[Federal Register Volume 60, Number 13 (Friday, January 20, 1995)]
[Notices]
[Pages 4211-4218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1497]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20839; 813-132]


Morgan Stanley Capital Investors, L.P. and Morgan Stanley Group 
Inc.; Notice of Application

January 13, 1995.
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: Morgan Stanley Capital Investors, L.P. (the ``Initial 
Partnership''; and Morgan Stanley Group Inc. (``MSG'').

RELEVANT ACT SECTIONS: Applicants seek an order under sections 6(b) and 
6(e) granting an exemption from all provisions of the Act except 
section 9, certain provisions of sections 17 and 30, sections 36 
through 53, and the rules and regulations thereunder.

SUMMARY OF APPLICATION: Applicants seek an order, on behalf of the 
Initial Partnership and certain partnerships or investment vehicles 
organized by MSG (together, the ``Partnerships'') that would grant an 
exemption from most provisions of the Act, and would permit certain 
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 
[[Page 4212]] eligible employees, officers, directors, and advisory 
directors of MSG and its affiliates.

FILING DATES: The application was filed on May 2, 1994, and amended on 
July 20, 1994, September 26, 1994, and January 10, 1995.

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 February 8, 
1995, 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 NW., Washington, DC 20549. 
Applicants, 1251 Avenue of the Americas, New York, NY 10020.

FOR FURTHER INFORMATION CONTACT:
Marc Duffy, Senior Attorney, at (202) 942-0656, or C. David Messman, 
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 at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. MSG and its subsidiaries (collectively, the ``Morgan Stanley 
Group'') constitute a global financial services firm. Morgan Stanley & 
Co. Incorporated (``MS&Co''), a wholly-owned subsidiary of MSG, is the 
principal broker-dealer affiliate of the Morgan Stanley Group and is 
registered as a broker-dealer under the Securities Exchange Act of 1934 
(the ``Exchange Act''). MS&Co. and MSG are registered as investment 
advisers under the Investment Advisors Act of 1940 (the ``Advisers 
Act'').
    2. The Initial Partnership is a newly-formed Delaware limited 
partnership and one of several anticipated investment vehicles that are 
to be formed for the purpose of enabling certain employees, officers, 
directors, and advisory directors of the Morgan Stanley Group to pool 
their investment resources and to participate in various types of 
investment opportunities, including venture capital and private equity 
investments. The pooling of resources permits diversification and 
participation in investments that usually would not be offered to 
individual investors. The goal of the Partnerships is to reward and 
retain key personnel by enabling them to participate in investment 
opportunities that would not otherwise be available to them and to 
attract other individuals to the Morgan Stanley Group.
    3. The Partnerships will operate as non-diversified closed-end 
management investment companies. The Partnerships will seek to achieve 
a high rate of return through long-term capital appreciation in risk 
capital opportunities. The Initial Partnership will co-invest alongside 
two private equity funds (the ``Equity Funds'') that recently were 
organized by the Morgan Stanley Group for third-party investors. The 
Equity Funds are exempt from registration under the Act in reliance 
upon section 3(c)(1) thereunder.\1\ Similarly, subsequent Partnerships 
primarily will co-invest alongside other private investment funds 
organized by the Morgan Stanley Group for third-party investors (such 
private investment funds, collectively with the Equity Funds, are 
referred to herein as the ``Investment Funds'').

    \1\Section 3(c)(1) exempts from the definition of investment 
company any issuer whose outstanding securities (other than short-
term paper) are beneficially owned by not more than one hundred 
persons and is not making and does not presently propose to make a 
public offering of its securities.
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    4. The general partner or other manager of each Partnership (the 
``General Partner'') will be registered as an investment adviser under 
the Advisers Act. The General Partner of each Partnership also may 
serve as the general partner or manager of the related Investment 
Funds.
    5. Interests in each Partnership will be offered without 
registration under a claim of exemption pursuant to section 4(2) of the 
Securities Act of 1933 (the ``Securities Act'').\2\ Interests will be 
offered and sold only to (a) ``Eligible Employees'' of the Morgan 
Stanley Group, or (b) trusts or other investment vehicles for the 
benefit of such Eligible Employees and/or the benefit of their 
immediate families (``Limited Partners''). To be an Eligible Employee, 
an individual must be a current employee, officer, director, or 
advisory director of an entity within the Morgan Stanley Group and, 
except for certain individuals described in paragraph 6 below, an 
``accredited investor'' meeting the income requirements set forth in 
rule 501(a)(6) of Regulation D under the Securities Act. The 
limitations on the class of persons who may acquire interests, in 
conjunction with other characteristics of the Partnership, will qualify 
the Partnership as an ``employees' securities company'' under section 
2(a)(13) of the Act.

    \2\Section 4(2) exempts transactions by an issuer not involving 
any public offering from the Securities Act's registration 
requirement.
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    6. Eligible Employees who are not accredited investors but who 
manage the day-to-day affairs of a Partnership may be permitted to 
invest their own funds through the General Partner of the Partnership 
if such individuals had reportable income from all sources in the 
calendar year immediately preceding such person's participation in 
excess of $120,000, and have a reasonable expectation of reportable 
income in the years in which such person will be required to invest 
his/her own funds of at least $150,000. These individuals will have 
primary responsibility for operating the Partnership. Such 
responsibility will include, among other things, identifying, 
investigating, structuring, negotiating, and monitoring investments for 
the Partnership, communicating with the Limited Partners, maintaining 
the books and records of the Partnership, and making recommendations 
with respect to investment decisions. Accordingly, all such individuals 
will be closely involved with, and knowledgeable with respect to, the 
Partnership's affairs and the status of Partnership investments.
    7. Only a small proportion of the Morgan Stanley Group's personnel 
qualify as Eligible Employees. The Eligible Employees are experienced 
professionals in the investment banking, merchant banking, or 
securities business, or in administrative, financial, accounting, or 
operational activities related thereto. No Eligible Employee will be 
required to invest in any Partnership.
    8. The management and control of each Partnership, including all 
investment decisions, will be vested exclusively in the General 
Partner. The management and control of the General Partner, in turn, 
will be vested, directly or indirectly, in MSG. Thus, the business and 
affairs of each Partnership indirectly will be managed by or under the 
direction of the board of directors or other committee serving similar 
functions (the ``Board'') of an entity (the ``MS Subsidiary 
Corporation'') that is directly or indirectly controlled by MSG and 
directly controls the Partnership. Each Board, among other things, will 
act as the investment committee of the Partnership responsible for 
approving all investment and valuation decisions. Actions by the Board 
generally will [[Page 4213]] require the vote of a majority of its 
members. Each Board will be comprised exclusively of directors and 
officers of the Morgan Stanley Group, each of whom is expected to 
qualify as an Eligible Employee. The day-to-day affairs of each 
Partnership will be managed by Eligible Employees who are officers or 
employees of the Morgan Stanley Group.
    9. With respect to the Initial Partnership, the partners thereof 
currently consist of the General Partner and a wholly-owned subsidiary 
of MSG, as sole limited partner (the ``MS Limited Partner''). The 
Initial Partnership has obtained subscriptions from a number of 
Eligible Employees to acquire limited partnership interests in the 
Initial Partnership. Such Eligible Employees, however, have not yet 
been admitted to the Partnership. As promptly as practicable after 
receipt of the requested order, the Eligible Employees will be admitted 
to the Initial Partnership as Limited Partners, and the limited 
partnership interest held by the MS Limited Partner will be redeemed by 
the Initial Partnership in full. Upon their admission into the Initial 
Partnership, the Eligible Employees will be allocated their shares of 
any investment made, and expense incurred, by the Initial Partnership 
prior to their admission, and will be required to make capital 
contributions to the Initial Partnership as if they had been Limited 
Partners from the formation of the Initial Partnership.
    10. The terms of each Partnership are expected to be based upon the 
terms of the related Investment Fund, and corresponding or analogous 
terms of each (or terms having substantially the same intent or effect) 
are expected to be substantially identical, except as described below. 
In addition, if the Partnership is required to co-invest ``lock-step'' 
with the related Investment Fund (which is generally expected to be the 
case), various terms designed for the protection of the investors in 
the related Investment Fund also will accrue to the benefit of the 
Limited Partners. Such terms may include, for example, (a) limitations 
with respect to the amounts permitted to be invested in the securities 
of certain issuers, and the nature of investments permitted to be made, 
by the related Investment Fund, and (6) limitations on the ability of 
the General Partner and its affiliates to engage in certain types of 
activities, such as the formation of a new Investment Fund or the 
making of certain types of investments for its own account without 
first having offered the investment opportunity to the related 
Investment Fund. In any event, the terms of each Partnership will be 
disclosed to the Eligible Employees at the time they are offered the 
right to subscribe for interests in the Partnership. To the extent 
there are differences between the terms of a Partnership and the 
related Investment Fund, or the Partnership could be affected by the 
terms of or actions taken with respect to the Investment Fund, such 
differences or effects also will be disclosed to the Eligible 
Employees.
    11. The General Partner of each Partnership will have all powers 
necessary, proper, suitable or advisable to carry out the purposes and 
business of the Partnership. The General Partner of each Partnership 
also may serve as the general partner or manager of the related 
Investment Fund and, in such capacity, be vested exclusively with the 
management and control of the Investment Fund.
    12. The General Partner of each Partnership generally will have a 
capital commitment to the Partnership equal to at least 1% of the 
Partnership's aggregate capital commitment and thus will be required to 
make capital contributions to the Partnership. In order for the General 
Partner to meet its capital contribution requirements, Morgan Stanley 
Group will be required to capitalize the MS Subsidiary Corporation with 
sufficient funds (and, if the General Partner is organized as a limited 
partnership or other non-corporate entity, the individual partners or 
other investors of the General Partner also will be required to fund 
their pro rata share of such capital contributions).
    13. The General Partner of each Partnership, as the general partner 
or manager of the related Investment Fund, will have a capital 
commitment to such Investment Fund. Another entity within the Morgan 
Stanley Group also may participate in such Investment Fund as a limited 
partner or other investor on the same terms as other third-party 
investors. In addition, individuals serving on the Board or managing 
the day-to-day affairs of the Partnership may also elect to invest 
their own funds as Limited Partners of the Partnership on the same 
terms as other Eligible Employees.
    14. The General Partner of each Partnership will pay its normal 
operating expenses, including rent and salaries of its personnel and 
certain expenses. To the extent any expenses are not borne by the 
General Partner, the Partnership will be required to pay such expenses. 
Such expenses may include, without limitation, the fees, commissions 
and expenses of an entity within the Morgan Stanley Group for services 
performed by such entity for such Partnership such as, for example, 
brokerage or clearing services in the Partnership's portfolio 
securities.
    15. The General Partner of a Partnership may be paid an annual 
management fee, generally determined as a percentage of assets under 
management or aggregate commitments. The General Partner of a 
Partnership also may be entitled to receive a performance-based fee (or 
``carried interest'') of a specified percentage based on the gains and 
losses of such Partnership's or each Limited Partner's investment 
portfolio.\3\ Such percentage will not exceed that used in calculating 
the General Partner's carried interest in the related Investment Fund. 
All or a portion of the carried interest arising from Partnership 
investments may be paid to the individuals who are partners of or 
investors in the General Partner. In addition, the General Partner may 
be entitled to other compensation from the Partnership as provided for 
in the Partnership Agreement of the Partnership, such as acquisition 
fees, disposition fees, structuring fees or other fees for additional 
services rendered by the General Partner to the Partnership in 
connection with the Partnership's affairs.

    \3\A ``carried interest'' is an allocation to the General 
Partner based on net gains in addition to the amount allocable to 
the General Partner that is in proportion to its capital 
contributions. Any carried interest will be structured to comply 
with the requirements of rule 205-3 under the Advisers Act.
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    16. Each Partnership generally will be required to invest ``lock-
step'' in investment opportunities in which the related Investment Fund 
invests. In connection with any such investment opportunity, the amount 
of the Partnership's do-investment will be determined in accordance 
with a specified formula. Such formula is expected to provide that the 
amount of the Partnership's co-investment will bear the same proportion 
to the aggregate investments of the related Partnership as the 
aggregate capital commitments of the Investment Fund and the 
Partnership as the aggregate capital commitments of the Investment Fund 
and the Partnership. In addition, the Partnership generally will be 
required to make any co-investments on terms no more favorable than 
those applicable to the investments by the related Investment Fund.\4\

    \4\It is anticipated that the economic terms applicable to the 
Partnership's investments will be substantially the same as those 
applicable to the corresponding investments by the related 
Investment Fund; however, it is possible that the related Investment 
Fund may invest in a different class of securities or that the 
Investment Fund's investment may have more favorable non-economic 
terms (e.q., the right to representation on the board of directors 
of the portfolio company) in light of differences in legal 
structure, or regulatory, tax, or other 
considerations. [[Page 4214]] 
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    17. It is possible that a Partnership will not participate in 
investment opportunities due to regulatory, tax, or other 
considerations even though the related Investment Fund proceeds to make 
investments in connection with such investment opportunities. The 
circumstances, if any, in which a Partnership will or will not make an 
investment alongside the related Investment Fund will be provided for 
in the Partnership Agreement. Under no circumstances, however, will a 
Partnership make an investment unless the related Investment Fund also 
makes an investment in connection with the applicable investment 
opportunity.
    18. Similarly, each Partnership, except as permitted by condition 3 
below, will be given the opportunity to sell or otherwise dispose of 
its investments prior to or concurrently with, and on the same terms as 
sales or other dispositions by the related Investment Fund.
    19. A Partnership will not invest more than 15% of its assets in 
securities issued by registered investment companies (with the 
exception of temporary investments in money market funds), and a 
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.
    20. The ``lock-step'' investment requirements described above could 
enable the Limited Partners of each Partnership to derive the benefit 
of various terms applicable to the related Investment Fund that were 
designed for the protection of investors in such Investment Fund. It 
also is possible that the terms of the related Investment Fund will 
include provisions that would give the investors of the Investment Fund 
rights that are specifically not made available to the Limited Partners 
of the Partnership. For example, investors of the Investment Fund may 
have the right (which will not be available to the Limited Partners) to 
make additional co-investments outside such Investment Fund in certain 
investment opportunities.
    21. Subject to the terms of each Partnership and the related 
Investment Fund, the Partnership will be permitted to enter into 
transactions involving an entity within the Morgan Stanley Group 
(including without limitation the related Investment Fund), a portfolio 
company, and partner of or other investor in the related Investment 
Fund that is not an entity within the Morgan Stanley Group (together 
with the affiliates (as defined in rule 12b-2 under the Exchange Act) 
of such partner or other investor, hereinafter referred to as a ``Non-
MS Investment Fund Partner''), or any partner or person or entity 
related to any partner. Such transactions may include, without 
limitation, the purchase or sale by the Partnership of an investment, 
or an interest therein, from or to any entity within the Morgan Stanley 
Group, acting as principal. With respect to any investment purchased by 
a Partnership from an entity within the Morgan Stanley Group, acting as 
principal, the Partnership will acquire the investment for no more than 
the fair value at the time of purchase, plus carrying costs and certain 
organizational expenses. The fair value at the time of such purchase 
may be more or less than the price paid by the entity, depending on the 
appreciation or depreciation in the particular investment.
    22. No individual who serves on the Board or manages or is 
otherwise employed to perform the day-to-day affairs of the Partnership 
will be permitted to invest his or her own funds in connection with any 
Partnership investment, except through the related Investment Fund or 
the Partnership as a partner or other investor of the General Partner, 
through the Partnership as a Limited Partner of the Partnership, or 
through the exercise of stock options or warrants granted, on the same 
terms and amounts, to all outside directors of the entities in which 
such Partnership invests.
    23. An entity within the Morgan Stanley Group (including the 
General Partner) may provide investment banking, management, or other 
services and receive fees or other compensation and expense 
reimbursement in connection therewith 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 the entity to 
share disproportionately in income or capital gains or similar 
compensation. An entity within the Morgan Stanley Group also may engage 
in market-making activities with respect to the securities of entities 
in which a Partnership makes an investment or competitor of such 
entities. Employees of an entity within the Morgan Stanley Group may 
serve as officers or directors of such entities pursuant to rights held 
by a Partnership or the related Investment Fund to designate such 
officers or directors, and receive officers' and directors' fees and 
expense reimbursement in connection with such services. The Morgan 
Stanley Group reserves the right not to charge or to waive all or part 
of any such fees or other compensation or expense reimbursement that a 
Partnership otherwise might incur or bear indirectly. However, any such 
fees or other compensation or expense reimbursement received by an 
entity within the Morgan Stanley Group generally will not be shared 
with any Partnership.
    24. With regard to the transactions described above into which a 
Partnership directly or indirectly enters, the Board must determine 
prior to entering into such transaction that the terms thereof are fair 
to the partners and the Partnership.
    25. Interests in a Partnership will be non-transferable, except 
with the prior written consent of the General Partner of the 
Partnership, which consent may be withheld in its sole discretion. In 
any event, interests will not be transferable to persons other than: 
(a) Other Eligible Employees; (b) trusts or other investment vehicles 
for the benefit of such Limited Partner and/or such Limited Partner's 
immediate family; or (c) an entity within the Morgan Stanley Group.
    26. Upon the death of a Limited Partner, or such Limited Partner 
becoming incompetent, insolvent, incapacitated or bankrupt, such 
Limited Partner's estate or legal representative will succeed to the 
Limited Partner's interest as an assignee for the purpose of settling 
such Limited Partner's estate or administering such Limited Partner's 
property, and may not become a Limited Partner.
    27. Interests in a Partnership may be redeemable by the Partnership 
upon the Limited Partner's termination of employment from the Morgan 
Stanley Group. Alternatively, Morgan Stanley Group may have the right 
to purchase a Limited Partner's interest upon such termination of 
employment. The terms upon which an interest may be so redeemed or 
purchased, including the manner in which the redemption or purchase 
price will be determined, will be fully disclosed to Eligible Employees 
at the time they are offered the right to subscribe for the interest. 
In any event, with respect to a redemption, the redemption price will 
not be less than the lower of (a) the amount invested plus interest 
calculated at a rate per [[Page 4215]] annum at least equal to the 
discounted rate for 90-day Treasury bills for the period since the 
investment and (b) the then fair value (as determined by the General 
Partner) of the interest, less amounts, if any, forfeited by the 
Limited Partner for failure to make required capital contributions.
    28. The consequences to a Limited Partner who defaults on his or 
her obligation to fund a required capital contribution to the 
Partnership will be described in the applicable Partnership agreement. 
Such default provisions shall be on terms no less favorable than those 
applicable to third party investors in the related Investment Fund, 
will be fully disclosed to Eligible Employees at the time they are 
offered the right to participate in the Partnership, and the General 
Partner will not elect to exercise any alternative involving the 
forfeiture by the defaulting Limited Partner of a portion of his or her 
capital account if the defaulting Limited Partner is suffering from, or 
will suffer, severe hardship.
    29. During the existence of each Partnership, books and accounts of 
the Partnership will be kept, in which the General Partner of the 
Partnership will enter, or cause to be entered, all business transacted 
by the Partnership and all moneys and other consideration received, 
advanced, paid out, or delivered on behalf of the Partnership, the 
results of the Partnership's operations, and each partner's capital. 
Such books will at all times be accessible to all partners of the 
Partnership, subject to certain reasonable limitations to address 
concerns with respect to, among other things, the confidentiality of 
certain information. In addition, for each fiscal year of a 
Partnership, the General Partner of the Partnership will cause an 
examination of the financial statements of the Partnership to be made 
by a nationally recognized firm of certified public accountants. A copy 
of the accounts' report with respect to each fiscal year, which will 
include the Partnership's financial statements, will be mailed or 
otherwise furnished to each partner of the Partnership within a 
specified period after the end of such fiscal year. Each Partnership 
also will supply all information reasonably necessary to enable the 
partners of the Partnership to prepare their Federal and state income 
tax returns. The General Partner generally also will furnish 
information regarding each Partnership to the Partners on a quarterly 
basis. It is expected that the scope and nature of the information 
furnished to the Limited Partners of any Partnership will be the same 
as that furnished to the third party investors of the related 
Investment Fund.

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 employers, 
persons on retainer, or former employees.
    2. Section 6(e) provides that in connection with any order 
exempting an investment company from any provision of section 7, 
certain specified provisions of the Act shall be applicable to such 
company, and to other persons in their transactions and relations with 
such company, as though such company were registered under the Act, if 
the SEC deems it necessary or appropriate in the public interest or for 
the protection of investors.
    3. Applicants request an exemption under sections 6(b) and 6(e) of 
the Act from all provisions of the Act, and the rules and regulations 
thereunder, except section 9, sections 17 and 30 (except as described 
below), sections 36 through 53, and the rules and regulations 
thereunder.
    4. Section 17(a) provides, in relevant part, that it is unlawful 
for any affiliated person of a registered investment company, or any 
affiliated person of such person, acting as principal, knowingly to 
sell any security or other property to such registered investment 
company or to purchase from such registered investment company any 
security or other property. Applicants request an exemption from 
section 17(a) of the Act to the extent necessary to: (a) Permit an 
entity within the Morgan Stanley Group, acting as principal, to engage 
in any transaction directly or indirectly with any Partnership or any 
company controlled by such Partnership; (b) permit any Partnership to 
invest in or engage in any transaction with any entity, acting as 
principal, (i) in which such Partnership, and company controlled by 
such Partnership, or any member of the Morgan Stanley Group has 
invested or will invest, or (ii) with which such Partnership, any 
company controlled by such Partnership, or any entity within the Morgan 
Stanley Group is or will become otherwise affiliated; and (c) permit a 
Non-MS Investment Fund Partner, acting as principal, to engage in any 
transaction directly or indirectly with the related Partnership or any 
company controlled by such Partnership. The transactions to which any 
Partnership is a party will be effected only after a determination by 
the Board that the requirements of Condition 1 below have been 
satisfied. In addition, these transactions will be effected only to the 
extent not prohibited by the limited partnership agreements or other 
organizational agreements of the related Investment Fund and the 
Partnership in question.
    5. The principal reason for the requested exemption is to ensure 
that each Partnership will be able to invest in companies, properties, 
or vehicles in which an entity within the Morgan Stanley Group 
(including without limitation the related Investment Fund), or the 
entity's employees, officers, directors, or advisory directors, or the 
partners of or other investors in the related Investment Fund, may make 
or have already made an investment. The relief also is requested to 
permit each Partnership the flexibility to deal with its portfolio 
investments in the manner the General Partner deems most advantageous 
to all partners of or investors in such Partnership, or as required by 
the related Investment Fund or the Partnership's other co-investors. 
Furthermore, the requested exemption is sought to ensure that a Non-MS 
Investment Fund Partner will not directly or indirectly become subject 
to a burden, restriction, or other adverse effect by virtue of the 
related Partnership's participation in an investment opportunity. 
Without this exemption, a Non-MS Investment Fund Partner may be 
restricted in its ability to engage in transactions with the related 
Partnership's portfolio companies, which would not have been the case 
had such Partnership not invested in such portfolio companies.
    6. The partners of or investors in each Partnership will have been 
fully informed of the possible extent of such Partnership's dealings 
with the related Investment Fund or another entity within the Morgan 
Stanley Group or with a Non-MS Investment Fund Partner and, as 
professionals employed in the securities business, will be able to 
understand and evaluate the attendant risks. Applicants assert that the 
community of interest among the partners of or other investors in each 
Partnership, on the one hand, and the related Investment Fund or 
another entity within the Morgan Stanley Group or the Non-MS Investment 
Fund [[Page 4216]] Partners, on the other hand, is the best insurance 
against any risk of abuse.
    7. Applicants state that a Partnership will not make loans to the 
related Investment Fund or any other entity within the Morgan Stanley 
Group, or to any employee, officer, director, or advisory director of 
the Morgan Stanley Group, with the exception of short-term repurchase 
agreements or other fully secured loans to an entity within the Morgan 
Stanley Group. In addition, a Partnership will not sell or lease any 
property to the related Investment Fund or any other entity within the 
Morgan Stanley Group, except on terms at least as favorable as those 
obtainable from unaffiliated third parties.
    8. Section 17(d) makes it unlawful for any affiliated person of a 
registered investment company, acting as principal, to effect any 
transaction in which the company is a joint or joint and several 
participant with the affiliated person in contravention of such rules 
and regulations as the SEC may prescribe for the purpose of limiting or 
preventing participation by such companies. Rule 17d-1 under section 
17(d) prohibits most joint transactions unless approved by order of the 
SEC. Applicants request an exemption from section 17(d) and rule 17d-1 
thereunder to the extent necessary to permit affiliated persons of each 
Partnership (including without limitation the General Partner, the 
related Investment Fund, and other entities within the Morgan Stanley 
Group) or affiliated persons of any of these persons (including without 
limitation the Non-MS Investment Fund Partners) to participate in, or 
effect any transaction in connection with, any joint enterprise or 
other joint arrangement or profit-sharing plan in which such 
Partnership or a company controlled by such Partnership is a 
participant. The exemption requested would permit, among other things, 
co-investments by each Partnership and individual partners or other 
investors or employees, officers, directors, or advisory directors of 
the Morgan Stanley Group making their own individual investment 
decisions apart from the Morgan Stanley Group.
    9. Compliance with section 17(d) would prevent each Partnership 
from achieving its principal purpose. Because of the number and 
sophistication of the potential partners of or investors in a 
Partnership and persons affiliated with such partners or investors, 
strict compliance with section 17(d) would cause a Partnership to 
forego investment opportunities simply because a partner or investor or 
other affiliated person of the Partnership (or any affiliate of such a 
person) also had, or contemplated making, a similar investment. In 
addition, attractive investment opportunities of the types considered 
by a Partnership often require each participant in the transaction to 
make available funds in an amount that may be substantially greater 
than may be available to the Partnership alone. As a result, the only 
way in which a Partnership may be able to participate in such 
opportunities may be to co-invest with other persons, including its 
affiliates. The flexibility to structure co-investments and joint 
investments in the manner described above will not involve abuses of 
the type section 17(d) and rule 17d-1 were designed to prevent. The 
concern that permitting co-investments or joint investments by the 
related Investment Fund or another entity within the Morgan Stanley 
Group or by the Non-MS Investment Fund Partners on the one hand, and a 
Partnership on the other, might lead to less advantageous treatment of 
the Partnership, should be mitigated by the fact that: (a) The Morgan 
Stanley Group, in addition to its substantial stake as a general 
partner or manager in such Investment Fund and such Partnership, will 
be acutely concerned with its relationship with the key personnel who 
invest in the Partnership; and (b) senior officers and directors of the 
Morgan Stanley Group will be investing in such Partnership.
    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. 
Applicants request an exemption from section 17(f) and rule 17f-1 to 
the extent necessary to permit an entity within the Morgan Stanley 
Group to act as custodian without a written contract. Because there is 
such a close association between each Partnership and the Morgan 
Stanley Group, requiring a detailed written contract would expose the 
Partnership to unnecessary burden and expense. Furthermore, any 
securities of a Partnership held by the Morgan Stanley Group will have 
the protection of fidelity bonds. An exemption is requested from the 
terms of rule 17f-1(b)(4), as applicants do not believe the expense of 
retaining an independent accountant to conduct periodic 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 each Partnership to comply with rule 17g-1 without the necessity 
of having a majority of the members of the related Board who are not 
``interested persons'' take such actions and make such approvals as are 
set forth in rule 17g-1.
    12. Section 17(j) and rule 17j-1 make it unlawful for certain 
enumerated 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. Rule 17j-1 also requires 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. 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 in the context of the Partnerships. 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 or 
investors in such Partnership by virtue of their common association in 
the Morgan Stanley Group; the substantial and largely overlapping 
protections afforded by the conditions with which applicants have 
agreed to comply; the concern of the Morgan Stanley Group that 
personnel who participate in each Partnership actually receive the 
benefits they expect to receive when investing in such Partnership; and 
the fact that the investments of the Partnerships will be investments 
that usually would not be offered to the investors, including those 
investors who would be deemed access persons, as individual investors. 
Accordingly, the requested exemption is consistent with the purposes of 
the Act, because the dangers against which section 17(j) and rule 17j-1 
are intended to guard are not present in the case of any Partnership.
    13. Sections 30(a), 30(b) and 30(d), and the rules under those 
sections, generally require that registered investment companies 
prepare and file with the SEC and mail to their shareholders certain 
periodic reports [[Page 4217]] and financial statements. The forms 
prescribed by the SEC for periodic reports have little relevance to a 
Partnership and would entail administrative and legal costs that 
outweigh any benefit to partners of or investors in the Partnerships. 
Exemptive relief is requested to the extent necessary to permit each 
Partnership to report annually to its investors in the manner described 
above in paragraph 29. An exemption also is requested from section 
30(f) to the extent necessary to exempt the General Partner, the 
managing general partner or manager, if any, of such General Partner, 
members of the related Board, and any other persons who may be deemed 
members of an advisory board of such Partnership from filing reports 
under section 16 of the Exchange Act with respect to their ownership of 
interests in the Partnership.
    14. Applicants submit that the exemptions requested are consistent 
with the protection of investors in view of the substantial community 
of interest among all the parties and the fact that each Partnership is 
an ``employees' securities company'' as defined in section 2(a)(13). 
Each Partnership will be conceived and organized and managed by persons 
who will be investing, directly or indirectly, or are eligible to 
invest, in such Partnership, and will not be promoted by persons 
outside the Morgan Stanley Group seeking to profit from fees or 
investment advice or from the distribution of securities. Applicants 
also submit that the terms of the proposed affiliated transactions will 
be reasonable and fair and free from overreaching.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
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 a party (the 
``Section 17 Transactions'') will be effected only if the Board, 
through the General Partner of such Partnership, determines that: (a) 
The terms of the transaction, including the consideration to be paid or 
received, are fair and reasonable to the partners of or investors in 
such Partnership and do not involve overreaching of the Partnership or 
its partners or investors on the part of any person concerned; and (b) 
the transaction is consistent with the interests of the partners of or 
investors in such Partnership, such Partnership's organizational 
documents and such Partnership's reports to its partners or investors. 
In addition, the General Partner of each Partnership 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.\5\

    \5\Each 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 the Section 17 Transactions, the Board, 
through the General partner, will adopt, and 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 such Partnership, or any 
affiliated person of such a person, promoter, or principal underwriter.
    3. The General Partner of each Partnership will not invest the 
funds of such Partnership in any investment in which a ``Co-Investor,'' 
as defined below, has or proposes to acquire the same class of 
securities of 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 
any such Co-Investor, prior to disposing of all or part of its 
investment, (a) gives the General Partner sufficient, but not less than 
one day's, 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 the Partnership's investment prior to or 
concurrently with, and 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 the 
Morgan Stanley Group; (c) an officer or director of an entity within 
the Morgan Stanley Group; 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 
(including without limitation the related Investment Fund). 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, to any company 
(a ``parent'') of which the Co-Investor is a 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 
under section 11A(a)(2) of the Exchange Act and rule 11Aa2-1 
thereunder.
    4. Each Partnership and the General Partner or manager of such 
Partnership 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 of or 
investors in such Partnership, and each annual report of such 
Partnership required to be sent to such partners or investors, and 
agree that all such records will be subject to examination by the SEC 
and its staff.\6\

    \6\Each 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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    5. The General Partner of each Partnership will send to each 
partner of or investor in such Partnership who had an interest in any 
capital account of such Partnership at any time during the fiscal year 
then ended Partnership financial statements audited by such 
Partnership's independent accountants. At the end of each fiscal year, 
the General Partner will make a valuation or have a valuation made of 
all of the assets of the Partnership as of such fiscal year end in a 
manner consistent with customary practice with respect to the valuation 
of assets of the kind held by the Partnership. In addition, within 90 
days after the end of each fiscal year of the Partnership or as soon as 
practicable thereafter, the General Partner of such Partnership will 
send a report to each person who was a partner or investor in such 
Partnership at any time during the fiscal year then ended, setting 
forth such tax information as shall be necessary for the preparation by 
the partner or investor of his or its federal and state income tax 
returns and a report of the investment activities of such Partnership 
during such year.
    6. In any case where purchases or sales are made by a Partnership 
from or [[Page 4218]] to an entity affiliated with the Partnership by 
reason of a 5% or more investment in such entity by a Morgan Stanley 
Group 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-1497 Filed 1-19-95; 8:45 am]
BILLING CODE 8010-01-M