WEST PALM BEACH, FL (www.hedgeco.net) – In a recent no-action letter, the staff of the U.S. Securities and Exchange Commission (the “SEC”) found that a settlor of a trust who had been deceased forover 45 years, is a qualified purchaser under the Investment Company Act of 1940 (the “1940 Act”). The no-action letter appears to have expanded the universe of what the SEC considers to be aqualified purchaser. This is good news for hedge funds and those who market on behalf of hedge funds, as the letter, Trusts Under the Will of Marion Searle (pub. avail. March 29, 2005) should allowmore individuals, dead or alive, to satisfy the qualified purchaser standard who did not meet the $5 million threshold at the time of contribution.
The letter involved several trusts (the “Trusts”), which were created under the will of the settlor following her death in 1959. In 1959, the settlor’s estate contained just over $3 million of investments; however, by 2005, the assets of the Trusts exceeded $26 million and were managed by co-trustees (the “Trustees”), who were qualified purchasers.
Section 2(a)(51)(A) of the 1940 Act defines specific categories of qualified purchasers that may invest in funds exempt from registration under Section 3(c)(7), assuming they meet the minimum standards regarding financial sophistication. Among other things, a qualified purchaser is defined as any trust that was not formed specifically to acquire securities offered by a Section 3(c)(7) Fund, and whose settlor and trustee, or other individual authorized to make decisions on behalf of the trust, is also a qualified purchaser. We can be fairly certain that the settlor in the Marion Searle situation did not create the Trusts for the purpose of investing in a Section 3(c)(7) Fund, as Section 3(c)(7) was added to the 1940 Act in the National Securities Markets Improvement Act of 1996.
In a previous no-action letter, (Meadowbrook Real Estate Fund, pub. avail. August 26, 1998), the SEC staff took the position that the settlor of a trust must be a qualified purchaser at the time the settlor contributed assets to the trust. However, Meadowbrook went on to state, certain circumstances may exist which indicate that a settlor had the required financial sophistication necessary to appreciate the risks presented by a Section 3(c)(7) Fund, which would satisfy the settlor requirement. For instance, if a trust was worth $5 million in 1996, the trust could theoretically be viewed as a proxy for the wealth of a settlor at the time he or she contributed assets to the trust. Using this principle, if a settlor was able to contribute sufficient assets to a trust for the trust to be worth $5 million in 1996, then the settlor likely was worth at least $5 million (in 1996 dollars) at the time that the assets were contributed to the trust (the ‘Meadowbrook Principle’).”
Relying on the Meadowbrook Principle as an alternate method for determining whether the settlor is a qualified purchaser, the incoming Marion Searle letter contended that the settlor’s wealth in 1959, when she contributed assets to the Trusts, measured in 1996 dollars, exceeded the $5 million qualified purchaser threshold by a significant margin. Specifically, the Trust’s $3 million of investments in 1959 dollars would, based on the changes in the relevant Consumer Price Index figures, be equivalent to approximately $17 million in 1996 dollars. The fact that the assets were divided among several trusts, should not diminish the applicability of the Meadowbrook Principle, it was contended.
The SEC staff therefore concluded that the settlor, a woman who died in 1959, is a qualified purchaser under the 1940 Act in 2005. It remains to be seen whether hedge funds and private equity funds will amend their subscription agreements to include a representation regarding purchaser viability as a result of this SEC staff position.
Note:
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White & Case LLP
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