SEC Company Response from GAMCO INVESTORS, INC. ET AL (GAMI) (CIK 0001060349) — Dec 9, 2005
GAMCO INVESTORS, INC. ET AL (GAMI) (CIK 0001060349)
Date: Dec. 9, 2005 · CIK: 0001060349 · Accession: 0001157523-05-010715
AI Filing Summary & Sentiment
Referenced dates: July 15, 2005, September 29, 2005, September 29, 2005
Letter
One Corporate Center Rye, NY 10580-1422 GAMCO Investors, Inc. Tel. (914) 921-5147 Fax (914) 921-5392 December 9, 2005 Mr. Amit Pande Assistant Chief Accountant United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549
Dear Mr. Pande:
We have reviewed your letter, dated November 4, 2005, regarding our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2005 and June 30, 2005. We have responded to each of your comments below and provided additional information where appropriate.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004:
FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES - INVESTMENTS IN PARTNERSHIPS AND AFFILIATES, PAGE F-10
COMMENT
1. We note your response to comment 3 of our letter dated July 15, 2005 wherein you state you relied on FIN 46R, APB 18, AIN 2, SOP 78-9 and ARB 51 in determining the appropriate accounting for your investment in the Funds. You state that you interpreted the third-party equity holders' ability to remove their investment from the respective partnership/fund as a means by which they prevent the Company from controlling the respective partnership. Therefore, prior to the adoption of FIN 46R you principally accounted for these entities under the equity method. Please tell us more as it relates to these third-party equity holders' ability to remove their investment. At a minimum address the following in your response:
o Whether they are permitted to remove their investment at any time;
o Whether they have to give notice to remove their investment;
o Whether there is a fee or penalty incurred by the equity holders if they choose to remove their investment;
o What if the fund does not have sufficient cash on hand for the equity holders to remove their investment;
o Whether the general partner is obligated to purchase the interest if the Fund does not have sufficient cash on hand; and
o Whether any of the Funds' equity holders removed, or declared their intent to remove, their equity investment in the past; 1 <PAGE>
RESPONSE
As it relates to the equity holders' ability to remove their investment from the partnerships/funds the following is applicable to all partnerships/funds:
o Equity holders have the ability to remove their investment from the partnerships/funds generally on a monthly, quarterly or annual basis depending on the policy of each partnership/fund. The equity holder generally must provide the written notice between 30 to 90 days prior to the requested redemption date. The redemption policy of each partnership/fund is generally stated in the private placement memorandum. We have summarized the redemption policy of each partnership/fund in Attachment I.
o Depending on the policy of the respective partnership/fund, equity holders may be charged a redemption fee in the event that the equity holder wishes to redeem their interest. The fee, if any, generally varies from 1% to 6% of the redemption amount depending on the policy of each partnership/fund. The redemption fee is generally paid to the partnership/fund and can often be increased or decreased with respect to any equity holder at the discretion of the general partner/investment manager or partnership/fund. We have summarized the redemption fee policy of each partnership/fund in Attachment I.
o If the partnership/fund does not have sufficient cash on hand for the equity holders to remove their investment, the partnership/fund will generally liquidate certain securities positions, in an orderly manner, to satisfy redemptions.
Certain partnerships/funds may take longer than the stated redemption policy to effect settlements of an equity holder's redemption amount or it may suspend redemptions in circumstances where the partnership/fund is unable to liquidate securities positions in an orderly manner in order to satisfy redemptions, or where the value of the net assets and liabilities of the partnership/fund cannot reasonably be determined. However, the partnerships/funds that have these policies have never taken longer than the stated redemption policy to effect settlements, nor have they suspended redemptions. Because the substantial majority of the partnerships'/funds' assets are invested in publicly traded securities, we believe the possibility of this ever occurring to be remote.
o The general partner/investment manager of each partnership/fund is not obligated to purchase the interest if the partnership/fund does not have sufficient cash on hand. However, in most of our partnerships/funds, the general partner/investment manager has the right to make distributions in kind (i.e., distribution of securities).
o In the normal course of the partnerships'/funds' businesses, equity holders have removed and/or declared their intent to remove their investments on many occasions in the past within the various partnerships/funds.
<PAGE>
COMMENT
2. Please tell us how the third-party equity holders' ability to remove their investment from the respective partnership/fund contrasts with the examples of "important rights" outlined in paragraph 9 of SOP 78-9. When preparing your response please note that the examples of "important rights" outlined in SOP 78-9 include the right to replace the general partner, approve the sale or refinancing of principal assets, or approve the acquisition of principal partnership. These examples appear to focus on how the limited partner can substantively participate in general partner's decision making. In your situation, it appears the equity holders are unable to participate in the decision making, but they are able to choose to remove their investment, presumably if they disagree with the general partner's decisions to run the fund.
RESPONSE
Before the issuance of EITF 04-5, little authoritative guidance existed in determining whether a general partner controlled a limited partnership. While analogies were made to guidance in SOP 78-9, which provides guidance on the accounting for investments in real estate ventures "important rights" under SOP 78-9 were not well defined. As a result, views in practice were mixed about what constituted important rights.
As all of our partnerships/funds are required to account for investments at quoted market value or fair value, we considered the impact of the nature of the underlying investments of the partnership/fund on the right of a third-party equityholder to remove their investment from a respective partnership/fund. Due to the liquid nature of the underlying investments in a partnership/fund that invests in publicly traded securities with quoted market values, as compared to real estate ventures with inherently illiquid underlying investments, the right of a third-party equityholder to remove their investment from a partnership/fund that invests in publicly traded securities is generally more practical and, as a result, was considered an important or valuable right.
In reviewing the principles of SOP 78-9 for applicability to our partnerships/funds, we considered paragraph 3 of SOP 78-9 which states:
THIS STATEMENT OF POSITION PRESENTS THE DIVISION'S RECOMMENDATIONS ON ACCOUNTING FOR INVESTMENTS IN REAL ESTATE VENTURES IN FINANCIAL STATEMENTS PREPARED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. IT DOES NOT APPLY TO REGULATED INVESTMENT COMPANIES AND OTHER ENTITIES THAT ARE REQUIRED TO ACCOUNT FOR INVESTMENTS AT QUOTED MARKET VALUE OR FAIR VALUE.
As a result, we determined that the recommendations of SOP 78-9 were not directly applicable to our partnerships/funds and interpreted the third-party equity holders' ability to remove their investments from the respective partnership/fund as a means by which they prevent the Company from controlling (i.e., substantive participating rights) the respective partnership/fund providing a sufficient basis to preclude consolidation.
EITF 04-5 was issued, in part, to reconcile the varying guidance, including SOP 78-9 and Issue 96-16, on consolidation models and to promote consistency among all entities in accounting for limited partnerships and similar entities. The provisions of EITF 04-5 will be effective beginning January 1, 2006.
<PAGE>
As a result of the clarity provided by EITF 04-5 in determining whether a general partner controls a limited partnership or similar entity, we have determined that we will consolidate fourteen (updated from twelve partnerships/funds in our previous letter dated September 29, 2005 as described below in the Response to Comment 4) of the partnerships/funds managed by GBL subsidiaries beginning in the first quarter 2006.
COMMENT
3. Please confirm the equity holders' right to remove their investment from the respective partnership was present in each of the seventeen Funds.
RESPONSE
We confirm that the equity holders' right to remove their investments from each respective partnership/fund was, and is still, present in each of the seventeen partnerships/funds as well as in each of the three additional partnerships/funds which are described below in the Response to Comment 4.
FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES - RECENTLY ISSUED ACCOUNTING STANDARDS, PAGE F-12
COMMENT
4. In your response to comment 4 of our letter dated July 15, 2005 you state that a majority of your investment partnerships, i.e. Funds, are subject to consolidation under EITF 04-5 beginning January 1, 2006 based on your conclusion that, among other factors, the limited partners do not have substantive participating rights. We further note that you plan to consolidate twelve of these funds beginning January 1, 2006 since you have now determined they are not variable interest entities (VIEs). We also note that you do not plan to consolidate five additional Funds which you determined to be VIEs, but for which you do not consider yourself the primary beneficiary.
Please address the following in your response:
o Confirm whether these seventeen Funds comprise all of the entities which you initially determined to be VIEs upon adoption of FIN 46R in March 2004 as discussed in your response to prior comment 3;
o For each of these seventeen Funds, please tell us how you considered the guidance in paragraph 5 of FIN 46R in determining whether or not the Fund is a VIE. Your response should clearly discuss the factors and characteristics of the five Funds which you continue to believe are VIEs. Please also address how you concluded that the Funds would not qualify for the business exemption outlined in paragraph 4(h) of FIN 46R; and
o For the five Funds which you continue to believe are VIEs, please tell us how you determined that your interests, along with interests held by unconsolidated related parties, did not absorb a majority of the expected losses or receive a majority of the expected returns, or both. Please confirm that you considered all cash flows you would receive from your interests in making this determination, including any cash flows from the incentive allocation and administrative fees. <PAGE>
RESPONSE
As an update to our letter dated September 29, 2005, we note that in our Quarterly Report on Form 10-Q for the period ended September 30, 2005, we have included one additional partnership as a VIE for which we are not the primary beneficiary or a holder of a significant variable interest. The appropriate disclosure for this partnership was included in our quarterly report.
In addition, there are two new partnerships that will be required to be consolidated beginning January 1, 2006 in accordance with the provisions of EITF 04-5, as we have determined that these entities are not VIEs based on the provisions of FIN46R.
As a result of these changes, we now plan to consolidate fourteen partnerships/funds beginning January 1, 2006. In addition, there are now six VIEs for which we have determined that we are not the primary beneficiary or a holder of a significant variable interest. Therefore, we are not currently consolidating these entities but have and will continue to provide the appropriate disclosures for these VIEs.
In response to your comment:
o We can confirm that these seventeen partnerships/funds comprise all of the entities which we initially determined to be VIEs upon adoption of FIN 46R in March 2004 as we discussed in our response to prior comment 3.
o For each of our partnerships/funds, including the three additional partnerships/funds discussed above, we considered the guidance in paragraph 5 of FIN 46R in determining whether or not the partnership/fund is a VIE.
We had reviewed the provisions of paragraph 5 of FIN46R and determined the following for our partnerships/funds:
o PARAGRAPH 5A: The total equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. In making this determination, we considered the guidance in paragraphs 9 and 10 of FIN46R. The equity investments in the partnerships/funds, in most cases, are within the range of 80%- 100% of the entity's total assets as the partnerships/funds generally use minimal leverage. Furthermore, the partnerships/funds would not be considered to be engaged in high-risk activities as most of the investments of these entities are in publicly traded securities with quoted market values. In addition, these entities do not have exposure to risks tha
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One Corporate Center
Rye, NY 10580-1422
GAMCO Investors, Inc.
Tel. (914) 921-5147
Fax (914) 921-5392
December 9, 2005
Mr. Amit Pande
Assistant Chief Accountant
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Pande:
We have reviewed your letter, dated November 4, 2005, regarding our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and our
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2005 and
June 30, 2005. We have responded to each of your comments below and provided
additional information where appropriate.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004:
FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES - INVESTMENTS IN PARTNERSHIPS AND
AFFILIATES, PAGE F-10
COMMENT
1. We note your response to comment 3 of our letter dated July 15, 2005
wherein you state you relied on FIN 46R, APB 18, AIN 2, SOP 78-9 and ARB
51 in determining the appropriate accounting for your investment in the
Funds. You state that you interpreted the third-party equity holders'
ability to remove their investment from the respective partnership/fund
as a means by which they prevent the Company from controlling the
respective partnership. Therefore, prior to the adoption of FIN 46R you
principally accounted for these entities under the equity method. Please
tell us more as it relates to these third-party equity holders' ability
to remove their investment. At a minimum address the following in your
response:
o Whether they are permitted to remove their investment at any
time;
o Whether they have to give notice to remove their investment;
o Whether there is a fee or penalty incurred by the equity holders
if they choose to remove their investment;
o What if the fund does not have sufficient cash on hand for the
equity holders to remove their investment;
o Whether the general partner is obligated to purchase the interest
if the Fund does not have sufficient cash on hand; and
o Whether any of the Funds' equity holders removed, or declared
their intent to remove, their equity investment in the past; 1
<PAGE>
RESPONSE
As it relates to the equity holders' ability to remove their investment
from the partnerships/funds the following is applicable to all
partnerships/funds:
o Equity holders have the ability to remove their investment from
the partnerships/funds generally on a monthly, quarterly or
annual basis depending on the policy of each partnership/fund.
The equity holder generally must provide the written notice
between 30 to 90 days prior to the requested redemption date. The
redemption policy of each partnership/fund is generally stated in
the private placement memorandum. We have summarized the
redemption policy of each partnership/fund in Attachment I.
o Depending on the policy of the respective partnership/fund,
equity holders may be charged a redemption fee in the event that
the equity holder wishes to redeem their interest. The fee, if
any, generally varies from 1% to 6% of the redemption amount
depending on the policy of each partnership/fund. The redemption
fee is generally paid to the partnership/fund and can often be
increased or decreased with respect to any equity holder at the
discretion of the general partner/investment manager or
partnership/fund. We have summarized the redemption fee policy of
each partnership/fund in Attachment I.
o If the partnership/fund does not have sufficient cash on hand for
the equity holders to remove their investment, the
partnership/fund will generally liquidate certain securities
positions, in an orderly manner, to satisfy redemptions.
Certain partnerships/funds may take longer than the stated redemption
policy to effect settlements of an equity holder's redemption amount
or it may suspend redemptions in circumstances where the
partnership/fund is unable to liquidate securities positions in an
orderly manner in order to satisfy redemptions, or where the value of
the net assets and liabilities of the partnership/fund cannot
reasonably be determined. However, the partnerships/funds that have
these policies have never taken longer than the stated redemption
policy to effect settlements, nor have they suspended redemptions.
Because the substantial majority of the partnerships'/funds' assets
are invested in publicly traded securities, we believe the possibility
of this ever occurring to be remote.
o The general partner/investment manager of each partnership/fund
is not obligated to purchase the interest if the partnership/fund
does not have sufficient cash on hand. However, in most of our
partnerships/funds, the general partner/investment manager has
the right to make distributions in kind (i.e., distribution of
securities).
o In the normal course of the partnerships'/funds' businesses,
equity holders have removed and/or declared their intent to
remove their investments on many occasions in the past within the
various partnerships/funds.
2
<PAGE>
COMMENT
2. Please tell us how the third-party equity holders' ability to remove
their investment from the respective partnership/fund contrasts with
the examples of "important rights" outlined in paragraph 9 of SOP
78-9. When preparing your response please note that the examples of
"important rights" outlined in SOP 78-9 include the right to replace
the general partner, approve the sale or refinancing of principal
assets, or approve the acquisition of principal partnership. These
examples appear to focus on how the limited partner can substantively
participate in general partner's decision making. In your situation,
it appears the equity holders are unable to participate in the
decision making, but they are able to choose to remove their
investment, presumably if they disagree with the general partner's
decisions to run the fund.
RESPONSE
Before the issuance of EITF 04-5, little authoritative guidance
existed in determining whether a general partner controlled a limited
partnership. While analogies were made to guidance in SOP 78-9, which
provides guidance on the accounting for investments in real estate
ventures "important rights" under SOP 78-9 were not well defined. As a
result, views in practice were mixed about what constituted important
rights.
As all of our partnerships/funds are required to account for
investments at quoted market value or fair value, we considered the
impact of the nature of the underlying investments of the
partnership/fund on the right of a third-party equityholder to remove
their investment from a respective partnership/fund. Due to the liquid
nature of the underlying investments in a partnership/fund that
invests in publicly traded securities with quoted market values, as
compared to real estate ventures with inherently illiquid underlying
investments, the right of a third-party equityholder to remove their
investment from a partnership/fund that invests in publicly traded
securities is generally more practical and, as a result, was
considered an important or valuable right.
In reviewing the principles of SOP 78-9 for applicability to our
partnerships/funds, we considered paragraph 3 of SOP 78-9 which states:
THIS STATEMENT OF POSITION PRESENTS THE DIVISION'S RECOMMENDATIONS ON
ACCOUNTING FOR INVESTMENTS IN REAL ESTATE VENTURES IN FINANCIAL
STATEMENTS PREPARED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. IT DOES NOT APPLY TO REGULATED INVESTMENT COMPANIES AND
OTHER ENTITIES THAT ARE REQUIRED TO ACCOUNT FOR INVESTMENTS AT QUOTED
MARKET VALUE OR FAIR VALUE.
As a result, we determined that the recommendations of SOP 78-9 were
not directly applicable to our partnerships/funds and interpreted the
third-party equity holders' ability to remove their investments from
the respective partnership/fund as a means by which they prevent the
Company from controlling (i.e., substantive participating rights) the
respective partnership/fund providing a sufficient basis to preclude
consolidation.
EITF 04-5 was issued, in part, to reconcile the varying guidance,
including SOP 78-9 and Issue 96-16, on consolidation models and to
promote consistency among all entities in accounting for limited
partnerships and similar entities. The provisions of EITF 04-5 will be
effective beginning January 1, 2006.
3
<PAGE>
As a result of the clarity provided by EITF 04-5 in determining
whether a general partner controls a limited partnership or similar
entity, we have determined that we will consolidate fourteen (updated
from twelve partnerships/funds in our previous letter dated September
29, 2005 as described below in the Response to Comment 4) of the
partnerships/funds managed by GBL subsidiaries beginning in the first
quarter 2006.
COMMENT
3. Please confirm the equity holders' right to remove their investment
from the respective partnership was present in each of the seventeen
Funds.
RESPONSE
We confirm that the equity holders' right to remove their investments
from each respective partnership/fund was, and is still, present in
each of the seventeen partnerships/funds as well as in each of the
three additional partnerships/funds which are described below in the
Response to Comment 4.
FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES - RECENTLY ISSUED ACCOUNTING
STANDARDS, PAGE F-12
COMMENT
4. In your response to comment 4 of our letter dated July 15, 2005 you
state that a majority of your investment partnerships, i.e. Funds, are
subject to consolidation under EITF 04-5 beginning January 1, 2006
based on your conclusion that, among other factors, the limited
partners do not have substantive participating rights. We further note
that you plan to consolidate twelve of these funds beginning January
1, 2006 since you have now determined they are not variable interest
entities (VIEs). We also note that you do not plan to consolidate five
additional Funds which you determined to be VIEs, but for which you do
not consider yourself the primary beneficiary.
Please address the following in your response:
o Confirm whether these seventeen Funds comprise all of the
entities which you initially determined to be VIEs upon adoption
of FIN 46R in March 2004 as discussed in your response to prior
comment 3;
o For each of these seventeen Funds, please tell us how you
considered the guidance in paragraph 5 of FIN 46R in determining
whether or not the Fund is a VIE. Your response should clearly
discuss the factors and characteristics of the five Funds which
you continue to believe are VIEs. Please also address how you
concluded that the Funds would not qualify for the business
exemption outlined in paragraph 4(h) of FIN 46R; and
o For the five Funds which you continue to believe are VIEs, please
tell us how you determined that your interests, along with
interests held by unconsolidated related parties, did not absorb
a majority of the expected losses or receive a majority of the
expected returns, or both. Please confirm that you considered all
cash flows you would receive from your interests in making this
determination, including any cash flows from the incentive
allocation and administrative fees.
<PAGE>
RESPONSE
As an update to our letter dated September 29, 2005, we note that in our
Quarterly Report on Form 10-Q for the period ended September 30, 2005, we
have included one additional partnership as a VIE for which we are not the
primary beneficiary or a holder of a significant variable interest. The
appropriate disclosure for this partnership was included in our quarterly
report.
In addition, there are two new partnerships that will be required to be
consolidated beginning January 1, 2006 in accordance with the provisions of
EITF 04-5, as we have determined that these entities are not VIEs based on
the provisions of FIN46R.
As a result of these changes, we now plan to consolidate fourteen
partnerships/funds beginning January 1, 2006. In addition, there are now
six VIEs for which we have determined that we are not the primary
beneficiary or a holder of a significant variable interest. Therefore, we
are not currently consolidating these entities but have and will continue
to provide the appropriate disclosures for these VIEs.
In response to your comment:
o We can confirm that these seventeen partnerships/funds comprise
all of the entities which we initially determined to be VIEs upon
adoption of FIN 46R in March 2004 as we discussed in our response
to prior comment 3.
o For each of our partnerships/funds, including the three
additional partnerships/funds discussed above, we considered the
guidance in paragraph 5 of FIN 46R in determining whether or not
the partnership/fund is a VIE.
We had reviewed the provisions of paragraph 5 of FIN46R and
determined the following for our partnerships/funds:
o PARAGRAPH 5A: The total equity investment at risk is sufficient
to permit the entity to finance its activities without additional
subordinated financial support provided by any parties, including
equity holders. In making this determination, we considered the
guidance in paragraphs 9 and 10 of FIN46R. The equity investments
in the partnerships/funds, in most cases, are within the range of
80%- 100% of the entity's total assets as the partnerships/funds
generally use minimal leverage. Furthermore, the
partnerships/funds would not be considered to be engaged in
high-risk activities as most of the investments of these entities
are in publicly traded securities with quoted market values. In
addition, these entities do not have exposure to risks tha