[Federal Register Volume 62, Number 93 (Wednesday, May 14, 1997)]
[Notices]
[Pages 26595-26601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12548]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-22656; 813-150]
The BSC Employee Fund, L.P. and BSCGP Inc.; Notice of Application
May 7, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: The BSC Employee Fund, L.P. (the ``Partnership'') and BSCGP
Inc. (the ``General Partner'').
RELEVANT ACT SECTIONS: Order under section 6(b) of the Act for an
exemption from all provisions of the Act except sections 7, 8(a), 9, 17
(except for certain provisions of sections 17(a), (d), (f), (g), and
(j) as described herein), and 36 through 53, and the rules and
regulations thereunder.
SUMMARY OF APPLICATION: Applicants request an order to permit the
Partnership, and other partnerships offered to the same class of
investors (the ``Subsequent Partnerships'') (together with the
Partnership, the ``Partnerhships''), to engage in certain
[[Page 26596]]
affiliated and joint transactions. Each partnership will be an
employees' securities company within the meaning of section 2(a) (13)
of the Act. Partnership interests will be offered to eligible
employees, officers, and directors of The Bear Stearns Companies Inc.
(``BSC'') and any entities controlled directly or indirectly by BSC
(together with BSC, ``Bear Stearns'').
FILING DATES: The application was filed on April 17, 1996 and amended
on August 16, 1996 and April 18, 1997. Applicants have agreed to file
an amendment, the substance of which is incorporated herein, during the
notice period.
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
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on June 2, 1997,
and should be accompanied by proof of service on 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: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 245 Park Avenue, New York, New York 10167.
FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard,
Branch Chief, at (202) 942-0564 (Division of Investment Management,
Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. BSC is a holding company that, through its subsidiaries,
principally Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corp.
(``BSSC''), is a leading U.S. investment banking, securities trading,
and brokerage firm serving U.S. and foreign corporations, governments,
and institutional and individual investors. Bear, Stearns & Co. Inc.
and BSSC are broker-dealers registered under the Securities Exchange
Act of 1934 (the ``Exchange Act''). Bear, Stearns and Co. Inc. and two
other affiliates of BSC are registered as investment advisers under the
Investment Advisers Act of 1940 (the ``Advisers Act'').
2. From time to time, in the course of its investment banking
business, numerous investment opportunities come to the attention of
Bear Stearns. Such opportunities may include certain types of closed-
end private investment funds that typically are excepted from the
definition of ``investment company'' under section 3(c)(1) or,
potentially, section 3(c)(7) of the Act (``Acquisition Funds'').
Acquisition Funds typically invest directly in portfolio companies
identified by the general partners of the Acquisition Funds (the
``Portfolio Companies''). Portfolio Companies may be subject to
leveraged buyouts, may require venture financing, or may otherwise
require growth capital. Certain of the Acquisition Funds may also make
other types of investments, including real estate-related investments
and investments in emerging market opportunities.
3. The Partnership currently consists of the General Partner, which
is a Delaware corporation and a wholly-owned subsidiary of BSC, and
BSC, which is currently acting as the Partnership's sole limited
partner. The General Partner has registered as an investment adviser
under the Advisers Act. The Partnership is soliciting subscriptions
from a number of its employees, officer, and directors (``Eligible
Employees,'' as defined below) to acquire limited partnership interests
in the Partnership; however, such Eligible Employees have not yet been
admitted to the Partnership as limited partners (``Limited Partners'').
Upon the occurrence of certain events, including receipt by the
Partnership of the order requested herein, the Eligible Employees will
be admitted into the Partnership as Limited Partners (the ``Closing''),
and, pursuant to the subscription agreements, as such time the Limited
Partners will be required to make their initial cash capital
contribution to the Partnership, which the Partnership in turn will use
to acquire the interests in the Acquisition Funds previously subscribed
for by Bear Stearns.\1\ Bear Stearns has entered into subscription
agreements with respect to seven Acquisition Funds identified for
investment by the Partnership. These subscription agreements were
entered into in the expectation that at the time Eligible Employees are
first admitted to the Partnership: (i) all the rights and obligations
arising under these subscription agreements will be transferred to the
Partnership; (ii) the Partnership will be admitted as a Limited Partner
to each of the Acquisition Funds or will otherwise succeed to the
economic interest in the Acquisition Funds previously held by Bear
Stearns; and (iii) Bear Stearns will be reimbursed by the Partnership
for its net cash contribution for any funds previously advanced by Bear
Stearns in respect of its subscription agreements with such Acquisition
Funds.
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\1\ Bear Stearns presently has not determined whether Subsequent
Partnerships will in fact be formed and offered to Eligible
Employees. To the extent that Subsequent Partnership are formed and
offered, it is expected that their purpose, structure, and manner of
operation will be substantially similar to the purpose, structure,
and manner of operation of the Partnership. Each Subsequent
Partnership will observe all of the terms and conditions of the
application.
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4. The purpose of the Partnership is to enable certain key
personnel of Bear Stearns to pool their investment resources and to
receive the benefit of investing in a portfolio of Acquisition Funds,
without the necessity of each investor seeking to identify such
opportunities and to analyze their investment merit. In addition, the
pooling of resources should allow the investors to participate in
investment opportunities that ordinarily would not be available to them
as individual investors. The Partnership will seek to reward and retain
current key personnel and, through the potential formation of
Subsequent Partnerships, to attract other individuals to Bear Stearns.
5. Interests in the Partnership will be offered without
registration under a claim of exemption under section 4(2) of the
Securities Act of 1933 (``Securities Act'') \2\ and will be offered and
sold only to Eligible Employees of Bear Stearns or trusts established
for their benefit or for the benefit of their immediate family. To be
an Eligible Employee, an individual must be at the time of subscription
a managing director or senior managing director of Bear Stearns (which
represent the two most senior categories of professional employees
within Bear Stearns) or a Bear Stearns director or senior officer, and
such individual must also be an ``accredited investor'' meeting the
income requirements set forth in rule 501(a)(6) of Regulation D under
the Securities Act.\3\ All Eligible Employees
[[Page 26597]]
will be offered interests in the Partnership, but no Eligible Employee
will be required to invest in the Partnership.
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\2\ Section 4(2) exempts transactions by an issuer not involving
any public offering from the Securities Act's registration
requirement.
\3\ The sole exception to these offering and eligibility
requirements is that three BSC employees who are not accredited
investors but who have been intimately involved in the organization
of the Partnership and the investment program contemplated thereby
will be offered the opportunity to invest in the Partnership. Each
employee who is not an accredited investor pursuant to the income
requirements set forth in rule 501(a)(6) of Regulation D will have
had reportable income from all sources (including any profit shares
or bonus) in the calendar year immediately preceding such person's
admission as a Limited Partner in excess of $120,000 and will have a
reasonable expectation of reportable income in the years in which
such person will be required to make capital contributions of at
least $150,000.
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6. The management and control of the Partnership, including all
investment decisions to be made on a going-forward basis, will be
vested exclusively in the General Partner, and the Limited Partners
will have no part in the management and control of the Partnership and
will have no authority or right to act on behalf of the Partnership in
connection with any matter. The business and affairs will be managed by
or under the direction of the board of directors of the General Partner
(the ``Board''); thus, the Board indirectly will manage and control the
Partnership. The Board will, among other things, act as the advisory
committee of the Partnership responsible for approving all investment
decisions. The Board is composed exclusively of senior officers of BSC
or one of its principal operating subsidiaries. Each member of the
Board qualifies as an Eligible Employee, and each initial member of the
Board will invest as a Limited Partner.
7. Except with respect to the reimbursement of expenses, the
General Partner will not receive any form of management fee or other
form of compensation for acting as the General Partner. Instead, it, or
any other entity within Bear Stearns incurring such expenses, will be
reimbursed for actual organization expenses up to a specified amount
and for normal operating expenses, including rent, salaries of its
personnel, expenses incurred by its personnel in investigating
investment opportunities, communications and travel expenses, and an
allocated share of corporate overhead, subject to a ceiling of 0.5% of
Total Commitments (as defined below) each year. The Partnership also
will pay certain enumerated expenses of the General partner and the
Partnership incurred in connection with the operation and dissolution
of the Partnership. The nature of the General Partner's interest in the
Partnership (which is expected to represent at least a 1.0% Percentage
Interest, as defined below), will not entitle it to a carried interest
or other special or preferred distribution rights. The General Partner
will be entitled to distributions from the Partnership solely in
accordance with its Percentage Interest.
8. Pursuant to subscription agreements to be entered into by the
General Partner and each of the Limited Partners (together, the
``Partners''), a maximum total commitment (``Total Commitment'') will
be established for each Partner in connection with that Partner's
investment in the Partnership. Each Limited Partner's Total Commitment
will consist of (i) a capital commitment (``Capital Commitment'') equal
to 50% of the Limited Partner's Total Commitment and (ii) an equal
amount of debt of the Partnership (other than amounts attributable to
accrued and unpaid interest) outstanding under a credit agreement to be
entered into between Bear Stearns and the Partnership (``BSC Credit
Facility''). The Total Commitment for all Partners will represent an
amount sufficient to fund the purchase price payable by the partnership
for the purchase of interests in the previously identified Acquisition
Funds, the aggregate unpaid capital commitments made in respect of the
Partnership's subscription agreements with the Acquisition Funds, as
well as organization and ongoing administrative expenses.\4\
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\4\ Acquisition Funds tend to make capital calls on their
limited partners periodically on an as-needed basis in connection
with particular investment in one or more Portfolio Companies. To
accommodate anticipated liquidity concerns of the Limited Partners
and to avoid drawing their capital substantially in advance of the
funding requirements established by the Acquisition Funds, the
partnership has determined to draw down the Limited Partners'
capital over time, roughly in parallel fashion to capital calls
issued by the Acquisition Funds.
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9. Concurrently with the Closing, the partnership will enter into
an agreement with Bear Stearns creating the BSC Credit Facility, a line
of credit with a maximum availability equal to the sum of (i) 50% of
the aggregate Total Commitment of each Limited Partner and (ii) accrued
and unpaid interest thereon. Indebtedness under the BSC Credit Facility
will be debt of the Partnership and without recourse to the Partners.
Because the Partners may not share in the debt proportionately,
indebtedness under the BSC Credit Facility will be allocated to each
Partner separately, and each Partner's share of interest expense and
cash distributions from the Partnership will be calculated separately
to reflect that Partner's allocable share of that indebtedness.
10. Advances from Bear Sterns under the BSC Credit Facility will
bear interest based on prevailing LIBOR rates plus an applicable margin
(initially expected to be 100 basis points). The terms of the BSC
Credit Facility will be no less favorable to the Limited Partners than
those that generally would be obtained by the Limited Partners on an
arm's length basis.
11. The Partnership will not be permitted to make investments other
than investments in (i) Acquisition Funds, (ii) temporary investments
in specified short-term government securities, certificates of deposit,
commercial paper and similar securities, as well as money market funds
(including funds managed, sponsored, or underwritten by Bear Stearns)
that invest in such securities (``Temporary Investments''),\5\ or (iii)
securities or other property that may be distributed by Acquisition
Funds to their limited partners (including securities for which
securities so distributed may be exchanged or into which securities so
distributed may be converted).
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\5\ The Partnership will not acquire any security issued by a
registered investment company if immediately after such acquisition
the Partnership will own more than 3% of the outstanding voting
stock of the registered investment company.
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12. No Bear Stearns Related Person (as defined below) other than
the Partnership is making an investment in any of the Acquisition Funds
that have been identified for transfer to the Partnership as of the
Closing Date and, except as described below, a Bear Stearns Related
Person will not, at any time a Partnership is not fully invested, be
permitted to make investments in Acquisition Funds without having first
offering the opportunity to make the investment to the Partnership
(``obligation to offer''). A ``Bear Stearns Related Person'' means the
General Partner, The Bear Stearns Companies Inc., and any other person
in which at least 80% of the ownership interest is beneficially owned
directly or indirectly by The Bear Stearns Companies Inc., as well as
any investment fund managed by any of the foregoing.
13. Certain investments are not subject to the ``obligation to
offer.'' These investments include (i) An investment made by a Bear
Stearns Related Person pursuant to an offer made only to BSC or one of
its subsidiaries, (ii) an investment that constitutes compensation for
providing investment banking or other services, (iii) an investment
made by any Bear Stearns Related Person in its underwriting capacity or
in connection with broker-dealer activities, or (iv) an investment made
in connection with the purchase of a portfolio of securities from
another entity.\6\
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\6\ Applicants expect that there may be co-investments by the
Partnership with one or more of its affiliated entities. For
example, the Partnership and a Bear Stearns Related Person may co-
invest in an Acquisition Fund. In all events, transactions to which
the Partnership is a party that would otherwise be prohibited by
section 17(d) of the Act and rule 17d-1 thereunder will be effected
only in compliance with the conditions applicable to such
transactions that are specified below.
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[[Page 26598]]
14. Any transactions involving Bear Stearns, an Acquisition Fund,
affiliates of Acquisition Funds, any Portfolio Company, or any Partner
or person or entity related to any Partner must be on terms no less
favorable to the Partnership than generally are afforded to unrelated
third parties in comparable transactions. Such transactions may include
the purchase or sale by the Partnership of an investment from or to any
Bear Stearns affiliate, acting as principal, or borrowings of the
Partnership pursuant to the BSC Credit Facility. With respect to any
investment purchased by the Partnership from Bear Stearns, acting as
principal, the Partnership will acquire the investment for no more than
Bear Stearns' net cash contribution, plus carrying costs and certain
organizational expenses. The Partnership does not presently expect that
it will acquire investments from Bear Stearns, acting as principal,
other than in connection with acquisitions of interests in Acquisition
Funds that previously have been acquired by Bear Stearns and designated
by Bear Stearns and the General Partner at the time of acquisition for
resale to the Partnership, and, potentially, in connection with the
purchase of Temporary Investments.
15. Bear Stearns may provide investment banking or management or
other services to, and receive related fees or other compensation and
expense reimbursement from, entities in which a Partnership makes an
investment or competitors of such entities. Such fees or other
compensation may include, without limitation, advisory fees,
organization or success fees, financing fees, management fees,
performance-based fees, fees for brokerage and clearing services, and
compensation in the form of carried interests entitling Bear Stearns to
share disproportionately in income or capital gains or similar
compensation.
16. Upon admission into the Partnership, each participant will
become a Limited Partner and, as such, will participate pro rata with
other Limited Partners in making Partnership investments and paying
Partnership expenses (other than interest on borrowing from Bear
Stearns, as discussed above). Each Limited Partner will also be
entitled to a pro rata share of Partnership allocations and
distributions. Distributions of amounts received from the Acquisition
Funds will be made, and items of income, gain, loss, and deduction
attributable to the Acquisition Funds will be allocated ratably among
the Partners in accordance with their percentage interests, which will
equal each Partner's Total Commitment as a percentage of all Total
Commitments of the Partners (``Percentage Interests'').
17. For a Limited Partner who is an employee of Bear Stearns at the
time of distributions, the Limited Partner's Percentage Interest of
available cash, net of expenses, will be applied in the following
order: (i) To fund aggregate distributions each year equal to the
combined federal, New York State, and New York City income tax on items
of income of the Partnership calculated at the highest rates applicable
to individuals for the type of income at issue (``Tax Distributions'');
(ii) to pay in full the Limited Partner's share of accrued interest on
any outstanding indebtedness under the BSC Credit Facility; (iii) to
repay the Limited Partner's share of the principal amount of any
outstanding indebtedness under the BSC Credit Facility; and (iv) to
fund distributions to the Partner.
18. A Limited Partner whose employment with Bear Stearns is
terminated for other than death, disability, or retirement and who
honors his or her obligation to fund Capital Commitments as described
below will no longer share in the 50% portion of the post-termination
distributions corresponding to the portion of the investment that was
initially funded with the proceeds of the BSC Credit Facility, but
otherwise will be treated as a Limited Partner who remains employed by
Bear Stearns. To achieve this result, such a Limited Partner's
Percentage Interest of available cash, net of expenses, will be applied
in the following order: (i) To fund Tax Distributions to the Limited
Partner; (ii) to fund Tax Distributions to Bear Stearns in respect of
the 50% portion of the distribution not paid to the Limited Partner;
(iii) to pay in full the Limited Partner's share of accrued interest on
any outstanding indebtedness under the BSC Credit Facility; (iv) to
repay the Limited Partner's share of the principal amount of any
outstanding indebtedness under the BSC Credit Facility; (v) to fund a
distribution to the Limited Partner equal to such Limited Partner's
``Catch-Up Amount,'' as defined below; and (vi) to fund distributions
50% to the Limited Partner and 50% to Bear Stearns.\7\
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\7\ The Catch-Up Amount of a Limited Partner shall equal an
amount based on the assumption that the distributions to such
Limited Partner were determined for such period without regard to
distributions made to cover payments of interest on and principal of
indebtedness under the BSC Credit Facility, and taxes on
distributions not made to the Limited Partner. The Catch-Up Amount
is intended to reverse the effects of using the investment return to
repay the attributable share of the BSC Credit Facility of a Limited
Partner who has ceased to be employed by Bear Stearns. Cash for each
investment is provided to the Partnership 50% from the Limited
Partner's Capital Commitment and 50% from BSC Credit Facility
proceeds. All distributions, after funding tax distributions, are
first applied to pay principal and interest on the BSC Credit
Facility. After the BSC Credit Facility is repaid, for a Limited
Partner who has ceased to be employed by Bear Stearns, additional
proceeds from the entire investment are first distributed to the
Limited Partner through the Catch-Up Amount provision (up to the
amount applied to make payments on the BSC Credit Facility) and then
are distributed 50% to the Limited Partner and 50% to Bear Stearns.
The effect is generally to put the Limited Partner in the same
position in which he or she would have been had the investment not
been leveraged in the first place.
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19. If a Limited Partner's employment with Bear Stearns is
terminated by reason of the disability or retirement of the Limited
Partner, the Limited Partner will retain his or her entire Interest
following the termination as though he or she were still an employee.
In the case of the death of the Limited Partner, (i) the Limited
Partner's estate will receive the economic rights of such Interest but
will not be admitted to the Partnership as a Limited Partner, without
the consent of the General Partner, and (ii) the estate of the Limited
Partners will have the option to cease making capital contributions, in
which case the estate's Interest will relate solely to assets of the
Acquisition Funds at the time of death, and (iii) the estate will have
the right to receive cash from the General Partner in an amount equal
to the fair market value of the Limited Partner's Interest in the
Partnership, as determined by the General Partner.
20. If a Limited Partner ceases to be employed by Bear Stearns for
any reason other than death, disability, or retirement, and at that
time all Capital Commitments of the Limited Partner have been fully
funded, the Limited Partner will retain, following the termination of
employment, his or her entire interest in assets of the Partnership
acquired with his or her Capital Commitments, but will not retain any
interest in assets of the Partnership acquired with the proceeds of the
BSC Credit Facility. If a Limited Partner's employment with Bear
Stearns is terminated other than for death, disability, or retirement,
and at that time the Limited Partner has an unfunded Capital
Commitment, the Limited Partner will be required to make a capital
contribution to the Partnership equal to the Limited Partner's undrawn
Total Commitment. Amounts contributed upon termination will be
[[Page 26599]]
invested in Temporary Investments, pending investment in the
Acquisition Funds. All income or loss from such Temporary Investments
will be allocated, and cash (net of expenses and reserves for future
expenses) produced by such investments will be distributed, to that
Limited Partner, but otherwise such a Limited Partner will be treated
as if his or her Capital Commitment had been fully funded at the
termination of employment. If the Limited Partner fails to make such
required capital contribution, the Partnership may then immediately
redeem such Limited Partner's Interest at a price equal to the lesser
of (i) the amount of such Limited Partner's capital account as
reflected on the books and records of the Partnership, and (ii) the
fair value of such Limited Partner's Interest (as determined by the
General Partner), in each case measured as of the date of termination
of such Limited Partner. Except as the Partnership and the Limited
Partner may otherwise agree, the redemption price will be paid in the
form of a note from the Partnership, bearing interest at three-month
LIBOR, that will mature upon dissolution of the Partnership. Interest
on the note will accrue and be payable at maturity.\8\ To avoid
unfairly disadvantaging departing Limited Partners who honor their
Capital Commitments as compared to those who do not, the amount payable
under the note will in no event exceed the amounts that would have been
payable in respect of a Limited Partner's Interest (after giving effect
to amounts advanced by Bear Stearns in respect of any unfunded Capital
Commitment) had such Limited Partner made the required capital
contribution upon his or her termination.
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\8\ Applicants believe that deferring maturity of the note until
dissolution of the Partnership is consistent with the protection of
investors because the timing of the dissolution of the Partnership
is outside the control of Bear Stearns and Bear Stearns has no
incentive to defer dissolution of the Partnership, and the holders
of the notes are not being treated any differently from other
Limited Partners, who also will await dissolution for their final
distributions.
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Applicants' Legal Analysis
1. Section 6(b) provides that the SEC shall exempt employees'
securities companies from the provisions of the Act to the extent that
such exemption is consistent with the protection of investors. Section
2(a)(13) defines an employees' security company, among other things, as
any investment company all of the outstanding securities of which are
beneficially owned by the employees or persons on retainer of a single
employer or affiliated employers or by former employees of such
employers; or by members of the immediate family of such employees,
persons on retainer, or former employees.
2. Applicants request an order under section 6(b) of the Act
granting an exemption from all provisions of the Act, except section 7,
8(a), 9, 17 (except for certain provisions of sections 17 (a), (d),
(f), (g), and (j) as described herein), and 36 through 53, and the
rules and regulations thereunder. Applicants assert that the order
requested pursuant to section 6(b) of the Act is consistent with the
protection of investors. Applicants believe that a substantial
community of economic and other interests exists among Bear Stearns,
the members of the Board, the officers of the General Partner, and the
Limited Partners, taking into consideration the form of organization of
the Partnership and the absence of any public investors. Applicants
note that the capital structure of the Partnership will be such that
the General Partner will contribute substantial capital to the
Partnership but will not receive any special or preferred distribution
rights with respect to its interest in the Partnership; indeed, neither
the General Partner nor any Bear Stearns affiliate will receive any
form of sales load or management or advisory fee from the Partnership
or any of the Limited Partners. Applicants state that the community of
interest between Bear Stearns and the Partnership will be enhanced
further by the existence of the BSC Credit Facility, since Bear Stearns
will bear a substantial portion of the risk of loans made thereunder,
given that such loans will be nonrecourse to the Partners and payable
only out of the assets of the Partnership. Finally, applicants believe
Bear Stearns will have a substantial stake in the success of the
Partnership given the concern of Bear Stearns with the morale of its
key personnel, a substantial number of which are expected to invest in
the Partnership.
3. Section 17(a) provides, in relevant part, that it is unlawful
for any affiliated person of a registered investment company, acting as
principal, to sell any security or other property to such registered
investment company or to purchase from such registered investment
company any security or other such property. Applicants request an
exemption from section 17(a) of the Act to the extent necessary to
permit a Partnership to: (a) Acquire interests in Acquisition Funds
from Bear Stearns on a principal basis; (b) purchase interests in an
Acquisition Fund in which Bear Stearns already owns an interest or
where such Acquisition Fund (or, in certain circumstances, one of its
Portfolio Companies) is otherwise affiliated with Bear Stearns or a
Partnership; (c) sell, put or tender, or grant options in securities or
interests in a company or other investment vehicle back to such entity,
where such entity is affiliated with Bear Stearns; (d) participate as a
selling security holder in a public offering that is underwritten by
Bear Stearns or in which Bear Stearns acts as a member of the
underwriting group; and (e) make money market fund or other short-term
investments.
4. Applicants assert that, without the requested relief, the
Partnerships would be precluded from acquiring interests in Acquisition
Funds previously subscribed for by Bear Stearns. Applicants note that
following commencement of the offering of Interests to Limited Partners
by the delivery of offering materials, there will be no discretion
regarding which interests in Acquisition Funds previously acquired by
Bear Stearns will be sold to the Partnership the Acquisition Funds
described in the offering materials have been designated for sale to
the Partnership since the time the investments were made, and will be
sold for a price not to exceed Bear Stearns' net cash contribution plus
carrying costs and certain organizational expenses. Applicants argue
that this arrangement should ensure the fairness and reasonableness of
the purchase of interests in the Acquisition Funds.
5. Applicants state that relief is also requested to permit a
Partnership the flexibility to deal with its portfolio of Acquisition
Funds, and, in particular, securities in Portfolio Companies that may
be distributed from time to time by the Acquisition Funds to their
limited partners, in the manner the General Partner deems most
advantageous. Applicants contend that relief from section 17(a) is
necessary since underwritten public offerings typically involve
purchases of each underwriter, on several basis, from each selling
security hold of a portion of the securities sold by each such security
holder. Applicants expect that the short-term investments described
above may be purchased from, or sold to, Bear Stearns at market value
without payment of fees by the Partnership. In connection with money
market fund investments in funds advised or administered by Bear
Stearns, applicants state that the assets will be subject to an
advisory and/or administrative fee on the same basis as those charged
to and paid by unaffiliated persons participating in the same fund or
transactions.
[[Page 26600]]
6. Applicants represent that the Partners will have been fully
informed of the possible extent of the dealings by the Partnership, the
Acquisition Funds, and the Portfolio Companies with Bear Stearns.
Applicants assert that, as professionals employed in the securities
business, the Partners will be able to understand and evaluate the
attendant risks. Applicants believe that the community of interest
among the Partners, on the one hand, and Bear Stearns, on the other
hand, is the best safeguard against any risk of abuse in this regard.
7. Section 17(d) makes it unlawful for any affiliated person of a
registered investment company, acting as principal, to effect any
transaction in which such company, or a company controlled by such
company, is a joint or joint and several participants with the
affiliated person in contravention of SEC rules. Rule 17d-1 provides
that the SEC may approve a transaction subject to section 17(d) after
considering whether the participation of such registered company is
consistent with the provisions, policies, and purposes of the Act and
the extent to which such participation is on a basis different from or
less advantageous than that of other participants.
8. Applicants request an order under section 17(d) and rule 17d-1
to the extent necessary to permit the Partnerships to engage in
transactions in which affiliated persons of the Partnerships may also
be participants. Applicants believe that the concern that permitting
joint investments with BSC or another Bear Stearns vehicle and/or an
affiliate of either of them on the one hand, and a Partnership on the
other, might lead to disadvantageous treatment of the Partnership will
be mitigated by the fact that Bear Stearns is acutely concerned with
its relationship with the key employees who are expected to invest in
the Partnership.
9. In addition, applicants believe the agreement of Bear Stearns to
lend substantial funds to the Partnership creates opportunities for the
Limited Partners to leverage their investment capital to a greater
degree than would be possible normally in transactions organized by
non-affiliated third parties. Applicants note that the nonrecourse
loans from Bear Stearns to the Partnership will provide the Partnership
with the ability to make a greater number of investments or larger
investments than would be possible if the Partnership has only its own
equity capital to invest. Applicants state that Bear Stearns will bear
a substantial portion of the risk of repayment of such loans since the
loans will be (i) nonrecourse to the Partners, (ii) generally payable
prior to maturity only out of 50% of the Partnership's cash available
for distribution after repayment of accrued interest and taxes and
certain other expenses, and (iii) payable at maturity only out of the
Partnership's assets. Applicants contend that all of the foregoing
factors suggest that the policy considerations underpinning section
17(d) are not present here.
10. Section 17(f) provides that the securities and similar
investments of a registered management investment company must be
placed in the custody of a bank, a member of a national securities
exchange, or the company itself in accordance with SEC rules. Rule 17f-
1 under the Act specifies the requirements that must be satisfied for a
registered management investment company to use a broker-dealer as
custodian. Applicants request an exemption from section 17(f) and rule
17f-1 to the extent necessary to permit Bear Stearns to act as
custodian without a written contract. Applicants believe that, because
there is such a close association between the Partnership and Bear
Stearns, requiring a detailed written contract would subject the
Partnership to unnecessary burden and exposure. Applicants also request
an exemption from the terms of rule 17f-1(b)(4), which requires an
independent accountant to periodically verify by actual examination the
securities and investments of a registered management investment
company using a broker-dealer as custodian. Applicants do not believe
the expense of retaining an accountant to conduct such verifications is
warranted given the community of interest of all the parties involved
and the existing requirement for an independent annual audit.
11. Section 17(g) and rule 17g-1 generally require the bonding of
officers and employees of a registered investment company who have
access to securities or funds of the company. Applicants request an
exemption from section 17(g) and rule 17g-1 to the extent necessary to
permit the Partnership to comply with rule 17g-1 without the necessity
of having a majority of the members of the Board who are not
``interested persons,'' as that term is defined in section 2(a)(19) of
the Act, take such actions and make such approvals as are set forth in
the 17g-1. Applicants state that, because all the members of the
related Board will be affiliated persons, a Partnership could not
comply with rule 17g-1 without the requested relief.
12. Section 17(j) and rule 17j-1 require every registered
investment company, its adviser, and its principal underwriter to adopt
a written code of ethics with provisions reasonably designed to prevent
fraudulent activities, and to institute procedures to prevent
violations of the code. Section 17(j) and paragraph (a) of rule 17j-1
also make it unlawful for certain persons to engage in fraudulent,
deceitful, or manipulative practices in connection with the purchase or
sale of a security held or to be acquired by an investment company.
Applicants request an exemption from section 17(j) and rule 17j-1
(except rule 17j-1(a)) because the requirements contained therein are
burdensome and unnecessary. Applicants believe that requiring each
Partnership to adopt a written code of ethics and requiring access
persons to report each of their securities transactions would be time
consuming and expensive, and would serve little purpose in light of,
among other things, the community of interest among the Partners of
such Partnership by virtue of their common association in Bear Stearns
and the substantial and largely overlapping protection afforded by the
conditions with which such Partnerships have agreed to comply.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. Each proposed transaction otherwise prohibited by section 17(a)
or section 17(d) and rule 17d-1 to which a Partnership is party (the
``Section 17 Transactions'') will be effected only if the Board,
through the General Partner, determines that: (a) The terms of the
transaction, including the consideration to be paid or received, are
fair and reasonable to the Partners and do not involve overreaching of
the Partnership or its Partners on the part of any person concerned;
and (b) the transaction is consistent with the interests of the
Partners, the Partnership's organizational documents, and the
Partnership's reports to its Partners. In addition, the General Partner
will record and preserve a description of such affiliated transactions,
the Board's findings, the information or materials upon which the
board's findings are based, and the basis therefor. All such records
will be maintained for the life of such Partnership and at least two
years thereafter, and will be subject to examination by the SEC and its
staff.\9\
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\9\ The Partnership will preserve the accounts, books, and other
documents required to be maintained in an easily accessible place
for the first two years.
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2. In connection with Section 17 Transactions, the Board, through
the General Partner, will adopt, and
[[Page 26601]]
periodically review and update, procedures designed to ensure that
reasonable inquiry is made, prior to the consummation of any such
transaction, with respect to the possible involvement in the
transaction of any affiliated person or promoter of or principal
underwriter for the Partnership, or any affiliated person of such a
person, promoter, or principal underwriter.
3. The Partnership and the General Partner will maintain and
preserve, for the life of the Partnership and at least two years
thereafter, such accounts, books, and other documents as constitute the
record forming the basis for the audited financial statements that are
to be provided to the Partners, and each annual report of the
Partnership required to be sent to the Partners, and agree that all
such records will be subject to examination by the SEC and its
staff.\10\
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\10\ The Partnership will preserve the accounts, books, and
other documents required to be maintained in an easily accessible
place for the first two years.
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4. The General Partner will send to each person who was a Partner
at any time during the fiscal year then ended, Partnership financial
statements audited by the Partnership's independent accountants. In
addition, within 90 days after the end of each fiscal year of the
Partnership or as soon as practicable thereafter, the General Partner
shall send a report to each person who was a Partner at any time during
the fiscal year then ended, setting forth such tax information as shall
be necessary for the preparation by the Partner of his or its federal
and state income tax returns and a report of the investment activities
of the Partnership during such year. To the extent that a valuation of
any interest in the Partnership is required by the terms of the
Partnership Agreement or otherwise, such valuation will be made by the
General Partner or by independent third parties appointed by the
General Partner and deemed qualified by the General Partner to render
an opinion as to the value of Partnership assets, using such methods
and considering such information relating to the investments, assets,
and liabilities of the Partnership as the General Partner or the
independent third party, as the case may be, may reasonably determine
and, in the case of the General Partner, consistent with its fiduciary
duty to the Limited Partners.
5. In any case where purchases or sales are made by a Partnership
from or to an entity affiliated with such Partnership by reason of a 5%
or more investment in such entity by a Bear Stearns advisory director,
director, officer, or employee, such individual will not participate in
the Partnership's determination of whether or not to effect such
purchase or sale.
6. The General Partner of each Partnership will not invest the
funds of the Partnership in any investment in which a ``Co-Investor,''
as defined below, has acquired or proposes to acquire an investment in
the same issuer, where the investment involves a joint enterprise or
other joint arrangement within the meaning of rule 17d-1 in which such
Partnership and the Co-Investor are participants, unless such Co-
Investor, prior to disposing of all or part of its investment, (a)
gives such General Partner sufficient, but not less than one day,
notice of its intent to dispose of its investment; and (b) refrains
from disposing of its investment unless such Partnership has the
opportunity to dispose of such Partnership's investment prior to or
concurrently with, on the same terms as, and pro rata with, the Co-
Investor. The term ``Co-Investor,'' with respect to any Partnership,
means any person who is: (a) an ``affiliated person'' (as such term is
defined in the Act) of such Partnership; (b) an entity within Bear
Stearns; (c) an officer or director of an entity within Bear Stearns;
or (d) a company in which the General Partner of such Partnership acts
as a general partner or has a similar capacity to control the sale or
other disposition of the company's securities. The restrictions
contained in this condition, however, shall not be deemed to limit or
prevent the disposition of an investment by a Co-Investor: (a) to its
direct or indirect wholly-owned subsidiary, or to a direct or indirect
wholly-owned subsidiary of its parent; (b) to immediate family members
of such Co-Investor or a trust or other investment vehicle established
for any such family member; (c) when the investment is comprised of
securities that are listed on any exchange registered as a national
securities exchange under section 6 of the Exchange Act; or (d) when
the investment is comprised of securities that are national market
system securities pursuant to section 11A(a)(2) of the Exchange Act and
rule 11Aa2-1 thereunder.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12548 Filed 5-13-97; 8:45 am]
BILLING CODE 8010-01-M