[13671]
June 22, 2001
TO: PENSION COMMITTEE No. 38-01
RE: SEC ISSUES NO-ACTION LETTER ON 401(K) INVESTMENTS
The Division of Investment Management of the Securities and Exchange Commission
recently issued a no-action letter regarding when 401(k) plans may invest in private investment
companies excepted from registration under Section 3(c)(7) of the Investment Company Act of
1940. 401(k)s may invest in such companies as long as plan participants are allowed to make
investment decisions only from among “generic investment objectives,” without being able to
make individual decisions about investment in the Section 3(c)(7) fund. In these instances, the
401(k) plan would be considered to be the qualified purchaser for purposes of Section 3(c)(7)
and not the plan participants.
The facts of the no-action letter are as follows. H.E. Butt Investment and Retirement
Plan, a defined contribution plan, offers participants six investment options: an aggressive fund,
a general fund, a conservative fund, a stocks-only fund a bonds-only fund and a money market
fund. Participants may choose from among these investment options, but the investment
decisions for each of these investment options is made by an investment committee made up of
five of the eight plan trustees. The plan has invested portions of the aggressive fund and the
general fund in private investment companies excepted from registration under Section 3(c)(1).
The plan follows the representations set out in the 1995 Standish Ayer no-action letter. The plan
asks whether it would be possible to follow similar representations in investing in Section
3(c)(7) funds.
The staff stated its position regarding counting plan participants when determining
investors in Section 3(c)(1) in two prior no-action letters. In the 1993 PanAgora letter, the staff
found that when plan participants may direct an investment in a particular Section 3(c)(1) fund,
each one of them should count as an individual investor for the purpose of determining
compliance with the 100-person limit for investing in a Section 3(c)(1) fund. In Standish Ayer,
the staff stated that a retirement plan that offers only generic investment options should be
treated as a single beneficial owner of the Section 3(c)(1) fund’s securities.
When it adopted rules to implement Section 3(c)(7), which was enacted as part of the
National Securities Markets Improvement Act of 1996, the Commission questioned whether the
position taken in Standish Ayer was consistent with that taken in PanAgora for he purposes of
Section 3(c)(1) and whether Standish Ayer was appropriate in the context of Section 3(c)(7).
2The staff has affirmed that the positions taken in PanAgora and Standish Ayer are
consistent and that Standish Ayer is appropriate for purposes of Section 3(c)(7). Therefore, the
H.E. Butt Plan may be considered the qualified purchaser for the purposes of investing in
Section 3(c)(7) funds subject to the representations it made in its letter, including:
• Other than plan trustees acting in their capacity as plan fiduciaries, a plan
participant’s investment discretion will be limited to allocating his or her account
among a number of investment options, each of which has an identified investment
objective.
• The decision to invest the asset of an investment option in a Section 3(c)(7) fund, to
withdraw the investment and the amount of assets invested will be made only by
plan fiduciaries.
• At least 50% of the assets of an investment option will consist of assets other than
Section 3(c)(7) funds.
• The plan will not make any representations to participants concerning investments
in Section 3(c)(7) funds. Any communication to participants that mentions such an
investment will contain a disclaimer that there is no assurance that the investment
option will continue to invest its assets, or the same portion of its assets, in the
Section 3(c)(7) fund.
A copy of the H.E. Butt no-action letter is attached.
Kathryn A. Ricard
Associate Counsel
Attachment
Attachment (in .pdf format)