

[Federal Register: January 4, 2006 (Volume 71, Number 2)]
[Notices]               
[Page 373-375]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ja06-96]                         

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-2469/803-181]

 
Greenhouse Associates, LLC and Superior Partners, LP; Notice of 
Application

December 28, 2005.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Advisers Act of 1940 (``Advisers Act'' or ``Act'').

-----------------------------------------------------------------------

Applicant: Greenhouse Associates, LLC (``Greenhouse'') and Superior 
Partners LP (``Superior'') (collectively, ``Applicants'').

Relevant Advisers Act Sections: Exemption requested under section 
205(e) of the Advisers Act from section 205(a)(1) of that Act.

Summary of Application: Applicants request an order under section 
205(e) of the Advisers Act to permit registered investment advisers to 
charge each of the Applicants performance-based advisory fees 
notwithstanding the prohibition set forth in section 205(a)(1) of the 
Act.

Filing Dates: The application was filed on February 16, 2005, and 
amended on December 8, 2005.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving each of 
the Applicants with a copy of the request, either personally or by 
mail. Hearing requests should be received by the SEC by 5:30 p.m., on 
January 20, 2006, and should be accompanied by proof of service on each 
of the Applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the SEC's Secretary.

ADDRESSES: SEC: Secretary, Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-9303. Applicants: (1) Greenhouse: 
Greenhouse Associates, LLC, c/o Dudley & Shanley, LLC, 130 Maple 
Avenue, Suite EB-2, Red Bank, NJ 07701-1735; (2) Superior: Superior 
Partners, LP, c/o Dudley & Shanley, LLC, 130 Maple Avenue, Suite EB-2, 
Red Bank, NJ 07701-1735.

FOR FURTHER INFORMATION CONTACT: Jamey Basham, Branch Chief, Division 
of Investment Management, Office of Investment Adviser Regulation, at 
(202) 551-6787.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Greenhouse is a Delaware limited liability company operating as 
a private investment company exempt from registration under section 
3(c)(1) of the Investment Company Act of 1940 (``Investment Company 
Act'').\1\ Greenhouse represents that it serves in essence as a family 
investment vehicle to manage, facilitate, and simplify the investments 
of family members and their trusts and custodial arrangements. The 
twelve current members of Greenhouse (``Current Greenhouse Members'') 
are (i) Henry C. Dudley (``Mr. Dudley''); (ii) Mr. Dudley's mother and 
two sisters; (iii) a trust for the benefit of Mr. Dudley's mother; (iv) 
six custodial arrangements (under the Uniform Transfers to Minors Act) 
for the exclusive benefit of one or more of the lineal descendants of 
Mr. Dudley or his sisters; and (v) Frank E. Shanley (``Mr. Shanley''). 
Greenhouse represents that it may admit new members in the future, but 
that future members (``Future Greenhouse Members'') will be limited to 
(a) lineal descendants of Mr. Dudley's mother (including Mr. Dudley and 
his two sisters) and spouses of such descendents; (b) lineal 
descendants of Mr. Shanley and spouses of such descendents; (c) trusts 
and custodial arrangements exclusively for the benefit of family 
members described in (a) and (b); (d) partnerships or other entities 
owned exclusively by family members described in (a) and (b) or the 
entities described in (c); and (v) charitable foundations and 
organizations controlled exclusively by family

[[Page 374]]

members described in (a) and (b) or the entities described in (c).
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 80a-3(c)(1). Section 3(c)(1) generally excepts 
from the definition of investment company under the Investment 
Company Act any issuer whose outstanding securities are beneficially 
owned by not more than 100 persons and which is not making, and does 
not presently propose to make, a public offering of its securities.
---------------------------------------------------------------------------

    2. Mr. Dudley and Mr. Shanley are the sole Managers of Greenhouse. 
Greenhouse has no executives or employees. Greenhouse represents that 
Mr. Dudley and Mr. Shanley are solely responsible for all investment 
decisions for the Greenhouse portfolio, as well as all aspects of the 
business and administration of Greenhouse. Mr. Dudley and Mr. Shanley 
have retained, under this authority, their investment firm, Dudley & 
Shanley, LLC (D&S), to perform these functions. Mr. Dudley and Mr. 
Shanley are the sole co-owners and principals of D&S, perform these 
functions personally, and have not delegated them to other D&S 
employees, with the exception that other D&S employees assist them with 
certain ministerial duties.
    3. Greenhouse pays D&S an annual management fee equal to 0.5% of 
Greenhouse's net asset value. Greenhouse represents that the management 
fee is intended to reimburse D&S' costs incurred in rendering services 
to Greenhouse and not to provide D&S, Mr. Dudley or Mr. Shanley with a 
profit. Greenhouse does not otherwise reimburse D&S, Mr. Dudley or Mr. 
Shanley for their expenses incurred in connection with managing the 
fund.
    4. Mr. Dudley and Mr. Shanley are also entitled to performance-
based advisory compensation from Greenhouse, consisting of an annual 
performance reallocation to their membership interests in Greenhouse. 
This performance reallocation equals ten percent of all Greenhouse 
members' net gain in excess of a ``high water mark'' (that is, the 
highest level of cumulative net gain for preceding periods). However, 
in making this performance reallocation, Greenhouse excludes its 
members that are not ``qualified clients'' as defined in rule 205-3 
under the Advisers Act,\2\ so that such non-qualified clients are not 
charged performance-based compensation.
---------------------------------------------------------------------------

    \2\ 17 CFR 275.205-3.
---------------------------------------------------------------------------

    5. Greenhouse states that it currently invests in other private 
investment companies whose investment advisers are not affiliated in 
any way with either Mr. Dudley or Mr. Shanley (``Greenhouse Third Party 
Funds''), and that the managers of some of these Greenhouse Third Party 
Funds charge their investors performance-based compensation. Greenhouse 
also states that it may in the future identify other desirable 
Greenhouse Third Party Funds in which Greenhouse wishes to invest, and 
which are managed by investment advisers who charge performance-based 
compensation. Greenhouse believes that many of the investment advisers 
managing these Greenhouse Third Party Funds will soon become subject to 
the performance-based compensation restrictions of section 205(a)(1) of 
the Advisers Act,\3\ and will accordingly look to Advisers Act rule 
205-3 to continue charging performance-based compensation, as discussed 
below. Greenhouse therefore seeks relief that will allow it to invest 
in Greenhouse Third Party Funds notwithstanding the fact that some of 
Greenhouse's members are not ``qualified clients'' as required by rule 
205-3.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 80b-5(a)(1).
---------------------------------------------------------------------------

    6. Mr. Dudley and Mr. Shanley are both ``qualified clients'' for 
purposes of rule 205-3, as are four other Current Greenhouse Members. 
The six other Current Greenhouse Members do not meet the definition of 
a qualified client. Greenhouse may admit Future Greenhouse Members that 
may not be qualified clients.
    7. Superior is a Delaware limited partnership operating as a 
private investment company exempt from registration under section 
3(c)(1) of the Investment Company Act. Superior was formed in 1978 by 
descendents of Chester A. Congdon, Mr. Dudley's great-grandfather, to 
manage for their benefit assets distributed to them from the Congdon 
estate. The current partners of Superior (``Current Superior 
Partners'') are all (i) Lineal descendents of Chester A. Congdon and 
spouses of such descendents; (ii) trusts exclusively for the benefit of 
lineal descendants of Chester A. Congdon; and (iii) entities owned 
exclusively by lineal descendents of Chester A. Congdon and their 
spouses. Superior represents that it may admit new partners in the 
future, but that future partners (``Future Superior Partners'') will be 
limited to (a) lineal descendents of Chester A. Congdon and spouses and 
adopted children of such descendents; (b) personal representatives 
(such as executors) of family members described in (a); (c) trusts and 
custodial arrangements exclusively for the benefit of family members 
described in (a); and (d) entities owned exclusively by or established 
for the exclusive benefit of any of the foregoing.
    8. The Current Superior Partners include four Managing General 
Partners who manage Superior: Mr. Dudley, Thomas E. Congdon, John P. 
Congdon, and Charles W. D'Autremont. Superior also has 13 other general 
partners; however, their status as general partners relates to 
historical family considerations, and no general partners other than 
the Managing General Partners participate in the administration or 
management of the partnership. Superior has no executives or employees. 
Superior's Limited Partnership Agreement authorizes the Managing 
General Partners to retain an investment manager and administrative 
agent, and the Managing General Partners have delegated their 
management responsibilities to D&S pursuant to this authority. Mr. 
Dudley and Mr. Shanley, as the sole co-owners and principals of D&S, 
perform all aspects of the administration and investment management of 
Superior personally and have not delegated them to other D&S employees, 
with the exception that other D&S employees assist them with certain 
ministerial duties. Mr. Dudley and Mr. Shanley consult with individual 
Managing General Partners regularly and meet with them as a group from 
time to time.
    9. Superior pays D&S an annual management fee equal to 0.5% of 
Superior's net asset value, as well as an administrative services fee 
equal to 0.1% of such net asset value. Superior represents that these 
fees are intended to reimburse D&S' costs incurred in rendering 
services to Superior and not to provide D&S, Mr. Dudley or Mr. Shanley 
with a profit. Superior does not otherwise reimburse D&S, Mr. Dudley or 
Mr. Shanley for their expenses incurred in connection with managing 
Superior. Superior does not compensate its Managing General Partners 
and does not reimburse the Managing General Partners for any expenses 
incurred with respect to their responsibilities towards Superior, with 
the exception of travel expenses to any meetings of the Managing 
General Partners. Superior pays no performance-related fees to D&S, Mr. 
Dudley, Mr. Shanley, or the Managing General Partners.
    10. Superior states that it currently invests in other private 
investment companies whose investment advisers are not affiliated in 
any way with either Mr. Dudley or Mr. Shanley, or with the Managing 
General Partners (``Superior Third Party Funds''), and that the 
managers of some of these Superior Third Party Funds charge their 
investors performance-based compensation. Superior also states that it 
may in the future identify other desirable Superior Third Party Funds 
in which Superior wishes to invest, and which are managed by investment 
advisers who charge performance-based compensation. Superior believes 
that many of the investment advisers managing these Superior Third 
Party

[[Page 375]]

Funds will soon become subject to the performance-based compensation 
restrictions of section 205(a)(1) of the Advisers Act, and will 
accordingly look to Advisers Act rule 205-3 to continue charging 
performance-based compensation, as discussed below. Superior therefore 
seeks relief that will allow it to invest in Superior Third Party Funds 
notwithstanding the fact that some of Superior's partners are not 
``qualified clients'' as required by rule 205-3.
    11. Superior's four Managing General Partners are all ``qualified 
clients'' for purposes of rule 205-3, as are 32 other Current Superior 
Partners. The 23 other Current Superior Partners do not meet the 
definition of a qualified client. Superior may admit Future Superior 
Partners that may not be qualified clients.

Applicants' Legal Analysis

    1. Section 205(a)(1) of the Advisers Act generally prohibits a 
registered investment adviser, unless exempt from registration pursuant 
to section 203(b) of the Act, from entering into, extending, renewing, 
or performing under any investment advisory contract that provides for 
compensation based upon ``a share of capital gains upon or capital 
appreciation of the funds or any portion of the funds of the client,'' 
commonly referred to as performance-based compensation or a performance 
fee.
    2. Rule 205-3 under the Act provides an exemption from the 
prohibition in section 205(a)(1), provided each client entering into an 
investment advisory contract that provides for performance-based 
compensation is a ``qualified client.'' Under rule 205-3(b), each 
equity owner of a ``private investment company'' is considered a client 
for purposes of rule 205-3(a).\4\ Applicants assert that Greenhouse and 
Superior are private investment companies.
---------------------------------------------------------------------------

    \4\ Under rule 205-3(d)(3), a private investment company is a 
company that would be defined as an investment company under section 
3(a) of the Investment Company Act of 1940 but for the exception 
provided from that definition by section 3(c)(1) of such Act.
---------------------------------------------------------------------------

    3. Because a number of the Current Greenhouse Members and Current 
Superior Partners are not qualified clients, Applicants may not be 
treated as meeting the requirements of rule 205-3(a).
    4. Applicants request an order under section 205(e) of the Advisers 
Act granting an exemption from section 205(a)(1) of the Act so as to 
permit registered investment advisers to charge Applicants performance-
related compensation. Applicants ask that the relief requested be 
applicable to Current Greenhouse Members and Current Superior Partners 
that are not qualified clients, as well as to Future Greenhouse Members 
and Future Superior Partners that are not qualified clients.
    5. Section 205(e) of the Advisers Act provides that the Commission, 
by order upon application, may exempt any person, or any class or 
classes of persons, from section 205(a)(1) of the Act, if and to the 
extent that the exemption relates to an investment advisory contract 
with any person that the Commission determines does not need the 
protection of section 205(a)(1), on the basis of such factors as 
financial sophistication, net worth, knowledge of and experience in 
financial matters, and such other factors as the Commission determines 
are consistent with section 205.
    6. Applicants assert that exemptive relief to permit Greenhouse and 
Superior to be charged performance-based compensation is appropriate 
and consistent with the purposes of 205(a)(1) of the Advisers Act. 
Applicants assert that the request for relief complies with the factors 
specified in section 205(e) of the Act. Applicants state that Mr. 
Dudley and Mr. Shanley, the investment decision-makers for Applicants, 
are qualified clients meeting the net worth requirement of rule 205-
3(d)(1)(ii)(A) under the Act. Superior further asserts that each of its 
Managing General Partners with whom Mr. Dudley and Mr. Shanley 
periodically consult is a qualified client. Applicants assert that Mr. 
Dudley and Mr. Shanley are financially sophisticated, with substantial 
knowledge of and long experience in financial matters, (particularly 
those pertinent to investing in private investment companies), and are 
accordingly fully able to assess the potential risks of performance-
related compensation. Superior further asserts that each of its 
Managing General Partners with whom Mr. Dudley and Mr. Shanley 
periodically consult is equally financially sophisticated, with similar 
knowledge and expertise, and are similarly able to asses the risk of 
performance-related compensation.
    7. Applicants further assert that Mr. Dudley and each of Superior's 
Managing General Partners with whom Mr. Dudley and Mr. Shanley 
periodically consult have strong familial relationships with Current 
Greenhouse Members, Current Superior Partners, Future Greenhouse 
Members, and Future Superior Partners that are not qualified clients 
(or with the beneficiaries of the trust and custodial arrangements that 
are or will be such members or partners). Applicants also assert that 
Mr. Shanley has had a long business and social relationship with many 
members of the Dudley and Congdon families, and is a trustee of a 
number of trusts established for the Dudley family. In addition, 
applicants assert that Mr. Dudley, Mr. Shanley, and each of Superior's 
Managing General Partners with whom Mr. Dudley and Mr. Shanley 
periodically consult have made substantial personal investments in 
Applicants. Applicants assert these factors will cause Mr. Dudley, Mr. 
Shanley, and each of Superior's Managing General Partners with whom Mr. 
Dudley and Mr. Shanley periodically consult to act in the best 
interests of Applicants' members and partners.
    8. Applicants further assert with respect to trusts and custodial 
arrangements that are Current Greenhouse Members and Current Superior 
Partners and are not qualified clients, the trustees and custodians are 
each qualified clients and, in many cases, are parents or other close 
family relations of the beneficiaries of those trusts and custodial 
arrangements who themselves have substantial personal investments in 
Applicants.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E5-8246 Filed 1-3-06; 8:45 am]

BILLING CODE 8010-01-P
