.. ... ~
 

28 DEè 1994
 p. Bli
 Our Ref. No. 94-722-CC
 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Caxton Corporation


DIVISION OF INVESTMNT MAAGEMENT File No. 132 - 3
 

Your letter of November 3, 1994 requests assurance that we
 

would not recommend that the Commission take any enforcement
 

action under the Investment Company Act of 1940 ("1940 Act") if,
 

as more fully described in your letter, Troye Limited Partnership
 

("Troye") counts the defined contribution plan sponsored by
 

Caxton Corporation ("Caxton"), Troye's general partner, as a
 

single beneficial owner of Troye's securities for purposes of
 

section 3 (c) (1) of the 1940 Act.
 

According to your letter, Caxton employs approximately 120
 

people. The company has established the Caxton Corporation
 

Savings & Profit-Sharing Plan (the "Plan"), a participant-


directed defined contribution plan qualified under section 401 (a)
 

of the Internal Revenue Code and subj ect to the Employee
 

Retirement Income Security Act of 1974, as amended ("ERISA").
 

The Plan has four trustees, all of whom are senior officers of
 

Caxton. The Plan permits Caxton employees to invest in four
 

options: three investment companies registered under the 1940
 

Act and Troye. Caxton manages Troye' s portfolio, which is
 

invested primarily in securities and commodities. Troye has
 

assets of approximately $328 million, including approximately $20
 

million invested by Caxton employees through the Plan. Caxton
 

receives no management or incentive fees ~t th respect to that
 

portion of Troye' s assets contributed by Caxton employees.
 

Troye is not registered under the 1940 Act in reliance on
 section 3 (c) (1) of the Act, which excepts from the definition of 

investment company any issuer whose outstanding !ecurities are
 

beneficially owned by not more than 100 persons. As of
 

September 30, 1994, Troye had 43 limited partners, counting the
 

Caxton Plan and four other participant-directed defined
 

contribution plans as single beneficial owners.
 

In PanAgora Gro~p Trust (pub. avail. Apr. 29, 1994), the
 

staff concluded that, for purposes of determining compliance with
 the 100-person limit of section 3 (c) (1), each participant in a 

participant-directed defined contribution plan who chooses to
 

invest in a private investment company must be counted as an
 

individual beneficial owner of that company's securities. The
 

PanAgora position would require Troye to count each Caxton
 

employee who has elected to invest in Troye through the Caxton
 

Plan as a beneficial owner of Troye.
 

1 Section 3 (c) (1) also requires that the issuer is not 

making and does not propose to make a public offering of its
 

securities. You represent that Troye satisfies this requirement.
 
- 2 ­

The investment vehicle proposed in the PanAgora letter was
 

to be created as an investment vehicle for a variety of plans
 

unaffiliated with the sponsor or the investment vehicle. By
 

contrast, the Caxton Plan participants who invest in Troye are
 

investing in a partnership for which Caxton acts as sponsor,
 

general partner, and investment adviser, and with which Caxton
 

employees have substantial contact and familiarity. You
 

represent that many Caxton employees are involved in the
 

operation of Troye and that all Caxton employees have easy access
 

to those employees and to the four senior Caxton officers who
 

serve as the trustees of the Caxton Plan. Thus, you assert that
 

Caxton Plan participants have complete and accurate informtion
 

about Troye sufficient to make an informed investment decision,
 including information regarding Troye's investment objectives, 

portfolio, and performnce.
 

Based on the foregoing fact~ and representations, we would 

not recommend enforcement action to the Commission if, for

purposes of section 3 (c) (1), Troye counts the ~axton Plan as a 

single beneficial owner of Troye's securities. Our position 

applies notwithstanding the addition of new employees under the 

Caxton Plan, provided that these employees will have the same 

access to senior management and pertinent informtion about 

Troye's operations and investments that current Caxton employees 

have, as described in your letter. 

Because our position is based upon the unique facts and
 

representations in your letter, any different facts or
 

circumstances would likely require a different conclusion.
 

Further, this response expresses the Division's position on
 

2 Our position is based specifically on the relationship 

between Caxton and Troye and the unusual degree of access Caxton 

employees have to informtion about Troye. This letter should 

not be read as reversing the interpretive position expressed in 

PanAqora or as agreeing with any other argument set forth in your letter. 

3 Our conclusion applies only to the Caxton Plan and does
 

not extend to the other limited partners of Troye that are
 

participant-directed defined contribution plans. Simultaneously
 

with this response, the staff is issuing a letter providing until
 

December 31, 1995 for private investment companies meeting
 

certain conditions to come into compliance with the PanAqora
 

position. Until then, assuming Troye meets the specified
 

conditions, it can continue to count each of those other plans as
 

a single beneficial owner of its securities. No later than
 

December 31, 1995, the other plans must liquidate their
 

investments in Troye, or Troye must count each participant
 

invested in Troye through those Plans as a beneficial owner of


Troye for purposes of section 3 (c) (1) . 
- 3 ­

enforcement action only and does not purport to express any legal
 

conclusions on the issues presented.
 

B~.~~l~ 

Senior Counsel
 
ROSENMAN & COLIN 

S?S MADISON AVENUE. NEW YORK. NY 10022-2S8S
 

TE:LE:PHONE: (2'21 lJ.o.eeoo SÀ"UE:L I. ROSE:"'...... (iees -'Sl73) 

CÀSLE: RoeOKÀV NE:WVORK RÀL"H ... COLIN (leCO-ISlSS) 

TE:LE:eOPIER (212) lJ.0-e776
 

(112) Sl3S-067lJ WÀSHINGTON O....,CE

TELE" .27571 ROSCOL (ITT) 1300 18~" STREET. N. W. W"SHINGTON, O. C. 10036 871&20 RC"LC NVK (W. u.) TELEPHONE: CIOII .83-7177 

EDWAJID H. F'LEISCHMAN 

TEL (212) 8.0 ee.oo
 

Section 3 (c) (1) 

November 3, 1994
 

ACT :reA of. 11'10 

SEION ~G.)(i) Barbara Green, Esq.
 

Deputy Director RULE 

Division of Investment Management
 

450 5th street, N. W.
 

Washington, D. C. 20549 i~ii~BILIT 1)-cc.;, ~t-jjJL

Re: Caxton Corporation §401 (k) Plan - Troye 

Limited Partnership
 

Dear Ms. Green:
 

On behalf of our client, Caxton Corporation ("Caxton"), we
 

hereby request the staff of the Division of Investment Management
 

to concur in our view that the position taken by the Division in
 

the no action letter concerning PanAaora GrouD Trust (Apr. 29,
 

1994) should not preclude continued investment in Troye Limited
 

Partnership ("Troye") by the Caxton Corporation Savings & Profit-


Sharing Plan (the "Caxton Plan"), a participant-directed section
 

401 (k) plan.
 

In the PanAqora letter, the Division took the position that,
 

if a qualified plan which invested in the group trust thereunder
 

consideration allowed plan participants to allocate their
 

individual account balances to the group trust and/or to allocate
 

their investments in the group trust among the various investment
 

options provided by the group trust through its sub-trusts, each
 

individual participant who exercised such choice would be
 

considered to be a beneficial owner of the group trust for the
 

purposes of calculating the 100-beneficial-owner limit imposed by


Section 3 (c) (1) of the Investment Company Act as a condition of 

exclusion from "investment company" status and regulation under
 

such Act. As you know, many people interpreted the PanAgora
 

letter as a reversal of the Division's prior published position
 
Barbara Green, Esq.
 

November 3, 1994
 

Page 2
 

on this issue taken in Intel Corporation (Nov. 18, 1992).
 

In a subsequent letter to Edward Fleischman of this Firm,
 

the staff delayed the effective date of the interpretive position
 

taken in the PanAgora letter until January 1, 1995. Edward H.
 

Fleischman (June 30, 1994). The staff also requested that
 

interested parties submit information in writing which would aid
 

the Division in clarifying its position concerning the
 

interaction of participant choices of investments in qualified
 

plans and the Section 3 (c) (1) exclusion from the definition of
 

"investment company". Specifically, the staff requested that any
 

request for clarification should distinguish the fact pattern
 

submitted from the fact pattern described in the PanAqora letter.
 

The purpose of this letter is to request that the staff
 

interpret its position in the PanAgora letter in a manner that
 

will permit Troye to continue to count the Caxton Plan as a
 single beneficial owner for purposes of Section 3 (c) (1), even

though Troye includes investments by the CaxtonPlan pursuant to 

participant direction. We believe that the factors set forth
 

below distinguish the fact situation which exists at Caxton/Troye
 

from the fact situation described in the PanAgora letter.
 

Description of Caxton/Trove
 

At September 30, 1994, Caxton employed approximately 120
 

people. Caxton is the general partner of Troye, a Connecticut
 

limi ted partnership which commenced operations in February 1983.
 

The business of Troye is investing in securities and commodities.
 

Caxton has sole discretion over, and responsibility for, Troye's
 

transactions. Caxton itself makes the majority of the trading
 

decisions on behalf of Troye and, in addition, exercises
 

discretionary authority to allocate funds to independent
 

discretionary traders. At September 30, 1994, the assets of
 

Troye exceeded $328 million.
 

Troye structured its operations and admitted limited
 

partners in reliance upon the exclusion from the definition of


"investment company" permitted by Section 3 (c) (1) of the 

Investment Company Act as interpreted prior to the issuance of
 

the PanAgora letter. Limi ted partnership interests in Troye were
 

offered in transactions which are exempt from registration under
 

the Securities Act of 1933. Troye has not made, is not making
 

and does not propose to make a public 
 offering of its securities. 

After giving effect to the attribution principles which must be

used for the purposes of Section 3 (c) (1) of the Investment 

Company Act (other than any attribution arising from the
 

application of the PanAaora letter), Troye has fewer than 100
 

beneficial owners of its securities.
 
Barbara Green, Esq.
 

November 3, 1994
 

Page 3
 

The Caxton Plan was adopted on or about April 1, 1983 and is
 

intended to be a qualified plan within the contemplation of
 

section 401(a) of the Internal Revenue Code of 1986, as amended
 

(the "Code"). The Caxton Plan is subject to the provisions of


the Employee Retirement Income Security Act of 1974 ("ERISA").
 

Four senior officers of Caxton (Caxton's President, its
 

Controller, its Treasurer and its General Counsel), all of whom
 

are sophisticated and knowledgeable in investment matters and all
 

of whom are intimately involved with the affairs of Troye, are
 

the trustees of the Caxton Plan. Troye is one of four vehicles
 

that are made available to participants in the Caxton Plan for
 

investment of their account balances thereunder. These vehicles
 

were all selected by the trustees of the Caxton Plan in the
 

exercise of their ERISA fiduciary duty. While the trustees of
 

the Caxton Plan allow employees to allocate portions of their
 

assets in the Caxton Plan to Troye, neither Caxton nor any of the
 

trustees recommends that any employee elect to make such an
 

allocation. Furthermore, in the case of the Caxton Plan, Caxton
 

has waived the management and incentive fees that Caxton receives
 

with respect to the investments by other limited partners in


Troye. 

At December 31, 1993, the assets of the Caxton Plan
 

aggregated $19,759,141 and 118 individuals were participants
 

therein. As pointed out above, the Caxton Plan provides each
 

participant with a number of choices concerning the investment of
 

his or her account balance thereunder and is intended to be a
 

plan described in section 404 (c) of ERISA. The current 

investment choices available to participants in the Caxton Plan
 

are the Fidelity Daily Income Trust, the Fidelity Equity Income
 

Fund, the Fidelity Intermediate Bond Fund and the Troye Limited
 Partnership. 

At September 30, 1994, Troye had 43 limited partners. Of
 

these limited partners, 5 were qualified plans all of which
 

allowed their participants to choose whether or not to have all
 

or a portion of their respective account balances invested in
 

Troye. The aggregate amount of limited partnership interests in
 

Troye owned by all qualified plans at September 30, 1994 was
 

approximately $31 million, or approximately 9.5' of Troye. The
 

Caxton Plan owned approximately 5.1' of Troye and no other plan
 

owned more than 2.4' of Troye. Since the ownership of Troye by
 

qualified plans is in the aggregate less than 25', a plan which
 

invests in Troye is deemed, for 
 the purposes of applying the
 

fiduciary responsibility provisions of ERISA, to own its limited
 

partnership interest in Troye but is not deemed to own a
 

undivided interest in the underlying assets of Troye. Department
 

of Labor Regulation 2510.3-101. For the purposes of ERISA,
 
Barbara Green, Esq.
 

November 3, 1994
 

Page 4
 

therefore, the assets of Troye that are attributable to the plan
 

accounts of the individuals who direct their assets into Troye
 

are not "plan assets" and are not subject to the responsibilities
 

and prohibitions imposed upon fiduciaries of employee benefit
 

plans by the provisions of Part 4 of Title I of ERISA.
 

Distinctions from PanAaora
 

For the reasons set forth below, we believe that the
 

Caxton/Troye fact pattern differs markedly from the PanAgora
 situation. 

1. In the Caxton/Troye situation, a portion of the assets
 of the 401 (k) plan of the general 
 partner of an investment
 

partnership has been invested for a numer of years in such
 

partnership. At all times, significantly less than 25 percent of
 

the assets of Troye were attributaple to investments by plans.
 

In contrast, the PanAgora si tuation involved a newly formed group
 

trust whose target market was unaffiliated participant-directed
 

plans. In fact, by definition, 100% of the assets of a group
 

trust like the PanAgora vehicle, but unlike Troye, must be
 

attributable to investment by qualified plans.
 

2. The investment vehicle proposed in the PanAaora letter
 

was to be created as an investment vehicle for a variety of plans
 

unrelated to the sponsor of such investment and to each other.
 

By contrast, the Caxton employees who participate in the Caxton
 

Plan invest in a partnership for which Caxton acts as sponsor,
 

general partner and investment advisor and with which the
 

employees of Caxton have substantial contact and familiarity.
 

The Division has previously expressed concern that participants
 

in many defined contribution plans do not receive sufficient
 

information to make an informed investment decision concerning
 

direction of their plan account balances. In the Caxton/Troye
 

situation, many Caxton Plan participants are intimately involved
 

in the operation of Troye and all personnel have access to the
 

trustees of the Caxton Plan. Thus, informational concerns in the
 

Caxton/Troye situation are significantly different from those in
 

the PanAqora situation, where unaffiliated plans were involved
 

and personal contact was missing.
 

3. The group trust described in the PanAaora letter was
 intended to be a so-called plan asset entity wi thin the 

contemplation of the Department of Labor regulations. Troye is
 

not a plan asset entity since ownership of Troye by benefit plans
 

is not considered to be "significant" under such regulations.
 

Thus, the Department of Labor, the agency which is charged by law
 

with regulating the investment activities of employee benefit
 

plans, has determined that, in the case of Troye and other
 
Barbara Green, Esq.
 

November 3, 1994
 

Page 5
 

similarly situated entities, no regulation based upon the plan
 

asset "look through" is appropriate or necessary. The Commission
 

stated that they are
 

currently engaged in a j oint study concerning the relationship of
 

so-called 404 (c) plans and the various securities laws. At the
 

least it would appear to be premature to preclude participation
 

by the Caxton Plan in Troye, and to require redemption of the
 

interests in Troye held for years by the Caxton Plan, before the
 

completion of that j oint study, before any resulting
 

determination that the principal task of regulation in situations
 

such as Troye's should lie with the Commission, and before the
 

effective date of any required enabling legislation.
 

and the Department of Labor have publicly 


4. The investment in Troye by the Caxton Plan represents
 

substantially less than 10% of Troye. Congress, in enacting
 

Section 3 (c) (1) (A), established a 10% "bright line" test in order
 to require a look-through for the purposes of the Section 3 (c) (1) 

exclusion. Where a plan like the Caxton Plan is affiliated with
 a Section 3 (c) (1) entity that does not hold plan assets, we believe that the traditional application of Section 3 (c) (1) to 

such plans, as set forth in Intel, is more appropriate than the
 

complete "look through" approach of PanAgora.
 

5. In the PanAqora letter, the commingled investment
 

vehicle under consideration was a new vehicle that had no
 

investors or investments. Thus, in the PanAqora situation, there
 

was no hardship imposed upon either an existing issuer or its
 

existing investors. By contrast, in the Caxton/Troye situation
 

over one half of Caxton's employees have elected to place
 

portions of their Caxton Plan account balances in Troye. All of
 

these employees have participated in Troye through this election
 

for at least three years, and in many cases for a longer period
 

of time. Moreover, as mentioned above, in the case of the Caxton
 

Plan, Caxton has waived the management and incentive fees it
 receives from other limited partners of Troye. Therefore, the 

application of the PanAaora letter in the Troye/Caxton situation
 

will impose a substantial hardship by requiring Caxton' s
 

employees to ignore (and withdraw from) the otherwise available
 

investment vehicle with which they and the trustees are most
 

directly involved and which is being made available free of


charge. 

6. Application of the PanAqora position specifically to
 

Caxton/Troye would create the following anomalous result.
 

CUrrently, the Caxton Plan is a limited partner of Troye, for
 

which Caxton acts as general partner and trading adviser.
 

Instead, Caxton could manage the portions of the Caxton Plan as a
 

separate managed account, without registering as an investment
 

adviser and without the securities laws mandating any addi tional
 
Barbara Green, Esq.
 

November 3, 1994
 

Page 6
 

disclosure or providing any greater protections to the Caxton
 

Plan or its participants. In fact, the Caxton Plan and its
 

participants currently have greater protection and benefits by
 

virtue of having limited liability as a limited partner in Troye
 

and the ability to participate in a portfolio of investments made
 

available by Troye' s size but which would not be possible for a
 

single smaller managed account.
 

7. Many qualified plans are undertaking investment
 

activities which cannot be accomplished through an investment
 

company. For instance, the Investment Company Act restricts the
 

ability of a registered investment company to purchase securities
 

on margin, to effect short sales, to engage in futures
 

transactions and to engage in certain option strategies. In
 

contrast, ERISA permits and many plans do, trade on margin,
 

effect short sales, buy and sell options and trade futures
 

wi thout being subj ect to such restrictions. Applying the
 

PanAgora letter to the Caxton/Troye situation would effectively
 

preclude the participants from participating in these types of


investments. 

Because plan fiduciaries, even in a plan which provides for
 

participant direction, have an overriding responsibility to


examine, approve and moni tor ~he investment al ternati ves made 

available, investment by a person in a private investment company
 

throuqh a plan provides that individual with more protection than
 

he or she would have if that individual was able to, and did,
 

invest individually. Thus, the application of the PanAgora
 posi tion to caxton/Troye would frustrate the purposes of section

404 (c) of ERISA and would deprive Caxton's employees of the 

ability, with an overlay of ERISA protection, to participate in
 

the nontraditional but modern and ERISA-complying investments
 

engaged in by Troye at no cost to the employee.
 

Conclusion 

On the basis of the foregoing, we advise you of our 
 opinion

that the Division's position in the PanAqora letter should not
 

preclude continued investment in Troye by the Caxton Plan, and we
 

request that the Division advise us whether it concurs in our


conclusion. 

This is an extremely important issue for the employees of
 

Caxton. We shall be pleased to discuss this issue in greater
 

detail at your convenience and to submit any further information
 

that you might require. since the effective date of the PanAgora
 

letter is now January 1, 1995, we would appreciate your prompt
 

consideration of this letter.
 
--

Barbara Green, Esq.
 

November 3, 1994
 

Page 7
 

Thank you for your consideration in this matter.
 

Very truly yours,


ROSENM & COLIN r,
 ¿i ..-~..rI /:; .
 

By: .?iftY¿ l-~((~).1 C.;ÚtflO-.
 A Partner 

cc: Scott Bernstein, Esq.