Investment Company Act of 1940 — Section 17(a), 17(d) and Rule 17d-1
Morgan Stanley Institutional Fund of Hedge Funds
October 7, 2011
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
IM Ref. No. 2011107912
File No. 811-10593
Your letter dated October 7, 2011 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (“Commission”) under Section 17(a) or 17(d) of the Investment Company Act of 1940 (the “Act”) or Rule 17d-1 under the Act, against: Morgan Stanley Institutional Fund of Hedge Funds (“IFHF”), a Delaware limited partnership registered under the Act as a closed-end investment company; Morgan Stanley AIP GP LP, IFHF’s investment adviser (“Investment Adviser”); a liquidating trust (“Liquidating Trust”) to which IFHF proposes to transfer certain of its portfolio securities that are interests in private investment companies (“Underlying Funds”); or any limited partner of IFHF (“Limited Partner”) that holds more than 5% of IFHF’s limited partnership interests or that may be under common control with IFHF (“Affiliated Limited Partner”), if IFHF transfers the interests in certain of the Underlying Funds to the Liquidating Trust and simultaneously distributes interests in the Liquidating Trust, pro rata, to IFHF’s Limited Partners (“Proposed Transactions”). Based on the facts and representations set forth in your letter, we would not recommend that the Commission take any enforcement action under Sections 17(a) or 17(d) of the Act, or Rule 17d-1 under the Act, against IFHF, the Investment Adviser, the Liquidating Trust, or any Affiliated Limited Partner, if IFHF engages in the Proposed Transactions.1
Background
You state that IFHF invests substantially all of its assets in Underlying Funds that are not registered under the Act. You also state that, subject to authorization by its board of directors (“Board”), IFHF engages in quarterly issuer tender offers in accordance with Rule 13e-4 under the Securities Exchange Act of 1934, to provide periodic liquidity to its Limited Partners (“Quarterly Tender Offers”). You state that, in order to satisfy the Quarterly Tender Offers, IFHF typically submits redemption requests to the Underlying Funds and distributes the cash it receives from the Underlying Funds and other available cash to its tendering Limited Partners. You further state that IFHF has submitted requests to redeem all or a portion of its interests in certain Underlying Funds that have suspended or sharply limited the ability of interest holders to redeem their interests (“Restricted Underlying Funds”). You state that IFHF and the Investment Adviser are concerned that as IFHF continues to engage in its Quarterly Tender Offers, IFHF’s interests in the Restricted Underlying Funds could become a growing percentage of its total assets, and that IFHF could become less diversified from a portfolio management perspective.
You state that IFHF and the Investment Adviser would like to establish the Liquidating Trust and to engage in a one-time transfer of all of IFHF’s interests in the Restricted Underlying Funds to the Liquidating Trust in exchange for an interest in the Liquidating Trust. You further state that IFHF would simultaneously engage in a one-time special distribution of all of its interest in the Liquidating Trust on a pro rata basis to each Limited Partner. You state that the sole purpose of the Liquidating Trust would be to facilitate the complete liquidation of the interests in the Restricted Underlying Funds. You state that the Investment Adviser will manage the assets of the Liquidating Trust for the purpose of achieving an orderly liquidation of Restricted Underlying Fund interests and that the Investment Adviser will receive no compensation for serving in this capacity. You state that the Board will monitor the liquidation activities of the Liquidating Trust, and that the Investment Adviser will provide the Board, on at least a quarterly basis, with a report on the liquidation activities of the Liquidating Trust.
Legal Analysis
Section 17(a)(2) of the Act generally prohibits an affiliated person, or an affiliated person of an affiliated person (“second tier affiliate”) of a registered investment company, acting as principal, from knowingly purchasing from the registered investment company any security or other property.2 You state that IFHF and the Liquidating Trust could be viewed as being under the common control of the Investment Adviser and therefore affiliated persons of each other. Therefore, you state that the proposed purchase by the Liquidating Trust of IFHF’s interests in the Restricted Underlying Funds in exchange for an interest in the Liquidating Trust may be prohibited by Section 17(a)(2). You also state that the distribution of interests in the Liquidating Trust to the Affiliated Limited Partners could be viewed as a purchase prohibited by Section 17(a)(2) of the Act.
Section 17(d) of the Act generally prohibits an affiliated person or second-tier affiliate of a registered investment company, acting as principal, from effecting any transaction in which the registered investment company is a joint or a joint and several participant, in contravention of such rules as the Commission may prescribe for the purpose of limiting or preventing participation by the registered investment company on a basis different from or less advantageous than that of such other participant. Rule 17d-1 under the Act generally prohibits participation in any “joint enterprise or other joint arrangement or profit-sharing plan,” as defined in the rule, without prior approval by the Commission by order upon application. You state that the creation and operation of the Liquidating Trust and the distribution of interests in the Liquidating Trust to the Limited Partners, including the Affiliated Limited Partners, could be viewed as a “joint enterprise or other joint arrangement or profit-sharing plan” among IFHF, the Investment Adviser, the Liquidating Trust and the Affiliated Limited Partners, within the meaning of Rule 17d-1.
You request our assurance that we would not recommend enforcement action to the Commission under Sections 17(a) or 17(d), or Rule 17d-1, against IFHF, the Investment Adviser, the Liquidating Trust, or any Affiliated Limited Partner, if IFHF engages in the Proposed Transactions.3 In support of your request, you state that all of IFHF’s interests in the Restricted Underlying Funds as of December 31, 2010, will be transferred by IFHF to the Liquidating Trust and will be valued in the same manner as they are valued for purposes of computing IFHF’s net asset value. You state that no Limited Partner will have any influence or control over the selection of the Restricted Underlying Funds to be transferred to the Liquidating Trust. You also state that the simultaneous distribution of all of IFHF’s interest in the Liquidating Trust, and any subsequent distributions of cash from the Liquidating Trust, to the Limited Partners, will be on a pro rata basis. In addition, you state that the Investment Adviser will receive no compensation for managing the assets of the Liquidating Trust.4 You also state that the Proposed Transactions are consistent with the policies of IFHF, as recited in its registration statement and reports filed under the Act.
Therefore, you conclude that the terms of the Proposed Transactions, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned. You further conclude that IFHF will participate in the Proposed Transactions on a basis no less advantageous than that of other participants, and that the Proposed Transactions are consistent with the general purposes of the Act.
Conclusion
Based on the facts and representations set forth in your letter, we would not recommend that the Commission take any enforcement action under Section 17(a) or 17(d) of the Act, or Rule 17d-1 under the Act, against IFHF, the Investment Adviser, the Liquidating Trust, or any Affiliated Limited Partner, if IFHF engages in the Proposed Transactions.5 This response expresses our view on enforcement action only and does not express any legal or interpretive conclusion on the issues presented. Because our position is based upon the representations made to us in your letter, any different facts or representations may require a different conclusion.6
Julia Kim Gilmer
Senior Counsel
1 This letter confirms oral no-action relief provided by James M. Curtis, Branch Chief, Division of Investment Management, to Richard Horowitz of Dechert LLP on June 29, 2011.
2 Section 2(a)(3) of the Act defines an affiliated person of another person to include “(A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or more of the outstanding voting securities of such other person; (B) any person 5 per centum or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (D) any officer, director, partner, copartner, or employee of such other person; (E) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof.”
3 You note that Rule 17a-3 under the Act (which exempts from Section 17(a) of the Act transactions solely between a registered investment company and its fully-owned subsidiaries) and Rule 17a-5 under the Act (which provides that certain pro rata distributions by a registered investment company to its common shareholders shall not be deemed to involve a sale to or a purchase from such distributing investment company, as those terms are used in Section 17(a) of the Act) may be read to permit the Proposed Transactions. Nevertheless, in light of the Commission’s order in M.A. Hanna Company, et al., Investment Company Release No. 2231 (Sep. 28, 1955), and the Chicago Milwaukee Corporation, SEC Staff No-Action Letter (pub. avail. Dec. 16, 1988), you are seeking the requested relief.
4 You also state that the general partner of IFHF, which is an affiliate of the Investment Adviser, has irrevocably agreed to waive any performance-based incentive allocation which it might otherwise receive from managing IFHF following the establishment of the Liquidating Trust.
5 You do not request, and we do not express any view concerning, the status of the Liquidating Trust under the Act, the status under the Act of any Restricted Underlying Fund in which the Liquidating Trust may hold interests, or the application of Section 12(d)(1) of the Act to IFHF’s acquisition of its interest in the Liquidating Trust.
6 The Division of Investment Management generally permits third parties to rely on no-action or interpretive letters to the extent that the third party’s facts and circumstances are substantially similar to those described in the underlying request for a no-action or interpretive letter. See Informal Guidance Program for Small Entities, Investment Company Act Release No. 22587 (Mar. 27, 1997), n.20. In light of the very fact-specific nature your request, however, the position expressed in this letter applies only to the named parties, and no other entity may rely on this position.
Incoming Letter
The Incoming Letter is in Acrobat format.
http://www.sec.gov/divisions/investment/noaction/2011/morganstanley100711-17d.htm
