2344 Spruce Street, Suite A
[GRAPHIC OMITTED] Boulder, Colorado 80302
First Opportunity Fund, Inc. WWW.FIRSTOPPORTUNITYFUND.COM
PHONE 303.444.5483
FAX 303.245.0420
SCMILLER@BOULDERFUNDS.NET
February 3, 2010
VIA EDGAR, EMAIL AND FEDERAL EXPRESS
Vincent J. Di Stefano, Esq.
Senior Counsel
U.S. Securities & Exchange Commission
Division of Investment Management
100 F Street, N.E.
Washington, DC 20549
Re: First Opportunity Fund, Inc. (the "Fund")
Dear Mr. Di Stefano:
This letter regards the Preliminary Schedule 14A filed by the Fund on June
5, 2009 (the "Proxy Statement") and the proposed changes submitted to you on
June 12, 2009, and responds to the comments conveyed by you during our various
telephone conversations thereafter. Following are responses to each of the items
discussed during our conversations with a brief heading/summary of the comment
made by you. Capitalized terms in this response letter not otherwise defined
will have the meaning ascribed to such term in the Proxy Statement.
In addition to an EDGAR filing of the revised Proxy Statement (with such
filing including revision tags to reference changes from the previous EDGAR
filing) we will provide copies to you by courier and email; such copies will
include a redline of the revised Proxy Statement so that you can easily identify
the changes made.
1. Explain the rationale for the 75%-25% fee split between the Barbados
adviser and Boulder adviser. As discussed in Question 4 in the Proxy Statement,
Stewart R. Horejsi, the primary investment manager for the New Advisers, spends
a substantial amount of his time in Barbados and, based on our internal analysis
of how Mr. Horejsi spends his working time when in Barbados as compared to when
he is in the United States, we have concluded that the 75%/25% split is
appropriate based on current facts and circumstances (e.g., when not in
Barbados, Mr. Horejsi spends a fair amount of time vacationing and attending to
family and other non-adviser-related functions and issues). That allocation may
change from time to time based on changed circumstances.
2. Is the New Adviser fee waiver subject to reimbursement or recoupment at
any time? As the fee waiver with respect to the Fund's investments in WHM Hedge
Funds is incorporated into the Advisory Agreements, it will be permanent and not
subject to subsequent reimbursement or recoupment without first amending the
Advisory Agreements, which would require approval by the Fund's stockholders.
Note, however, that the fee waiver only applies to the look-through fees
attributable to the Fund's investment in hedge funds managed by WHM.
Consequently, if the New Advisers invest in hedge funds that are not managed by
a Wellington affiliate, such investments would not be affected by the fee waiver
and would be subject to the entirety of the Proposed Fee.
3. Provide information regarding acquired fund fees and expenses in the
Fees and Expenses Table. We agree that the WHM Hedge Funds are subject to the
acquired funds fee and expense disclosure in the Fees and Expenses Table. We
have added a line item for such disclosure which is reflected in the Pro Forma
column. Notably, the Acquired Fund Fees and Operating Expenses line item
reflects a pro forma performance fee consistent with the example cited in the
paragraph immediately above as referenced in the Proxy Statement (e.g., 10% for
the WHM Hedge Fund investments). However, as you know, expenses related to
performance fees are not predictable with any certainty (e.g., during calendar
year 2008, no performance fees were paid with respect to the WHM Hedge Funds the
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February 3, 2010 First Opportunity Fund, Inc.
Page 2
New Advisers are considering for investment by the Fund) and we have stated as
much in the accompanying footnote. In addition, we have revised the disclosure
in Question 9 (now Question 10) and in the few paragraphs before the Fees and
Expenses Table to be consistent with the Pro Forma column of the Fees and
Expenses Table.
4. Provide additional disclosure in Question 14 regarding the risks of
investing in hedge funds. We have provided additional disclosure in Question 15
regarding the general risks of investing in hedge funds. In addition, we have
directed stockholders to the substantive discussion of hedge fund-related risk
later in the Proxy Statement.
5. Provide disclosure regarding the asset-based fees charged by WHM with
respect to the WHM Hedge Funds. We have added the following disclosure in
Question 10; in the paragraph "Multiple Fees and Expenses" on page 7; in the
third paragraph under "The Advisory Agreements" on page 17; and in the footnote
to the Fees and Expenses Table:
WHM charges an asset-based fee of 1.00% to the WHM Hedge Funds presently
under consideration for investment by the New Advisers.
6. Clarify the fee split arrangement in Exhibit A to the advisory
agreements. We have clarified the fee split arrangement by specifically naming
the New Advisers in each Exhibit A.
7. Provide additional disclosures as appropriate for a "fund of hedge
funds" (e.g., DB Hedge Strategies Fund, LLC). We have provided additional
disclosure at various locations in the Proxy Statement. In particular, we have
provided a new section under Proposals 1 and 2 entitled "Net Asset Valuation"
which describes the Fund's fair valuation procedures, net asset value
calculation methodology, and risks and nuances particular to valuation of the
Fund's portfolio generally and in particular with respect to its investments in
Hedge Funds. The attached redline of the Proxy Statement shows the changes
particular to this comment, primarily occurring in Question 15 and under the
heading "Risks and Special Considerations Associated with the Restructuring
Proposals" under Proposals 1 and 2.
8. Provide language in the Sub-Advisory Agreement consistent with Section
15(a)(3) of the Investment Company Act of 1940 (the "1940 Act"). We have revised
Paragraph 9 of the Sub-Advisory Agreement to provide for termination of the
agreement as contemplated by Section 15(a) (i.e., "by the board of directors . .
.. or by a vote of a majority of the outstanding voting securities"). The second
sentence now states:
This Agreement is terminable by any party hereto, by the Board or by the
vote of a majority of the outstanding voting securities of the Fund, on
sixty (60) days' written notice to the respective party. Any termination
shall be without penalty and any notice of termination shall be deemed
given when received by the addressee.
Note that the term of the Sub-Advisory Agreement is for a fixed period of two
years such that the two-year renewal requirements of Section 15(a)(2) will not
be applicable (i.e., the agreement will terminate by its own terms at the point
in time when board approval would be due under Section 15(a)(2)). Also, to be
consistent with the Sub-Advisory Agreement, we have revised both of the Advisory
Agreements with the same language required under Section 15(a)(3).
9. Provide explanation as to why, given the Fund's anticipated investment
in the WHM Hedge Funds, the stockholders of the Fund should not be required to
be "qualified purchasers". The Fund, as an investment company registered under
the 1940 Act, qualifies as an accredited investor, and as an investment company
that owns at least $25 million in investments, qualifies as a qualified
purchaser (even if the Fund's stockholders individually are not qualified
purchasers or accredited investors). The regulatory look-through doctrine, under
which the Securities & Exchange Commission (the "SEC") and its staff ("SEC
Staff") tend to look through an entity deemed to have been formed or operated
for the specific purpose of investing in a Section 3(c)(1) or Section 3(c)(7)
fund (i.e., private investment companies exempt from registration under the 1940
Act pursuant to Sections 3(c)(1) and 3(c)(7), respectively) to qualify the
investors in the investing fund (or count the investors in the investing fund
towards the 100-beneficial owner limit of Section 3(c)(1) in the case of an
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February 3, 2010 First Opportunity Fund, Inc.
Page 3
investee fund that is relying on this exclusion), should not apply to the Fund
given the present and anticipated diversity of its investments.
10. Provide assurances that the Restructuring does not violate any NYSE
rules regarding closed-end funds of hedge funds. Both Fund management and the
Fund's legal counsel researched whether any NYSE listing standards affect
closed-end funds that invest significantly in hedge funds. In discussions with
SEC Staff, we were directed to a proposed listing standard of the American Stock
Exchange(1) ("AMEX") (the "Proposed Standard") which could, if adopted under the
then current proposal and applied to NYSE members, impact the Restructuring as
presented in the Proxy Statement. In particular, the Proposed Standard would
have limited each member "closed-end fund of hedge funds" to investing only in
hedge funds that report their net asset values weekly with valuation reports
prepared by an unaffiliated, independent third party. Also, the Proposed
Standard would have required each such member fund to contractually agree to
publicly disseminate any material information that each underlying hedge fund
makes available to its investors. As discussed in the Proxy Statement, most
hedge funds, including the WHM Hedge Funds, report their net asset values on a
monthly basis. Also, for various reasons, not the least of which is to avoid
being viewed as engaged in the public offering of securities and thus
jeopardizing the hedge funds' exemptions under Sections 3(c)(1) and 3(c)(7) of
the 1940 Act, hedge fund sponsors are generally unwilling to acquiesce to such
public disclosures. Consequently, if the Proposed Standard were adopted by the
NYSE and the Fund were subject to the standard, the Fund, after the
Restructuring, would likely not comply with such standard. However, the Fund is
a NYSE member and the Proposed Standard was a standard proposed for AMEX
members, not NYSE members. Since the merger of the exchanges in 2008, the NYSE
has neither proposed nor adopted any such standard and the Proposed Standard
contemplated for the AMEX appears to have been tabled. Accordingly, as presently
contemplated by the Proxy Statement, the Restructuring does not conflict with
any of the NYSE's current or proposed listing standards.
11. Explain why the Restructuring should not be subject to Rule 140 of the
Securities Act of 1933 (the "1933 Act"). We do not believe that the
Restructuring is subject to Rule 140 of the 1933 Act. Under Rule 140, the Fund
would be engaged in the distribution of securities of the WHM Hedge Funds under
section 2(a)(11) of the 1933 Act if the chief part of its business consisted of
purchasing the securities of the WHM Hedge Funds and selling its shares to the
public to furnish the proceeds with which to purchase securities of the WHM
Hedge Funds. However, the Fund is a closed-end investment company and was formed
and completed its public offering in 1986. Thus, the Fund is not selling its
securities to the public as contemplated by Rule 140. We believe that since the
Fund is not offering its securities, it will not be regarded as engaged in the
distribution of the securities of the WHM Hedge Funds and, accordingly, Rule 140
does not apply to the Restructuring.
12. Explain why the Fund should not be required to provide disclosure of
the material information (e.g., balance sheets) that the WHM Hedge Funds makes
available to its investors. We understand that SEC Staff has made reference to a
recommendation contained in an interpretive letter issued by the former Chief
Accountant in the SEC's Division of Investment Management suggesting that funds
of funds investing significantly in other funds should consider providing
additional financial information to stockholders (the "Friend Letter"), (2) and
that the SEC Staff has adopted an unwritten informal position that investments
by any company of greater than 25% of its net assets in any unaffiliated company
would require such disclosure. The Friend Letter suggests that:
when a top tier fund has a significant amount of its portfolio invested in
a single underlying fund or owns a controlling interest in an underlying
fund, registrants should consider providing additional financial
information to shareholders.
For example, if the top tier fund has a significant portion of its
portfolio invested in an underlying fund, the top tier fund should consider
accompanying its financial statements with those of the underlying fund.
Additionally, if a top tier fund owns a controlling interest in an
underlying fund, current accounting literature may require consolidating
the financial statements of an underlying fund and the top tier fund.
-------------------
(1) See Notice of Filing of Proposed Rule Change Relating to Closed-End Fund of
Hedge Fund Listing Requirements, Release No. 34-58067 (June 30, 2008).
(2) Interpretive Letter by Lawrence A. Friend, Chief Accountant, Division of
Investment Management dated November 7, 1997.
Vincent J. Di Stefano, Esq. [GRAPHIC OMITTED]
February 3, 2010 First Opportunity Fund, Inc.
Page 4
The letter footnotes Statement of Financial Accounting Standard No. 94 ("SFAS
94") as support for part of the recommendation. SFAS 94 generally requires
financial statement consolidation of majority-owned subsidiaries, with control
being defined as ownership of over 50% of the outstanding voting shares of
another company. We believe SFAS 94 is not applicable to the Restructuring
because, once implemented, the Fund will not own a controlling interest in any
underlying hedge fund in which the Fund invests. Indeed, based on current
assets, the Fund would invest no more than $37 million in any single WHM Hedge
Fund, in which case, its percentage ownership interest would only be 2.1% and
11.4%, respectively, in the two WHM Hedge Funds the New Advisers are presentely
considering for investment by the Fund.
Furthermore, the above excerpt from the Friend Letter is a recommendation and
does not cite authority requiring a fund to provide additional financial
information when it is has "a significant amount of its portfolio invested in a
single underlying fund". As discussed above, the nature of the hedge fund
industry and the concerns regarding jeopardizing hedge fund exemptions under
Sections 3(c)(1) and 3(c)(7) of the 1940 Act weigh heavily against having to
provide such enhanced disclosure. Moreover, all registered investment companies
have the authority to and often do make at least one 25% concentrated investment
(in the case of non-diversified funds, two 25% investments) in single issuers
(both public and private) and such companies are not subject to enhanced
financial disclosures regarding their underlying investments. Consequently, we
believe that the recommendation should not be applied to the Restructuring.
However, in order to reduce the possibility that the Fund will ever have greater
than 25% of its net assets invested in any single company, the Fund will adopt
policies and procedures that limit its initial investment in a hedge fund to 17%
of the Fund's net assets at the time of investment, and if such percentage
increases over time due to market fluctuations (i.e., an increase in the value
of the hedge fund investment, a decrease in the value of other investments made
by the Fund, or both), the Fund will take steps to reduce its investment in such
hedge fund in order to prevent the value of the investment from exceeding 25% of
the Fund's net assets. Of course, there can be no assurance that the Fund will
be able to reduce its investment in a hedge fund in a timely manner due to
withdrawal notice requirements or limitations on liquidity imposed by the hedge
fund and, accordingly, it is possible that an investment in a hedge fund may
exceed 25% of the Fund's net assets despite the Fund's best efforts to prevent
this from occurring.
We acknowledge on behalf of the Fund that: (i) the Fund is responsible for
the adequacy and accuracy of the disclosure in this filing; (ii) SEC Staff
comments regarding this filing or changes to disclosure in response to SEC Staff
comments regarding this filing reviewed by the SEC Staff do not foreclose the
SEC from taking any action with respect to this filing; and (iii) the Fund may
not assert SEC Staff comments as a defense in any proceeding initiated by the
SEC or by any person under the federal securities laws of the United States.
If you have questions regarding the resubmitted Proxy Statement or this
response letter, please feel free to contact me at 303-442-2156.
Sincerely,
/s/ Stephen C. Miller
Stephen C. Miller
President and General Counsel
Cc: Arthur L. Zwickel, Esq., Paul, Hastings, Janofsky, and Walker LLP
The Board of Directors of First Opportunity Fund, Inc.
Rocky Mountain Advisers, LLC
Stewart Investment Advisers