[Federal Register Volume 62, Number 68 (Wednesday, April 9, 1997)]
[Rules and Regulations]
[Pages 17512-17529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8950]
[[Page 17511]]
_______________________________________________________________________
Part VII
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 270
Privately Offered Investment Companies; Final Rule
Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Rules
and Regulations
[[Page 17512]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release No. IC-22597, International Series Release No. 1071, File No.
S7-30-96]
RIN 3235-AH09
Privately Offered Investment Companies
AGENCY: Securities and Exchange Commission
ACTION: Final rules.
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SUMMARY: The Commission is adopting rules under the Investment Company
Act of 1940 to implement provisions of the National Securities Markets
Improvement Act of 1996 that apply to privately offered investment
companies. The rules define certain terms for purposes of the new
exclusion from regulation under the Investment Company Act for
privately offered investment companies whose investors are all highly
sophisticated investors, termed ``qualified purchasers.'' The rules
also address certain transition issues relating to existing privately
offered investment companies that have no more than 100 investors and
other matters concerning privately offered investment companies.
EFFECTIVE DATE: The rules become effective on June 9, 1997.
FOR FURTHER INFORMATION CONTACT: David P. Mathews, Senior Counsel,
Nadya B. Roytblat, Assistant Office Chief, or Kenneth J. Berman,
Assistant Director, at (202) 942-0690, Office of Regulatory Policy,
Division of Investment Management, Mail Stop 10-2, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Requests for formal interpretative advice should be directed to the
Office of Chief Counsel at (202) 942-0659, Division of Investment
Management, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Mail Stop 10-6, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission today is adopting rules 2a51-
1, 2a51-2, 2a51-3, 3c-1, 3c-5 and 3c-6 [17 CFR 270.2a51-1, .2a51-2,
.2a51-3, .3c-1, .3c-5 and .3c-6] under the Investment Company Act of
1940 [15 U.S.C. 80a] (the ``Investment Company Act'' or ``Act'').
Table of Contents:
Executive Summary
I. Background
A. Statutory Exclusions for Privately Offered Funds
B. Amendments to Section 3(c)(1)
C. The Commission's Rule Proposals
II. Rules Relating to Section 3(c)(7) Funds
A. Investments and Other Matters
1. Qualified Institutional Buyers as Qualified Purchasers
2. Definition of Investments
a. Securities
b. Real Estate
c. Commodity Interests, Commodities and Financial Contracts
d. Cash and Cash Equivalents
e. Other Types of Investments
3. Determining the Amount of Investments
a. Value of Investments
b. Deductions from Amount of Investments
i. Certain Indebtedness
ii. Other Payments
4. Jointly Held Investments
5. Investments Held by Certain Affiliated Entities
6. Reasonable Belief
7. Retirement Plans and Other Forms of Holding Investments
8. Pension and Retirement Plans as Qualified Purchasers
9. Other Issues Relating to Qualified Purchasers
B. Definitions of Beneficial Ownership and Other Issues Relating
to the Grandfather and Consent Provisions
1. The Grandfather Provision
a. Background
b. Operation of the Rule
c. Interpretative Issues Relating to the Grandfather Provision
i. Scope of the Grandfather Provision
ii. ``Net Assets''
2. The Consent Provision
a. Definition of Beneficial Owner
b. Required Consent
C. Conforming Rule
D. Non-Exclusive Safe Harbor for Certain Section 3(c)(7) Funds
III. Other Rules Relating to Privately Offered Funds
A. Section 3(c)(1) Funds
1. Transition Rule
2. Applicability of the Amended Look-Through Provision
B. Investments by Knowledgeable Employees
C. Involuntary Transfers
IV. Cost/Benefit Analysis and Effects on Competition, Efficiency and
Capital Formation
V. Summary of Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Rules
Executive Summary
The Commission is adopting rules to implement certain provisions of
the National Securities Markets Improvement Act of 1996 (the ``1996
Act''). The 1996 Act, among other things, added section 3(c)(7) to the
Investment Company Act to create a new exclusion from regulation under
the Act for privately offered investment companies that sell their
securities solely to ``qualified purchasers'' owning or investing on a
discretionary basis a specified amount of ``investments'' (``Section
3(c)(7) Funds''). The 1996 Act also amended section 3(c)(1) of the
Investment Company Act, which excludes from regulation under the Act
privately offered investment companies with 100 or fewer ``beneficial
owners'' (``Section 3(c)(1) Funds''). Reflecting a relationship between
section 3(c)(1) and new section 3(c)(7), the 1996 Act contains
provisions that permit an existing Section 3(c)(1) Fund to convert into
a Section 3(c)(7) Fund or invest in a Section 3(c)(7) Fund as a
qualified purchaser, subject to certain requirements designed to
protect the Section 3(c)(1) Fund's existing ``beneficial owners.''
The 1996 Act requires the Commission to prescribe rules defining
the terms ``investments'' and ``beneficial owner'' relevant to the new
provisions by April 9, 1997. Other changes to the provisions of the
Investment Company Act relating to privately offered investment
companies require Commission rulemaking as well. The Commission is
adopting rules under the Investment Company Act that:
Define the term ``investments'' for purposes of the
qualified purchaser definition;
Define the term ``beneficial owner'' for purposes of the
provisions that permit an existing Section 3(c)(1) Fund to convert into
a Section 3(c)(7) Fund or to be treated as a qualified purchaser;
Clarify certain interpretative issues under section
3(c)(7);
Permit certain Section 3(c)(1) Funds to rely on the pre-
1996 Act provisions of section 3(c)(1) rather than restructure their
existing relationships with investors;
Permit knowledgeable employees of a Section 3(c)(1) Fund
or a Section 3(c)(7) Fund (referred to collectively in this Release as
``privately offered funds'' or ``funds''), and knowledgeable employees
of certain affiliates of these Funds, to invest in the Funds; and
Address transfers of securities in a privately offered
fund when the transfer was a gift or caused by divorce or death.
The rules reflect modifications suggested by commenters that are
designed to make the rules less complex and easier to apply, consistent
with the policies underlying the Investment Company Act and the 1996
Act's provisions relating to privately offered funds.
I. Background
A. Statutory Exclusions for Privately Offered Funds
Section 3(c)(1) of the Investment Company Act excludes from
regulation under the Act certain privately offered investment companies
``whose
[[Page 17513]]
outstanding securities (other than short-term paper) are beneficially
owned by not more than one hundred persons.'' 1 A wide variety of
investment vehicles rely on section 3(c)(1), ranging from small groups
of individual investors, such as investment clubs, to venture capital
and other investment pools designed primarily for sophisticated
investors. 2
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\1\ 15 USC 80a-3(c)(1). In addition, the Section 3(c)(1) Fund
must be an issuer that ``is not making and does not presently
propose to make a public offering of its securities.'' Id.
\2\ See Division of Investment Management, SEC, Protecting
Investors: A Half Century of Investment Company Regulation
(hereinafter Protecting Investors Report) at 104 (1992).
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The 1996 Act 3 added new section 3(c)(7) of the Investment
Company Act to create an alternative exclusion for investment companies
that sell their securities solely to investors who are ``qualified
purchasers.'' 4 As is the case for a Section 3(c)(1) Fund, a
Section 3(c)(7) Fund cannot make, or propose to make, a public offering
of its securities. 5
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\3\ The National Securities Markets Improvement Act of 1996,
Pub. L. No. 104-290 (1996) (codified in scattered sections of the
United States Code).
\4\ 15 U.S.C. 80a-3(c)(7). For the history of the development of
section 3(c)(7), see Private Investment Companies, Investment
Company Act Release No. IC-22405 (Dec. 18, 1996) [61 FR 68100 (Dec.
26, 1996)] (hereinafter Proposing Release) at nn.3-9 and
accompanying text.
\5\ Section 3(c)(7) of the Act. While the legislative history of
the 1996 Act does not explicitly discuss section 3(c)(7)'s
limitation on public offerings by Section 3(c)(7) Funds, the
limitation appears to reflect Congress's concerns that
unsophisticated individuals not be inadvertently drawn into a
Section 3(c)(7) Fund. See The Investment Company Act Amendments of
1995: Hearing on H.R. 1495 before the Subcomm. on Telecommunications
and Finance of the Comm. on Commerce, House of Representatives,
104th Cong., 1st Sess. 53 (1995) (hereinafter House Hearings)
(testimony of Matthew P. Fink, President, Investment Company
Institute, urging that section 3(c)(7) include a public offering
limitation). Section 3(c)(1)'s limitation on public offerings has
been interpreted to permit ``transactions by an issuer not involving
any public offering'' under section 4(2) of the Securities Act of
1933 (``Securities Act'') [15 U.S.C. 77d(2)]. See, e.g., Engelberger
Partnerships (Dec. 7, 1981). The Commission believes that section
3(c)(7)'s public offering limitation should be interpreted in the
same manner as the limitation in section 3(c)(1).
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New section 2(a)(51)(A) of the Investment Company Act defines the
term qualified purchaser as (i) any natural person who owns not less
than $5 million in investments (as defined by the Commission), 6
(ii) a family-owned company (``Family Company'') that owns not less
than $5 million in investments, 7 (iii) certain trusts, 8 and
(iv) any other person (e.g., an institutional investor) that owns and
invests on a discretionary basis not less than $25 million in
investments.9
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\6\ Section 2(a)(51)(A)(i) of the Act [15 U.S.C. 80a-
2(a)(51)(A)(i)]. The 1996 Act directed the Commission to prescribe
rules defining the term ``investments'' by April 9, 1997. 15 U.S.C.
80a-2 note.
\7\ A Family Company is a company ``that is owned directly or
indirectly by or for 2 or more natural persons who are related as
siblings or spouse (including former spouses), or direct lineal
descendants by birth or adoption, spouses of such persons, the
estates of such persons, or foundations, charitable organizations,
or trusts established by or for the benefit of such persons * * *
*'' Section 2(a)(51)(A)(ii) of the Act [15 U.S.C. 80a-
2(a)(51)(A)(ii)].
\8\ A trust may be a qualified purchaser if (i) it was not
formed for the specific purpose of acquiring the securities offered,
and (ii) the trustee or other person authorized to make decisions
with respect to the trust, and each settlor or other person who has
contributed assets to the trust, are qualified purchasers. Section
2(a)(51)(A)(iii) of the Act [15 U.S.C. 80a-2(a)(51)(A)(iii)].
\9\ A qualified purchaser that meets the $25 million threshold
may act for its own account or for the accounts of other qualified
purchasers. See section 2(a)(51)(A)(iv) of the Act [15 U.S.C. 80a-
2(a)(51)(A)(iv)].
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Section 3(c)(7)(B) includes a ``grandfather'' provision
(``Grandfather Provision'') that permits an existing Section 3(c)(1)
Fund to convert into a Section 3(c)(7) Fund (``Grandfathered
Fund'').10 The outstanding securities of a Grandfathered Fund may
be beneficially owned by as many as 100 persons that are not qualified
purchasers, provided that these persons acquired the securities of the
Grandfathered Fund on or before September 1, 1996.11 The
Grandfather Provision is designed to allow an existing Section 3(c)(1)
Fund wishing to avail itself of section 3(c)(7) to continue its
existing relationships with investors that are not qualified
purchasers.12
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\10\ 15 U.S.C. 80a-3(c)(7)(B).
\11\ Section 3(c)(7)(B)(i)(I) of the Act [15 U.S.C. 80a-
3(c)(7)(B)(i)(I)].
\12\ See S. Rep. No. 293, 104th Cong., 2d Sess. 23 (1996)
(hereinafter Senate Report); H.R. Rep. No. 622, 104th Cong., 2d
Sess. 51 (1996) (hereinafter House Report). These Reports relate to
bills that were eventually enacted as the 1996 Act.
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The Grandfather Provision requires the Grandfathered Fund, prior to
the conversion, to provide each beneficial owner of its securities (i)
notice of the Fund's intention to become a Section 3(c)(7) Fund and
(ii) an opportunity to redeem the owner's interest in the Fund.13
The 1996 Act directs the Commission to define the term ``beneficial
owner'' for this purpose.14 The 1996 Act also requires an existing
privately offered fund that wishes to become a qualified purchaser to
obtain the consent of certain beneficial owners of its securities and
certain other persons (the ``Consent Provision'').15
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\13\ Section 3(c)(7)(B)(ii) of the Act [15 U.S.C. 80a-
3(c)(7)(B)(ii)].
\14\ 15 U.S.C. 80a-3 note.
\15\ Section 2(a)(51)(C) of the Act [15 U.S.C. 80a-2(a)(51)(C)].
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B. Amendments to Section 3(c)(1)
To prevent circumvention of the 100-investor limit, section
3(c)(1)(A) (the ``Look-Through Provision'') requires, in some
instances, that a fund seeking to rely on section 3(c)(1) ``look
through'' certain companies (e.g., corporations, partnerships and other
investors that are not natural persons) that hold its voting securities
and count the company's security holders as beneficial owners of the
fund's securities.16 Prior to the 1996 Act,17 the Look-
Through Provision applied (i) if a company owned 10% or more of a
Section 3(c)(1) Fund's voting securities (``First 10% Test'') and (ii)
more than 10% of the company's total assets consisted of securities of
Section 3(c)(1) Funds generally (``Second 10% Test'').18
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\16\ 15 U.S.C. 80a-3(c)(1)(A). Section 2(a)(42) of the
Investment Company Act [15 U.S.C. 80a-2(a)(42)] defines a voting
security as any security ``presently entitling the owner or holder
thereof to vote for the election of a company.'' See Thomas P. Lemke
and Gerald T. Lins, Private Investment Companies Under Section
3(c)(1), 44 Bus. Law. 401, 416-18 (Feb. 1989) (discussing the types
of non-voting interests that have been treated as voting
securities).
\17\ The 1996 Act was signed into law by President Clinton on
October 11, 1996. The provisions relating to privately offered funds
do not become effective until the earlier of April 9, 1997 or the
date on which the rule defining the term investments is published in
the Federal Register. For purposes of convenience, this Release
assumes that the amendments to section 3(c)(1) are now effective.
\18\ To illustrate the operation of the pre-1996 Act Look-
Through Provision, assume Company A is seeking to rely on section
(3)(c)(1). If one of Company A's security holders, Company B,
beneficially owned 10% or more of Company A's voting securities (the
First 10% Test), then the security holders of Company B would have
been counted as security holders of Company A, unless no more than
10% of Company B's assets consisted of securities of Section 3(c)(1)
Funds (the Second 10% Test). The operation of the pre-1996 Act Look-
Through Provision also is relevant to determining who is a
beneficial owner of a Section 3(c)(1) Fund's securities for purposes
of the Grandfather and Consent Provisions. See section II.B. of this
Release.
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The 1996 Act's amendments to section 3(c)(1) were designed, in
part, to simplify the way in which the number of investors in a fund is
calculated for purposes of the 100-investor limit. The amended Look-
Through Provision does not apply to an investor that is an operating
company. In other words, a Section 3(c)(1) Fund must only look through
an investor to count its shareholders if the investor is an investment
company or a privately offered fund.19 In addition, the Second
[[Page 17514]]
10% Test has been eliminated. As a result, a Section 3(c)(1) Fund must
count all of the shareholders of an investment company or fund investor
that owns 10% or more of the Section 3(c)(1) Fund's voting securities
even if the investor does not have more than 10% of its assets invested
in Section 3(c)(1) Funds.20 These revisions, while generally
narrowing the scope of the Look-Through Provision, have raised
questions regarding the regulatory status of existing Section 3(c)(1)
Funds that have relied on the Second 10% Test.
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\19\ This approach recognizes that an investment in a Section
3(c)(1) Fund by a company that is not itself an investment company
generally does not implicate the concerns that the Look-Through
Provision was intended to address--that the investor may be a
conduit that was created to enable a Section 3(c)(1) Fund to have
indirectly more than 100 investors. See The Securities Investment
Promotion Act of 1996: Hearing on S. 1815 before the Senate Comm. on
Banking, Housing and Urban Affairs, 104th Cong., 2d Sess. 40 (1995)
(testimony of Arthur Levitt, Chairman, SEC).
\20\ This change reflects the view that the private nature of a
Section 3(c)(1) Fund may be brought into question when an investment
company has a substantial investment in the Section 3(c)(1) Fund.
See, e.g., Protecting Investors Report, supra note 2, at 106-09. See
section III.A.2 of this Release for a discussion of when a Section
3(c)(1) Fund should determine whether an investor is subject to the
amended Look-Through Provision.
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C. The Commission's Rule Proposals
On December 26, 1996, the Commission published a release proposing
several rules under the Investment Company Act to implement the
provisions of the 1996 Act relating to privately offered funds
(``Proposing Release'').21 Proposed rule 2a51-1 would define the
term ``investments'' for purposes of the qualified purchaser
definition. Proposed rule 2a51-2 would define the term ``beneficial
owner'' for purposes of the Grandfather and Consent Provisions.
Proposed rule 2a51-3 would provide that a company could not be a
qualified purchaser if it was formed for the specific purpose of
acquiring the securities of a Section 3(c)(7) Fund unless each
beneficial owner of the company's securities is a qualified purchaser.
Proposed rule 3c-7 would address certain issues related to a
Grandfathered Fund and an affiliated Section 3(c)(1) Fund.
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\21\ Proposing Release, supra note 4.
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The Commission also proposed two other rules that the 1996 Act
directed the Commission to adopt. The 1996 Act directed the Commission
to prescribe rules permitting ``knowledgeable employees'' of a
privately offered fund (or knowledgeable employees of the fund's
affiliates) to invest in the fund without causing the fund to lose its
exclusion from regulation under the Investment Company Act.22 The
Commission proposed rule 3c-5 to permit knowledgeable employees to make
such investments.
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\22\ 15 U.S.C. 80a-3 note. The purpose of this provision appears
to be to allow privately offered funds to offer persons who
participate in the funds' management the opportunity to invest in
the fund as a benefit of employment. See House Hearings, supra note
5, at 22-23 (testimony of Barry P. Barbash, Director, Division of
Investment Management, SEC).
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The 1996 Act also directed the Commission to prescribe rules
implementing section 3(c)(1)(B) of the Act.23 Section 3(c)(1)(B)
provides that beneficial ownership of securities of a Section 3(c)(1)
Fund by any person who acquires the securities as a result of ``a legal
separation, divorce, death, or other involuntary event'' will be deemed
to be beneficial ownership by the person from whom the transfer was
made, pursuant to such rules and regulations as the Commission
prescribes.24 The Commission proposed rule 3c-6 to implement
section 3(c)(1)(B) of the Act. The proposed rule also would address
similar transfers of securities issued by Section 3(c)(7) Funds.25
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\23\ 15 USC 80a-3 note.
\24\ 15 USC 80a-3(c)(1)(B).
\25\ See section 3(c)(7)(A) of the Act [15 USC 80a-3(c)(7)(A)]
(permitting certain transfers by qualified purchasers).
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The Commission received letters from 48 commenters concerning the
proposals. While commenters generally supported the proposed rules,
many suggested changes designed to simplify the rules, make them more
flexible or resolve technical issues. The Commission is adopting the
proposed rules with several modifications that reflect, in part, many
of the commenters' suggestions.
II. Rules Relating to Section 3(c)(7) Funds
A. Investments and Other Matters
Rule 2a51-1 under the Investment Company Act defines the term
investments for purposes of determining whether a prospective investor
in a Section 3(c)(7) Fund (``Prospective Qualified Purchaser'') meets
the $5 million/$25 million thresholds.26 Rule 2a51-1 also contains
provisions designed to clarify how the amount of a Prospective
Qualified Purchaser's investments should be determined.
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\26\ The 1996 Act provides that the term investments is to be
defined by Commission rule. 15 USC 80a-2 note. Section 2(a)(51)(B)
of the Act [15 USC 80a-2(a)(51)(B)] also gives the Commission
authority to prescribe such rules and regulations governing
qualified purchasers as the Commission determines are necessary or
appropriate in the public interest or for the protection of
investors.
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1. Qualified Institutional Buyers as Qualified Purchasers
Many commenters suggested that the determination of qualified
purchaser status could be made significantly easier if qualified
institutional buyers (``QIBs''), as defined in rule 144A under the
Securities Act of 1933 (``Securities Act''), were deemed to be
qualified purchasers. Rule 144A generally defines QIBs as certain
institutions (including registered investment companies) that own and
invest on a discretionary basis $100 million of securities of issuers
that are not affiliated with the institution (``QIB Securities'');
banks that own and invest on a discretionary basis $100 million of QIB
Securities and that have an audited net worth of at least $25 million;
and certain registered dealers.27 The Commission believes that it
is generally appropriate to treat QIBs as qualified purchasers for
purposes of section 3(c)(7) in light of the high threshold of
securities ownership that these institutions must meet under rule 144A,
a threshold much higher than the investment ownership threshold
required for qualified purchasers under section 2(a)(51)(A) of the Act.
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\27\ 17 CFR 230.144A(a). In each case, the QIB must be acting
for its own account or the account of another QIB.
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Rule 2a51-1 therefore provides that, with two exceptions, a QIB is
deemed to be a qualified purchaser.28 The first exception relates
to dealers. Under rule 144A, a dealer (other than a dealer acting for a
QIB in a riskless principal transaction) must own and invest on a
discretionary basis $10 million of QIB Securities.29 In order to
coordinate the definition of QIB with the statutory definition of
qualified purchaser, rule 2a51-1 requires the dealer to own and invest
on a discretionary basis $25 million of QIB Securities.30
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\28\ Rule 2a51-1(g)(1) [17 CFR 270.2a51-1(g)(1)]. The QIB must
be acting for its own account, the account of another QIB or the
account of a qualified purchaser. A person's status as a QIB would
be determined based on QIB Securities, not investments as defined by
rule 2a51-1.
\29\ Rule 144A(a)(1)(ii) [17 CFR 230.144A(a)(1)(ii)].
\30\ Rule 2a51-1(g)(1)(i) [17 CFR 270.2a51-1(g)(1)(i)]. A dealer
that does not own and invest on a discretionary basis $25 million of
QIB Securities could still be a qualified purchaser if the dealer
owns and invests on a discretionary basis $25 million of
investments, determined in accordance with rule 2a51-1.
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The second exception relates to employee benefit plans. Rule 144A
includes in its QIB definition certain employee benefit plans, as well
as certain trusts that hold assets of employee benefit plans.31 A
self-directed employee benefit plan (such as a ``401(k)'' plan)
generally would not be
[[Page 17515]]
considered to be a qualified purchaser for purposes of rule 2a51-1;
rather, an employee could invest in a Section 3(c)(7) Fund through a
self-directed plan only if the employee is a qualified
purchaser.32 This provision therefore is not available to a self-
directed plan.33
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\31\ Rule 144A(a)(1)(i)(D) (government employee benefit plans),
(E) (any employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974), and (F) (trust
funds whose participants are exclusively plans of the types
identified in paragraphs (D) and (E)) [17 CFR
230.144A(a)(1)(i)(D),(E), and (F)].
\32\ See infra section II.A.8 of this Release (discussing the
circumstances under which pension and retirement plans can be
treated as qualified purchasers).
\33\ Rule 2a51-1(g)(1)(ii) [17 CFR 270.2a51-1(g)(1)(ii)]
provides that a plan will not be deemed to be acting for its own
account if investment decisions with respect to the plan are made by
the beneficiaries of the plan. In other words, the investment
decision must be made by a qualified purchaser.
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2. Definition of Investments
Rule 2a51-1, as proposed, would have defined investments broadly to
include securities (other than controlling interests in certain
issuers), and real estate, futures contracts, physical commodities, and
cash and cash equivalents held for investment purposes. The Commission
believes that this approach is consistent with the legislative history
of the 1996 Act, which suggests that Congress expected that the
definition of investments would be broader than securities, but that
not every asset be treated as an investment.34 Rather, the
legislative history suggests that the asset should be held for
investment purposes and that the nature of the asset should indicate
that its holder has the investment experience and sophistication
necessary to evaluate the risks of investing in unregulated investment
pools.35
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\34\ See Proposing Release, supra note 4, at nn.29-31 and
accompanying text.
\35\ Id. The legislative history was confined to addressing new
section 3(c)(7), and should not be viewed as suggesting how issues
of investor sophistication should be analyzed in other contexts
under the federal securities laws. Although Section 3(c)(7) Funds
are not subject to regulation under the Investment Company Act,
these Funds and persons who sell their securities are subject to the
antifraud, civil liability, and other applicable provisions of the
federal securities laws. Persons who sell the securities issued by
Section 3(c)(7) Funds should also consider the applicability of the
broker-dealer registration provisions of the Securities Exchange Act
of 1934 [15 USC 78a-78jj] (``Exchange Act'').
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Commenters generally supported the approach of the proposal,
although many commenters suggested alternative approaches to addressing
particular issues. The Commission is adopting the definition of
investments substantially as proposed, with modifications made in view
of the commenters' suggestions, as discussed below.
a. Securities
Rule 2a51-1(b)(1) includes securities within the definition of
investments.36 This approach should result in a broad range of
assets being treated as investments for purposes of the qualified
purchaser definition. Many investment opportunities, such as limited
partnerships and limited liability companies, are offered in the form
of securities.37
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\36\ 17 CFR 270.2a51-1(b)(1).
\37\ See section 2(a)(1) of the Securities Act [15 USC
77b(a)(1)].
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Under the rule, securities that constitute a ``control interest''
in an issuer generally do not come within the definition of
investments.38 Limiting the definition in this manner is designed
to exclude, among other things, controlling ownership interests in
family-owned and other closely-held businesses. These holdings may not
demonstrate the degree of financial sophistication necessary to invest
in unregulated investment pools.
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\38\ The rule excludes from the definition of investments
securities of an issuer that ``controls, is controlled by, or is
under common control with, the person that owns the securities.''
The term ``control'' is defined in section 2(a)(9) of the Act [15
USC 80a-2(a)(9)] as ``the power to exercise a controlling influence
over the management or policies of a company, unless such power is
solely the result of an official position with such company.''
Section 2(a)(9) also provides that a person who owns beneficially,
``either directly or through one or more controlled companies, more
than 25 per centum of the voting securities of a company shall be
presumed to control such company.'' Id.
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The Commission proposed certain exceptions from the control
interest exclusion. The Commission is broadening these exceptions in
certain respects, in light of the suggestions of commenters as
discussed below.
Investment Vehicles. The rule permits control interests in
``investment vehicles'' excluded or exempted from the definition of
investment company by sections 3(c)(1) through 3(c)(9) of the Act or
rule 3a-6 or 3a-7 under the Act to be treated as investments.39
Sections 3(c)(1) through 3(c)(9) and rules 3a-6 and 3a-7 except from
the definition of investment company, in addition to privately offered
funds, certain types of issuers that engage in significant investment-
related activities (i.e., brokers and other financial intermediaries,
banks, insurance companies, finance companies, and certain structured
finance vehicles).40
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\39\ Rule 2a51-1(a)(3) [17 CFR 270.2a51-1(a)(3)] (defining the
term ``investment vehicle'').
\40\ 15 USC 80a-3(c)(1) through (9); 17 CFR 270.3a-6 (exemption
for foreign banks and insurance companies) and .3a-7 (exemption for
certain structured finance vehicles).
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A control interest in these types of companies generally suggests a
significant degree of investment experience. In a change from the
proposal, the rule also specifies that a control interest in a
commodity pool may be treated as an investment.41 As in the case
of a control interest in an investment company, a control interest in a
commodity pool may suggest a significant degree of investment
experience on the part of the Prospective Qualified Purchaser.
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\41\ Rule 2a51-1(a)(3).
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Public Companies. The rule, as proposed, would have included in the
definition of investments a control interest in a ``listed'' company
that is not a majority-owned subsidiary of the Prospective Qualified
Purchaser. A listed company would have been defined as a company whose
equity securities are listed on a national securities exchange, traded
on the National Association of Securities Dealers Automated Quotation
System (NASDAQ), or listed on a designated offshore securities market.
Commenters generally supported treating control interests in listed
companies as investments, but suggested that the category should be
broadened to include control interests (including majority ownership
interests) in any public company.
The Commission agrees, and has revised the rule to include in the
definition of investments a control interest in a company that files
periodic reports in accordance with the Securities Exchange Act of
1934.42 The Commission has concluded that a person that holds a
control interest in a reporting company is likely to have significant
experience in financial matters and investments. The fact that the
control interest is a majority interest should not affect this
analysis. As proposed, a control interest in an issuer whose securities
are listed on a designated offshore securities market (as defined by
Regulation S under the Securities Act) also may be treated as an
investment.43
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\42\ Rule 2a51-1(b)(1)(ii) [17 CFR 270.2a51-1(b)(1)(ii)]. A
control interest in an issuer may be treated as an investment if the
issuer files reports pursuant to section 13 or 15(d) of the Exchange
Act [15 USC 78m and 78o(d)].
\43\ Rule 2a51-1(a)(7)(ii) [17 CFR 270.2a51-1(a)(7)(ii)]; 17 CFR
230.901 through .904.
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Large Private Companies. Many commenters suggested that a control
interest in a large private operating company should be treated as an
investment. These commenters asserted that the very size of such a
company suggests that a person who controls it is sophisticated and has
significant financial acumen.44 The commenters
[[Page 17516]]
also pointed out that sophisticated investors, such as venture capital
investors, often hold control interests in private companies, and that
not treating these holdings as investments could result in these
investors not being treated as qualified purchasers.
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\44\ Commenters did not agree, however, on how to identify such
a company. Several commenters suggested that the definition be based
on the company's shareholders' equity (e.g., $25 million or $50
million). Other commenters suggested that the definition be based on
the company's revenues, assets or going concern value. Still other
commenters suggested that a control interest should be included if
its value was in excess of a specified amount.
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Under the rule as adopted, a control interest in a company that has
shareholders' equity of $50 million or more may be treated as an
investment.45 The Commission believes that this change should
respond to the concerns of the commenters in a manner consistent with
the legislative history indicating Congress' view that control
interests in family-owned and other small businesses may not evidence
investment sophistication.
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\45\ Rule 2a51-1(b)(1)(iii) [17 CFR 270.2a51-1(b)(1)(iii)]. The
company must have had $50 million of shareholders' equity on its
most recent financial statements (whether annual or quarterly). Id.
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b. Real Estate
Rule 2a51-1(b)(2) includes real estate held for investment purposes
within the definition of investments.46 Most commenters strongly
supported treating real estate as an investment.
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\46\ 17 CFR 270.2a51-1(b)(2).
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Consistent with the examples provided by the legislative history of
the 1996 Act, real estate is not considered to be held for investment
purposes if the real estate is used by the Prospective Qualified
Purchaser or a member of the Prospective Qualified Purchaser's family
(``Related Person'') for personal purposes (e.g., as a personal
residence).47 The term ``personal purposes'' is derived from the
Internal Revenue Code provision that addresses circumstances under
which a taxpayer is allowed deductions with respect to certain
``dwelling units.'' 48 Thus, residential property may be treated
as an investment if it is not treated as a residence for tax purposes.
Many commenters agreed that the reference to the Internal Revenue Code
provisions is appropriate because it would allow a Prospective
Qualified Purchaser to determine whether residential real estate is an
investment based on the same provisions he or she would apply in
determining whether certain expenses related to the property are
deductible for purposes of his or her tax returns.
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\47\ Rule 2a51-1(c)(1) [17 CFR 270.2a51-1(c)(1)]. Rule 2a51-
1(a)(8) [17 CFR 270.2a51-1(a)(8)] defines ``related person'' as a
sibling, spouse or former spouse of the prospective qualified
purchaser, or a direct lineal descendant or ancestor by birth or
adoption of the Prospective Qualified Purchaser, or a spouse of the
descendant or ancestor.
\48\ Internal Revenue Code (``IRC'') section 280A(d) [26 USC
280A(d)]. Rule 2a51-1(c) [17 CFR 270.2a51-1(c)] treats residential
real estate as an investment if it is not treated as a dwelling unit
used as a residence in determining whether deductions for
depreciation and other items are allowable under the IRC. Section
280A provides, among other things, that a taxpayer uses a dwelling
unit during the taxable year as a residence if he or she uses such
unit for personal purposes for a number of days that exceeds the
greater of 14 days or 10 percent of the number of days during which
the unit is rented at a fair market value.
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Property owned by a Prospective Qualified Purchaser that has been
used by the Prospective Qualified Purchaser or a Related Person as a
place of business or in connection with the conduct of a trade or
business (``Business-Related Property'') also is not considered to be
held for investment purposes.49 While Business-Related Property
may have been acquired with an investment goal in mind, these holdings
may not be indicative of extensive experience in the financial or real
estate markets and may have been acquired for reasons other than the
potential investment merits of the property.50
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\49\ Rule 2a51-1(c)(1).
\50\ Real property held by a Prospective Qualified Purchaser
primarily engaged in the real estate investment and development
business as part of that business may be treated as an investment.
Id.
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c. Commodity Interests, Commodities and Financial Contracts
Rule 2a51-1(b)(3) includes contracts for the purchase or sale of a
commodity for future delivery (``Commodity Interests'') held for
investment purposes within the definition of investments.51 Most
commenters agreed that Commodity Interests should be treated as
investments.
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\51\ 17 CFR 270.2a51-1(b)(3). Paragraph (a)(1) of rule 2a51-1
[17 CFR 270.2a51-1(a)(1)] defines Commodity Interests to mean
commodity futures contracts, options on commodity futures contracts,
and options on physical commodities traded on or subject to the
rules of (a) any contract market designated for trading such
transactions under the Commodity Exchange Act (the ``CEA'') [7 USC
1] and the rules thereunder; or (b) any board of trade or exchange
outside the United States, as contemplated in Part 30 of the rules
under the CEA. 17 CFR 30.1 through 30.11. Commodity Interests held
as part of a business by a Prospective Qualified Purchaser that is
primarily engaged in the business of investing or trading in
Commodity Interests may be treated as investments. Rule 2a51-1(c)(2)
[17 CFR 270.2a51-1(c)(2)].
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The rule also includes in the definition of investments commodities
that are held in physical form and for investment purposes.52 This
provision recognizes that many investors hold gold, silver or other
commodities as part of their investment portfolios. While some
commenters suggested that the definition include any commodity, other
commenters stated that the rule's definition would include most
commodities held as investments.
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\52\ Rule 2a51-1(b)(4) [17 CFR 270.2a51-1(b)(4)]. Physical
commodities, for purposes of the rule, are defined as any commodity
with respect to which a Commodity Interest is traded on a domestic
or foreign commodities exchange. Rule 2a51-1(a)(5) [17 CFR 270.2a51-
1(a)(5)].
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The rule has been revised from the proposal to include ``swaps''
and similar financial contracts in the definition of
investments.53 The Commission agrees with the commenters that,
because these instruments often are used in connection with
investments, it is appropriate to treat them as investments.54
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\53\ Rule 2a51-1(b)(5) [17 CFR 270.2a51-1(b)(5)] includes in the
definition of investments ``financial contracts'' as defined by
section 3(c)(2) of the Act [15 USC 80a-3(c)(2)]. This definition was
added to section 3(c)(2) by the 1996 Act in order to expand the
exclusion from the definition of investment company applicable to
securities brokers to include certain other market intermediaries
(e.g., ``swap'' dealers). Section 3(c)(2) provides, in pertinent
part, that a financial contract is any arrangement that--
(I) takes the form of an individually negotiated contract,
agreement, or option to buy, sell, lend, swap, or repurchase, or
other similar individually negotiated transaction commonly entered
into by participants in the financial markets;
(II) is in respect of securities, commodities, currencies,
interest or other rates, other measures of value, or any other
financial or economic interest similar in purpose or function to any
of the foregoing; and
(III) is entered into in response to a request from a counter
party for a quotation, or is otherwise entered into and structured
to accommodate the objectives of the counter party to such
arrangement.
Some ``financial contracts'' are also securities, and thus
investments under rule 2a51-1(b)(1). See In re BT Securities Corp.,
Exchange Act Release No. 35136 (Dec. 22, 1994).
\54\ As with other investments, a financial contract can be
valued at its fair market value or cost. See section II.A.3.a of
this Release. The rule does not permit a financial contract to be
valued at its notional amount (e.g., the principal amount upon which
the interest payments in a swap transaction are based).
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d. Cash and Cash Equivalents
Rule 2a51-1(b)(7) includes cash and cash equivalents held for
investment purposes (``Cash'') in the definition of investments.55
Most commenters agreed that treating Cash as an investment was
appropriate because many investors are likely at any given time to have
a component of their investment portfolio in Cash.56 In response
to a request for comment in the Proposing Release whether the
``investment purposes'' test for Cash needed further elaboration, many
commenters responded that the
[[Page 17517]]
``investment purposes'' test was an appropriate formulation.
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\55\ 17 CFR 270.2a51-1(b)(7).
\56\ For example, an investor may have a significant amount of
Cash as a result of a recent sale of an investment or because market
conditions resulted in the investor taking a ``defensive'' position.
Cash also may be integral to certain sophisticated investment
strategies (such as hedging).
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The rule clarifies certain issues related to Cash that were
addressed in the Proposing Release or raised by commenters. The rule
specifies that the net cash surrender value of an insurance policy may
be considered to be Cash.57 The rule also specifies that, for
purposes of the rule, bank deposits, certificates of deposit, bankers
acceptances and similar bank instruments may be treated as Cash.58
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\57\ Rule 2a51-1(b)(7). See also Proposing Release, supra note
4, at n.48.
\58\ Rule 2a51-1(b)(7). One commenter suggested that the rule be
specific on this point because certain bank instruments with longer
maturities might not be considered to be either cash equivalents or
securities. The rule does not specify that securities of a money
market fund are Cash because they are securities and would be
investments under rule 2a51-1(b)(1).
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The rule also provides that a Prospective Qualified Purchaser that
is a privately offered fund or a commodity pool may treat as
investments unfunded capital commitments (i.e., firm agreements by
investors to provide these Prospective Qualified Purchasers with cash
upon request).59 Several commenters noted that privately offered
funds often do not require their investors to provide the moneys the
investors have committed to invest in the fund until investment
opportunities become available to the fund. The fund therefore has
access to cash that will be used for investment purposes, through
commitments that reflect investors' assessment of the fund sponsor's
investment expertise. The Commission thus considers it appropriate to
treat these capital commitments in a manner similar to Cash.
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\59\ Rule 2a51-1(b)(6) [17 CFR 270.2a51-1(b)(6)].
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e. Other Types of Investments
The Commission requested comment whether certain assets (such as
jewelry, artwork, antiques and other collectibles) that may be held by
some for investment purposes should be treated as investments. While
several commenters suggested that such assets should be included in the
definition of investments, others agreed that they should be excluded
because these holdings do not necessarily suggest any experience in the
financial markets or investing in unregulated investment pools.60
The Commission agrees with this analysis and the rule therefore does
not include such assets in the definition of investments.
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\60\ See also American Bar Association, Section of Business Law,
Committee on Federal Regulation of Securities, Task Force on Hedge
Funds, Report on Section 3(c)(1) of the Investment Company Act of
1940 and Proposals to Create an Exception for Qualified Purchasers,
51 Bus. Law. 773, 778 (Dec. 5, 1995) (hereinafter Hedge Funds Task
Force Report) (suggesting that automobiles, jewelry and art be
excluded from investments for purposes of measuring financial
sophistication).
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3. Determining the Amount of Investments
Rule 2a51-1 permits the amount of a Prospective Qualified
Purchaser's investments to be based either on the market value of the
investments or on their cost. In either case, the rule requires
indebtedness incurred to acquire investments to be deducted from the
amount of investments owned as discussed below.
a. Value of Investments
Rule 2a51-1(d) specifies that the value of an investment may be
either its market value on the most recent practicable date or its
cost.61 Most commenters supported this approach. The rule as
adopted has been reformulated to state that the value of an investment
may be either its cost or ``fair market value'' on the most recent
practicable date. This change is designed to clarify that, in the
absence of a recent market value, an investment's value could be
determined by an appraisal by an independent third party.62
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\61\ 17 CFR 270.2a51-1(d). In the case of a security, market
value could be determined in the manner described in rule 17a-7(b)
under the Investment Company Act [17 CFR 270.17a-7(b)].
\62\ See Proposing Release, supra note 4, at n.53.
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The rule does not specify which valuation methodology should be
used in a particular circumstance. A Section 3(c)(7) Fund could allow
Prospective Qualified Purchasers to provide the amount of their
investments based on either methodology, since either methodology is an
appropriate way to measure a Prospective Qualified Purchaser's
investment experience.
b. Deductions from Amount of Investments
i. Certain Indebtedness
The rule, as proposed, would have required the deduction from the
amount of a Prospective Qualified Purchaser's investments (i) of any
indebtedness incurred to acquire the investments and (ii) of certain
mortgage-related indebtedness incurred during the preceding 12 months
(``Mortgage Deduction''). These provisions, (collectively, the
``Indebtedness Deduction Provision'') reflected the Commission's belief
that, in establishing the $5 million/$25 million investment thresholds,
Congress intended that qualified purchasers generally be limited to
persons who own a specified amount of investments. This intention would
appear to be inconsistent with permitting a Prospective Qualified
Purchaser to accumulate the requisite amount of investments through
borrowing or similar means.
Most commenters objected to the Indebtedness Deduction Provision as
unnecessary and inconsistent with Congress's intent. Some commenters,
however, believed that the provision was appropriate and consistent
with the policies underlying section 3(c)(7). Many commenters, whether
opposing or supporting the provision, suggested that it be revised in
certain respects to make it easier to apply.
After considering all of the comments received and the 1996 Act's
legislative history, the Commission continues to believe that the
Indebtedness Deduction Provision appropriately implements Congress's
intent. The Commission is therefore adopting this provision
substantially as proposed with one change designed to simplify its
application. The rule, as adopted, does not include the Mortgage
Deduction. This deduction was designed to preclude a personal residence
or a vacation home from, in effect, being converted into Cash or
another type of investment for purposes of meeting the $5 million
threshold. Some commenters suggested that this provision was overly
complex and would be difficult to administer. Other commenters
suggested generally that the Indebtedness Deduction Provision, if
included in the rule, be limited to indebtedness incurred to acquire
investments. These commenters noted that indebtedness secured by a
mortgage could be incurred for various reasons other than to acquire
investments and that the provision was therefore overbroad.
Upon reflection, the Commission has concluded that the Mortgage
Deduction is unnecessary. As discussed above, the rule requires that
indebtedness incurred to acquire an investment be deducted.63 If a
mortgage loan (or any other type of loan) is incurred to acquire, or
for the purpose of acquiring, an investment, the outstanding amount of
such loan would have to be deducted.64
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\63\ Rule 2a51-1(e) [17 CFR 270.2a51-1(e)].
\64\ It also should be noted that Cash held for investment
purposes is an investment. Therefore, if the cash proceeds of a loan
are treated as an investment, the outstanding amount of the loan
must be deducted.
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Consistent with these changes to the Indebtedness Deduction
Provision, the rule's provision with respect to indebtedness deductions
by Family Companies has been significantly simplified. Certain proposed
deductions relating to indebtedness incurred by a
[[Page 17518]]
Family Company or its owners are not required by the adopted
rule.65 The rule, as adopted, requires a Family Company to deduct
the amount of any outstanding indebtedness incurred by the Family
Company or any of the Family Company's owners to acquire the
investments held by the Family Company.66
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\65\ Under the proposed rule, a Family Company also would have
been required to deduct (i) the amount of any real estate loans that
any owner of the Family Company would have had to deduct if the
owner were the Prospective Qualified Purchaser; (ii) the amount of
any indebtedness incurred by the Family Company during the preceding
12 months to the extent that the principal amount of the
indebtedness exceeded the fair market value of any assets of the
Family Company other than investments; and (iii) the amount of any
indebtedness incurred during the preceding 12 months by an owner of
the Family Company or by a related person of an owner of the Family
Company and guaranteed by the Family Company. See Proposing Release,
supra note 4, at nn.59-61 and accompanying text.
\66\ Rule 2a51-1(f) [17 CFR 270.2a51-1(f)].
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ii. Other Payments
The rule, as proposed, would have required a Prospective Qualified
Purchaser who is a natural person to deduct certain payments that he or
she received during the preceding 12 months relating to, among other
things, lawsuits, insurance policies, divorce and separation
agreements, and gifts and bequests. This provision (``Other Payments
Provision'') was designed to assure that Prospective Qualified
Purchasers who are natural persons would be required to deduct from the
amount of their investments certain amounts received during the
preceding 12 months that could inflate the amount of their investments
(particularly Cash) without reflecting any investment experience.
As with the Indebtedness Deduction Provision, most commenters
objected to the Other Payments Provision as overly complex and
potentially difficult to administer. One commenter, however, believed
that the Other Payments Provision was consistent with the policies
underlying section 3(c)(7) and suggested that the Commission consider
additional deductions (such as the proceeds from the sale of a family-
owned business).
After considering the comments received, the Commission has
determined not to adopt the Other Payments Provision at this time.
Similarly, the provision that would have required Other Payments
received by owners of a Family Company to be deducted by the Family
Company is not being adopted. At this time, the burdens that might be
associated with the Other Payments Provision appear to outweigh its
benefits to investors. The Commission may revisit this issue in the
future if experience with section 3(c)(7) suggests that a provision
similar to the Other Payments Provision is necessary or appropriate in
the public interest or for the protection of investors.
4. Jointly Held Investments
The rule provides that, in determining whether a natural person is
a qualified purchaser, the person may include in the amount of his or
her investments any investments held jointly with the person's spouse
(``Joint Investments'').67 Thus, a person who owns $3 million of
investments individually and $2 million of Joint Investments would be a
qualified purchaser. The spouse also would be a qualified purchaser if
he or she owned, individually, an additional $3 million of investments.
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\67\ Rule 2a51-1(g)(2) [17 CFR 270.2a51-1(g)(2)]. Joint
Investments also include investments in which the person shares with
his or her spouse a community property or similar shared ownership
interest. Id. In determining the amount of Joint Investments, the
Prospective Qualified Purchaser must deduct from the amount of any
Joint Investments any outstanding indebtedness incurred by the
spouse to acquire the investments. Id.
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A spouse who is not a qualified purchaser can hold a joint interest
in a Section 3(c)(7) Fund with his or her qualified purchaser
spouse.68 The Commission requested comment whether spouses who
hold $5 million in investments in the aggregate (regardless of whether
the investments are held jointly) should be treated as qualified
purchasers if they make a joint investment in a Section 3(c)(7) Fund.
All the commenters that addressed this issue agreed that permitting
such investments would be appropriate. The rule as adopted reflects
this approach.69 The Commission believes that this approach will
simplify the determination of whether spouses making a joint investment
are qualified purchasers.
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\68\ Section 2(a)(51)(A)(i) of the Act.
\69\ Rule 2a51-1(g)(2). Consistent with this approach, the
Commission believes that, for purposes of determining the number of
beneficial owners of voting securities of a Section 3(c)(1) Fund,
securities of the Section 3(c)(1) Fund jointly owned by both spouses
should be considered to be owned by one beneficial owner. This
approach is a departure from an earlier staff position on this
issue. See, e.g., Joseph H. Moss (Feb. 27, 1984).
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5. Investments Held by Certain Affiliated Entities
The rule, as proposed, would have permitted a parent company that
is a Prospective Qualified Purchaser to aggregate investments it owns
with those owned by its majority-owned subsidiaries, provided that the
subsidiaries' investments were managed under the direction of the
parent company.70 Most commenters agreed with this approach, but
suggested that the provision should address a broader range of
corporate and other inter-company structures. Commenters suggested, for
example, that when a company that is part of a group of related
companies is making an investment in a Section 3(c)(7) Fund, it is not
necessary to focus on which of these companies actually owns or manages
the investments.
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\70\ This approach is designed to recognize, for example,
holding company structures necessitated by legal, tax or other
factors that may require or make advantageous the holding of
investments in separate corporate entities. See, e.g., Resale of
Restricted Securities; Changes To Method of Determining Holding
Period of Restricted Securities Under Rules 144 and 145, Securities
Act Release No. 6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30, 1990)]
(describing bank holding company structures).
---------------------------------------------------------------------------
The Commission agrees with this analysis. The rule as adopted
permits the investments of a parent company and its majority-owned
subsidiaries to be aggregated, regardless of which company is the
Prospective Qualified Purchaser.71
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\71\ Rule 2a51-1(g)(3) [17 CFR 270.2a51-1(g)(3)]. Several
commenters noted that the rule, as proposed, would not have extended
to non-corporate structures. The rule as adopted refers generally to
``companies'' rather than ``corporations.'' Id.
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6. Reasonable Belief
The rule, as proposed, would have permitted a Section 3(c)(7) Fund
or a person acting on its behalf, when determining whether a
Prospective Qualified Purchaser is a qualified purchaser, to rely upon
audited financial statements, brokerage account statements and other
appropriate information and certifications provided by the Prospective
Qualified Purchaser or its representatives, as well as upon publicly
available information as of a recent date.72 The rule would have
required that reliance on this information be reasonable and that the
Section 3(c)(7) Fund or its representatives, after reasonable inquiry,
have no basis for believing that the information is incorrect in any
material respect.
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\72\ Proposed rule 2a51-1(j).
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Commenters generally agreed that the proposed rule was consistent
with the suggestion in the 1996 Act's legislative history that the
Commission use its rulemaking authority to adopt rules with respect to
``reasonable care defenses.'' 73 The commenters suggested,
[[Page 17519]]
however, that the rule should conform to the provisions of other
Commission rules under the Securities Act that address transactions
involving certain categories of sophisticated investors, such as rule
506 of Regulation D (offerings to ``accredited investors'' and
``sophisticated investors'') and rule 144A (sales to QIBs).74
These rules focus on whether an issuer ``reasonably believes'' that a
purchaser of securities satisfies certain criteria for investors
specified in the rules.75 Rule 2a51-1, as adopted, reflects this
approach.76
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\73\ The legislative history of the 1996 Act indicates that the
Commission can use its rulemaking authority provided in section
2(a)(51) of the Act [15 USC 80a-2(a)(51)] to ``develop reasonable
care defenses when an issuer relying on the qualified purchaser
exception in good faith sells securities to a purchaser that does
not meet the qualified purchaser definition.'' House Report, supra
note 12, at 53.
\74\ 17 CFR 230.144A, .506.
\75\ 17 CFR 230.144A(d)(1), .501(a).
\76\ Rule 2a51-1(h) [17 CFR 270.2a51-1(h)] provides, in relevant
part, that the term ``qualified purchaser'' as used in section
3(c)(7) of the Act includes a person who a Section 3(c)(7) Fund or
its representative ``reasonably believes'' is a qualified purchaser.
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The Commission requested comment whether the rule should contain a
list of the types of documents (similar to the list included in rule
144A) that a Section 3(c)(7) Fund could rely on in determining whether
a Prospective Qualified Purchaser was a qualified purchaser. Commenters
had mixed reactions to this approach. Some commenters objected to the
inclusion of a list, while others argued that the types of documents
set forth in rule 144A were not sufficiently inclusive. Although the
Commission understands that the list provided in rule 144A has been
useful in that context, that list reflects the type of information that
usually is publicly available concerning institutional investors (the
only type of investor that can be a QIB). Commenters suggested that
similar information typically is not available for individual
investors. Because a list similar to that included in rule 144A would
be of limited use, it is not included in rule 2a51-1.
7. Retirement Plans and Other Forms of Holding Investments
The Commission requested comment whether there are other structures
for holding ownership interests in investments that should be addressed
by the rule. Many commenters requested clarification on various issues
related to assets held in individual retirement accounts (``IRAs'') and
employee benefit plans. The rule provides that a Prospective Qualified
Purchaser who is a natural person may include investments held in his
or her IRA or in other retirement accounts (such as a ``401(k)'' plan)
when the Prospective Qualified Purchaser makes all of the investment
decisions for the account.77
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\77\ Rule 2a51-1(g)(4) [17 CFR 270.2a51-1(g)(4)]. A 401(k) plan
is established in accordance with section 401(k) of the IRC [26 USC
401(k)]. If a 401(k) plan provides several options in which an
employee can choose to invest his or her account, the employee would
be making the investment decision with respect to the account even
though the plan's trustee or sponsor selects the range of options
from which the employee can choose.
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The Commission understands that there are other forms of holding
investments that may raise interpretative issues concerning whether a
Prospective Qualified Purchaser ``owns'' an investment.78 For
instance, when an entity that holds investments is the ``alter ego'' of
a Prospective Qualified Purchaser (as in the case of an entity that is
wholly owned by a Prospective Qualified Purchaser who makes all the
decisions with respect to such investments), it would be appropriate to
attribute the investments held by such entity to the Prospective
Qualified Purchaser.
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\78\ Many of the issues raised by commenters have been addressed
by the provision of the rule dealing with ownership of investments
by certain affiliated companies. See rule 2a51-1(g)(3); supra
section II.A.5 of this Release.
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8. Pension and Retirement Plans as Qualified Purchasers
A number of commenters raised interpretative questions concerning
the circumstances under which a pension or other type of employee
benefit plan that holds $25 million of investments in the aggregate
could be treated as a qualified purchaser. Most of these questions
concerned 401(k) plans that allow an employee to direct the investment
of his or her account balance (which may consist of amounts contributed
by the employee, the employer, or both) to specified investment
alternatives available through the plan. Some commenters suggested that
if such a plan holds $25 million of investments in the aggregate,
participants in the plan should have an opportunity to invest in a
Section 3(c)(7) Fund offered as an investment option. Other commenters
argued that the Section 3(c)(7) Fund should ``look through'' the 401(k)
plan to its participants for purposes of determining whether each
investor in the Fund is a qualified purchaser.
The latter approach reflects the Commission's interpretation of
section 3(c)(7). The legislative history of the 1996 Act indicates that
Section 3(c)(7) Funds are to be limited to investors who own a
specified amount of investments.79 The critical issue, therefore,
is not whether the employee is directing his or her investments through
a 401(k) plan or a similar intermediary, but whether the employee owns
the requisite amount of investments. Congress determined generally that
the person making the investment decision to invest in a Section
3(c)(7) Fund had to own a requisite amount of investments; the Act
generally does not permit a person who does not own the requisite
amount of investments to be treated as a qualified purchaser even if he
or she received advice from a third party concerning the investment.
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\79\ See Senate Report, supra note 12, at 10. The Commission
staff has taken a similar position under section 3(c)(1) of the Act,
with which the Commission agrees, with respect to how to ``count''
401(k) plans for purposes of determining whether a Section 3(c)(1)
Fund has 100 or fewer investors. Thus, each participant in the plan
who chooses to invest in the Fund, as opposed to the plan itself,
should be treated as a separate investor in the Section 3(c)(1) Fund
for purposes of determining the number of beneficial owners of the
Fund's securities. See The PanAgora Group Trust (Apr. 29, 1993).
The Commission is aware that the staff has taken the position
under section 3(c)(1) that a self-directed employee benefit plan can
be considered to be a single investor under certain circumstances.
In particular, the staff has indicated that such a plan would be a
single investor for purposes of section 3(c)(1) if the plan operates
in a manner resembling that of a defined benefit plan. See The
Standish Ayer & Wood, Inc. Stable Value Group Trust (Dec. 28, 1995).
In adopting the analysis set forth in the PanAgora letter, the
Commission is not endorsing the analysis set forth in the Standish
Ayer letter for purposes of section 3(c)(7). The Commission has
requested the staff to consider whether the position taken in the
Standish Ayer letter is appropriate in the context of section
3(c)(7) and to reconsider whether the position taken in the Standish
Ayer letter is consistent with that reflected in the PanAgora letter
for purposes of section 3(c)(1).
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The approach described above would not apply to a defined benefit
or other retirement plan that owns $25 million of investments and does
not permit participants to decide whether or how much to invest in
particular investment alternatives. If the decision to invest in a
Section 3(c)(7) Fund is made by the plan trustee or other plan
fiduciary that makes investment decisions for the plan, and the plan
owns at least $25 million of investments that is not subject to
participant direction, the plan would be a qualified purchaser with
respect to investments made by the plan trustee.
9. Other Issues Relating to Qualified Purchasers
Section 3(c)(7)(A) of the Act provides that the outstanding
securities of a Section 3(c)(7) Fund must be owned ``exclusively by
persons who, at the time of acquisition of such securities, are
qualified purchasers.'' The Commission believes that, as a general
matter, this provision requires the determination whether a person is a
qualified purchaser to be made or
[[Page 17520]]
reaffirmed each time the person acquires securities of a Section
3(c)(7) Fund.
Commenters noted that privately offered funds often allow investors
to make their investment in a fund in installments or as the fund's
manager needs capital to make investments. These commenters requested
that the Commission clarify whether section 3(c)(7) requires the
investor to be a qualified purchaser at the time each installment is
paid. The Commission would interpret section 3(c)(7) as not requiring a
Section 3(c)(7) Fund to determine whether the investor is a qualified
purchaser each time the investor makes additional investments in the
Fund pursuant to a binding commitment to make such payments, provided
the investor was a qualified purchaser at the time the investor made
the commitment. The Commission believes that this approach is
consistent with section 3(c)(7).
Commenters also requested guidance whether affiliates of a Section
3(c)(7) Fund's sponsor that hold interests in the Fund are required to
be qualified purchasers. A privately offered fund is often organized as
a limited partnership with the fund's sponsor or investment adviser (or
one of their affiliates) serving as the general partner. In these
circumstances, if the general partnership interest is not a security
80 and is not being used as a device to evade the provisions of
section 3(c)(7) limiting security holders of the Section 3(c)(7) Fund
to qualified purchasers, the general partner need not be a qualified
purchaser.81
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\80\ See, e.g., Williamson v. Tucker, 645 F.2d 404 (5th Cir.),
cert. denied, 454 U.S. 897 (1981).
\81\ See, e.g., Shoreline Fund, L.P and Condor Fund
International, Inc. (Nov. 14, 1994) (taking a similar approach under
section 3(c)(1)).
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B. Definitions of Beneficial Ownership and Other Issues Relating to the
Grandfather and Consent Provisions
Rule 2a51-2 defines the term ``beneficial owner'' for purposes of
the Grandfather Provision governing Section 3(c)(1) Funds that wish to
convert into Section 3(c)(7) Funds and the Consent Provision governing
Section 3(c)(1) and Section 3(c)(7) Funds that wish to become qualified
purchasers. The rule also addresses what types of ownership constitute
``indirect'' beneficial ownership for purposes of the Consent
Provision.
1. The Grandfather Provision
a. Background
Under the Grandfather Provision, a Grandfathered Fund may convert
into a Section 3(c)(7) Fund without requiring investors that are not
qualified purchasers to dispose of their interests in the Fund.82
The Grandfather Provision requires the Grandfathered Fund, prior to the
conversion, (i) to disclose to each ``beneficial owner'' that future
investors will be limited to qualified purchasers, and that ownership
in the Grandfathered Fund will no longer be limited to 100 persons, and
(ii) concurrently with or after the disclosure, to provide each
beneficial owner with a reasonable opportunity to redeem any part or
all of its interests in the Fund for that beneficial owner's
proportionate share of the Fund's ``net assets.'' 83
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\82\ See 142 Cong. Rec. at E1929 (Oct. 4, 1996) (Remarks of Hon.
Thomas J. Bliley, Jr.). These non-qualified purchasers must have
acquired all or a portion of their investment in the Grandfathered
Fund on or before September 1, 1996. The Grandfather Provision was
designed to enable existing Section 3(c)(1) Funds to preserve their
arrangements with these non-qualified purchasers, and does not limit
additional purchases by these non-qualified purchasers of the
Grandfathered Fund's securities. Any person owning a security of the
Grandfathered Fund who acquired the security after September 1, 1996
must be, either on the date of the acquisition or on the date that
the Fund avails itself of section 3(c)(7), a qualified purchaser.
\83\ The opportunity must be provided ``notwithstanding any
agreement to the contrary between the [Grandfathered Fund] and such
beneficial owner.'' Section 3(c)(7)(B)(ii)(II) of the Act [15 USC
80a-3(c)(7)(B)(ii)(II)].
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The 1996 Act directs the Commission to define the term ``beneficial
owner'' for purposes of the Grandfather Provision. The legislative
history of the 1996 Act suggests that the Commission was to use this
authority to alleviate any unnecessary burdens that might arise as a
result of the application of section 3(c)(1)'s Look-Through
Provision.84 Specifically, Congress appears not to have intended
to require a Grandfathered Fund to provide the notice and redemption
opportunity to security holders of its institutional investors, even
when those security holders would be deemed beneficial owners of the
Grandfathered Fund's voting securities under the Look-Through
Provision.85 Rather, the notice and redemption opportunity
generally are intended to be provided only to the institutional
investor, unless the institutional investor is controlled by or under
common control with the Grandfathered Fund.86
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\84\ See supra note 18 and accompanying text (describing section
3(c)(1)(A) of the Investment Company Act).
\85\ See Remarks of Hon. Thomas J. Bliley, supra note 82.
\86\ Id.
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Consistent with the purposes indicated in the legislative history
of the 1996 Act, the Commission believes that the grandfather notice
and redemption opportunity requirements were intended not only for the
purposes described above, but for the benefit of certain persons who
were deemed to be beneficial owners prior to the 1996 Act's amendments
to the Look-Through Provision.87 These persons may have relied on
the then-existing Look-Through Provision as a way to limit the
Grandfathered Fund's ability to sell its securities to additional
investors.88 Allowing the Grandfathered Fund to raise substantial
new capital from an unlimited number of qualified purchasers could
significantly alter the nature of an investment in the Grandfathered
Fund. Most commenters agreed that the manner in which the proposed rule
defined beneficial ownership for purposes of the Grandfather Provision
is consistent with the 1996 Act's legislative history and supported the
rule.
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\87\ See supra note 19 and accompanying text (discussing the
elimination of the Second 10% Test).
\88\ This reliance can be illustrated by the following example.
An investor invested in a Section 3(c)(1) Fund (``Fund A'') through
another Section 3(c)(1) Fund (``Fund B'') that was subject to the
Look-Through Provision as then in effect. The investor may have made
its investment in Fund B (or Fund B may have made its investment in
Fund A) recognizing that under section 3(c)(1)(A) as then in effect,
each security holder of Fund B was deemed to be a beneficial owner
of Fund A's voting securities. In this way, the Look-Through
Provision would have limited the number of additional persons that
could invest in Fund A. As noted above, however, even in these
circumstances, Congress appears to have intended that investors in
Fund B not be deemed beneficial owners of Fund A's securities for
purposes of the Grandfather Provision unless there is a control
relationship between Fund A and Fund B.
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b. Operation of the Rule
Paragraph (a) of rule 2a51-2 provides generally that beneficial
ownership is to be determined in accordance with section 3(c)(1) of the
Act.89 Paragraph (b) of the rule provides a special rule for
determining beneficial ownership of securities held by a
company.90 Paragraph (b) provides that securities of a
Grandfathered Fund beneficially owned by a company (without giving
effect to the Look-Through Provision) are deemed to be beneficially
owned by one person (the ``Owning Company'') unless (i) on October 11,
1996, under section 3(c)(1)(A) of the Act as then in effect, the voting
securities of the Grandfathered Fund were deemed to be beneficially
owned by the holders of the Owning Company's outstanding
securities,91 (ii) the Owning Company
[[Page 17521]]
has a control relationship with the Grandfathered Fund,92 and
(iii) the Owning Company is itself an investment company or a privately
offered fund.93 If these conditions do not apply, the grandfather
notice and redemption opportunity should be provided to the Owning
Company. If the conditions do apply, the grandfather notice and
redemption opportunity should be provided to the Owning Company's
security holders as the beneficial owners of the Grandfathered Fund's
securities.
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\89\ 17 CFR 270.2a51-2(a).
\90\ 17 CFR 270.2a51-2(b).
\91\ The applicability of the Look-Through Provision is
determined as of October 11, 1996 to assure that the Grandfathered
Fund did not engage in transactions subsequent to the enactment of
the 1996 Act designed to limit the applicability of the Look-Through
Provision (such as the issuance of additional voting securities so
that the percentage of voting securities owned by an Owning Company
falls below 10%).
\92\ See supra note 38 (describing the Act's definition of
control).
\93\ Limiting the application of the Look-Through Provision in
this context to Owning Companies that are investment companies or
privately offered funds is consistent with amended section
3(c)(1)(A). If the Owning Company is not an investment company or a
privately offered fund, its security holders are unlikely to have a
sufficient interest in its investment in the Grandfathered Fund to
justify providing them with the grandfather notice and redemption
opportunity. See supra note 19 and accompanying text.
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The application of the rule can best be illustrated by the
following example. Assume Company A is a Grandfathered Fund and that
Company B, a Section 3(c)(1) Fund, owned more than 10% of the voting
securities of Company A on October 11, 1996. If Company B does not have
a control relationship with Company A, the grandfather notice and
redemption opportunity can be provided directly to Company B. If a
control relationship does exist, and on October 11, 1996, the security
holders of Company B were deemed to be the beneficial owners of Company
A's voting securities (because of the Second 10% Test),94 Company
A must provide the grandfather notice and redemption opportunity to
each of Company B's security holders.
---------------------------------------------------------------------------
\94\ See supra section I.B. of this Release.
---------------------------------------------------------------------------
c. Interpretative Issues Relating to the Grandfather Provision
i. Scope of the Grandfather Provision
The Commission believes that the notice and redemption opportunity
requirements of the Grandfather Provision were intended for the benefit
of all persons who are beneficial owners of the securities of a
Grandfathered Fund. The Commission noted in the Proposing Release that,
consistent with this legislative intent, it believed that the
conditions in the Grandfather Provision must be complied with by any
Section 3(c)(1) Fund that wishes to rely on the Grandfather Provision,
even if each beneficial owner of the Fund meets the definition of
qualified purchaser. While several commenters objected to this
interpretation, the Commission believes that it clearly reflects the
legislative history of the Grandfather Provision. If the notice and
redemption opportunity requirements had been intended only for the
benefit of beneficial owners who are not qualified purchasers, Congress
could have limited the Grandfather Provision accordingly.95
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\95\ Compare House Report, supra note 12, at 51 (describing
original provision in H.R. 3005, as reported by the Committee on
Commerce, which limited the notice and redemption opportunity to
investors that were not qualified purchasers) and Senate Report,
supra note 12, at 23 (``The issuer must allow section 3(c)(1) fund
owners `of record' to redeem their interests in the fund in either
cash or a proportionate share of the fund's assets.''); see also
supra note 82.
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ii. ``Net Assets''
The Grandfather Provision states that a redeeming beneficial owner
of a Grandfathered Fund is entitled to receive its proportionate share
of the Fund's ``net assets.'' 96 The Act does not define the term
``net assets.'' In the Proposing Release, the Commission noted that the
term ``current net assets'' is used in the Investment Company Act and
defined by Commission rule.97 The Commission requested comment
whether ``net assets,'' for purposes of the Grandfather Provision,
should be determined based upon the methods used to determine ``current
net assets,'' or the methods that would have been used to determine the
amount that the beneficial owner would have received in accordance with
existing withdrawal provisions in the Grandfathered Fund's governing
documents. Most commenters suggested that ``net assets'' be determined
in accordance with the latter approach.
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\96\ Section 3(c)(7)(B)(ii)(II) of the Act. Each person electing
to redeem must receive its proportionate share of the Grandfathered
Fund's net assets in cash, unless the person agrees to accept such
amount in kind (i.e., in assets of the Grandfathered Fund). If the
Grandfathered Fund elects to provide investors with an opportunity
to receive an in-kind distribution, this election must be disclosed
in the grandfather disclosure.
\97\ See, e.g., section 2(a)(32) of the Investment Company Act
[15 U.S.C. 80a-2(a)(32)] (defining the term redeemable security as a
``security * * * under the terms of which the holder * * * is
entitled (whether absolutely or only out of surplus) to receive
approximately his proportionate share of the issuer's current net
assets, or the cash equivalent thereof'') and rule 2a-4 [17 CFR
270.2a-4] (definition of current net asset value for certain
purposes).
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The Commission does not believe that the term ``net assets'' as
used in the Grandfather Provision was intended to be identical to the
term ``current net assets'' as used in the Act. The Commission believes
that the term ``net assets'' should be interpreted in a manner
consistent with the legislative purposes of the notice and redemption
opportunity requirements of the Grandfather Provision. The Grandfather
Provision was designed to afford investors in the Grandfathered Fund an
opportunity to redeem their investment, without penalty, before the
Grandfathered Fund raises substantial new capital by increasing the
number of the Fund's security holders above the limit in section
3(c)(1), thereby possibly altering the nature of an investment in the
Grandfathered Fund.\98\
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\98\ See Proposing Release, supra note 4, at n.76 and
accompanying text.
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It would be consistent with the Grandfather Provision for a
Grandfathered Fund to conclude that it could redeem a beneficial
owner's pro rata share of the net asset value of the Fund in accordance
with the methods specified in the Fund's governing documents. Valuation
methods that ``hold back'' certain amounts (e.g., reserves for
contingent liabilities) may be consistent with the Grandfather
Provision to the extent that they do not act as a penalty for
exercising the redemption right afforded by section 3(c)(7). If a fund
is unable to conclude that the hold back is not a penalty, the fund
could continue to comply with section 3(c)(1) until all amounts due to
redeeming beneficial owners have been paid.
Commenters requested guidance concerning how to determine the pro
rata share of net assets to which debt and senior securities redeemed
in accordance with the Grandfather Provision would be entitled. The
Commission believes that the ``net assets'' attributable to these
securities would generally be determined by the repayment or redemption
provisions governing such instruments. In most cases, this amount could
be the principal amount of the securities (or, in the case of preferred
stock, the liquidation preference or other amount payable upon
redemption), any accrued and unpaid interest or dividends, and any
premium due upon prepayment or redemption.
The Commission also notes that the Grandfather Provision does not
override provisions in fund documents, other agreements or applicable
law that could have the effect of preventing a fund from converting
into a Section 3(c)(7) Fund.\99\ For example, if a fund's
[[Page 17522]]
partnership agreement prohibits the fund from having more than 100
investors, the fund may have to seek to amend the agreement before
selling its securities to qualified purchasers (if the fund already has
100 investors).\100\
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\99\ The Grandfather Provision requires that a Grandfathered
Fund afford its beneficial owners a redemption opportunity
``notwithstanding any agreement to the contrary between'' the Fund
and its investors. Section 3(c)(7)(B)(ii)(II) of the Act. This
provision is designed to assure that the Grandfathered Fund affords
the redemption opportunity prior to admitting qualified purchasers
in accordance with section 3(c)(7), notwithstanding contractual
provisions that only require redemption opportunities to be provided
periodically.
\100\ Similarly, if a Grandfathered Fund has issued debt
securities pursuant to an indenture that requires a prepayment
premium if the debt securities are repaid before a specified date
(or precludes prepayment), the Grandfather Provision does not
override these provisions.
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Many commenters observed that in the case of certain privately
offered funds, providing the redemption opportunity required by the
Grandfather Provision could have significant adverse effects on a
fund's investment strategy.\101\ The Grandfather Provision does not
override the fiduciary duties that a sponsor of a Grandfathered Fund
may have to the beneficial owners of the Fund's securities under the
Fund's governing documents or applicable law. Thus, the general partner
or other fiduciary of a privately offered fund may have to consider
whether effecting the notice and redemption required by the Grandfather
Provision in order to be able to open the fund to new investors (and
increase the amount of assets in the fund and the general partner's
fee) is in the best interests of the fund's security holders.
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\101\ For example, commenters suggested that in order to meet
redemption requests, a fund might be required to sell illiquid
portfolio positions at a loss or when it would not otherwise be in
the best interests of the fund's investors to do so.
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2. The Consent Provision
Section 2(a)(51)(C) of the Act requires that a privately offered
fund that wishes to become a qualified purchaser (``Purchasing Fund'')
obtain the consent of all of its beneficial owners that had invested in
the Purchasing Fund on or before April 30, 1996.\102\ The beneficial
owners of the securities of any privately offered fund that is a direct
or indirect beneficial owner of the securities of the Purchasing Fund
also must consent to the treatment of the Purchasing Fund as a
qualified purchaser.\103\
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\102\ The legislative history of the 1996 Act does not explain
the purpose of the Consent Provision.
Section 2(a)(51)(C) uses the term ``excepted company'' to refer
to Section 3(c)(1) and Section 3(c)(7) Funds. The inclusion of
Section 3(c)(7) Funds in this provision was presumably designed to
require the consent to be obtained by any Grandfathered Fund that
wished to be a qualified purchaser.
\103\ Id.
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a. Definition of Beneficial Owner
Paragraph (c) of rule 2a51-2 clarifies the meaning of the term
``beneficial owner'' for purposes of the Consent Provision.\104\ The
rule provides that securities of a Purchasing Fund beneficially owned
by a company (``Owning Company''), without giving effect to the Look-
Through Provision, are deemed to be beneficially owned by one person
unless (i) on April 30, 1996, under section 3(c)(1)(A) of the Act as
then in effect, the voting securities of the Purchasing Fund were
deemed to be beneficially owned by the holders of the Owning Company's
outstanding securities, (ii) the Owning Company has a control
relationship with either the Purchasing Fund or the Section 3(c)(7)
Fund with respect to which the Purchasing Fund will be a qualified
purchaser (``Target Fund''), and (iii) the Owning Company itself is a
privately offered fund. If these conditions do not apply, the consent
must be obtained from the Owning Company. If the conditions do apply,
the consent must be obtained from the Owning Company's security holders
as the beneficial owners of the Purchasing Fund's securities under the
rule.
---------------------------------------------------------------------------
\104\ 17 CFR 270.2a51-2(c).
---------------------------------------------------------------------------
As in the case of the definition of beneficial owner for purposes
of the Grandfather Provision, the rule relating to the Consent
Provision is intended to allow an institutional investor to provide the
required consent even if, under the Look-Through Provision, the
security holders of the institutional investor are deemed to be
beneficial owners of the Purchasing Fund's securities. If there is a
control relationship between the Purchasing Fund and either the Owning
Company or the Target Fund, and the Owning Company is a privately
offered fund whose security holders were deemed beneficial owners of
the Purchasing Fund on April 30, 1996, then the consent must be
obtained from those security holders.
b. Required Consent
As proposed, paragraph (d) of the rule clarifies what constitutes
``indirect'' ownership with regard to the requirement in section
2(a)(51)(C) of the Act that the consent be obtained from the security
holders of a privately offered fund that is an indirect beneficial
owner of the Purchasing Fund.\105\ The rule provides that the privately
offered fund would not be considered to own the securities of the
Purchasing Fund indirectly unless the privately offered fund has a
control relationship with either the Purchasing Fund or the Target
Fund. Commenters generally supported this approach.
---------------------------------------------------------------------------
\105\ 17 CFR 270.2a51-2(d).
---------------------------------------------------------------------------
Several commenters also suggested that the rule generally should
limit the circumstances under which a Purchasing Fund must obtain the
consent of the beneficial owners of the securities of a privately
offered fund that directly owns the securities of the Purchasing Fund
(``Owning Fund'').\106\ These commenters stated that if the rule did
not contain such a limitation, consent would have to be obtained from
security holders who would not be entitled to receive the notice and
redemption opportunity required by the Grandfather Provision.
---------------------------------------------------------------------------
\106\ Many of these commenters believed that such consent was
not required under the provision of the proposed rule defining
indirect beneficial ownership.
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As noted in the Proposing Release, the Consent Provision appears to
be designed to prohibit an existing Section 3(c)(1) Fund from avoiding
the notice and redemption opportunity requirements of the Grandfather
Provision by investing its assets in a Section 3(c)(7) Fund, either
directly or indirectly through another privately offered fund.\107\
This purpose is served if the scope of the Consent Provision is the
same as that of the Grandfather Provision.\108\ Paragraph (e) of the
rule, as adopted, clarifies that the consent of the beneficial owners
of the Owning Fund is not required unless the Owning Fund directly or
indirectly controls, is controlled by, or is under common control with,
the Purchasing Fund or the Target Fund.\109\
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\107\ Such conduct also may raise issues under section 48(a) of
the Investment Company Act [15 USC 80a-47(a)] (prohibiting
violations of the Act's provisions by indirect means).
\108\ The Consent Provision also may have been designed to give
investors in an existing privately offered fund the opportunity to
review what could be a significant change in the manner in which the
fund makes investments as a result of the regulatory changes
effected by the 1996 Act. In the absence of a control relationship,
however, it is unlikely that the investors in the Owning Fund would
have a significant interest in the Purchasing Fund's decision to
invest in a Section 3(c)(7) Fund.
\109\ 17 CFR 270.2a51-2(e). The following example illustrates
the operation of the rule. Assume Company A is a Purchasing Fund
that wishes to invest in Company B as a qualified purchaser, and
that Companies C and D are beneficial owners of Company A's voting
securities. Company C is an operating company that does not have a
control relationship with Company A, but whose security holders were
deemed to be beneficial owners of Company A's voting securities on
April 30, 1996. Company D is a privately offered fund that was
deemed to own beneficially Company A's voting securities on April
30, 1996 (in other words, the Look-Through Provision did not apply).
Each of Company D's investors (Companies E through G) are themselves
privately offered funds, but none has a control relationship with
Company D or Company A.
Company C would have to consent to Company A being a qualified
purchaser. Because Company C is not a privately offered fund,
Company C's shareholders would not be treated as beneficial owners
of Company A's voting securities, and their consent would not be
required. (The consent of Company C's shareholders would not be
required even if Company C had a control relationship with Company
A.)
Company D would have to consent to Company A being a qualified
purchaser. Even though Company D is a privately offered fund, the
beneficial owners of its outstanding securities (i.e., Companies E
through G) would not have to consent to Company A being a qualified
purchaser unless there was a control relationship between Company D
and either Company A or Company B. Security holders of Companies E
through G would not be required to consent even if they are
considered to be beneficial owners of Company D's securities under
the Look-Through Provision because there is no control relationship.
Similarly, Companies E through G would not be deemed to indirectly
own voting securities of Company A.
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[[Page 17523]]
Under the rule, the Purchasing Fund could obtain a general consent
with respect to most transactions in which it will be a qualified
purchaser. Whether a specific consent would be required when there is a
control relationship between the Purchasing Fund or certain of its
beneficial owners and the Target Fund would depend upon whether the
general consent provided sufficient information to elicit an informed
consent from the appropriate investors.
C. Conforming Rule
Rule 2a51-3(a) under the Investment Company Act clarifies an
interpretative issue concerning companies that are qualified
purchasers.110 The statutory definition of qualified purchaser
specifies that a trust that is a qualified purchaser must not have been
formed ``for the specific purpose of acquiring the securities
offered.'' 111 The rule makes the same condition applicable to any
other company that is a Prospective Qualified Purchaser (whether a
Family Company or another type of company) unless each beneficial owner
of the company's securities is a qualified purchaser. The rule thus
limits the possibility that a company will be able to do indirectly
what it is prohibited from doing directly (i.e., organize a ``qualified
purchaser'' entity for the purpose of making an investment in a
particular Section 3(c)(7) Fund available to investors that themselves
did not meet the definition of qualified purchaser).112
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\110\ 17 CFR 270.2a51-3(a).
\111\ Section 2(a)(51)(A)(iii) of the Act.
\112\ See supra note 107 and accompanying text (discussing
section 48(a) of the Act). The rule, as proposed, would have
required all interests in the company to be owned by qualified
purchasers. The rule, as adopted, recognizes that such a company may
be organized as a limited partnership, with a person or company
serving as the general partner. In these circumstances, if the
general partnership interest is not being used as a device to evade
the provisions of section 3(c)(7) limiting security holders of the
Section 3(c)(7) Fund to qualified purchasers, the general partner
need not be a qualified purchaser. See supra notes 78-79 and
accompanying text.
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As suggested by several commenters, the scope of the rule has been
expanded to permit a company to be a qualified purchaser (even if the
company did not own $5 million of investments, in the case of a Family
Company, or $25 million of investments in the case of any other type of
company) if each beneficial owner of the company's securities is a
qualified purchaser.113
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\113\ Rule 2a51-3(b) [17 CFR 270.2a51-3(b)]; see supra note 112.
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D. Non-Exclusive Safe Harbor for Certain Section 3(c)(7) Funds
The legislative history of the 1996 Act indicates that a sponsor of
an existing Section 3(c)(1) Fund could establish a new Section 3(c)(7)
Fund.114 Section 3(c)(7)(E) of the Act (the ``Non-Integration
Provision) provides that the Commission may not ``integrate'' the two
Funds--that is, treat the two Funds as a single issuer for purposes of
determining the number of beneficial owners of the Section 3(c)(1) Fund
or whether the outstanding securities of the Section 3(c)(7) Fund are
owned by anyone who is not a qualified purchaser.115 The Non-
Integration Provision, however, is not intended to allow a sponsor of
an existing Section 3(c)(1) Fund nominally to convert that fund into a
Section 3(c)(7) Fund, and then to create another Section 3(c)(1) Fund
(``Related Section 3(c)(1) Fund'') thereby avoiding the 100-investor
limit.116 The Non-Integration Provision, thus, was not designed to
preclude the Commission from treating a nominally converted Section
3(c)(1) Fund and a Section 3(c)(1) Fund organized by the same sponsor
as a single issuer for certain purposes.
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\114\ See 142 Cong. Rec. at E1938 (Oct. 21, 1996) (Remarks of
Hon. John D. Dingell); House Hearings, supra note 5, at 71 (prepared
statement of Marianne Smythe); see also Hedge Funds Task Force
Report, supra note 60, at 779.
\115\ The Non-Integration Provision states, in part, that an
issuer that is otherwise excepted under section 3(c)(7) and an
issuer that is otherwise excepted under section 3(c)(1) are not to
be treated by the Commission as being a single issuer for purposes
of determining the number of beneficial owners of the Section
3(c)(1) Fund or whether the outstanding securities of the Section
3(c)(7) Fund are owned by anyone who is not a qualified purchaser.
The Commission staff has addressed the possibility of integrating
Section 3(c)(1) Funds established by the same sponsor for purposes
of determining whether they constitute the same issuer and have
exceeded the 100-investor limit of section 3(c)(1). See, e.g.,
Shoreline Fund (Apr. 11, 1994) (the staff considers several factors
in determining whether funds should be integrated and generally will
require integration if ``a reasonable purchaser would view an
interest in an offering as not materially different from another'').
\116\ See Remarks of Hon. John D. Dingell, supra note 114.
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Prior to the publication of the Proposing Release, representatives
of hedge funds and other investment pools raised concerns regarding the
ability of a sponsor of a Section 3(c)(1) Fund that undergoes a bona
fide conversion into a Section 3(c)(7) Fund (i.e., provides the
grandfather notice and redemption opportunity and sells its securities
to new investors that are qualified purchasers) to then create a new
Section 3(c)(1) Fund. The Commission proposed rule 3c-7 to respond to
these concerns. The rule would have provided that a Grandfathered Fund
will be treated as an issuer excluded under section 3(c)(7) of the Act
if, at the time the new Section 3(c)(1) Fund offers its securities, 25%
or more of the value of all securities of the Grandfathered Fund is
held by qualified purchasers that acquired these securities after
October 11, 1996.
Commenters had mixed reactions to the proposed rule. Several
commenters supported the rule as proposed or with modifications that
would base availability of the safe harbor on securities held by
qualified purchasers regardless of when acquired. Other commenters
believed that the proposed rule was unnecessary, that the percentage
threshold for qualified purchasers investing in the fund would preclude
bona fide conversions, and that the Commission could rely on its anti-
fraud authority to address ``sham'' grandfathering transactions.
Upon further consideration of the issue, and after considering the
views of the commenters, the Commission does not believe that a safe
harbor rule is necessary. In the Commission's view, the Non-Integration
Provision was not designed to permit a fund to rely on section 3(c)(7)
if the fund's compliance with the Grandfather Provision was designed to
evade the 100-investor limitation of section 3(c)(1). A fund that
purports to rely on section 3(c)(7) based on the Grandfather Provision
must have the bona fide purpose of selling its securities to qualified
purchasers. At this time, the Commission does not believe that it is
necessary to set forth a test based on the percentage of securities
owned by qualified purchasers to establish the bona fides of a
conversion for purposes of determining compliance with the Act. Whether
a conversion to a Grandfathered Fund is bona fide and undertaken in
good faith would depend upon the facts and circumstances. The relevant
facts would include, among others, whether the fund has taken steps to
sell its securities to qualified purchasers, and whether the fund is
[[Page 17524]]
subject to legal or other impediments that would preclude it from
selling its securities to qualified purchasers.
III. Other Rules Relating to Privately Offered Funds
A. Section 3(c)(1) Funds
1. Transition Rule
The 1996 Act amended section 3(c)(1)(A) of the Investment Company
Act, the Look-Through Provision, which governs the way in which a
Section 3(c)(1) Fund calculates the number of its beneficial owners for
purposes of complying with the 100-investor limit. Under amended
section 3(c)(1)(A), a Section 3(c)(1) Fund must include among its
beneficial owners the underlying security holders of any investment
company or privately offered fund that owns 10% or more of the Section
3(c)(1) Fund (collectively, ``10%+ Security Holders''). The pre-1996
Act Look-Through Provision did not apply unless the 10%+ Security
Holder also had more than 10% of its assets invested in Section 3(c)(1)
Fund securities generally. The amendment, in effect, limits the ability
of certain types of investors to own more than 10% of a Section 3(c)(1)
Fund.117
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\117\ The amended Look-Through Provision applies only when an
investment company or a privately offered fund invests in a Section
3(c)(1) Fund. The 1996 Act expands the ability of corporate, non-
investment company investors to participate in Section 3(c)(1) Funds
by no longer requiring Section 3(c)(1) Funds to count the underlying
shareholders of these investors under any circumstances.
---------------------------------------------------------------------------
Some existing Section 3(c)(1) Funds have 10%+ Security Holders in
reliance on the pre-amendment application of the Look-Through
Provision. As a result of the 1996 Act, such a fund may be required to
treat a 10% Security Holder as more than one beneficial owner for
purposes of the 100-investor limit. The Commission believes that the
amendment to the Look-Through Provision was designed primarily to
simplify the application of the Provision and was not intended to
disrupt existing investment arrangements. The Commission, therefore,
proposed rule 3c-1 under the Investment Company Act to provide that the
amended Look-Through Provision will not apply in the case of a pre-1996
Act 10%+ Security Holder, provided that the 10%+ Security Holder
continues to satisfy the Second 10% Test.118
---------------------------------------------------------------------------
\118\ The rule does not limit additional acquisitions of
securities by a 10%+ Security Holder, as long as it satisfies the
Second 10% Test on the date of acquisition. For the purpose of the
rule, securities of Section 3(c)(7) Funds would be included in
applying the Second 10% Test, since a Section 3(c)(7) Fund probably
would have been a Section 3(c)(1) Fund but for the new exclusion
created by the 1996 Act. The rule also applies to ownership
interests of 10% or more that are acquired as a result of a
conversion of convertible non-voting securities.
---------------------------------------------------------------------------
The rule is adopted with one change. The rule, as proposed, would
have applied only to a 10%+ Security Holder that acquired its interest
in the fund before the 1996 Act was signed by the President. Several
commenters suggested that the rule should apply to any 10%+ Security
Holder that acquired its securities prior to the effective date of the
amendments to the Look-Through Provision. These commenters noted that
Section 3(c)(1) Funds that admitted new investors near the end of 1996
may not have known, or appreciated the significance, of the 1996 Act's
amendments. In view of the commenters' suggestions, the rule as adopted
applies to 10%+ Security Holders that acquired their securities on or
before April 1, 1997.
2. Applicability of the Amended Look-Through Provision
The Commission believes that, as a general matter, the
determination of whether an investor is subject to the amended Look-
Through Provision must be made each time the investor acquires a voting
security of a Section 3(c)(1) Fund. Thus, an investor would not become
subject to the Look-Through Provision if its proportionate ownership of
the Fund's voting securities increased solely because another investor
redeemed its securities in the Fund. This analysis would not apply if
the redemption (or other transaction) were part of a series of
transactions designed to avoid the Look-Through Provision.119
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\119\ See supra note 107 (discussing section 48(a) of the Act).
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B. Investments by Knowledgeable Employees
As directed by Congress, the Commission is adopting rule 3c-5 under
the Investment Company Act to permit ``knowledgeable employees'' of a
fund and certain of its affiliates to acquire securities issued by the
fund without being counted for purposes of section 3(c)(1)'s 100-
investor limit.120 In addition, as directed by Congress, the rule
permits knowledgeable employees to invest in a Section 3(c)(7) Fund
even though they do not meet the definition of qualified
purchaser.121 Commenters generally supported the rule, although
several commenters suggested that the scope of the rule's definition of
knowledgeable employees be expanded.
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\120\ The rule specifies that these persons must be
knowledgeable employees at the time they acquire the fund's
securities. They do not have to dispose of these securities (or be
counted as security holders for purposes of section 3(c)(1)'s 100-
investor limit) upon termination of employment.
\121\ The fund will have to determine whether a knowledgeable
employee's acquisition of the securities is a transaction exempt
from the registration requirements of the Securities Act. See, e.g.,
Regulation D under the Securities Act [17 CFR 230.501 through .508].
---------------------------------------------------------------------------
Rule 3c-5 defines knowledgeable employees as the directors,
executive officers, and general partners of the fund or an affiliated
person of the fund that oversees the fund's investments (``Management
Affiliate'').122 The rule also encompasses persons who serve in
capacities similar to directors, such as trustees and advisory board
members.123
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\122\ Rule 3c-5(a)(4) [17 CFR 270.3c-5(a)(4)]. The rule
specifies that a fund's investment adviser is considered to be an
affiliated person of the fund for purposes of the rule. Rule 3c-
5(a)(1) [17 CFR 270.3c-5(a)(1)].
\123\ Rule 3c-5(a)(4)(i) [17 CFR 270.3c-5(a)(4)(i)].
---------------------------------------------------------------------------
The rule as proposed also would have included as knowledgeable
employees other employees of the fund or its Management Affiliate who,
in connection with their regular functions or duties, participate in,
or obtain information regarding, the investment activities of the fund
or other investment companies managed by the Management Affiliate. One
commenter suggested that including employees who ``obtain information''
regarding the investment activities could include employees, such as
compliance personnel, who may not have any investment experience. The
Commission agrees, and the rule as adopted includes only employees who
``participate in'' the investment activities of the fund or other
investment companies managed by the fund's Management
Affiliate.124
---------------------------------------------------------------------------
\124\ Rule 3c-5(a)(4)(ii) [17 CFR 270.3c-5(a)(4)(ii)].
---------------------------------------------------------------------------
The rule, as proposed, would have required employees who are
knowledgeable employees by virtue of their participation in investment
activities to have been engaged in these activities on behalf of the
fund or the Management Affiliate for a period of at least 12 months.
Several commenters suggested that the 12 month period would
unnecessarily limit the ability of new employees who had equivalent
experience with their previous employer to invest in the fund. The
Commission has concluded that it is not necessary to require that an
employee work for the particular fund or Management Affiliate for the
entire 12-month period as long as the employee has the requisite
experience to appreciate the risks of investing in the fund. The rule,
as adopted, therefore includes as knowledgeable employees those
employees who performed substantially similar functions or duties
[[Page 17525]]
for or on behalf of another person during the preceding 12
months.125
---------------------------------------------------------------------------
\125\ Id.
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The rule permits the acquisition of privately offered fund
securities by a company all of whose owners are knowledgeable
employees.126 This change is consistent with rule 2a51-3, which
permits a company all of whose securities are owned by qualified
purchasers to itself be treated as a qualified purchaser. In addition,
the rule permits knowledgeable employees to transfer their securities
of a privately offered fund on the same terms as those governing
transfers by other owners of fund securities in rule 3c-6 discussed
below.127
---------------------------------------------------------------------------
\126\ Rule 3c-5(b)(2) [17 CFR 270.3c-5(b)(2)].
\127\ Rule 3c-5(b)(3) [17 CFR 270.3c-5(b)(3)].
---------------------------------------------------------------------------
Several commenters suggested that the rule permit purchases by
broader categories of employees. The provision in the 1996 Act
directing Commission rulemaking with regard to investments in privately
offered funds by knowledgeable employees appears to be intended to
encompass persons who actively participate in the management of a
fund's investments. At this time, the Commission believes that the rule
as adopted is consistent with this legislative purpose.
C. Involuntary Transfers
Section 3(c)(1)(B) of the Act provides that beneficial ownership of
securities of a Section 3(c)(1) Fund by any person who acquires the
securities as a result of a ``legal separation, divorce, death, or
other involuntary event'' will be deemed to be beneficial ownership by
the person from whom the transfer was made, pursuant to such rules and
regulations as the Commission prescribes. This provision was designed
to address situations in which section 3(c)(1)'s 100-investor limit is
exceeded ``because of transfers which are neither within the issuer's
control nor are voluntary on the part of the present beneficial
owner.'' 128
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\128\ H.R. Rep. No. 1341, 96th Cong., 2d Sess. at 36 (1980).
---------------------------------------------------------------------------
The 1996 Act directed the Commission to prescribe rules to
implement section 3(c)(1)(B). 129 The Commission is adopting rule
3c-6 under the Investment Company Act to provide that beneficial
ownership by a person (``Transferee'') who acquired securities of a
Section 3(c)(1) Fund pursuant to a gift, bequest, or an agreement
relating to a legal separation or divorce will be deemed to be
beneficial ownership by the person from whom the transfer was made
(``Transferor'').130 Rule 3c-6, as proposed, would have permitted
such transfers of fund securities only to certain persons, generally
family members. Commenters suggested that the categories of Transferees
were unnecessarily limited. These commenters also noted that, as long
as the transfer is in the form of a gift, the relationship of the
Transferee to the Transferor was not particularly important for
purposes of the policies underlying section 3(c)(1). The rule as
adopted reflects this approach.131
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\129\ 15 U.S.C. 80a-3 note.
\130\ Transferees are not limited to natural persons. Donative
transfers to charitable organizations are therefore permitted by the
rule.
\131\ The rule, as proposed, would have permitted transfers to
the specified categories of Transferees pursuant to ``other
involuntary events.'' Given the breadth of the rule and the
elimination of restrictions on the classes of Transferees, the
Commission does not believe that it is necessary at this time to
address other involuntary transfers of Section 3(c)(1) Fund
securities.
---------------------------------------------------------------------------
Unlike the proposed rule, the rule as adopted does not limit
subsequent transfers by Transferees that are in the form of a gift or
bequest. Several commenters suggested that this limitation would be
unnecessarily restrictive. As noted by commenters, it is not necessary
for the rule to contain restrictions on non-donative transfers since
the effect of the transfer may be to cause the Section 3(c)(1) Fund to
lose its exclusion from Investment Company Act regulation.132
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\132\ A person that acquires securities from a Transferee for
consideration or from the Section 3(c)(1) Fund would have to be
counted toward the 100-investor limitation as a beneficial owner (or
more than one beneficial owner, if the amended Look-Through
Provision is applicable).
---------------------------------------------------------------------------
Rule 3c-6 also deals with transfers of securities by qualified
purchasers under section 3(c)(7)(A) of the Act. That section provides
that securities of a Section 3(c)(7) Fund that are owned by persons who
received them from a qualified purchaser as a gift or bequest, or when
the transfer was caused by legal separation, divorce, death or other
involuntary event, will be deemed to be owned by a qualified purchaser,
subject to such rules as the Commission may prescribe. Rule 3c-6
permits transfers of securities of a Section 3(c)(7) Fund under
essentially the same conditions as those governing transfers under
section 3(c)(1)(B).133 The rule treats a person who acquires
securities of a Section 3(c)(7) Fund in accordance with the rule as
qualified purchasers only for purposes of those securities. If the
person acquires additional securities of the Fund other than in
accordance with the rule, the person would have to meet the definition
of qualified purchaser (without regard to the rule) at that time.
---------------------------------------------------------------------------
\133\ Other involuntary transfers of Section 3(c)(7) Fund
securities may occur even if they are not covered by rule 3c-6. See
section 3(c)(7)(A) of the Act (``securities that are owned by
persons who received the securities from a qualified purchaser * * *
in a case in which the transfer was caused by * * * other
involuntary event, shall be deemed to be owned by a qualified
purchaser, subject to such rules, regulations and orders as the
Commission may prescribe * * *''). The Commission does not
contemplate adopting additional rules concerning involuntary
transfers under section 3(c)(7) at the present time.
---------------------------------------------------------------------------
IV. Cost/Benefit Analysis and Effects on Competition, Efficiency and
Capital Formation
Consistent with legislative intent and the protection of investors,
the rules benefit privately offered funds and their investors in a
number of ways. The rules define certain terms necessary to effectuate
the new exclusion from regulation under the Investment Company Act for
Section 3(c)(7) Funds; enable Section 3(c)(1) Funds that wish to
convert into Section 3(c)(7) Funds or become qualified purchasers to do
so without being subject to unduly burdensome notice and consent
requirements; enable knowledgeable employees of a privately offered
fund to invest in the fund without causing the fund to relinquish its
exclusion from regulation under the Act; permit certain transfers of
privately offered fund securities; and clarify certain interpretative
issues for privately offered funds. The Commission believes that the
rules would not impose any additional costs on privately offered funds.
Rather, the rules would clarify the statutory requirements for
privately offered funds in order to reduce any unnecessary burdens
without jeopardizing investor protection.
Section 2(c) of the Investment Company Act provides that whenever
the Commission is engaged in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, the Commission also shall consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. 134 The Commission believes
that the rules will promote efficiency, competition and capital
formation. The rules define terms and clarify certain provisions of the
new statutory exclusion for Section 3(c)(7) Funds and clarify other
statutory requirements applicable to privately offered funds. The
Commission believes that the rules do so in a way that will reduce
unnecessary burdens and provide greater flexibility, consistent with
investor protection.
---------------------------------------------------------------------------
\134\ 15 U.S.C. 80a-2(c).
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[[Page 17526]]
V. Summary of Regulatory Flexibility Analysis
A summary of the Initial Regulatory Flexibility Act Analysis
(``IRFA''), which was prepared in accordance with 5 U.S.C. 603, was
published in Investment Company Act Release No. 22405. No comments were
received on the IRFA.
The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with 5 U.S.C. 604 regarding rules 2a51-1,
2a51-2, 2a51-3, 3c-1, 3c-5 and 3c-6 under the Investment Company Act.
The FRFA indicates that the rules comply with the provisions of the
1996 Act directing the Commission to prescribe certain rules concerning
privately offered funds, and address certain interpretive issues raised
by the 1996 Act's amendments relating to privately offered funds. The
FRFA states that the rules, among other things, are designed to assure
that investors in Section 3(c)(7) Funds are the types of investors that
Congress determined do not need the protections of the Investment
Company Act. The FRFA further states that the rules give privately
offered funds greater flexibility as well as minimize certain
compliance burdens imposed by the applicable provisions of the
Investment Company Act.
The FRFA also discusses the effect of the rules on small entities
that are Section 3(c)(7) or Section 3(c)(1) Funds. For purposes of the
rules, small entities are those with assets of $50 million or less at
the end of their most recent fiscal year. The FRFA states that the
rules make possible the creation of small entities that are Section
3(c)(7) Funds, and provide greater flexibility and minimize certain
compliance burdens imposed by the provisions of the Investment Company
Act on small entities that are Section 3(c)(1) Funds. It is estimated
that there are approximately 600 U.S. venture capital pools that are
Section 3(c)(1) Funds, of which about 50% may be considered small
entities. The number of U.S. hedge funds has been estimated as being
between 800 and 3,000. Based on a sample of 250 hedge funds, it is
estimated that approximately 75% may be small entities.
The FRFA states that the rules do not impose any new reporting,
recordkeeping or compliance requirements, and that the Commission
believes that there are no rules that duplicate, overlap or conflict
with the adopted rules.
The FRFA discusses the various alternatives considered by the
Commission in connection with the rules that might minimize the effect
on small entities, including: (a) the establishment of differing
compliance or reporting requirements or timetables that take into
account the resources of small entities; (b) the clarification,
consolidation or simplification of compliance and reporting
requirements under the rule for small entities; (c) the use of
performance rather than design standards; and (d) an exemption from
coverage of the rule or any part of the rule, for small entities. The
Commission believes that it would be inconsistent with the purposes of
the Act to exempt small entities from the rules or to use performance
standards to specify different requirements for small entities.
Different compliance or reporting requirements for small entities are
not necessary because the rules do not establish any new reporting,
recordkeeping or compliance requirements. The Commission has determined
that it is not feasible to further clarify, consolidate or simplify the
rules for small entities.
Cost-benefit information reflected in the ``Cost/Benefit Analysis''
section of this Release also is reflected in the FRFA. A copy of the
FRFA may be obtained by contacting David P. Mathews, Securities and
Exchange Commission, 450 5th Street, N.W., Mail Stop 10-2, Washington,
D.C 20549.
VI. Statutory Authority
The Commission is adopting rules 2a51-1, 2a51-2 and 2a51-3 pursuant
to the authority set forth in sections 2(a)(51)(B), 6(c) and 38(a) of
the Investment Company Act [15 U.S.C. 80a-2(a)(51)(B), -6(c) and -
37(a)] and sections 209(d) (2) and (4) of the 1996 Act [15 U.S.C. 80a-2
note and -3 note). The Commission is adopting rule 3c-1 pursuant to the
authority set forth in sections 6(c) and 38(a) of the Investment
Company Act [15 U.S.C. 80a-6(c) and -37(a)]. The Commission is adopting
rule 3c-5 pursuant to the authority set forth in sections 6(c) and
38(a) of the Investment Company Act [15 U.S.C. 80a-6(c) and -37(a)] and
section 209(d)(3) of the 1996 Act [15 U.S.C. 80a-3 note]. The
Commission is adopting rule 3c-6 pursuant to the authority set forth in
sections 3(c)(1), 3(c)(7), 6(c) and 38(a) of the Investment Company Act
[15 U.S.C. 80a-3(c)(1), -3(c)(7), -6(c) and -37(a)] and section
209(d)(1) of the 1996 Act [15 U.S.C. 80a-3 note].
List of Subjects in 17 CFR Part 270
Investment companies, Securities.
Text of Rules
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 continues to read in part as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
* * * * *
2. Section 270.2a51-1 is added to read as follows:
Sec. 270.2a51-1. Definition of investments for purposes of section
2(a)(51) (definition of ``qualified purchaser''); certain calculations.
(a) Definitions. As used in this section:
(1) The term Commodity Interests means commodity futures contracts,
options on commodity futures contracts, and options on physical
commodities traded on or subject to the rules of:
(i) Any contract market designated for trading such transactions
under the Commodity Exchange Act and the rules thereunder; or
(ii) Any board of trade or exchange outside the United States, as
contemplated in Part 30 of the rules under the Commodity Exchange Act
[17 CFR 30.1 through 30.11].
(2) The term Family Company means a company described in paragraph
(A)(ii) of section 2(a)(51) of the Act [15 U.S.C. 80a-2(a)(51)].
(3) The term Investment Vehicle means an investment company, a
company that would be an investment company but for the exclusions
provided by sections 3(c)(1) through 3(c)(9) of the Act [15 U.S.C. 80a-
3(c)(1) through 3(c)(9)] or the exemptions provided by Secs. 270.3a-6
or 270.3a-7, or a commodity pool.
(4) The term Investments has the meaning set forth in paragraph (b)
of this section.
(5) The term Physical Commodity means any physical commodity with
respect to which a Commodity Interest is traded on a market specified
in paragraph (a)(1) of this section.
(6) The term Prospective Qualified Purchaser means a person seeking
to purchase a security of a Section 3(c)(7) Company.
(7) The term Public Company means a company that:
(i) Files reports pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [15 U.S.C. 78m or 78o(d)]; or
(ii) Has a class of securities that are listed on a ``designated
offshore
[[Page 17527]]
securities market'' as such term is defined by Regulation S under the
Securities Act of 1933 [17 CFR 230.901 through 230.904].
(8) The term Related Person means a person who is related to a
Prospective Qualified Purchaser as a sibling, spouse or former spouse,
or is a direct lineal descendant or ancestor by birth or adoption of
the Prospective Qualified Purchaser, or is a spouse of such descendant
or ancestor, provided that, in the case of a Family Company, a Related
Person includes any owner of the Family Company and any person who is a
Related Person of such owner.
(9) The term Relying Person means a Section 3(c)(7) Company or a
person acting on its behalf.
(10) The term Section 3(c)(7) Company means a company that would be
an investment company but for the exclusion provided by section 3(c)(7)
of the Act [15 U.S.C. 80a-3(c)(7)].
(b) Types of Investments. For purposes of section 2(a)(51) of the
Act [15 U.S.C. 80a-2(a)(51)], the term Investments means:
(1) Securities (as defined by section 2(a)(1) of the Securities Act
of 1933 [15 U.S.C. 77b(a)(1)]), other than securities of an issuer that
controls, is controlled by, or is under common control with, the
Prospective Qualified Purchaser that owns such securities, unless the
issuer of such securities is:
(i) An Investment Vehicle;
(ii) A Public Company; or
(iii) A company with shareholders' equity of not less than $50
million (determined in accordance with generally accepted accounting
principles) as reflected on the company's most recent financial
statements, provided that such financial statements present the
information as of a date within 16 months preceding the date on which
the Prospective Qualified Purchaser acquires the securities of a
Section 3(c)(7) Company;
(2) Real estate held for investment purposes;
(3) Commodity Interests held for investment purposes;
(4) Physical Commodities held for investment purposes;
(5) To the extent not securities, financial contracts (as such term
is defined in section 3(c)(2)(B)(ii) of the Act [15 U.S.C. 80a-
3(c)(2)(B)(ii)] entered into for investment purposes;
(6) In the case of a Prospective Qualified Purchaser that is a
Section 3(c)(7) Company, a company that would be an investment company
but for the exclusion provided by section 3(c)(1) of the Act [15 U.S.C.
80a-3(c)(1)], or a commodity pool, any amounts payable to such
Prospective Qualified Purchaser pursuant to a firm agreement or similar
binding commitment pursuant to which a person has agreed to acquire an
interest in, or make capital contributions to, the Prospective
Qualified Purchaser upon the demand of the Prospective Qualified
Purchaser; and
(7) Cash and cash equivalents (including foreign currencies) held
for investment purposes. For purposes of this section, cash and cash
equivalents include:
(i) Bank deposits, certificates of deposit, bankers acceptances and
similar bank instruments held for investment purposes; and
(ii) The net cash surrender value of an insurance policy.
(c) Investment Purposes. For purposes of this section:
(1) Real estate shall not be considered to be held for investment
purposes by a Prospective Qualified Purchaser if it is used by the
Prospective Qualified Purchaser or a Related Person for personal
purposes or as a place of business, or in connection with the conduct
of the trade or business of the Prospective Qualified Purchaser or a
Related Person, provided that real estate owned by a Prospective
Qualified Purchaser who is engaged primarily in the business of
investing, trading or developing real estate in connection with such
business may de deemed to be held for investment purposes. Residential
real estate shall not be deemed to be used for personal purposes if
deductions with respect to such real estate are not disallowed by
section 280A of the Internal Revenue Code [26 U.S.C. 280A].
(2) A Commodity Interest or Physical Commodity owned, or a
financial contract entered into, by the Prospective Qualified Purchaser
who is engaged primarily in the business of investing, reinvesting, or
trading in Commodity Interests, Physical Commodities or financial
contracts in connection with such business may be deemed to be held for
investment purposes.
(d) Valuation. For purposes of determining whether a Prospective
Qualified Purchaser is a qualified purchaser, the aggregate amount of
Investments owned and invested on a discretionary basis by the
Prospective Qualified Purchaser shall be the Investments' fair market
value on the most recent practicable date or their cost, provided that:
(1) In the case of Commodity Interests, the amount of Investments
shall be the value of the initial margin or option premium deposited in
connection with such Commodity Interests; and
(2) In each case, there shall be deducted from the amount of
Investments owned by the Prospective Qualified Purchaser the amounts
specified in paragraphs (e) and (f) of this section, as applicable.
(e) Deductions. In determining whether any person is a qualified
purchaser there shall be deducted from the amount of such person's
Investments the amount of any outstanding indebtedness incurred to
acquire or for the purpose of acquiring the Investments owned by such
person.
(f) Deductions: Family Companies. In determining whether a Family
Company is a qualified purchaser, in addition to the amounts specified
in paragraph (e) of this section, there shall be deducted from the
value of such Family Company's Investments any outstanding indebtedness
incurred by an owner of the Family Company to acquire such Investments.
(g) Special rules for certain Prospective Qualified Purchasers--(1)
Qualified institutional buyers. Any Prospective Qualified Purchaser who
is, or who a Relying Person reasonably believes is, a qualified
institutional buyer as defined in paragraph (a) of Sec. 230.144A of
this chapter, acting for its own account, the account of another
qualified institutional buyer, or the account of a qualified purchaser,
shall be deemed to be a qualified purchaser provided:
(i) That a dealer described in paragraph (a)(1)(ii) of
Sec. 230.144A of this chapter shall own and invest on a discretionary
basis at least $25 million in securities of issuers that are not
affiliated persons of the dealer; and
(ii) That a plan referred to in paragraph (a)(1)(i)(D) or
(a)(1)(i)(E) of Sec. 230.144A of this chapter, or a trust fund referred
to in paragraph (a)(1)(i)(F) of Sec. 230.144A of this chapter that
holds the assets of such a plan, will not be deemed to be acting for
its own account if investment decisions with respect to the plan are
made by the beneficiaries of the plan, except with respect to
investment decisions made solely by the fiduciary, trustee or sponsor
of such plan.
(2) Joint Investments. In determining whether a natural person is a
qualified purchaser, there may be included in the amount of such
person's Investments any Investments held jointly with such person's
spouse, or Investments in which such person shares with such person's
spouse a community property or similar shared ownership interest. In
determining whether spouses who are making a joint investment in a
Section 3(c)(7) Company are qualified purchasers, there may be included
in
[[Page 17528]]
the amount of each spouse's Investments any Investments owned by the
other spouse (whether or not such Investments are held jointly). In
each case, there shall be deducted from the amount of any such
Investments the amounts specified in paragraph (e) of this section
incurred by each spouse.
(3) Investments by Subsidiaries. For purposes of determining the
amount of Investments owned by a company under section 2(a)(51)(A)(iv)
of the Act [15 U.S.C. 80a-2(a)(51)(A)(iv)], there may be included
Investments owned by majority-owned subsidiaries of the company and
Investments owned by a company (``Parent Company'') of which the
company is a majority-owned subsidiary, or by a majority-owned
subsidiary of the company and other majority-owned subsidiaries of the
Parent Company.
(4) Certain Retirement Plans and Trusts. In determining whether a
natural person is a qualified purchaser, there may be included in the
amount of such person's Investments any Investments held in an
individual retirement account or similar account the Investments of
which are directed by and held for the benefit of such person.
(h) Reasonable Belief. The term ``qualified purchaser'' as used in
section 3(c)(7) of the Act [15 U.S.C. 80a-3(c)(7)] means any person
that meets the definition of qualified purchaser in section 2(a)(51)(A)
of the Act [15 U.S.C. 80a-2(a)(51)(A)]) and the rules thereunder, or
that a Relying Person reasonably believes meets such definition.
3. Section 270.2a51-2 is added to read as follows:
Sec. 270.2a51-2. Definitions of beneficial owner for certain purposes
under sections 2(a)(51) and 3(c)(7) and determining indirect ownership
interests.
(a) Beneficial ownership: General. Except as set forth in this
section, for purposes of sections 2(a)(51)(C) and 3(c)(7)(B)(ii) of the
Act [15 U.S.C. 80a-2(a)(51)(C) and -3(c)(7)(B)(ii)], the beneficial
owners of securities of an excepted investment company (as defined in
section 2(a)(51)(C) of the Act [15 U.S.C. 80a-2(a)(51)(C)]) shall be
determined in accordance with section 3(c)(1) of the Act [15 U.S.C.
80a-3(c)(1)].
(b) Beneficial ownership: Grandfather provision. For purposes of
section 3(c)(7)(B)(ii) of the Act [15 U.S.C. 80a-3(c)(7)(B)(ii)],
securities of an issuer beneficially owned by a company (without giving
effect to section 3(c)(1)(A) of the Act [15 U.S.C. 80a-3(c)(1)(A)])
(``owning company'') shall be deemed to be beneficially owned by one
person unless:
(1) The owning company is an investment company or an excepted
investment company;
(2) The owning company, directly or indirectly, controls, is
controlled by, or is under common control with, the issuer; and
(3) On October 11, 1996, under section 3(c)(1)(A) of the Act as
then in effect, the voting securities of the issuer were deemed to be
beneficially owned by the holders of the owning company's outstanding
securities (other than short-term paper), in which case, such holders
shall be deemed to be beneficial owners of the issuer's outstanding
voting securities.
(c) Beneficial ownership: Consent provision. For purposes of
section 2(a)(51)(C) of the Act [15 U.S.C. 80a-2(a)(51)(C)], securities
of an excepted investment company beneficially owned by a company
(without giving effect to section 3(c)(1)(A) of the Act [15 U.S.C. 80a-
3(c)(1)(A)]) (``owning company'') shall be deemed to be beneficially
owned by one person unless:
(1) The owning company is an excepted investment company;
(2) The owning company directly or indirectly controls, is
controlled by, or is under common control with, the excepted investment
company or the company with respect to which the excepted investment
company is, or will be, a qualified purchaser; and
(3) On April 30, 1996, under section 3(c)(1)(A) of the Act as then
in effect, the voting securities of the excepted investment company
were deemed to be beneficially owned by the holders of the owning
company's outstanding securities (other than short-term paper), in
which case the holders of such excepted company's securities shall be
deemed to be beneficial owners of the excepted investment company's
outstanding voting securities.
(d) Indirect ownership: Consent provision. For purposes of section
2(a)(51)(C) of the Act [15 U.S.C. 80a-2(a)(51)(C)], an excepted
investment company shall not be deemed to indirectly own the securities
of an excepted investment company seeking a consent to be treated as a
qualified purchaser (``qualified purchaser company'') unless such
excepted investment company, directly or indirectly, controls, is
controlled by, or is under common control with, the qualified purchaser
company or a company with respect to which the qualified purchaser
company is or will be a qualified purchaser.
(e) Required consent: Consent provision. For purposes of section
2(a)(51)(C) of the Act [15 U.S.C. 80a-2(a)(51)(C)], the consent of the
beneficial owners of an excepted investment company (``owning
company'') that beneficially owns securities of an excepted investment
company that is seeking the consents required by section 2(a)(51)(C)
(``consent company'') shall not be required unless the owning company
directly or indirectly controls, is controlled by, or is under common
control with, the consent company or the company with respect to which
the consent company is, or will be, a qualified purchaser.
Notes to Sec. 270.2a51-2:
1. On both April 30, 1996 and October 11, 1996, section
3(c)(1)(A) of the Act as then in effect provided that: (A)
Beneficial ownership by a company shall be deemed to be beneficial
ownership by one person, except that, if the company owns 10 per
centum or more of the outstanding voting securities of the issuer,
the beneficial ownership shall be deemed to be that of the holders
of such company's outstanding securities (other than short-term
paper) unless, as of the date of the most recent acquisition by such
company of securities of that issuer, the value of all securities
owned by such company of all issuers which are or would, but for the
exception set forth in this subparagraph, be excluded from the
definition of investment company solely by this paragraph, does not
exceed 10 per centum of the value of the company's total assets.
Such issuer nonetheless is deemed to be an investment company for
purposes of section 12(d)(1).
2. Issuers seeking the consent required by section 2(a)(51)(C)
of the Act should note that section 2(a)(51)(C) requires an issuer
to obtain the consent of the beneficial owners of its securities and
the beneficial owners of securities of any ``excepted investment
company'' that directly or indirectly owns the securities of the
issuer. Except as set forth in paragraphs (d) (with respect to
indirect owners) and (e) (with respect to direct owners) of this
section, nothing in this section is designed to limit this consent
requirement.
4. Section 270.2a51-3 is added to read as follows:
Sec. 270.2a51-3. Certain companies as qualified purchasers.
(a) For purposes of section 2(a)(51)(A) (ii) and (iv) of the Act
[15 U.S.C. 80a-2(a)(51) (A)(ii) and (iv)], a company shall not be
deemed to be a qualified purchaser if it was formed for the specific
purpose of acquiring the securities offered by a company excluded from
the definition of investment company by section 3(c)(7) of the Act [15
U.S.C. 80a-3(c)(7)] unless each beneficial owner of the company's
securities is a qualified purchaser.
(b) For purposes of section 2(a)(51) of the Act [15 U.S.C. 80a-
2(a)(51)], a company may be deemed to be a qualified purchaser if each
beneficial
[[Page 17529]]
owner of the company's securities is a qualified purchaser.
5. Section 270.3c-1 is added to read as follows:
Sec. 270.3c-1. Definition of beneficial ownership for certain section
3(c)(1) funds.
(a) As used in this section:
(1) The term Covered Company means a company that is an investment
company, a Section 3(c)(1) Company or a Section 3(c)(7) Company.
(2) The term Section 3(c)(1) Company means a company that would be
an investment company but for the exclusion provided by section 3(c)(1)
of the Act [15 U.S.C. 80a-3(c)(1)].
(3) The term Section 3(c)(7) Company means a company that would be
an investment company but for the exclusion provided by section 3(c)(7)
of the Act [15 U.S.C. 80a-3(c)(7)].
(b) For purposes of section 3(c)(1)(A) of the Act [15 U.S.C. 80a-
3(c)(1)(A)], beneficial ownership by a Covered Company owning 10
percent or more of the outstanding voting securities of a Section
3(c)(1) Company shall be deemed to be beneficial ownership by one
person, provided that:
(1) On April 1, 1997, the Covered Company owned 10 percent or more
of the outstanding voting securities of the Section 3(c)(1) Company or
non-voting securities that, on such date and in accordance with the
terms of such securities, were convertible into or exchangeable for
voting securities that, if converted or exchanged on or after such
date, would have constituted 10 percent or more of the outstanding
voting securities of the Section 3(c)(1) Company; and
(2) On the date of any acquisition of securities of the Section
3(c)(1) Company by the Covered Company, the value of all securities
owned by the Covered Company of all issuers that are Section 3(c)(1) or
Section 3(c)(7) Companies does not exceed 10 percent of the value of
the Covered Company's total assets.
6. Section 270.3c-5 is added to read as follows:
Sec. 270.3c-5. Beneficial ownership by knowledgeable employees and
certain other persons.
(a) As used in this section:
(1) The term Affiliated Management Person means an affiliated
person, as such term is defined in section 2(a)(3) of the Act [15
U.S.C. 80a-2(a)(3)], that manages the investment activities of a
Covered Company. For purposes of this definition, the term ``investment
company'' as used in section 2(a)(3) of the Act includes a Covered
Company.
(2) The term Covered Company means a Section 3(c)(1) Company or a
Section 3(c)(7) Company.
(3) The term Executive Officer means the president, any vice
president in charge of a principal business unit, division or function
(such as sales, administration or finance), any other officer who
performs a policy-making function, or any other person who performs
similar policy-making functions, for a Covered Company or for an
Affiliated Management Person of the Covered Company.
(4) The term Knowledgeable Employee with respect to any Covered
Company means any natural person who is:
(i) An Executive Officer, director, trustee, general partner,
advisory board member, or person serving in a similar capacity, of the
Covered Company or an Affiliated Management Person of the Covered
Company; or
(ii) An employee of the Covered Company or an Affiliated Management
Person of the Covered Company (other than an employee performing solely
clerical, secretarial or administrative functions with regard to such
company or its investments) who, in connection with his or her regular
functions or duties, participates in the investment activities of such
Covered Company, other Covered Companies, or investment companies the
investment activities of which are managed by such Affiliated
Management Person of the Covered Company, provided that such employee
has been performing such functions and duties for or on behalf of the
Covered Company or the Affiliated Management Person of the Covered
Company, or substantially similar functions or duties for or on behalf
of another company for at least 12 months.
(5) The term Section 3(c)(1) Company means a company that would be
an investment company but for the exclusion provided by section 3(c)(1)
of the Act [15 U.S.C. 80a-3(c)(1)].
(6) The term Section 3(c)(7) Company means a company that would be
an investment company but for the exclusion provided by section 3(c)(7)
of the Act [15 U.S.C. 80a-3(c)(7)].
(b) For purposes of determining the number of beneficial owners of
a Section 3(c)(1) Company, and whether the outstanding securities of a
Section 3(c)(7) Company are owned exclusively by qualified purchasers,
there shall be excluded securities beneficially owned by:
(1) A person who at the time such securities were acquired was a
Knowledgeable Employee of such Company;
(2) A company owned exclusively by Knowledgeable Employees;
(3) Any person who acquires securities originally acquired by a
Knowledgeable Employee in accordance with this section, provided that
such securities were acquired by such person in accordance with
Sec. 270.3c-6.
7. Section 270.3c-6 is added to read as follows:
Sec. 270.3c-6. Certain transfers of interests in section 3(c)(1) and
section 3(c)(7) funds.
(a) As used in this section:
(1) The term Donee means a person who acquires a security of a
Covered Company (or a security or other interest in a company referred
to in paragraph (b)(3) of this section) as a gift or bequest or
pursuant to an agreement relating to a legal separation or divorce.
(2) The term Section 3(c)(1) Company means a company that would be
an investment company but for the exclusion provided by section 3(c)(1)
of the Act [15 U.S.C. 80a-3(c)(1)].
(3) The term Section 3(c)(7) Company means a company that would be
an investment company but for the exclusion provided by section 3(c)(7)
of the Act [15 U.S.C. 80a-3(c)(7)].
(4) The term Transferee means a Section 3(c)(1) Transferee or a
Qualified Purchaser Transferee, in each case as defined in paragraph
(b) of this section.
(5) The term Transferor means a Section 3(c)(1) Transferor or a
Qualified Purchaser Transferor, in each case as defined in paragraph
(b) of this section.
(b) Beneficial ownership by any person (``Section 3(c)(1)
Transferee'') who acquires securities or interests in securities of a
Section 3(c)(1) Company from a person other than the Section 3(c)(1)
Company shall be deemed to be beneficial ownership by the person from
whom such transfer was made (``Section 3(c)(1) Transferor''), and
securities of a Section 3(c)(7) Company that are owned by persons who
received the securities from a qualified purchaser other than the
Section 3(c)(7) Company (``Qualified Purchaser Transferor'') or a
person deemed to be a qualified purchaser by this section shall be
deemed to be acquired by a qualified purchaser (``Qualified Purchaser
Transferee''), provided that the Transferee is:
(1) The estate of the Transferor;
(2) A Donee; or
(3) A company established by the Transferor exclusively for the
benefit of (or owned exclusively by) the Transferor and the persons
specified in paragraphs (b)(1) and (b)(2) of this section.
Dated: April 3, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8950 Filed 4-7-97; 10:26 am]
BILLING CODE 8010-01-P