SHEREFF FRIEDMAN HoFFMAN GooDMAN LLP

919 THIRD AVENUE

NEW YORK 10022-9998

TELEPHONE 212 756-9500

FACSIMILE 212 758-9526

TELEX 237328

MAROERY NEALE

DIRECT DIAL NUMBER

212 891-9228

Jack Murphy Esq

Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street NW

Washington DC 20549

Re The Ayco Company L.P

Investment Advisers Act of 1940

as amended Section 205a3

The Ayco Company L.P Ayco is an investment adviser registered under the

Investment Advisers Act of 1940 as amended the IAA Ayco is limited partnership that

was established on October 1994 under the Delaware Revised Uniform Limited Partnership

Act the Delaware Act It has one general partner Hambre Inc New York corporation

the General Partner and currently has 61 limited partners Aycos Partnership Agreement

as hereinafter defined allows for additional limited partners to be admitted prior to

December 1996 and additional limited partners are scheduled to be admitted in December

1995 It is likely that additional limited partners will be admitted prior to December 1996

Ayco currently has over 10000 advisory clients As required by Section 205a3 of the IAA

the advisory contract with each client provides in substance that Ayco will notify the client of

any change in its membership within reasonable time after such change We hereby seek the

assurance of the Staff of the Securities and Exchange Commission the Commission that it

will not recommend enforcement action under the IAA against Ayco if as set forth below Ayco

does not include in its contracts with clients the provision required by Section 205a3 with

respect to notice of changes in limited partners

Discussion of Facts

Ayco provides either directly or through subsidiaries financial planning financial

education benefit consulting insurance agency and insurance brokerage as well as investment

1q1ti tV IT -VS

Dear Mr Murphy
SHEREFF FRIEDMAN HoFFMAN GOODMAN LLP

Jack Murphy Esq

October 25 1995

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advisory services and ancillary sales of products In particular Ayco offers the following

advisory services

Individual Counseling Services Incidental to Aycos primary business of

financial and tax counseling Ayco makes recommendations as to

investments suited to the overall personal objectives of the individual

client As of July 18 1995 Ayco had 1976 individual counseling clients

and 196 corporate clients

Asset Management Services Ayco Asset Management division of

Ayco provides investment supervisory services It manages equity

balanced and fixed income accounts for clients As of July 18 1995

Ayco had 540 asset management clients

Money in Motion Program This program is an educational program that

focuses on the fundamentals of financial planning for large groups of

corporate employees The service may include workbook with

customized employee benefit supplement RoadMap software

newsletters toll-free answer line two-tape video set and half-day

seminar Fees range from $20 to $450 per participant depending on the

number of participants in program and components selected As of

July 18 1995 Ayco had 7471 individual Money in Motion clients

Financial Related Services Financial Related Services provides broad

spectrum of financial planning seminars As of July 18 1995 Ayco had

36 Financial Related Services clients

As of July 18 1995 Ayco had total of 10219 clients

Hambre Inc is Aycos General Partner John Breyo and Barry Hammerling

are the sole shareholders of the General Partner each owning 50% interest therein The

Amended and Restated Agreement of Limited Partnership dated as of December 1994 the

Partnership Agreement of Ayco provides

Except as otherwise expressly provided or limited

by the provisions of this Agreement the General

Partner shall have full and complete authority to

manage and control the business and affairs of the

Partnership to make all decisions affecting the

business and affairs of the Partnership and to take
SHEPEFF FRIEDMAN HOFFMAN GOODMAN LLP

Jack Murphy Esq

October 25 1995

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all such actions as it deems necessary or appropriate

to accomplish the purposes of the Partnership

being understood that the Limited Partners shall not

participate in the management and control of the

Partnership emphasis supplied

The General Partner owns and will continue to own following admission of new

limited partners of Ayco

The Partnership Agreement provides for four classes of limited partners although

units of only two classes Class and Class are currently outstanding

There are currently 59 Class limited partners all of whom are employees of

the General Partner who are leased to Ayco The number includes 29 employees who purchased

Class limited partnership units in an offering that was completed on June 19 1995

Additional Class limited partnership units may subsequently be offered and sold to other

employees from time to time No Class limited partner owns or assuming the sale of Class

limited partnership units to additional employees will own 5% or more of Ayco Ayco

anticipates that any new limited partners who are subsequently admitted will in the aggregate

own less than 20% of Ayco

Messrs Breyo and Hammerling are currently the only Class limited partners

and own in the aggregate 35% of Ayco Following the admission of additional Class limited

partners as anticipated by the Partnership Agreement the Class limited partners will own in

the aggregate 29% of Ayco

The Partnership Agreement imposes restrictions on the ability of the Class and

limited partners to withdraw from Ayco prior to its dissolution and prohibits the transfer or

assignment of such limited partnership units without the prior written approval of the General

Partner If limited partner terminates his employment with the General Partner the limited

partners units will be purchased by Ayco

The Travelers Inc holds an option to acquire all of the Class limited

partnership units The option is not exercisable until January 1998 If the option is exercised

in full the Class limited partnership units will represent 13.02% interest in Ayco The

Partnership Agreement provides that Class limited partners will be guaranteed distributions

equal to fixed minimum percentage of gross revenues and that the interests of Class limited

partners may not be diluted The Partnership Agreement also imposes restrictions on transfer

of Class limited partnership units and grants certain rights of first refusal with respect thereto
SHEREFF FRIEDMAN HOFFMAN GoODMAN LLP

Jack Murphy Esq

October 25 1995

Page

Class limited partnership units will be issued in exchange for Class and

limited partnership units of certain limited partners who desire to withdraw from Ayco or

terminate their employment with the General Partner but whose interests are not redeemed by

Ayco Class limited partners will receive guaranteed distribution and will have priority to

have their interests redeemed in full based on the chronological order in which they become

Class limited partners

Each of Aycos advisory contracts currently provides

The Ayco Company L.P limited partnership

will notify you of any change in general partner

and to the extent required by applicable law of

any changes in its limited partners in each case

within reasonable time of such change.1

On May 24 1995 Ayco notified its clients of the anticipated admission of 29 additional Class

limited partners who were admitted as of June 19 1995

Given the large number of limited partners the potential frequency of their

admission and withdrawal and the lack of any ability on the part of the limited partners to

participate in Aycos management for the reasons discussed below we hereby seek assurances

from the Staff of the Commission that it will not recommend enforcement action against Ayco

if it does not include the provision required pursuant to Section 205a3 of the IAA with

respect to the provision of notice to clients of changes in limited partners

Legal Discussion

Section 205a3 of the IAA provides in pertinent part

No investment adviser unless exempt from

registration pursuant to section 203b shall make

The language was drafted in anticipation of seeking the no-action assurance requested

herein In the event that such assurance is granted Ayco will not in the future provide

clients whose contracts contain such provision with notice of changes in limited partners

since Section 205a3 of the IAA requires contractual provision but does not itself

require actual notice of changes in limited partners In addition Ayco will not include in

future contracts any provision pursuant to Section 205a3 of the IAA with respect to notice

of changes in limited partners
SHEREFF FRIEDMAN HOFFMAN GooDMAN LLP

Jack Murphy Esq

October 25 1995

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use of the mails or any means or instrumentality of

interstate commerce directly or indirectly to enter

into extend or renew any investment advisory

contract or in any way to perform any investment

advisory contract .. if such contract .. fails to

provide in substance that the investment adviser

if partnership will notify the other party to the

contract of any change in the membership of such

partnership within reasonable time after such

change

As limited partnership Ayco is subject to the foregoing requirement and its advisory contracts

contain the requisite language

We respectfully submit that the mere notice of changes in limited partners is not

meaningful information to client of Ayco As described above all current limited partners are

employees of Ayco and the offer and sale of Class limited partnership units to an employee

is similar to many corporate equity participation programs such as stock option plans If Ayco

were organized as corporation rather than as limited partnership it would not be obligated

to notify clients each time there was change in share ownership

The fact that Ayco is organized as limited partnership does not create for the

limited partners as investors in Ayco any greater right to affect the management of Aycos

business than they would have as shareholders of an investment adviser organized as

corporation As stated in the preceding section the Partnership Agreement vests the right to

manage and control the business of Ayco in the General Partner and specifically provides that

the limited partners shall not participate in such management and control Indeed under

Delaware law it is in the interest of limited partner not to participate in management of

limited partnership so as to insulate himself from liability to the creditors of the partnership

Section 17-303a of the Delaware Act provides

limited partner is not liable for the obligations of

limited partnership unless he is also general

partner or in addition to the exercise of his rights

and powers as limited partner he participates in

the control of the business

Section 17-303b of the Delaware Act provides that limited partner does not

participate in the control of the business within the meaning of Section 17-303a by virtue
SHEREFF FRIEDMAN HOFFMAN GoODMAN LLP

Jack Murphy Esq

October 25 1995

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Moreover if change in limited partners were significant enough to result in

change in control of Ayco Aycos contracts with its clients would be deemed to be assigned

within the meaning of Section 202a1 of the IAA.3 Under such circumstances clients would

have to be notified and their consent to the assignment solicited

We respectfully further submit that the requirement that Ayco notify its clients of

any change in limited partners is superfluous in that any limited partner who is principal

executive officer of Ayco or member of Aycos investment committee that determines general

investment advice to be given to clients must be disclosed in Part II of Aycos Form ADV and

any written disclosure statement used in lieu thereof which must be delivered to clients at

inception of the advisory relationship and offered annually thereafter subject to the requirements

of Rule 204-3 under the IAA Rule 204-1 under the IAA specifies when Form ADV must be

amended to reflect changes in advisory personnel disclosed therein In addition Schedule to

Form ADV must be completed for any registered investment adviser organized as partnership

Notably the schedule does not require disclosure of every limited partner of limited

partnership rather only those limited partners who have contributed directly or indirectly

through intermediaries 5% or more of the partnerships capital must be identified on Schedule

The only limited partners currently reflected on Schedule to Aycos Form ADV are John

Breyo and Barry Hammerling Aycos Schedule would have to be amended pursuant to

Rule 204-1 under the IAA to reflect the addition of any other limited partner owning 5% or

more of Aycos capital

We have located nothing in the legislative history of the IAA specifically

explaining the purpose of the requirement in Section 205a3 relating to notification of changes

in the membership of partnership We believe that it is logical to conclude however that this

requirement was not intended to require notification of changes in the roster of limited partners

We base this conclusion on the following First there is no investor protection purpose to be

served by applying such requirement with regard to limited partners Second we believe that

of among other things being an employee of the limited partnership or its general partner

Assignment is defined in Section 202a1 of the IAA to include any direct or

indirect transfer or hypothecation of controlling block of the assignors outstanding

voting securities by security holder of the assignor but if the investment adviser is

partnership no assignment of an investment advisory contract shall be deemed to result from

the death or withdrawal of minority of the members of the investment adviser having only

minority interest in the business of the investment adviser or from the admission to the

investment adviser of one or more members who after such admission shall be only

minority of the members and shall have only minority interest in the business
SHEREFF FPIEDMAN HOFFMAN GooDMAN LLP

Jack Murphy Esq

October 25 1995

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prior to enactment of the IAA in 1940 investment advisory firms were organized typically as

either general partnerships or sole proprietorships although there were several firms organized

as corporations Not only does this fact support the argument that the subject requirement was

not intended to reach passive non-controlling investors like corporate shareholders or limited

partners it also explains the inconsistency of not treating corporate shareholders the same as

limited partners assuming no control in either case That is the framers of the IAA did not

contemplate that investment advisers would be organized as limited partnerships and fortiori

they did not intend to require that advisory clients be bombarded with what in some cases might

be hundreds of notices of changes in the identity of non-controlling holders of ownership

interests in the adviser

Further the Staff of the Commission has given no-action advice that is consistent

with our interpretation of the purpose of the notification requirement in Section 205a3 That

is in W.R Huff Asset Management Co. L.P pub available August 10 1994 WR_Huff

the Staff stated that it would not recommend enforcement action to the Commission under Rule

204-2a12 if W.R Huff Asset Management Co L.P W.RH Delaware limited

partnership registered as an investment adviser did not treat certain of its limited partners as

advisory representatives for purposes of the recordkeeping requirements of Rule 204-2a12

under the IAA The limited partners in question were individuals each of whom owned less

than 5% of WRHs limited partnership interests and was passive investor not involved in

WRHs investment decisions In granting the no-action assurance the Staff apparently found

persuasive two arguments made by WRH which were repeated in the Staffs letter The first

argument was that these limited partners were analogous to an incorporated investment

advisers non-controlling shareholders who are not included in the definition of advisory

representative unless they also have another relationship with the adviser that is specified in the

rule The second argument specifically cited by the Staff was the recent equalization of

treatment by the Commission of limited partners and shareholders under the Investment

Company Act of 1940 as amended the 1940 Act recognizing that they are similarly

situated

Section 2a3D of the 1940 Act defines affiliated

person to include any partner of another person

The Commission recently adopted Rule 2a3-1 under

the 1940 Act to except limited partners from this

defmition ifthe sole reason for the affiliation arises

from being limited partner investor We are

persuaded that the same reasoning underlying the

adoption of Rule 2a3-1 applies in the circumstances

you describe footnote omitted
SHEREFF FRIEDMAN HOFFMAN GooDMAN LLP

Jack Murphy Esq

October 25 1995

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We believe that the reasoning that persuaded the Staff in WR Huff should also

apply to Aycos request We do not believe that notice of every change in limited partners

provides meaningful or necessary disclosure to Aycos clients Clients will be notified and their

consent sought in the event of any change in control of Ayco that results in an assignment of

advisory contracts They will also be notified through revised disclosure in Part II of Aycos

Form ADV or other written disclosure statement of any material changes in advisory

personnel To subject Ayco to more onerous notification requirement than would be the case

if Ayco were organized as corporation would not seem to produce any tangible benefits to

clients

Accordingly we respectfully request the Staff to take the position that it will not

recommend enforcement action against Ayco if it does not include in its advisory contracts

provision otherwise required by Section 205a3 of the IAA with respect to notification of

changes in its limited partners

Please contact the undersigned at 212 891-9228 with any questions you may

have

Very truly yours

14/

Marger Neale

MKNfs
QEC i4

Our Ref No 95-426-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL The Ayco Company L.P

DIVISION OF INVESTMENT MANAGEMENT File No 801-48238

Your letter dated October 25 1995 requests our assurance

that we would not recommend enforcement action to the Commission

under Section 205a of the Investment Advisers Act of 1940

Advisers Act if The Ayco Company L.P Ayco registered

investment adviser does not include in its advisory contracts

provision obligating it to notify its clients when limited

partners withdraw from or new limited partners are admitted to

Ayco

Ayco is limited partnership organized under Delaware law

and currently has more than 10000 advisory clients Ayco has

one general partner Hambre Inc Hambre and 61 limited

partners The sole shareholders of Hambre John Breyo and

Barry Hammerling also are limited partners of Ayco and own in

the aggregate 35% of Ayco All of the other limited partners are

employees of Hambre who are leased to Ayco Aycos partnership

agreement allows for additional limited partners to be admitted

prior to December 1996

Section 205a of the Advisers Act provides that it is

unlawful for an investment adviser to enter into extend or

renew any investment advisory contract or in any way perform any

investment advisory contract if such contract fails to provide

that the investment adviser if partnership will notify the

other party to the contract of any change in the membership of

the partnership within reasonable time after such change ./

You assert that notwithstanding this provision an investment

adviser organized as limited partnership should not be required

to include provision in its advisory contracts requiring client

notification each time limited partner withdraws from or is

admitted to the limited partnership

In support of your argument you contend that limited

partners are passive investors and therefore are in comparable

position to corporate shareholders with respect to their right to

affect the entitys management You note that the Advisers

1/ You state that Aycos contract provides that Ayco will

notify clients of any changes in its limited partners to

the extent required by applicable law While we question

whether this language technically complies with Section

205 the position we take herein obviates the need to

address this issue further

2/ Under Delaware law limited partner is not personally

liable for the obligations of the partnership unless in

addition to the exercise of his rights and powers as

limited partner he participates in the control of the
Act does not require an adviser organized as corporation to

include provision in its advisory contracts providing for

notice of changes in share ownership notwithstanding that in

1940 numerous advisers were organized as corporations Given

the similarity between the status of limited partners and that of

shareholders you maintain that advisers organized as limited

partnerships also should not be required to notify clients of

changes in the identity of limited partners

The Commission acknowledged that limited partners and

shareholders are similarly situated in rule that equalizes

their treatment for purposes of the definition of affiliated

person under the Investment Company Act of 1940 1940 Act

Although this rule was considered in context outside of the

Advisers Act the staff subsequently applied similar reasoning in

issuing no-action letter under Advisers Act Rule 204-2 12

to an adviser organized as limited partnership W.R Huff

Asset Management Co L.P pub avail Aug 10 1994 Huff

Rule 04-2 12 requires that advisers keep such records for

business Section 17-303a of the Delaware Revised Uniform

Limited Partnership Act You state that Aycos partnership

agreement provides that the limited partners shall not

participate in the management and control of the

partnership

3/ See SEC Supplemental Report on Investment Counsel

Investment Management Investment Supervisory and

Investment Advisory Services August 17 1939 The

legislative history of the Advisers Act offers no guidance

with respect to the purposes underlying Section 205a

4/ We reject your argument that the application of Section

205a to limited partnership interests is superfluous

because advisers are required to amend Part II of Form ADV

to reflect certain material changes in advisory personnel

see Rule 204-1b under the Advisers Act and Item of

Part II of Form MV First this argument is not supported

by the statutory language or the legislative history

Second while Part II of Form ADV is required to be

delivered to clients at the inception of the advisory

relationship it only need be offered to existing clients

annually Section 205a requires that clients be

notified of certain information without requesting it

5/ Rule 2a3-l under the 1940 Act excepts limited partners from

the definition of affiliated person under Section 2a ID

of that Act which includes any partner of another person

provided that the persons status as limited partner is

the sole reason for the affiliation Investment Company Act

Rel No 19658 Aug 25 1993

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their advisory representatives term defined to include any

partner but not any shareholder of the adviser In Huff the

adviser argued that it should not have to maintain records of

limited partners securities transactions if those limited

partners owned less than of the advisers outstanding limited

partnership interests and had no other relationship with the

adviser

As illustrated by the foregoing we believe that generally

it is appropriate to treat limited partners comparably to

corporate shareholders because of the essentially passive nature

of limited partnership interest Therefore we conclude that

for purposes of Section 205a an investment adviser

organized as limited partnership need not notify clients of

changes in its limited partners ./ This position applies to all

limited partners including Messrs Breyo and Hanimerling who are

also the sole shareholders of Hambre Aycos general partner Of

course client consent would be required under Section 205a

if disposition of the limited partnership interests of these two

individuals or disposition of their interests in Hambre were to

result in the assignment of Aycos advisory contracts 7/

Our position is unaffected by the fact that all of Aycos

limited partners also are its employees There is nothing

in the express language of Section 205a or in the

legislative history to indicate that Section 205a was

intended to require client notification of changes in

partnerships advisory personnel Moreover if Congress had

intended that Section 205a apply to personnel changes

it seems unlikely that it would have singled out advisers

that are organized as partnerships as opposed to some other

organizational structure

We note nonetheless that Section 206 of the Advisers Act

which requires advisers to disclose all material facts to

their clients might require advisers to notify their

clients of material changes in advisory personnel

Capital Gains Research Bureau Inc 375 U.S 180 194

1963

2/ Section 205a of the Advisers Act requires that advisory

contracts provide that the adviser will not assign the

contract without the clients consent Section 202a of

the Advisers Act includes in the definition of assignment

any transfer of controlling block of an advisers

outstanding voting securities Section 202a also

provides that if the investment adviser is partnership no

assignment of an advisory contract shall be deemed to result

from the withdrawal or admission of minority of the

members having only minority interest in the adviser You

represent that Ayco will not rely on this less restrictive

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Accordingly we would not recommend enforcement action to

the Commission under Section 205a if Ayco does not include

in its advisory contracts provision obligating it to notify its

clients whenever there is change in the identity of Aycos

limited partners ./ 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 different

conclusion

IXCL

ana Cayne

Attorney

provision of Section 202a addressing the assignment of

partnerships advisory contracts in connection with the

transfer of minority limited partnerships interests and

instead Ayco will obtain client consent to the assignment

of its advisory contracts whenever change in Aycos

limited partners is significant enough to result in change

of control

./ Our position applies only to notification of changes in the

identity of limited partners An adviser organized as

limited partnership continues to be required to include in

its contracts notification provision with respect to

changes in its general partners

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