82 FR 13520 - Katahdin Asset Management LLC; Notice of Application

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 47 (March 13, 2017)

[Federal Register Volume 82, Number 47 (Monday, March 13, 2017)]
[Notices]
[Pages 13520-13522]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-04811]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-4660; File No. 803-00230]


Katahdin Asset Management LLC; Notice of Application

March 7, 2017.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an exemptive order under the 
Investment Advisers Act of 1940 (``Advisers Act'').

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Applicant: Katahdin Asset Management LLC (the ``Applicant'').

Relevant Advisers Act Sections: Exemption requested under Section 
202(a)(11)(H) of the Advisers Act from Section 202(a)(11) of the 
Advisers Act.

Summary of Application: The Applicant requests that the Commission 
issue an order declaring the Applicant to be a person not within the 
intent of Section 202(a)(11) of the Advisers Act, which defines the 
term ``investment adviser.''

Filing Dates: The application was filed on September 2, 2016, and 
amended on December 14, 2016 and February 9, 2017.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving the Applicant with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on April 3, 2017, and should be accompanied by proof of service on 
the Applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Pursuant to Rule 0-5 under the Advisers Act, 
hearing requests should state the nature of the writer's interest, any 
facts bearing upon the desirability of a hearing on the matter, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549. Applicant, Katahdin Asset Management LLC, c/
o Dan L. Jaffe, Vorys, Sater, Seymour and Pease LLP, 52 East Gay 
Street, Columbus, Ohio 43215.

FOR FURTHER INFORMATION CONTACT: James McGinnis, Senior Counsel, at 
(202) 551-3025 or Holly Hunter-Ceci, Acting Assistant Chief Counsel, at 
(202) 551-6825 (Division of Investment Management, Chief Counsel's 
Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site either at http://www.sec.gov/rules/iareleases.shtml or by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.

Applicant's Representations

    1. The Applicant, a Delaware limited liability company, is a multi-
generational single-family office that provides services to the family 
and descendants of Joseph A. Jeffrey (1836-1928) (``J.A. Jeffrey'') 
through the provision of services to Jeffrey LLC, a Delaware limited 
liability company, and to The Jeffrey Company, an Ohio corporation 
(``TJC''). The securities of each of Jeffrey LLC and TJC are 100% owned 
directly or indirectly by the descendants of J.A. Jeffrey. The managing 
member of Jeffrey LLC is TJC. Unless otherwise defined herein, 
capitalized terms have the same meaning as defined in the Family Office 
Rule.
    2. The Applicant provides a wide array of services (both advisory 
and non-advisory) to, and conducts the day-to-day operations of, 
Jeffrey LLC and TJC with the Applicant's own employees (neither Jeffrey 
LLC nor TJC having employees of its own), subject to the direction of 
the board of directors of TJC (the ``Board''). TJC is managed by the 
Board, a majority of the members of which are Family Members as defined 
in paragraph (d)(6) of Rule 202(a)(11)(G)-1 (the ``Family Office 
Rule'') (with J.A. Jeffrey being the ``common ancestor'' for this 
purpose). The Applicant is wholly owned and controlled by the same 
individual who is TJC's chief executive officer, and who also is a 
Family Member.
    3. The Applicant represents that (i) each of the persons served by 
the Applicant is a Family Client, i.e., the Applicant has no clients 
other than Family Clients as required by paragraph (b)(1) of the Family 
Office Rule, (ii) the Applicant is owned and controlled in a manner 
that complies in all respects with paragraph (b)(2) of the Family 
Office Rule, and (iii) the Applicant does not hold itself out to the 
public as an investment adviser as required by paragraph (b)(3) of the 
Family Office Rule.
    4. The Applicant represents that Jeffrey LLC currently relies on an 
exception from the definition of investment company pursuant to Section 
3(c)(1) of the Investment Company Act of 1940, as amended (the 
``ICA''). Jeffrey LLC would like to offer to additional Family Clients 
the opportunity to invest in Jeffrey LLC (subject to securities law 
compliance, including complying with applicable federal and state 
exemptions from the registration of its securities). The Applicant 
states that the 100 beneficial owner limitation of Section 3(c)(1) of 
the ICA would cause family friction by denying to many Family Clients 
the opportunity to invest in Jeffrey LLC. The Applicant states that 
there are approximately 350 Family Members. Accordingly, on March 11, 
2016, Jeffrey LLC filed an application with the Commission pursuant to 
Section 6(c) of the ICA requesting an exemption from all of the 
provisions of the ICA and all rules and regulations thereunder. Such 
exemption would permit Jeffrey LLC to allow all Family Clients the 
opportunity to invest in Jeffrey LLC without imposing on Jeffrey LLC 
the costs of registering under, and complying with, the ICA.
    5. The Applicant represents that, in the event Jeffrey LLC were to 
exceed the 100 beneficial owner limitation of Section 3(c)(1) of the 
ICA, the Applicant would continue to meet the three general conditions 
of the Family Office Rule set forth in item 3 above, with the exception 
that Jeffrey LLC would not qualify as a Family Client, as more fully 
described below. The Applicant represents that the assets owned

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beneficially by Family Members and/or Family Entities (including assets 
beneficially owned by Family Members and/or Family Entities indirectly 
through Jeffrey LLC) will account for at least 75% of the assets for 
which the Applicant provides services.
    6. The Applicant represents that the membership interests of 
Jeffrey LLC (``units'') have not been, and will not be, offered or sold 
to the public. The Applicant states that under Jeffrey LLC's limited 
liability company agreement, sales or other transfers of units for 
value to any purchaser, other than to Jeffrey LLC itself, are 
prohibited. The Applicant further states that transfers for value to 
existing members or other Family Clients are prohibited.\1\ The 
Applicant represents that a market never will develop for units. 
Applicant represents that the exit strategies available to a Family 
Client will be to surrender units for redemption by Jeffrey LLC at fair 
market value or to gift or contribute units to other Family Clients. 
Investors are permitted to redeem their units at the end of each 
calendar quarter.
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    \1\ Applicant states that Jeffrey LLC allows a very limited 
exception for estate planning transfers for value, such as 
installment sales to a grantor trust. Any such transfers will be 
made only to Family Clients. Additionally, investors are permitted 
to pledge units as collateral for a loan, but only if the pledge 
documents require, in lieu of foreclosure or other enforcement 
action in the event of a default, that the pledged units be redeemed 
by Jeffrey LLC prior to any transfer of economic or voting rights. 
In the event that units are pledged, the party to which such units 
are pledged shall not receive direct economic benefit from the units 
nor can such party directly or indirectly vote the units.
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    7. The Applicant represents that TJC, since 1974, has relied on an 
exception from the definition of investment company pursuant to Section 
3(c)(1) of the ICA. As of December 31, 2016, however, virtually all of 
TJC's assets consist of managing member units of Jeffrey LLC, which 
Jeffrey LLC has determined are not securities. Applicant represents 
that TJC no longer is required to rely on Section 3(c)(1) of the ICA 
and does not require an exemption from the provisions of the ICA.

Applicant's Legal Analysis

    1. Section 202(a)(11) of the Advisers Act defines the term 
``investment adviser'' to mean ``any person who, for compensation, 
engages in the business of advising others, either directly or through 
publications or writings, as to the value of securities or as to the 
advisability of investing in, purchasing, or selling securities, or 
who, for compensation and as a part of a regular business, issues or 
promulgates analyses or reports concerning securities . . . .''
    2. The Applicant currently complies with the Family Office Rule, 
and thus the Applicant is not considered to be an ``investment 
adviser'' under Section 202(a)(11) of the Advisers Act. In the event 
that Jeffrey LLC were to exceed the 100 beneficial owner limitation of 
Section 3(c)(1) of the ICA and thereby no longer would be excepted from 
the definition of ``investment company'' under the ICA, the Applicant 
would not comply with the Family Office Rule exclusion from the term 
``investment adviser'' because the Applicant's ``client'' (Jeffrey LLC) 
would not qualify as a Family Client under paragraph (d)(4)(xi) of the 
Family Office Rule. The Applicant does not qualify for any of the 
exemptions from registration as an investment adviser set forth in 
Section 203(b) of the Advisers Act and, because the Applicant has 
regulatory assets under management of more than $100 million, the 
Applicant is not prohibited from registering with the Commission under 
Section 203A(a) of the Advisers Act. Therefore, absent relief, the 
Applicant would be required to register as an investment adviser under 
Section 203(a) of the Advisers Act.
    3. The Applicant submits that, in the event Jeffrey LLC were to 
exceed the 100 beneficial owner limitation of Section 3(c)(1) of the 
ICA, the Applicant's relationship with Jeffrey LLC would not change the 
nature of the Applicant into that of a commercial advisory firm. In 
support of this argument, the Applicant notes that the Applicant would 
continue to be held entirely by Family Clients, and the Applicant would 
continue not to hold itself out to the public as an investment adviser. 
The Applicant represents that Jeffrey LLC would continue to be managed 
and controlled by TJC, which in turn is managed by the Board, a 
majority of the members of which are Family Members.
    4. The Applicant states that, in requesting the order, the 
Applicant is not attempting to expand its operations or engage in any 
level of commercial activity to which the Advisers Act is designed to 
apply. Further, in the event Jeffrey LLC receives from the Commission 
an order exempting Jeffrey LLC from all of the provisions of the ICA 
and all rules and regulations thereunder, given the conditions of such 
exemptive order, which are designed to alleviate the policy concerns 
implicated by expanding Jeffrey LLC beyond one hundred investors, the 
Applicant submits that there is no practical difference from a 
regulatory standpoint between (i) a pooled investment vehicle created 
exclusively for the benefit of and wholly owned by Family Clients that 
is ``excepted from the definition'' of ``investment company'' under the 
ICA, and (ii) such a pooled investment vehicle that is, by virtue of a 
Commission order, exempt from all the provisions of the ICA and all 
rules and regulations thereunder.
    5. The Applicant also submits that there is no public interest in 
requiring the Applicant to be registered under the Advisers Act. The 
Applicant is a private organization that was formed to be the ``family 
office'' for descendants of J.A. Jeffrey. The Applicant's clients are 
Jeffrey LLC and TJC; the Applicant has no clients other than Family 
Clients. Applicant represents that such services would not change or be 
affected in the event Jeffrey LLC were to exceed the 100 beneficial 
owner limitation of Section 3(c)(1) of the ICA.
    6. The Applicant argues that, although the Family Office Rule 
largely codified the exemptive orders that the Commission had 
previously issued before the enactment of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, the Commission recognized in 
proposing the Family Office Rule that the exact representations, 
conditions, or terms contained in every exemptive order could not be 
captured in a rule of general applicability. The Commission noted that 
family offices would remain free to seek a Commission exemptive order 
to advise an individual or entity that did not meet the proposed 
``family client'' definition, and that certain situations may raise 
unique conflicts and issues that are more appropriately addressed 
through an exemptive order process where the Commission can consider 
the specific facts and circumstances, than through a rule of general 
applicability.
    7. The Applicant notes that the Commission has issued orders 
subsequent to the adoption of the Family Office Rule, and that each of 
those orders treated the applicant as a Family Office even though the 
applicant was providing services to persons who did not fall within the 
definition of ``Family Client.'' The Applicant submits that those 
orders recognized unusual circumstances in which an entity provided 
services to such persons while remaining focused on a single family's 
needs. The Applicant maintains that its unusual circumstances--
providing services to an entity that currently qualifies as a Family 
Client because it is excepted from the definition of ``investment 
company'' under the ICA but would not be so excepted if it were to 
exceed 100 beneficial owners--would not change the nature of the 
Applicant's operations into that of a commercial advisory business, and 
that an

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exemptive order is appropriate based on the Applicant's facts and 
circumstances.
    8. For the foregoing reasons, the Applicant requests an order 
declaring it to be a person not within the intent of Section 202(a)(11) 
of the Advisers Act. The Applicant submits that the order is necessary 
and appropriate, in the public interest, consistent with the protection 
of investors, and consistent with the purposes fairly intended by the 
policy and provisions of the Advisers Act.

Applicant's Conditions

    1. The Applicant will offer and provide services only to: (i) 
Jeffrey LLC, which will generally be deemed to be, and treated as if it 
were, a Family Client, and (ii) other Family Clients.
    2. The Applicant at all times will be wholly owned by Family 
Clients and exclusively controlled (directly or indirectly) by one or 
more Family Members and/or Family Entities as defined in paragraph 
(d)(5) of the Family Office Rule.
    3. Jeffrey LLC at all times will be wholly owned by Family Clients.
    4. At all times the assets beneficially owned by Family Members 
and/or Family Entities (including assets beneficially owned by Family 
Members and/or Family Entities indirectly through Jeffrey LLC) will 
account for at least 75% of the assets for which the Applicant provides 
services.
    5. The Applicant will comply with all the terms for exclusion from 
the definition of ``investment adviser'' under the Advisers Act set 
forth in the Family Office Rule except for the limited exception 
requested by the application.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-04811 Filed 3-10-17; 8:45 am]
BILLING CODE 8011-01-P