[Federal Register Volume 61, Number 186 (Tuesday, September 24, 1996)]
[Notices]
[Pages 50065-50067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24369]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Advisers Act Release No. 1579; 803-102]


Technology Funding Partners III, L.P., et al.; Notice of 
Application

September 17, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').


.ACTION: Notice of application for an order under the Investment 
Advisers Act of 1940 (the ``Advisers Act'').

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APPLICANTS: Technology Fund Partners III, L.P. (``P3''); Technology 
Funding Venture Partners IV, An Aggressive Growth Fund, L.P. (``VP4''); 
Technology Funding Venture Partners V, An Aggressive Growth Fund L.P. 
(``VP5''); Technology Funding Medical Partners I, L.P. (``MP1''); 
Technology Funding Inc. (``TFI''); and Technology Funding Ltd. 
(``TFL'').

RELEVANT ADVISERS ACT SECTIONS: Order requested under section 206A of 
the Advisers Act for an exemption from section 205(a)(1) of the 
Advisers Act.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain business development companies (``BDCs'') to make in-kind 
distributions of portfolio securities and deem gains or losses on such 
securities to be realized upon such distributions to partners of such 
BDCs. The order would apply only to in-kind distributions of portfolio 
securities for which market quotations are available and are traded 
publicly on any nationally recognized exchange or market (``Exchange 
Traded Securities'').

FILING DATE: The application was filed on July 15, 1996.

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 October 15, 
1996, and should be accompanied by proof of service on 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, 2000 Alameda de las Pulgas, San Mateo, California 
94403.

.FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Alison E. 
Baur, 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. P3, VP4, VP5, and MP1 are Delaware limited partnerships 
registered as BDCs under the Investment Company Act of 1940 (the 
``Act''). Each

[[Page 50066]]

BDC's investment objective is to seek long-term capital appreciation by 
making venture capital investments. Each of the BDCs has five general 
partners consisting of three individuals (the ``Individual General 
Partners''), TFL and TFI (the ``Managing General Partners'' and 
together with the Individual General Partners, the ``Partners''). No 
Individual General Partner of one BDC serves as an Individual General 
Partner of any other BDC. Each of the BDCs has received an exemptive 
order determining that each Individual General Partner is not an 
``Interested person'' of the relevant BDC within the meaning of section 
2(a)(19) of the Act.\1\
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    \1\ Technology Fund Partners III, L.P., Investment Company Act 
Release Nos. 15724 (notice) (May 8, 1987) and 15764 (June 2, 1987); 
Technology Funding Venture Partners IV, An Aggressive Growth Fund, 
L.P., Investment Company Act Release Nos. 16596 (notice) (Oct. 14, 
1988) and 16626 (order) (Nov. 8, 1988); Technology Funding Venture 
Partners V, An Aggressive Growth Fund L.P., Investment Company Act 
Release Nos. 17370 (notice) (Mar. 12, 1990) and 17422 (order) (Apr. 
11, 1990); and Technology Funding Medical Partners I, L.P., 
Investment Company Act Release Nos. 19183 (notice) (Dec. 28, 1992) 
and 19229 (order) (Jan. 25, 1993) (collectively, the ``Prior 
Orders'').
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    2. TFL is a California limited partnership that is registered as an 
investment adviser under the Advisers Act. TFI is a California 
corporation that also is registered as an investment adviser under the 
advisers Act. TFI is a wholly-owned subsidiary of TFL.
    3. With the exception of P3 and VP4, which are managed by all their 
General Partners, the BDCs are managed by their respective Individual 
General partner, who has complete and exclusive authority to manage and 
control them. The Managing General Partners are charged with certain 
responsibilities pursuant to the BDCs' respective partnership 
agreements (the ``Partnership Agreements''). The Managing General 
partners have the authority to determine and manage the BDCs' 
respective venture capital investments and performance of the day-to-
day operations, including the investment and realization of investments 
and the making of distributions by the Funds, subject to the 
supervision of the Individual General Partners. The Individual General 
Partners perform general fiduciary duties including conducting: 
management arrangements of the BDCs; custody arrangements for portfolio 
securities; and transactions with affiliated persons.
    4. Allocation of profits of the BDCs to their Partners are made in 
accordance with the terms of the Partnership Agreements that provide 
that net profit will be allocated: (a) first, to those Partners with 
deficit capital account balances until such deficits have been 
eliminated; (b) second, to Partners that had been allocated net losses 
and sales commissions in the amounts that such net losses and sales 
commissions had been previously allocated to them; and (c) then, 20% to 
the Managing General Partners, 75% to the limited partners generally in 
proportion to the number of units they hold, and 5% to the limited 
partners in proportion to the number of units held by each limited 
partner multiplied by the number of half-months the limited partner 
held such units from his admission to the partnership until the closing 
date (``Unit Months'') bears to the total number of units multiplied by 
the total number of Unit Months.
    5. Net losses of each BDC generally will be allocated in the 
proportion that net profit is allocated under paragraph 4(c) above and 
then 99% to the limited partners and 1% to the general partners. Each 
Partnership Agreement provides for a special allocation to the Managing 
General Partners of net loss otherwise allocable to a limited partner 
that exceeds the positive balance in the capital account of such 
limited partner and a subsequent allocation of net profit in the same 
amount.
    6. Cash and securities ``available for distribution'' means all 
partnership cash from whatever sources derived (less such reserves as 
the Individual General Partners or management committee shall deem 
reasonable for the partnership's business), plus any securities held by 
the BDC that the Individual General Partners deem available for 
distribution. In general, cash and securities available for 
distribution are distributed 99% to the limited partners and 1% to the 
general partners, until such time as the amount of cash and the value 
of all securities distributed to all limited partners and thereafter 
are distributed in proportion to Partners' capital accounts.
    7. Under each Partnership Agreement, securities distributed in-kind 
to Partners during the life of any BDC are treated as if sold at their 
appraised value. Securities the value of which cannot be appraised on 
the basis of either available market quotations or third party 
transactions involving actual transactions or actual firm offers by 
investors who are not affiliates of the relevant BDC, are requested to 
be valued by an appraisal carried out by two independent appraisers. In 
the event the two independent appraisers are unable to agree upon a 
valuation, they are required jointly to appoint a third independent 
appraiser whose decision will be final and binding.
    8. Notwithstanding the above, no in-kind distributions have 
previously been made by any of the BDCs. This is because in the Prior 
Orders, applicants agreed to obtain an exemption pursuant to section 
260A of the Advisers Act permitting the BDC's to deem gains or losses 
to be realized upon in-kind distributions of securities before such 
distributions are made, or obtain a favorable response to a no-action 
request indicating that an exemption was not necessary.

Applicants' Legal Analysis

    1. Applicants request an order under sections 206A of the Advisers 
Act exempting applicants from Section 205(a)(1) of the Advisers Act. 
The requested order would permit the BDCs to make in-kind distributions 
of portfolio securities and deem gains or losses on such securities to 
be realized upon such distributions to the Partners. The order would 
apply only to in-kind distributions of portfolio securities for which 
market quotations are available and are Exchange Traded Securities.
    2. Section 205(a)(1) of the Advisers Act prohibits any investment 
adviser registered under the Advisers Act from entering into a contract 
which provides for compensation based upon ``a share of capital gains 
or capital appreciation of the funds or any portions of the funds of 
the client,'' commonly referred to as a ``performance fee.''
    3. Section 205(b)(3) provides, in pertinent part, that the 
performance fee prohibitions of section 205(a)(1) are not applicable to 
advisory contracts between an investment adviser and a BDC if, among 
other things, the compensation provided for in such contract does not 
exceed 20% of the realized capital gains upon the funds of the BDC over 
a specified period or as of definite dates, computed net of all 
realized capital losses and unrealized capital depreciation.
    4. Applicants believe that the proposed in-kind redemptions conform 
with section 205(b)(3). Section 205(b)(3), however, does not 
comtemplate, on its face, the procedures set forth in the Partnership 
Agreements whereby unrealized gains or losses are deemed realized under 
certain conditions for purposes of the compensation formula. 
Specifically, the Partnership Agreements provide that unrealized gains 
or losses will be deemed to be realized with respect to distributions 
in-kind both during the life of the BDCs and upon their termination.

[[Page 50067]]

    5. Section 206A of the Advisers Act provides that the SEC may 
exempt any person or transaction from any provision of the Advisers Act 
if and to the extent that such exemption is appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Advisers 
Act.
    6. Applicants argue that to the extent section 205(b)(3) requires a 
performance fee to be based on realized capital gains, the proposal is 
consistent with the statutory purpose. Once the in-kind distribution is 
made, the Managing General Partner will no longer have any control over 
the investment in the subject securities. The Partners will have the 
exclusive ability to liquidate such investments. In addition, 
applicants assert that there will be no concern over the proper 
valuation of the securities upon which the fee is based because 
applicants request relief only to cover in-kind distributions of 
Exchange Traded Securities.
    7. Applicants submit that the requested relief satisfies the 
section 206A standards. First, the distributed securities would be 
freely transferable, which would enable the Partners to determine 
whether to hold or sell the distributed securities. In such 
circumstances, Partners will not forfeit any particular management 
expertise, since TFL and TFI have not held themselves out as possessing 
particular experience in managing a portfolio of Exchange Traded 
Securities. Second, the distributions of portfolio securities will not 
constitute a taxable event, so the Partners will, in determining 
whether to hold or sell the securities, control the timing of 
realization of capital gains. Third, in-kind distributions on 
termination are an efficient way of winding up the BDC's affairs and 
avoiding premature dispositions of portfolio investments.

Applicants' Conditions

    Applicant agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The relief will only apply to the distribution in-kind by the 
BDCs of Exchange Traded Securities.
    2. All portfolio securities distributed in-kind pursuant to the 
proposed relief will be valued at the average of the closing bid and 
asked prices at which the relevant securities were quoted on the 
relevant exchange or system during the five trading days immediately 
preceding the distribution.
    3. The BDCs agree to use all reasonable endeavors to ensure that 
portfolio securities that are the subject of an in-kind distribution 
are transferred to limited partners as soon as practicable following 
their valuation and in any event within 30 days thereof.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-24369 Filed 9-23-96; 8:45 am]
BILLING CODE 8010-01-M