--- In FundLaw@yahoogroups.com
, "balchlaw" <rpearson@b...> wrote:
> In doing some research, I ran across this article about banks that
> had registered subsidiaries under the 40 Act to hold a part of their
> portfolios. The article indicates that the "funds" have been
> shutdown. Is this the situation in which the SEC required funds to
> deregister because registration wasn't required in the first place?
> If so, what was the rationale for registration so clearly not being
I wasn�t involved in the de-registrations to which you refer, and I obviously can�t speak for the SEC or the Staff. What is left is my own take on the matter.
I think you are incorrect in the penultimate sentence of your post. This is not a case of registration not being "required,� but rather a case where registration is not permitted at all.
You ask what was the "rationale for registration so clearly not being required." I sense a bit of sarcasm, and perhaps a bit of frustration. This is natural; many fine corporate and banking lawyers, especially those who don't regularly deal with investment company regulation, often find themselves a bit frustrated when dealing with a slightly nuanced '40 Act issue. I have a certain amount of sympathy for your plight. I have therefore provided a step-by-step analysis below, along with some pertinent no-action letters that you may wish to pull and examine.
Section 8 of the 1940 Act is the section that governs the registration of investment companies. Section 8(a) states that "[a]ny investment company organized or otherwise created under the laws of the United States or of a State may registered for the purposes of this title...." A narrow reading of this section makes it clear that only "investment companies" may register under section 8. It follows, therefore, that any issuer that falls within one of the 3(c) exceptions to the definition of an investment company, and is thus definitionally not an "investment company," may not register under section 8. To illustrate: an issuer that meets the requirements of section 3(c)(1) of the Act, i.e., has 100 or fewer shareholders and which is not making and does not presently propose to make a public offering of its securities, is not an �investment company,� and therefore would be prohibited from registering under section 8.
I have a hunch that if you look at the registration statements for the effected bank subs you will notice two things: (1) the registration statements were filed as '40 Act-only registrations, and consequently did not involve public offerings, and (2) the subs had 100 or fewer shareholders. If that is the case, the subs fit nicely within the 3(c)(1) exception, they are not investment companies, and they may not register under section 8 of the Act.
This is, admittedly, my own supposition and could very well be wrong. The available staff guidance, however, appears to support me on this one. See, e.g., The Franklin Corporation (pub. avail. June 1, 1981); Paradise & Alberts (pub. avail. Oct. 27, 1975). Also, the fact that these subs were apparently registered solely in an attempt to obtain favorable tax treatment might have gotten the staff's dander up. See, e.g., George E. Mrosek (pub. avail. Jan. 7, 1973) (stating that the staff does "not favor registration under the Act where the sole or predominant purpose is to obtain a tax advantage for a limited number of private investors."); Plans Incorporated (pub. avail. Feb. 27, 1972) (stating that a issuer that does not fall "within the statutory definition of investment company or which comes within the an exception of the definition has no standing to register under the Act merely to qualify for some favorable tax treatment afforded registered investment companies by the
Internal Revenue Code.").
Good luck with your quest to figure this one out.
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