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Investment Advisers Act of 1940 - Section 206(4)
16th Amendment Advisors LLC
March 23, 2015
Response of the Division of Investment Management
IM Ref. No. 801-70324
Edwin C. Laurenson
McDermott Will & Emery
340 Madison Avenue
New York, NY 10173
Dear Mr. Laurenson:
Your letter dated March 23, 2015 requests our assurance that we would not recommend enforcement action to the United States Securities and Exchange Commission (“Commission”) under Section 206(4) of, and Rule 206(4)-2 (the “Custody Rule”) under, the Investment Advisers Act of 1940 (the “Advisers Act”) if 16th Amendment Advisors LLC (“16th Amendment”), an investment adviser registered with the Commission under the Advisers Act, does not comply with the independent verification and account statement provisions of clauses (a)(2), (a)(3) and (a)(4) of the Custody Rule in connection with 16th Amendment's management of Vicksburg Municipal Trading Fund LP, a private investment fund (the “Master Fund”), and a private feeder fund into the Master Fund, Vicksburg Municipal Trading Offshore Fund LTD (the “Feeder Fund,” and together with the Master Fund, the “Funds”).[1]
Background
You state that 16th Amendment is registered with the Commission as an investment adviser. You state that Messrs. Evan D. Lamp, John J. Lee and Richard J. McCarthy together own (with their family members and family trusts) a 91% interest in 16th Amendment.[2] You state that the only other member of 16th Amendment, Mr. Bidyut Sen, owns a 9% interest. Each of Messrs. Lamp, Lee and McCarthy is listed as a “control person” in Schedule A to Form ADV because of his status an officer of 16th Amendment. You state that Mr. Sen owns a passive interest in 16th Amendment, without management responsibilities or authority (although he has the rights to access to information concerning 16th Amendment’s affairs that are provided by section 18-305(a) of the Delaware Limited Liability Company Act (the “Delaware LLC Act”)).
You state that 16th Amendment currently manages the Master Fund (which is a Delaware limited partnership that trades in municipal securities) and the Feeder Fund, which is a Cayman Islands corporation. The general partner of the Master Fund is Vicksburg Municipal Partners LLC (the "General Partner"). You state that, as the joint managers of the General Partner, Messrs. Lamp, Lee and McCarthy are jointly responsible for the General Partner's affairs and have access to all information concerning those affairs. Messrs. Lamp, Lee and McCarthy together own (with their family members and family trusts) 100% of the General Partner.
You state that the General Partner has sole control over the Master Fund, which is owned entirely by the General Partner and the Feeder Fund. Messrs. Lamp, Lee and McCarthy are the sole directors of, and therefore solely control, the Feeder Fund. As directors of the Feeder Fund, you state that Messrs. Lamp, Lee and McCarthy have access to all information concerning the Feeder Fund's affairs and are ultimately responsible for keeping accurate books and records of the Feeder Fund. You state that the only investors in the Feeder Fund are IRAs for the benefit of Messrs. Lamp, Lee and McCarthy or their spouses.
Discussion
A registered investment adviser with custody of client funds or securities is required by Advisers Act Rule 206(4)-2 to take a number of steps designed to safeguard those client assets.[3] An adviser with custody must maintain client funds and securities with “qualified custodians” either under the client’s name or under the adviser’s name as agent or trustee for the client.[4] The adviser must have a reasonable basis, after due inquiry, for believing that the qualified custodian sends quarterly account statements directly to the client.[5] An adviser that has custody of client assets generally must undergo an annual surprise examination by an independent public accountant to verify the client funds and securities.[6] If the adviser is the general partner of a limited partnership (or holds a similar position with another form of pooled investment vehicle), the adviser is deemed to have complied with the annual surprise examination requirement and need not form a reasonable belief regarding delivery of account statements if the pool’s financial statements are audited by an independent public accountant that is registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board, and the audited statements are distributed to the pool’s investors.[7]
You suggest that the policy considerations that informed the Commission's adoption of the examination/audit provisions, as well as the distribution provisions, are not implicated when the only investors in a pooled investment vehicle client of which a registered investment adviser has custody are (1) individuals who (a) have plenary access to information (either statutory, contractual or some combination of the two) concerning the management of the investment adviser, the pooled investment vehicle and the vehicle’s general partner or managing member (or equivalent), (b) are listed as “control persons” in Schedule A to Form ADV because of their status as the investment adviser’s officer or director with executive responsibility (or having a similar status or function) and (c) have a material ownership interest in the investment adviser (“Principals”) and/or (2) any of the Principals’ spouses and minor children, as well as investment vehicles established solely for the individual or joint benefit of the Principals, their spouses or minor children.[8]
Conclusion
Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under the Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act if 16th Amendment does not comply with independent verification and account statement delivery provisions of clauses (a)(2), (a)(3) and (a)(4) of the Custody Rule in connection with the Funds.[9] Our position is based on the facts and representations in your letter dated March 23, 2015, particularly the representations of 16th Amendment that the only investors in the Funds are the following:
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Individuals who (a) have plenary access to information (either statutory, contractual or some combination of the two) concerning the management of 16th Amendment, the Funds and each of the Fund’s general partners (or equivalent), (b) are listed as “control persons” in Schedule A to Form ADV because of their status as 16th Amendment’s officers or directors with executive responsibility (or having a similar status or function) and (c) have a material ownership in 16th Amendment (“16th Amendment Principals”); and
- The 16th Amendment Principals’ spouses and minor children, as well as investment vehicles established for the individual or joint benefit of the 16th Amendment Principals, their spouses or minor children.[10]
Because our position is based on the facts and representations made in your letter, you should note that any different facts or circumstances might require a different conclusion.
Sincerely,
Christopher J. Mulligan
Division of Investment Management
[1] You also request assurance that 16th Amendment would not be required to obtain audits that comply with clause (b)(4) of the Custody Rule with respect to the Funds.
[2] You state that the ownership of 16th Amendment approximately is as follows: Evan Lamp, 23%; The Evan Lamp 2001 Trust (trust for the benefit of Mr. Lamp's spouse and minor children), 8%; John J. Lee, 20%; Marguerite B. Lee (Mr. Lee's wife), 5%; Marguerite E. Lee (Mr. Lee's minor child), 2%; John W. Lee (Mr. Lee's minor child), 2%; Austin J. Lee (Mr. Lee's minor child), 2%; Richard J. McCarthy, 20%; McCarthy Family Trust (trust for the benefit of Mr. McCarthy's minor children), 10%; and Bidyut Sen, 9%.
[3] Advisers Act Rule 206(4)-2(d)(2). Custody means “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” An adviser has custody if an affiliate has custody of its client funds or securities in connection with advisory services it provides to clients. Custody includes any capacity that gives an adviser or its supervised person legal ownership of or access to client funds or securities (such as acting as general partner or trustee of a pooled investment vehicle).
[4] Advisers Act Rule 206(4)-2(d)(6). Qualified custodians are broker-dealers, banks, savings associations, futures commission merchants and non-U.S. financial institutions that customarily hold financial assets for their customers.
[5] Advisers Act Rule 206(4)-2(a)(3).
[6] Advisers Act Rule 206(4)-2(a)(4).
[7] Advisers Act Rule 206(4)-2(b)(4).
[8] 16th Amendment has determined that the Funds are investment advisory clients. Whether an entity is an investment advisory client will depend on the particular facts and circumstances, which this letter is not addressing.
[9] The includes relief from obtaining audits that comply with clause (b)(4) of the Custody Rule with respect to the Funds.
[10] We consider spouses to include spousal equivalents (as defined in the family office rule (rule 202(a)-11(G)-1 under the Advisers Act).
Incoming Letter
The Incoming Letter is in Acrobat format.
http://www.sec.gov/divisions/investment/noaction/2015/16th-amendment-advisors-032315.htm
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