[Federal Register Volume 62, Number 50 (Friday, March 14, 1997)]
[Notices]
[Pages 12258-12259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6420]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IA-1617; 803-104]


Brac Associates Limited Liability Company, et al.; Notice of 
Application

March 7, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Advisers Act of 1940 (the ``Advisers Act'').

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    Applicants: Brac Associates Limited Liability Company (``Brac'') 
and Lexington Capital Partners, L.P. (``Lexington'').
    Relevant Act Sections: Order requested under section 205(e) of the 
Advisers Act for an exemption from section 205(a)(1) of the Advisers 
Act.
    Summary of Application: Applicants are a limited liability company 
and a limited partnership that a family formed to facilitate and 
simplify the investment of its assets and multiple trusts established 
by family members. Applicants request an order to permit registered 
investment advisers to charge them performance-based advisory fees.
    Filing Dates: The application was filed on August 29, 1996, and 
amended on February 12, 1997.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the SEC orders a hearing. Interested 
persons may request a hearing by writing to the SEC's Secretary and 
serving applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on April 2, 
1997, and should be accompanied by proof of service on applicants, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, c/o Antaeus Enterprises, Inc., Suite 3020, 420 Lexington 
Avenue, New York, New York 10170.

FOR FURTHER INFORMATION CONTACT:
Brian T. Hourihan, Senior Counsel, at (202) 942-0526, or Mary Kay 
Frech, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Applicants were formed by the Beinecke family to facilitate and 
simplify the investment of Beinecke family assets and trusts 
established by Beinecke family members. Applicants are excepted from 
registration under the Investment Company Act of 1940 under section 
3(c)(1). Applicants request an order under section 205(e) of the 
Advisers Act granting an exemption from section 205(a)(1) of the 
Advisers Act to permit registered investment advisers to charge them a 
performance-based advisory fee.
    2. Brac and Lexington are essentially Beinecke family investment 
vehicles. Brac is a Delaware limited liability company that is owned by 
Antaeus Enterprises, Inc. (``Antaeus''), one individual Beinecke family 
member, and four irrevocable trusts (the trustees and beneficiaries of 
which are all Beinecke family members). Lexington is a Delaware limited 
partnership that is owned by Antaeus, four individual Beinecke family 
members, fifteen irrevocable trusts and one revocable grantor trust 
(the trustees and beneficiaries of which are all Beinecke family 
members), and two investment vehicles established by Mr. Robert L. 
Bael, a long-term family employee and an executive officer of Antaeus 
(together, the ``Bael Partners'').
    3. Brac's managing member and Lexington's general partner, Antaeus, 
is responsible for making investment decisions for applicants. Antaeus 
is an investment management company owned by four trusts established by 
William Sperry Beinecke for the benefit of his four children. Antaeus 
acts as coordinator and administrator of the Beinecke family assets, 
including certain trusts. Antaeus invests in publicly traded and 
privately held fixed income and equity securities and investment 
partnerships, with a portion of its assets invested in applicants. No 
management, performance, or other fee is charged to the members of Brac 
or the limited partners of Lexington.
    4. Applicants state that they want to participate in investment 
opportunities managed by registered investment advisers that seek to 
charge applicants a performance-based advisory fee pursuant to rule 
205-3 of the Advisers Act. Applicants represent that neither 
themselves, Antaeus, any other Beinecke family member who acts as 
trustee of any Beinecke trust, any other Beinecke family member who is 
a beneficiary of any of the Beinecke trusts, nor any partner, trustee 
or beneficiary of the Bael Partners has any relationship with, or is an 
affiliate or an interested

[[Page 12259]]

person of, any such registered investment adviser.
    5. All current members of Brac and the majority of limited partners 
of Lexington, as well as the general partner, have a net worth 
exceeding $1,000,000 and thereby satisfy the client eligibility 
requirements of paragraph (b) of rule 205-3. However, nine trusts which 
are limited partners of Lexington fail individually to satisfy the net 
worth requirements of rule 205-3(b) (the ``Non-qualifying Trusts'').\1\ 
Six of the Non-qualifying Trusts have been established on behalf of six 
of the grandchildren of William Sperry Beinecke, whose ages range form 
7 to 17. The seventh Non-qualifying Trust is a grantor trust which was 
established by a seventh grandchild of William Sperry Beinecke upon 
reaching the age of majority. Such grandchildren are the ultimate 
beneficiaries of (a) the four trusts which own Antaeus, a corporation 
having assets with an estimated market value in excess of $50 million, 
and (b) the trusts which are qualifying limited partners of Lexington. 
The eighth Non-qualifying Trust is a testamentary trust beneficially 
owned by the four adult children of William Sperry Beinecke, each of 
whom has assets in excess of $1,000,000. The ninth Non-qualifying Trust 
is beneficially owned by the three adult children of Mr. Bael. Each of 
the Bael children is expected to be an eventual beneficiary of the 
estate of his or her parents to the extent of more than $1,000,000. As 
a result of the limited partnership interests held by the Non-
qualifying Trusts, Lexington may not be treated as satisfying the 
client eligibility requirements in paragraph (b) of rule 205-3.
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    \1\ It is unlikely that the alternative requirement of having at 
least $500,000 under the management of the investment adviser will 
be satisfied, because applicants invest their assets in multiple 
private investment companies.
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    6. Applicants request that any relief be applicable not only with 
respect to the Non-qualifying Trusts that are currently limited 
partners of Lexington, but also with respect to future Beinecke family 
trusts and custodianships under the Uniform Gift to Minors Act 
(``UGMA'') having Beinecke family members as trustee or custodian, as 
applicable, that may become limited partners or members, as the case 
may be, of applicants in the future. Such future trusts and 
custodianships will comply with the representations set forth in the 
application.

Applicants' Legal Analysis.

    1. Section 205(a)(1) of the Advisers Act generally prohibits a 
registered investment adviser from receiving compensation on the basis 
of a share of capital gains in or capital appreciation of a client's 
account, or any portion thereof. Section 205(e) of the Advisers Act 
provides that the SEC may exempt any person or transaction, or any 
class or classes of persons or transactions from section 205(a)(1) of 
the Advisers Act if and to the extent that the exemption relates to an 
investment advisory agreement with any person that the SEC determines 
does not need the protection of section 205(a)(1), on the basis of such 
factors as financial sophistication, net worth, knowledge of and 
experience in financial matters, amount of assets under management, 
relationship with a registered investment adviser, and such other 
factors as the SEC determines are consistent with section 205.
    2. Rule 205-3 provides an exemption from the prohibition against 
performance-based compensation in section 205(a)(1) provided the 
conditions of the rule are satisfied. Paragraph (b)(1) of rule 205-3 
requires each client entering into an investment advisory contract that 
provides for such compensation to be: (a) A natural person or a company 
who immediately after entering into the contract has at least $500,000 
under management of the investment adviser; or (b) a person who the 
registered investment adviser reasonably believes, prior to entering 
into the contract, is a natural person or a company whose net worth at 
the time the contract is entered into exceeds $1,000,000. Paragraph 
(b)(2) of the rule provides that the term ``company'' does not include 
private investment companies such as applicants unless each of the 
equity owners is a natural person or a company, as defined therein, 
that meets the eligibility requirements of paragraph (b)(1) of the 
rule. A trust is expressly included in the definition of a ``company.'' 
Applicants believe that a custodianship should be viewed as a type of 
trust for this purpose because, under UGMA, a custodian is a fiduciary 
whose duties and powers are similar to those of a trustee.
    3. The client eligibility requirements of rule 205-3 reflect the 
SEC's recognition that certain high net worth clients have the capacity 
to bear the additional risks of performance fees, as well as the 
ability to protect themselves against the potential abuses of 
performance fees. Applicants are unable to rely on the rule because the 
Non-qualifying Trusts do not satisfy the $500,000 under management or 
the $1,000,000 net worth requirement. However, applicants believe that 
exemptive relief is appropriate under and consistent with the purposes 
of section 205(a)(1) and complies with the factors specified in section 
205(e) of the Advisers Act because: (a) Antaeus, the entity which makes 
the investment decisions for applicants, satisfies the net worth 
requirement, is financially sophisticated with very substantial 
knowledge of and experience in financial matters, and is fully able to 
assess the potential risks of performance fees; (b) each trustee of the 
Non-qualifying Trusts is a family member of the beneficiaries thereof 
who, in addition to possessing a high level of financial sophistication 
and very substantial knowledge of and experience in financial matters, 
have substantial personal wealth, entitlements or expectancies invested 
in applicants, and may reasonably be presumed to be acting in the best 
interests of the beneficiaries who are their close family members; and 
(c) the beneficiaries of the Non-qualifying Trusts have the financial 
means to bear the potential risks of performance fees, because each 
satisfies the net worth requirement if his or her entitlements and 
expectancies are aggregated for this purpose, and do not have a 
relationship with prospective registered investment advisers.
    4. Because those executing investment authority for the Non-
qualifying Trusts have such strong and intimate familial relationships 
to the beneficiaries, applicants believe that it is not unreasonable to 
presume that the commonality of such interest will result in the 
decision-maker behaving in the best interests of the beneficiaries. 
Except for the requested exemption for the Non-qualifying Trusts and 
custodianships, the requirements of rule 205-3 are satisfied in all 
respects. Thus, applicants believe that granting the requested 
exemption is appropriate under and consistent with the purposes of 
section 205(a)(1) and the factors specified in section 205(e).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-6420 Filed 3-13-97; 8:45 am]
BILLING CODE 8010-01-M