the institutional market (commercial paper, for example). Third,
 

limited partnerships also, of course, were in existence in
 

1984 and long pre-date the adoption of Rule 3a-5. As
 

indicated above, the Staff nevertheless has taken the
 

position that finance subsidiaries organized as limited
 

partnerships issuing non-voting preferred partner interests 

but otherwise complying with the requirements of Rule 3a- 5 

may rely on the exemption for finance subsidiaries under
 

Rule 3a-5. 

* * *

We respectfully request your confirmation of our
 

view that Rule 3a-5 may be interpreted to permit a business
 

trust issuing Preferred Trust Certificates to rely on
 
Office of the Chief Counsel, 

Division of Investment Management -14­

Rule 3a- 5. Should you have any questions, please contact 

the undersigned at 212-558-3669, John E. Baumgardner, Jr.,
 

at 212-558-3866 or Robert S. Risoleo at 212-558-3570.
 

Very truly yours,
 

r~ oJ1. ~. W$~:~ ti~ 

Mark J. Welshimer