[Federal Register Volume 59, Number 27 (Wednesday, February 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2892]
[[Page Unknown]]
[Federal Register: February 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20053; 813-126]
DLJ LBO Plans Management Corporation; Application for Exemption
February 2, 1994.
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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APPLICANT: DLJ LBO Plans Management Corporation (``DLJ Management''),
on behalf of certain limited liability companies (the ``Companies'').
RELEVANT ACT SECTIONS: Applicant seeks an order under section 6(b)
granting an exemption from all provisions of the Act except sections 7,
8(a), and 9, certain provisions of section 17, sections 36 through 53,
sections 2 through 5 to the extent necessary to implement the other
sections, and the rules and regulations related to these sections.
SUMMARY OF APPLICATION: Applicant, on behalf of the Companies, seeks an
order that would grant the Companies an exemption from most provisions
of the Act, and would permit certain affiliated and joint transactions.
Each Company would be an employees' securities company within the
meaning of section 2(a)(13) of the Act.
FILING DATES: The applications was filed on August 2, 1993, and amended
on December 2, 1993.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on February 28,
1994, and should be accompanied by proof of service on the applicant,
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, NW., Washington, DC 20549;
Applicant, 140 Broadway, New York, New York 10005-1285.
FOR FURTHER INFORMATION CONTACT:
John V. O'Hanlon, Senior Attorney, at (202) 272-3922, or Elizabeth G.
Osterman, Branch Chief, at (202) 272-3016 (Division of Investment
Management, Office of Investment Company Regulations).
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.
Applicant's Representatives
1. DLJ Management is a Delaware corporation and a wholly-owned
subsidiary of Donaldson, Lufkin & Jenrette, Inc. (``DLJ Inc.,''
together with any person that directly or indirectly is controlled by
DLJ Inc., ``DLJ''). DLJ Inc. is a diversified financial services
holding company which, directly and through its subsidiaries, provides
investment, financing, and related services. DLJ Inc.'s principal
subsidiary, Donaldson, Lufkin & Jenrette Securities Corporation, is a
broker-dealer registered under the Securities Exchange Act of 1934.
2. DLJ Management, or another direct or indirect wholly-owned
subsidiary of DLJ Inc. formed for such purpose, will be the manager of
the Companies (the ``Manager'').
3. Each Company will be a Delaware limited liability company formed
as an ``employees' securities company'' within the meaning of section
2(a)(13) of the Act, and will operate as a closed-end, non-diversified,
management investment company.\1\ Each Company will be governed by a
limited liability company agreement (``LLC Agreement'').
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\1\A limited liability company generally is treated as a
corporation for limited liability purposes and under certain
circumstances as a partnership for federal income tax purposes.
Applicant reserves the right to implement this structure through a
limited partnership arrangement.
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4. Investors in the Companies (``Members''), other than the
Manager, will be current, highly-compensated employees, officers, or
directors of DLJ (``Eligible Employees''), who are also ``accredited
investors'' under subsection 6 of rule 501(a) of Regulation D under the
Securities Act of 1933 (the ``Securities Act''). In addition, these
Members will be experienced professionals in the investment banking and
securities business, or in administrative, financial, accounting,
legal, or operational activities related thereto. They will be
sophisticated investors able to fend for themselves without benefit of
regulatory safeguards. All Members will be aware that (a) interests in
the Companies will be sold in a transaction exempt under section 4(2)
of the Securities Act or Regulation D under the Securities Act, and
thus are offered without registration under the Securities Act; and (b)
although registered under the Act, the Companies will be exempt from
most provisions of the Act.
5. The Companies will enable Eligible Employees to pool their
investment resources and to receive the benefit of certain investment
opportunities that come to the attention of DLJ. Each Company will
acquire equity and equity-related investments, excluding any investment
in a company which is an investment company as defined in section 3(a)
of the Act, in (a) companies which are the subject of DLJ transactions
involving leveraged or management buyouts, recapitalizations,
bankruptcies, reorganizations, start-up and expansion financings, or
other similar investments or restructurings (``Merchant Banking
Transactions'') structured by DLJ Merchant Banking Partners, L.P., DLJ
Offshore Partners, C.V., or DLJ International Partners, C.V. (together
with any similar funds created hereafter, the ``DLJ Merchant Banking
Funds''), or with respect to which a DLJ Merchant Banking Fund assisted
in the consummation and, in each case, in which DLJ has a long-term
equity or equity-related investment (``Fund Investments''); and/or (b)
companies other than DLJ which are the subject of transactions
structured by DLJ's investment banking or merchant banking groups or
with respect to which either group assisted in the consummation, in
which DLJ has a long-term equity or equity-related investment, and
which are not Fund Investments (``Non-Fund Investments'') (together
with Fund Investments, the ``DLJ Investments''). The LLC Agreement may
provide for limitations on the amount of investments in Non-Fund
Investments.
6. At least two plans will be available to Eligible Employees.
Eligible Employees in the ``DLJ Plan'' will invest in all investments
made by a Company and share in the net profits or losses of the Company
for each investment period in proportion to their capital accounts. The
``DLJMB Plan'' is available only to Eligible Employees who are deemed
important to DLJ's business through their involvement in Merchant
Banking Transactions. Eligible Employees in the DLJMB Plan may only
invest in Merchant Banking Transactions in which they have been
directly involved and will share in the net profits or losses of each
such investment in proportion to the capital accounts of the DLJMB Plan
participants relating to that particular investment.\2\
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\2\Applicant reserves the flexibility to utilize the Companies
for additional DLJ employee plans, subject generally to the
representations in the application.
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7. Because of the difference in the eligibility of membership and
the nature of the interests held in the two plans, DLJ may create
separate Companies for each plan, although DLJ may create only one
Company for both plans, with separate capital accounts and allocations
for each plan. To the extent a DLJMB Plan Company co-invests with a DLJ
Plan Company in DLJ Investments, the amount of a particular investment
made available to each company will be governed by the terms of the
agreement described in paragraph 9 below.
8. Applicant expects that a new Company will be established each
year (or other relevant period), although, depending upon investment
activity, it may not be necessary or desirable to form a new Company
after only one year of activity.\3\
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\3\Applicant reserves the right to establish a single long-term
Company, in which the interests for each year (or other relevant
period) would be held in separate and distinct portfolios with
different classes of interests, capital accounts, and allocations of
income and loss applicable for each such year (or other relevant
period). Each of these portfolios would comply with rule 18f-2 under
the Act.
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9. To assure each DLJ Plan Company that it will have the ability to
acquire an interest in every DLJ Investment, and to assure each DLJMB
Plan Company that it will have the ability to acquire an interest in
every DLJ Investment on which DLJMB Plan Company participants worked,
each Company will enter into an agreement with DLJ Inc. (the ``DLJ
Agreement''). Under the DLJ Agreement, unless a committee comprised of
senior professionals at DLJ (the ``administrative Committee'') approves
a determination by the Manager that a Company not participate in a
particular investment, each Company will be obligated to purchase from
DLJ Inc. or an affiliate of DLJ Inc., and DLJ Inc. will agree to sell
or cause an affiliate of DLJ Inc. to sell to the Company, a fixed
percentage of such entity's long-term equity or equity-related
investment in each DLJ Investment that closes during a period specified
in the DLJ Agreement (the ``Investment Period'') (other than
investments held by Designated Funds or Designated Subsidiaries, and
Exempted Investments, as defined below).
10. For DLJ Plan Companies, it is expected that a Company will be
obligated to purchase from DLJ and DLJ will be obligated to sell to the
Company not less than 20% and not more than 30% of DLJ's long-term
equity or equity-related investment in DLJ Investments, to be
determined at the beginning of each Investment Period depending on,
among other factors, availability of capital and compensation
objectives.
11. For DLJMB Plan Companies, a Company will be obligated to
purchase from DLJ and DLJ will be obligated to sell to the Company a
percentage of DLJ's long-term equity or equity-related investment in
DLJ Investments to be determined on an investment by investment basis
no later than two weeks following DLJ's acquisition, depending
principally on the number of Members who will be participating in each
investment, the size of the DLJ Investment, and the quality of work
done. No employee will be obligated to take the portion of the
investment offered under the DLJMB Plan.\4\
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\4\The DLJ Bridge Fund purchases short-term securities to
provide bridge financing for acquisitions. In transactions in which
the DLJ Bridge Fund has provided a bridge loan in connection with
the transaction, (a) the percentage to be purchased under the DLJMB
Plan will be determined upon full repayment of the bridge loan,
unless the Administrative Committee approves an earlier
determination by the Manager; and (b) in addition to the fixed
percentage to be purchased under the DLJ Plan, after the bridge loan
is fully repaid, DLJ may offer an additional equity portion of the
investment to the Company.
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12. Each DLJ Agreement will provide that a Company will acquire DLJ
Investments from DLJ as soon as practicable after DLJ purchases the
investment, but in no event later than one month after the later of
such purchase or organization of the Company, at a price equal to the
cost to DLJ of purchasing the investment.\5\
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\5\In certain transactions, a Company may acquire its investment
directly from the issuer, concurrently with DLJ.
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13. Each DLJ Agreement will provide that a Company may not sell any
security purchased under the DLJ Agreement or any Other Investment, as
defined below, so long as DLJ Inc. or any direct or indirect wholly-
owned affiliate of DLJ Inc. has an investment in a stock or security
which is identical, substantially similar, or economically equivalent
to such security, absent the consent of the administrative Committee. A
Company will be required to participate in any public or private sale
by DLJ Inc. and/or any wholly-owned affiliate of DLJ Inc. of securities
owned by them or for their benefit which are identical, substantially
similar, or economically equivalent to the securities held by a
Company. The DLJ Agreement provides that the Company must sell no less
than its pro rata share of such securities but may, with the consent of
the Administrative Committee, sell more than its pro rata share of
these securities.
14. Although each Company will be required to purchase DLJ
Investments, the Company will not be required to participate in sales
by non-wholly-owned affiliates of DLJ (such as other partnerships
established by DLJ Inc.) in which DLJ Inc. or its wholly-owned
affiliates do not participate. The rationale underlying the differing
requirements is that while DLJ Inc. has the ability to make all DLJ
Investments available to the Companies, DLJ Inc. and its wholly-owned
affiliates may not have the authority to require that a non-wholly-
owned affiliate permit a Company to participate in its disposition of
such investments.
15. The Administrative Committee will have no involvement in
disposition decisions where a portfolio security is held by a Company
and a non-wholly-owned affiliate, but not by DLJ Inc. or a wholly-owned
affiliate. In such circumstances, the timing of the disposition will be
determined by the Manager in the exercise of its fiduciary
responsibilities.
16. Pursuant to the DLJ Agreement, certain funds managed by DLJ
(the ``Designated Funds'') will not be obligated under the DLJ
Agreements to sell DLJ Investments to the Companies. The Designated
Funds include certain merchant banking funds established by DLJ Inc.,
the investors of which are limited partners unaffiliated with DLJ Inc.
Because of certain provisions in the documents establishing the
Designated Funds, DLJ Inc. lacks the ability to compel the sale of any
of the Designated Funds' portfolio securities to the Companies. At the
present time, the DLJ Merchant Banking Funds, DLJ Merchant Banking,
L.P., DLJ Merchant Banking, Inc., and DLJ Offshore Management N.V. are
the only Designated Funds. To the extent that a substantial portion of
DLJ's activities in initiating and structuring Fund Investments is
conducted through the DLJ Merchant Banking Funds, and DLJ is obligated
to co-invest with such funds, each Company will be assured of the
ability to acquire an interest in several DLJ Investments.
17. Pursuant to the DLJ Agreement, certain investment subsidiaries
and affiliates of DLJ Inc. (``Designated Subsidiaries'') will not be
obligated under the DLJ Agreements to sell DLJ Investments to the
Companies. Many of the investments in which the Designated Subsidiaries
invest would be unsuitable investments for a Company due to the size of
the investment, the maturity of the portfolio company, or other
relevant factors. The Designated Subsidiaries at present include The
Sprout Group; Wood, Struthers & Winthrop Management Corp.; and the DLJ
Bridge Fund.
18. Each DLJ Agreement will provide that DLJ will not be obligated
to offer a Company any portion of securities (a) which it receives as
compensation for providing investment banking or other services, (b)
which it acquires solely in the capacity of underwriter or principal
market maker or in connection with block positioning, proprietary
trading accounts, risk arbitrage, or other broker dealer activities, or
(c) in other circumstances enumerated as exceptions to DLJ's obligation
to offer an investment opportunity to a DLJ Merchant Banking Fund, as
set forth in the fund's organizational document (collectively,
``Exempted Investments''). The circumstances in which DLJ acquires any
Exempted Investment generally are not of the type making those
investments appropriate for acquisition by the Companies.
19. A Company may invest in an investment made by a Designated Fund
or a Designated Subsidiary if the Company is offered the opportunity to
invest in such investment and if the Administrative Committee approves
a determination by the Manager that the Company's participation in such
investment is appropriate.
20. A Company will not invest in investments made by DLJ that are
not DLJ Investments or are Exempted Investments (``Other Investments'')
unless the Company is offered the opportunity to invest in such Other
Investments and the Administrative Committee approves a determination
by the Manager that the Company's participation in such investments is
appropriate.
21. Pending investment, and prior to distribution, Company funds
will be invested in: (a) United States Government obligations with
maturities of no more than one year and one day; (b) high grade
commercial paper with maturities of no more than six months and one
day; (c) interest-bearing deposits maturing within one year in any bank
or trust company organized or licensed under the laws of the United
States or any state thereof and having an unrestricted surplus of at
least $250 million; or (d) any money market fund distributed or managed
by DLJ, Alliance Capital Management L.P., or Wood, Struthers & Winthrop
Management Corp. (each such investment, a ``Temporary Investment'').
Consistent with section 12(d)(1)(A)(i) of the Act, no Company will
acquire more than 3% of the total outstanding voting stock of any
investment company. Also, the Manager temporarily may invest any
portion of Company funds attributable to its own capital contributions
by making unsecured demand loans to DLJ for working capital purposes.
Such a loan would be made at a return rate equal to the Manager's
Preferred Return, as defined below.
22. The Manager, in addition to performing all management and
administrative services necessary for the operation of the Companies,
will make a substantial investment in each Company. For DLJ Plan
Companies, upon the formation of each Company, and for both DLJ Plan
Companies and DLJMB Plan Companies, at the time of each investment by a
Company, the Manager will contribute 1% of the total cash contributions
made by all the Members (excluding the Manager's other capital
contribution obligations described in the following sentence). In
addition, at the time of each investment by the Company in DLJ
Investments and Other Investments, the Manager generally will make an
additional capital contribution to the Company equal to approximately
65% of the aggregate amount that the Company proposes to invest.\6\
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\6\If a particular employee plan does not involve as much
leverage as the DLJ Plan and the DLJMB Plan, it is possible that DLJ
will not contribute capital to the Company other than its 1% capital
contribution, and instead will hold a substantially similar
investment outside of the Company.
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23. The Manager will be entitled to receive a cumulative annual
return on its contribution to the capital of a Company (other than its
1% capital contribution described above) from the time contributed
until the repayment of such capital at (a) the rate of interest
publicly announced by Citibank, N.A. as its prime rate or base lending
rate, or, if no such rate has been announced by Citibank, N.A., then
the rate of interest so announced by another major money center bank in
New York City selected by the Manager in its sole discretion, plus (b)
1\3/4\% per annum (the ``Preferred Return'').
24. Company profits, excluding those derived from Temporary
Investments, will be allocated as follows: first, to the Manager in an
amount necessary to provide it the Preferred Return; second, to the
Members, including the Manager, in the same proportions, in reverse
order, as any previously allocated losses, up to the amount of such
losses; and third, to the Members, including the Manager only to the
extent of its 1% contribution, in proportion to their capital accounts.
25. Company losses not derived from Temporary Investments will be
allocated to the Members, including the Manager, in the same
proportions as any profits would be allocated pursuant the third item
of paragraph 24 above
26. Profits and losses of a Company derived from Temporary
Investments of capital contributions pending investments in portfolio
investments will be allocated to the Members, including the Manager, in
proportion to their capital accounts. Profits and losses of each
Company from Temporary Investments of distributions held for the
account of the Members, including the Manager, pending termination of
the Manager's right to purchase interests during the Forfeiture Period,
as defined below, will be allocated to the Members, including the
Manager, for whose account such distributions are retained.
27. Each member will have a limited obligation to restore to a
Company, upon liquidation, such Member's negative capital account
balance, if any. The Member's obligation will not exceed the value of
the Member's interests in specified other Companies created under the
application and other employee benefit, compensation, and similar plans
established by DLJ.
28. All of the Manager's directors and principal officers will be
directors or officers of DLJ, and a majority of such directors and
principal officers will be Eligible Employees under the DLJ Plan. No
compensation will be paid to the Manager or its officers or directors
for its services. The Manager will bear all expenses incurred in
connection with the organization, business operations, winding up, and
liquidation of the Companies.
29. The Manager will register as an investment adviser under the
Investment Advisers Act of 1940. The Manager believes that its
relationships with the Companies will fully comply with the provisions
of the Advisers Act.
30. The Members may remove a Manager upon the approval of at least
90% of the entire ownership interest of the Members of a Company,
excluding the Manager. The remaining Members may elect to continue the
Company following such removal.
31. All Company interests will be non-transferable. However, with
the consent of the Manager, in its sole discretion, a Member may assign
his economic interest to a member of the assignor's immediate family.
32. In the DLJ Plan, a participant's investment generally will
become vested at the rate of 33\1/3\% annually beginning on March 31 of
the year after the Company's formation, except as provided below. If a
participant ceases to be an active employee of DLJ (a ``Departing
Member'') by reason of (a) death, (b) retirement on or after age 65 or
on any other date qualifying the participant for early or disability
retirement, or (c) termination of a participant's employment with DLJ
for any reason (other than for cause, as defined in the LLC Agreement)
within 24 months after a change of control, as defined in the LLC
Agreement, of DLJ, such Departing Member's investment will be fully
vested; provided that if a participant's employment with DLJ is
terminated at any time for cause, any previous vesting will be
forfeited, and all of the Department Member's investment shall be
subject to repurchase, as explained in paragraph 34 below, during the
period from the termination date to the later of (i) December 31 of the
year following the year in which the participant's employment is
terminated and (ii) the last day of the eighteenth calendar month
following the month in which the participant's employment is terminated
(the ``Forfeiture Period''). If a Member voluntarily resigns his or her
employment with DLJ, any unvested interests similarly will be subject
to repurchase.
33. In the DLJMB Plan, a participant's investment will be vested
25% annually beginning 18 months after the investment date for each
particular investment, except as provided below. If (a) a participant's
employment with DLJ is terminated at any time for cause, or (b) a
participant voluntarily terminates his employment and during the
Forfeiture Period the participant becomes employed by, or a partner in,
consultant to, or otherwise joins any firm that the Manager determines,
in its reasonable discretion, to be competitive with DLJ's merchant
banking or investment banking (including high yield) businesses or any
other business of DLJ, any previous vesting will be forfeited and all
of the Departing Member's investment shall be subject to repurchase, as
explained in paragraph 34 below. Notwithstanding the foregoing,
however, if the participant's employment is terminated for any reason,
other than for cause, within 24 months after a change in control, such
Departing Member's investment will be fully vested.
34. In both the DLJ Plan and the DLJMB Plan, upon termination of a
participant's employment with DLJ, the Manager may decide at any time
during the Forfeiture Period to purchase for cash all or a portion of
the unvested interests. Upon any such purchase, the Manager will pay
the Departing Member an amount determined under a prescribed formula
set forth in the application.
35. Each Company will send audited annual financial statements to
the Members within 120 days of the end of the fiscal year, or as soon
as practicable thereafter. In addition, a copy of each Member's
Internal Revenue Service Schedule ``K-1'' will be transmitted to such
Member.
36. The Companies and the Manager permanently will maintain and
preserve such accounts, books, and other documents as constitute the
record forming the basis for the audited financial statements that are
to be provided to each Member or that are necessary or appropriate to
record its transactions with the Company. All such records will be
subject to examination by the Commission and its staff.
Applicant's Legal Analysis
1. On behalf of the Companies, applicant requests an exemption
under section 6(b) of the Act from all provisions of the Act except (a)
sections 7, 8(a), 9, 36, and 37, and the rules and regulations under
those sections; (b) certain provisions of section 17, and the related
rules and regulations under those sections; (c) sections 2 through 5 to
the extent necessary to implement the other sections; and (d) sections
38 through 53, and the rules and regulations under those administrative
and jurisdictional sections necessary to enforce compliance with the
terms of any order granted.
2. Applicant requests an exemption from section 17(a) of the Act to
the extent necessary to permit DLJ to engage in any transaction as
principal with a Company. The exemption is requested to permit the
Companies to (a) purchase portfolio investments from DLJ on a principal
basis pursuant to the DLJ Agreement; (b) purchase interests or property
in a company or other investment vehicle in which DLJ already owns
securities, or where such company or other investment vehicle is
otherwise affiliated with DLJ Inc. or a Company; (c) sell, put or
tender, or grant options in securities or interests in a company or
other investment vehicle back to such entity, where that entity is
affiliated with DLJ; (d) participate as a selling security holder in a
public offering that is underwritten by DLJ or in which DLJ acts as a
member of the underwriting or selling group; and (e) make short-term
Temporary Investments purchased from, and sold to, DLJ or its
affiliates.
3. Applicant requests an exemption from section 17(d) under the Act
to permit the Companies to engage in transactions in which affiliated
persons of the Companies may also be participants. Applicant states
that such an exemption is necessary in view of the fact that the
Companies will be required to invest their capital contributions in DLJ
Investments in which DLJ will retain an interest.
4. Applicant requests an exemption from section 17(f) to the extent
necessary to permit DLJ to act as custodian without a written contract.
Applicant asserts that because there is such a close association
between the Companies and DLJ, a written contract would cause a burden
and expense where none is necessary.
5. Applicant requests an exemption from section 17(g) and rule
17(g)(1) to permit the Manager's officers and directors, who may be
deemed ``interested persons,'' to take actions and make the
determinations set forth in the rule. In addition, applicant requests
an exemption from section 17(j) and rule 17j-1 (except for paragraph
(a) thereof) because the ``access person'' requirements are unnecessary
in this context.
6. Applicant submits that the exemptions requested pursuant to
section 6(b) are consistent with the protection of investors. Applicant
asserts that the exemptions are necessary or relevant to the operations
of the Companies as an investment program uniquely adapted to the needs
of employees of DLJ. Applicant further submits that the requested
relief is consistent with the legislative history relating to
employees' securities companies. In support of these assertions,
applicant cites the nature of the Companies as employees' securities
companies under the Act and their intended manner of operation.
7. Applicant asserts that a substantial community of economic and
other interests exists among DLJ and the Members, including the
Manager, which obviates the need for protection of investors under the
Act. The Companies were conceived and will be organized and managed by
persons who will be investing in the Companies, and will not be
promoted by persons seeking to profit from fees or investment advice or
from the distribution of securities. Applicant also submits that the
terms of the proposed affiliated transactions will be reasonable and
fair and free from overreaching.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2892 Filed 2-8-94; 8:45 am]
BILLING CODE 8010-01-M