Document ID: SEC-2008-1763-0001
Agency: sec
Document Type: Notice
Title: Wortham Finance, L.P. et al.; Notice of Application
Posted Date: 2008-11-17T16:18:31Z

[Federal Register: November 17, 2008 (Volume 73, Number 222)]
[Notices]               
[Page 67901-67905]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17no08-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28484; 813-365]

 
Wortham Finance, L.P. et al.; Notice of Application

November 10, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under sections 6(b) and 
6(e) of the Investment Company Act of 1940 (the ``Act'') granting an 
exemption from all provisions of the Act, except section 9 and sections 
36 through 53, and the rules and regulations under the Act. With 
respect to sections 17 and 30 of the Act, and the rules and regulations 
thereunder, and rule 38a-1 under the Act, the exemption is limited as 
set forth in the application.

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Summary of the Application: Applicants request an order to exempt a 
vehicle formed for the benefit of certain eligible current employees of 
John L. Wortham & Son, L.P. (``Insurance LP'') from certain provisions 
of the Act. The vehicle will be an ``employees' securities company'' as 
defined in section 2(a)(13) of the Act.

Applicants: Wortham Finance, L.P. (``Finance LP''), JLW Finance, LLC 
(``Finance GP''), J. Wortham, LLC (``Insurance GP'') and Insurance LP 
(together with any business organization that results solely from a 
reorganization of Insurance LP into a different organizational 
structure or into an entity organized under the laws of another 
jurisdiction, ``Insurance LP''). Insurance LP, Finance LP, Finance GP 
and Insurance GP are collectively referred to herein as the ``Firm''.

Filing Dates: The application was filed on April 10, 2007 and amended 
on December 5, 2007 and October 30, 2008.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on December 8, 2008 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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F St., 
NE., Washington, DC 20549-1090. Applicants, 2727 Allen Parkway, Suite 
2400, Houston, Texas 77109-2115.

FOR FURTHER INFORMATION CONTACT: Shannon Conaty, Senior Counsel, at 
(202) 551-6827, or Janet M. Grossnickle, Assistant Director, at (202) 
551-6821, (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 at the 
Commission's Public Reference Room, 100 F St., NE., Washington, DC 
20549-1520 (tel. 202-551-5850).

Applicants' Representations

    1. Founded in 1915, Insurance LP, a Texas limited partnership, is 
the largest

[[Page 67902]]

independent insurance broker in Texas with headquarters in Houston and 
offices in Addison, Austin, Dallas, Fort Worth and San Antonio. 
Insurance LP offers a comprehensive portfolio of services, including 
insurance brokerage, claims management, loss control, risk management 
consulting, personal life insurance and employee benefits to public and 
private companies, professional practices and individuals engaged in an 
extensive range of industries. Since its inception, Insurance LP has 
been an independent, privately-owned entity. In 1965, Insurance LP was 
purchased from its founders, Gus Wortham and other selling founders, by 
a new generation of partners, thus beginning a cyclical succession of 
ownership that continues today. Prior to December 1, 2003, when an 
Insurance LP partner sold all or a portion of his or her partnership 
interest in Insurance LP, the Insurance LP Executive Committee (as 
defined below) designated either a new or existing partner to buy such 
interest. On December 1, 2003, Insurance LP was restructured and two 
new limited partnerships were formed, Insurance LP and Finance LP.
    2. Insurance LP conducts the traditional insurance business of the 
Firm while Finance LP buys and sells ownership interests in the Firm. 
The two new limited partnerships, and the corresponding limited 
liability companies created to be the general partners of such limited 
partnerships, Insurance GP and Finance GP, are owned directly or 
indirectly by each equity partner of the Firm in the same proportion as 
their pre-restructuring ownership in Insurance LP. Limited partnership 
interests in Insurance LP and membership interests in Insurance GP may 
only be transferred together (such interests, the ``Insurance Units''). 
Limited partnership interests in Finance LP and membership interests in 
Finance GP may only be transferred together (such interests, the 
``Finance Units'', and together with the Insurance Units, ``Units'').
    3. Finance LP is a Texas limited partnership. Finance LP operates 
as a non-diversified, closed-end management investment company. Finance 
LP has been established to facilitate the purchase or sale of Units. 
Finance GP, a Texas limited liability company, serves as the sole 
general partner of Finance LP. Finance GP has delegated all management 
functions for Finance LP to an executive committee (the ``Finance GP 
Executive Committee'') composed of managing members of Finance GP 
elected by a majority of the individuals and entities which currently 
own Units (``Unitholders''). Insurance GP, a Texas limited liability 
company, serves as the sole general partner of Insurance LP. Insurance 
GP has delegated all management functions for Insurance LP to an 
executive committee (the ``Insurance GP Executive Committee'') composed 
of managing members of Insurance GP elected by a majority of the 
Unitholders. All the members of the Finance GP Executive Committee and 
the Insurance GP Executive Committee are Unitholders. The Finance GP 
Executive Committee will be the sole manager of Finance LP and make all 
investment and other operational decisions for Finance LP. Finance GP 
or any person involved in the operation of Finance LP will register as 
an investment adviser if required under the Investment Advisers Act of 
1940 (``Advisers Act''), or the rules under it.
    4. Unitholders and Eligible Unitholders (as defined below) are 
required to buy and sell their Insurance Units and Finance Units 
simultaneously. Finance LP is responsible for (a) purchasing Units from 
Unitholders, (b) issuing its own promissory notes for such purchases, 
(c) selling Units acquired by it to Eligible Unitholders, (d) accepting 
promissory notes from Eligible Unitholders purchasing Units, (e) 
holding and managing investments in certain marketable securities and 
other assets, and (f) handling the administration of such activities.
    5. Units will be offered without registration in reliance on 
section 4(2) of the Securities Act of 1933 (the ``Securities Act'') or 
Regulation D under the Securities Act, and will be offered solely to 
Eligible Unitholders. Eligible Unitholders must be (a) persons who are, 
at the time of investment, current employees of Insurance LP (``Wortham 
Employees'') but who are not yet Unitholders, (b) persons who are, at 
the time of investment, current Wortham Employees and who are 
Unitholders, (c) persons who are highly-experienced individual 
insurance professionals who laterally join Insurance LP (``Lateral 
Partners''), or (d) a limited partnership, corporation or other 
business entity all of the voting power of which is controlled by such 
Lateral Partners (``Lateral Partner Investment Vehicle''). In order for 
a Lateral Partner Investment Vehicle to be an ``Eligible Unitholder'', 
it must qualify as either (a) an accredited investor as defined in rule 
501(a) of Regulation D or (b) an entity for which a Lateral Partner is 
a settlor and principal investment decision-maker.\1\ In order for a 
Wortham Employee or Lateral Partner to qualify as an ``Eligible 
Unitholder'', that person must be a person who is, at the time of 
investment, a current Wortham Employee or Lateral Partner who (a) meets 
the standards of an ``accredited investor'' set forth in rule 501(a)(5) 
or rule 501(a)(6) of Regulation D under the Securities Act, or (b) is 
one of 35 or fewer current Wortham Employees or Lateral Partners who 
meets certain requirements (``Category 2 investors'').
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    \1\ If a Lateral Partner Investment Vehicle is an entity other 
than a trust, the reference to ``settlor'' shall be construed to 
mean a person who created the vehicle, alone or together with 
others, and who contributed funds or other assets to the vehicle.
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    6. Each Category 2 investor will be a current Wortham Employee or 
Lateral Partner, who meets the sophistication requirements set forth in 
rule 506(b)(2)(ii) of Regulation D under the Securities Act and who (a) 
has a college education and/or has had a minimum of five years of 
business and/or professional experience in the insurance and risk 
management industries, and (b) has had compensation of at least $80,000 
in the preceding 12 month period, and has a reasonable expectation of 
compensation of at least $140,000 in each of the two immediately 
succeeding 12 month periods.
    7. Prior to offering Units to an individual, the Insurance GP 
Executive Committee and the Finance GP Executive Committee must 
reasonably believe that the individual is a sophisticated investor 
capable of understanding and evaluating the risks of investing in the 
Firm without the benefit of regulatory safeguards.
    8. Finance LP is a financing vehicle intended to create an 
opportunity for Eligible Unitholders to become owners in the Firm when 
they might not have otherwise been able to make immediate full payment 
of the purchase price of the Units. Eligible Unitholders who are 
individuals acquire Units by executing a non-recourse 10-year 
promissory note bearing interest at prime rate (but not exceeding 10%) 
to Finance LP in a face amount equal to (i) a fixed formula price 
calculated monthly for the Insurance Units (as determined in accordance 
with the terms of the Insurance Units transfer agreement) multiplied by 
the total number of Insurance Units purchased and sold plus (ii) a 
fixed formula price calculated monthly for the Finance Units (as 
determined in accordance with the terms of the Finance Units transfer 
agreement) multiplied by the total number of Finance Units purchased 
and sold (together, the ``Formula Price''). Eligible Unitholders that 
are S corporations contribute their net

[[Page 67903]]

insurance brokerage business assets as tax-free contributions to 
Insurance LP in exchange for newly issued Units and execute 10-year 
promissory notes for any shortfall in their pro-rata share of the 
combined equity in the Firm.
    9. Each selling Unitholder currently receives a non-recourse 10-
year prime rate (not to exceed 10%) bearing promissory note in an 
amount equal to the Formula Price for the number of Units sold. Through 
a credit facility with a local financial institution (the ``Credit 
Facility''), Finance LP provides letter of credit enhanced promissory 
notes to selling Unitholders in exchange for their Units. All 
promissory notes for Eligible Unitholders contain a pre-payment 
provision exercisable at the option of Finance LP. On rare occasions, 
cash is paid for the Units acquired from selling Unitholders.
    10. To secure full and complete payment and performance of the 
obligations under the Credit Facility, Finance LP must grant the lender 
a first priority security interest in certain collateral held by 
Finance LP. Such collateral is comprised of a portfolio consisting of 
high quality fixed income securities, including municipal bonds (rated 
AA or better) and U.S. Treasury and Agency securities (rated AAA), and 
registered money market funds operating in compliance with rule 2a-7. 
The Finance GP Executive Committee selects one or more investment 
advisers registered under the Advisers Act to manage Finance LP's 
portfolio based on such adviser's overall level of professional 
experience and its conservative value preservation strategies. Neither 
the Credit Facility nor any other borrowing by Finance LP from a bank 
or other financial institution would cause any person not named in 
section 2(a)(13) of the Act to own outstanding securities of Finance LP 
(other than short-term paper). Any borrowings by Finance LP will be 
non-recourse other than to the Firm.
    11. The terms of the Units will be fully disclosed in the private 
placement memorandum of the Firm, and each Eligible Unitholder will 
receive a private placement memorandum, Finance LP's limited 
partnership agreement and Insurance LP's limited partnership agreement 
(or other organizational documents) prior to his or her investment in 
the Units. Finance GP will send Unitholders annual reports of the Firm, 
which will contain audited financial statements, as soon as practicable 
after the end of each fiscal year, but no later than 180 days after the 
fiscal year end. In addition, as soon as practicable after the end of 
each fiscal year of the Firm, Finance GP shall send a report to each 
person who was a Unitholder at any time during the fiscal year then 
ended, setting forth such tax information as shall be necessary for the 
preparation by the Unitholder of his or her federal and state income 
tax returns and a report of the investment activities of Finance LP 
during such year.
    12. Unitholders will be permitted to transfer Units only by 
operation of law, to a receiver or trustee in bankruptcy for that 
Unitholder, to the Unitholder's estate in the event of his or her 
death, or with the express consent of both the Insurance GP Executive 
Committee and the Finance GP Executive Committee. No person may become 
a transferee or substitute Unitholder unless that person is a member of 
one of the classes of persons listed in section 2(a)(13) of the Act, 
except that a legal representative or executor may hold Units in order 
to settle the estate of a decedent or bankrupt or for similar purposes. 
No fee of any kind will be charged in connection with the sale of 
Units.
    13. No separate management fee will be charged to Finance LP by 
Finance GP, and no compensation will be paid by Finance LP or by 
Unitholders to Finance GP for its services.
    14. Finance LP will not acquire any security issued by a registered 
investment company if immediately after the acquisition Finance LP 
would own more than 3% of the outstanding voting stock of the 
registered investment company.

Applicants' Legal Analysis

    1. Section 6(b) of the Act provides, in part, that the Commission 
may exempt employees' securities companies from the provisions of the 
Act to the extent that the exemption is consistent with the protection 
of investors. Section 6(b) provides that the Commission will consider, 
in determining the provisions of the Act from which the company should 
be exempt, the company's form of organization and capital structure, 
the persons owning and controlling its securities, the price of the 
company's securities and the amount of any sales load, how the 
company's funds are invested, and the relationship between the company 
and the issuers of the securities in which it invests. Section 2(a)(13) 
defines an employees' securities company as any investment company all 
of whose securities (other than short-term paper) are beneficially 
owned (a) by current or former employees, or persons on retainer, of 
one or more affiliated employers, (b) by immediate family members of 
such persons, or (c) by such employer or employers together with any of 
the persons in (a) or (b).
    2. Section 7 of the Act generally prohibits investment companies 
that are not registered under section 8 of the Act from selling or 
redeeming their securities. Section 6(e) provides that, in connection 
with any order exempting an investment company from any provision of 
section 7, certain provisions of the Act, as specified by the 
Commission, will be applicable to the company and other persons dealing 
with the company as though the company were registered under the Act. 
Applicants request an order under sections 6(b) and 6(e) of the Act 
exempting Finance LP from all provisions of the Act, except section 9 
and sections 36 through 53, and the rules and regulations under the 
Act. With respect to sections 17 and 30 of the Act, and the rules and 
regulations thereunder, and rule 38a-1 under the Act, the exemption is 
limited as set forth in the application.
    3. Section 17(a) generally prohibits any affiliated person of a 
registered investment company, or any affiliated person of an 
affiliated person, acting as principal, from knowingly selling or 
purchasing any security or other property to or from the company. 
Applicants request an exemption from section 17(a) to the extent 
necessary permit Finance LP to: (a) Purchase, from the Firm or any 
affiliated person thereof, Units for the account of the Firm or any 
affiliated person thereof; or (b) sell, to the Firm or any affiliated 
person thereof, Units previously acquired by Finance LP.
    4. Applicants state that an exemption from section 17(a) is 
consistent with the protection of investors and the purposes of the 
Act. Applicants state that Unitholders will be informed in the Firm's 
private placement memorandum of the possible extent of Finance LP's 
dealings with the Firm or any affiliated person thereof. Applicants 
also state that, as financially sophisticated professionals, 
Unitholders will be able to evaluate the attendant risks. Applicants 
assert that the community of interest among Unitholders and the Firm 
will provide the best protection against any risk of abuse.
    5. Section 17(f) of the Act designates the entities that may act as 
investment company custodians, and rule 17f-2 allows an investment 
company to act as self-custodian, subject to certain requirements. 
Applicants request an exemption from section 17(f) and rule 17f-2 to 
permit the following exceptions from the requirements of rule 17f-2: 
(a) The promissory notes and non-publicly traded securities held by 
Finance LP may be kept in the locked files of Finance LP; (b) for 
purposes of paragraph (d) of the rule, (i) employees

[[Page 67904]]

of the Firm will be deemed employees of Finance LP, (ii) officers of 
Finance GP (including the Finance GP Executive Committee) will be 
deemed to be officers of Finance LP, and (iii) the Finance GP Executive 
Committee will be deemed to be the board of directors of Finance LP; 
and (c) in place of the verification procedure under paragraph (f) of 
the rule, verification will be effected quarterly by two employees of 
the Firm. Applicants assert that the promissory notes and non-publicly 
traded securities held by Finance LP are most suitably kept in Finance 
LP's files, where they can be referred to as necessary. The publicly 
traded securities owned by Finance LP are held in one or more brokerage 
accounts.
    6. Section 17(g) and rule 17g-1 generally require the bonding of 
officers and employees of a registered investment company who have 
access to its securities or funds. Rule 17g-1 requires that a majority 
of directors who are not interested persons (``independent directors'') 
take certain actions and give certain approvals relating to fidelity 
bonding. Paragraph (g) of rule 17g-1 sets forth certain materials 
relating to the fidelity bond that must be filed with the Commission 
and certain notices relating to the fidelity bond that must be given to 
each member of the investment company's board of directors. Paragraph 
(h) of rule 17g-1 provides that an investment company must designate 
one of its officers to make the filings and give the notices required 
by paragraph (g). Paragraph (j) of rule 17g-1 exempts a joint insured 
bond provided and maintained by an investment company and one or more 
other parties from section 17(d) of the Act. Rule 17g-1(j)(3) requires 
that the board of directors of an investment company satisfy the fund 
governance standards defined in rule 0-1(a)(7). Applicants request an 
exemption from section 17(g) and rule 17g-1 to the extent necessary to 
permit Finance LP to comply with rule 17g-1 without the necessity of 
having a majority of the independent directors take such action and 
make such approvals as are set forth in the rule. Specifically, Finance 
LP will comply with rule 17g-1 by having the GP Finance Executive 
Committee take such actions and make such approvals as are set forth in 
rule 17g-1. Applicants state that, because Finance GP will be an 
interested person of Finance LP, Finance LP could not comply with rule 
17g-1 without the requested relief. Applicants also request an 
exemption from the requirements of rule 17g-1(g) and (h) relating to 
the filing of copies of fidelity bonds and related information with the 
Commission and the provision of notices to the board of directors and 
from the requirements of rule 17g-1(j)(3). Applicants believe the 
filing requirements are burdensome and unnecessary as applied to 
Finance LP. The Finance GP Executive Committee will maintain the 
materials otherwise required to be filed with the Commission by rule 
17g-1(g) and agree that all such material will be subject to 
examination by the Commission and its staff. The Finance GP Executive 
Committee will designate a person to maintain the records otherwise 
required to be filed with the Commission under paragraph (g) of the 
rule. Applicants also state that the notices otherwise required to be 
given to the board of directors would be unnecessary as Finance LP will 
not have a board of directors. Finance LP will comply with all other 
requirements of rule 17g-1.
    7. Section 17(j) and paragraph (b) of rule 17j-1 make it unlawful 
for certain enumerated persons to engage in fraudulent or deceptive 
practices in connection with the purchase or sale of a security held or 
to be acquired by a registered investment company. Rule 17j-1 also 
requires that every registered investment company adopt a written code 
of ethics and that every access person of a registered investment 
company report personal securities transactions. Applicants request an 
exemption from the requirements of rule 17j-1, except for the anti-
fraud provisions of paragraph (b), because they are unnecessarily 
burdensome as applied to Finance LP.
    8. Applicants request an exemption from the requirements in 
sections 30(a), 30(b) and 30(e), and the rules under those sections, 
that registered investment companies prepare and file with the 
Commission and mail to their shareholders certain periodic reports and 
financial statements. Applicants contend that the forms prescribed by 
the Commission for periodic reports have little relevance to Finance LP 
and would entail administrative and legal costs that outweigh any 
benefit to Unitholders. Applicants request exemptive relief to the 
extent necessary to permit Finance LP to report annually to 
Unitholders. Applicants also request an exemption from section 30(h) to 
the extent necessary to exempt the Finance GP Executive Committee and 
any other persons who may be deemed members of an advisory board of 
Finance LP from filing Forms 3, 4 and 5 under section 16 of the under 
the Securities Exchange Act of 1934 with respect to their ownership of 
Units. Applicants assert that, because there will be no trading market 
and the transfers of Units will be severely restricted, these filings 
are unnecessary for the protection of investors and burdensome to those 
required to make them.
    9. Rule 38a-1 requires investment companies to adopt, implement and 
periodically review written policies and procedures reasonably designed 
to prevent violation of the federal securities laws and to appoint a 
chief compliance officer. Finance LP will comply with rule 38a-1(a), 
(c) and (d), except that (i) since Finance LP does not have a board of 
directors, the Finance GP Executive Committee will fulfill the 
responsibilities assigned to a board of directors under the rule, and 
(ii) since the Finance GP Executive Committee does not have any 
independent members, approval by a majority of the independent board 
members required by rule 38a-1 will not be obtained.

Applicants' Conditions

    The applicants agree that any order granting the requested relief 
will be subject to the following conditions:
    1. Each proposed transaction to which Finance LP is a party 
otherwise prohibited by Section 17(a) (each, a ``Section 17 
Transaction'') will be effected only if the Finance GP Executive 
Committee determines that: (a) the terms of the Section 17 Transaction, 
including the consideration to be paid or received, are fair and 
reasonable to Unitholders and do not involve overreaching of Finance LP 
or Unitholders on the part of any person concerned; and (b) the Section 
17 Transaction is consistent with the interests of the Unitholders, the 
Firm's organizational documents and the Firm's reports to its 
Unitholders.
    In addition, the Finance GP Executive Committee will record and 
preserve a description of such Section 17 Transactions, its findings, 
the information or materials upon which its findings are based and the 
basis therefore. All such records will be maintained for the life of 
Finance LP and at least six years thereafter, and will be subject to 
examination by the Commission and its staff. All such records will be 
maintained in an easily accessible place for at least the first two 
years.
    2. Finance GP will send to each person who was a Unitholder at any 
time during the fiscal year then ended audited financial statements 
with respect to the Firm. At the end of each fiscal year, the Firm will 
make a valuation or have a valuation made of all of the assets of 
Finance LP as of the fiscal year end in a manner consistent with 
customary practice with respect to

[[Page 67905]]

the valuation of assets of the kind held by Finance LP. Consistent with 
the Firm's customary practice, Units will be valued in accordance with 
the terms of the Transfer Agreements. In addition, as soon as 
practicable after the end of each fiscal year of the Firm, Finance GP 
shall send a report to each person who was a Unitholder at any time 
during the fiscal year then ended, setting forth such tax information 
as shall be necessary for the preparation by the Unitholder of his or 
her federal and state income tax returns and a report of the investment 
activities of Finance LP during such year.
    3. Finance LP and the Finance GP Executive Committee will maintain 
and preserve, for the life of Finance LP and at least six years 
thereafter, such accounts, books, and other documents as constitute the 
record forming the basis for the audited financial statements and 
annual reports of the Firm to be provided to Unitholders, and agree 
that all such records will be subject to examination by the Commission 
and its staff. All such records will be maintained in an easily 
accessible place for at least the first two years.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-27213 Filed 11-14-08; 8:45 am]

BILLING CODE 8011-01-P