[Federal Register Volume 62, Number 93 (Wednesday, May 14, 1997)]
[Notices]
[Pages 26595-26601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12548]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-22656; 813-150]


The BSC Employee Fund, L.P. and BSCGP Inc.; Notice of Application

May 7, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: The BSC Employee Fund, L.P. (the ``Partnership'') and BSCGP 
Inc. (the ``General Partner'').

RELEVANT ACT SECTIONS: Order under section 6(b) of the Act for an 
exemption from all provisions of the Act except sections 7, 8(a), 9, 17 
(except for certain provisions of sections 17(a), (d), (f), (g), and 
(j) as described herein), and 36 through 53, and the rules and 
regulations thereunder.

SUMMARY OF APPLICATION: Applicants request an order to permit the 
Partnership, and other partnerships offered to the same class of 
investors (the ``Subsequent Partnerships'') (together with the 
Partnership, the ``Partnerhships''), to engage in certain

[[Page 26596]]

affiliated and joint transactions. Each partnership will be an 
employees' securities company within the meaning of section 2(a) (13) 
of the Act. Partnership interests will be offered to eligible 
employees, officers, and directors of The Bear Stearns Companies Inc. 
(``BSC'') and any entities controlled directly or indirectly by BSC 
(together with BSC, ``Bear Stearns'').

FILING DATES: The application was filed on April 17, 1996 and amended 
on August 16, 1996 and April 18, 1997. Applicants have agreed to file 
an amendment, the substance of which is incorporated herein, during the 
notice period.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on June 2, 1997, 
and should be accompanied by proof of service on the applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 245 Park Avenue, New York, New York 10167.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard, 
Branch Chief, at (202) 942-0564 (Division of Investment Management, 
Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. BSC is a holding company that, through its subsidiaries, 
principally Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corp. 
(``BSSC''), is a leading U.S. investment banking, securities trading, 
and brokerage firm serving U.S. and foreign corporations, governments, 
and institutional and individual investors. Bear, Stearns & Co. Inc. 
and BSSC are broker-dealers registered under the Securities Exchange 
Act of 1934 (the ``Exchange Act''). Bear, Stearns and Co. Inc. and two 
other affiliates of BSC are registered as investment advisers under the 
Investment Advisers Act of 1940 (the ``Advisers Act'').
    2. From time to time, in the course of its investment banking 
business, numerous investment opportunities come to the attention of 
Bear Stearns. Such opportunities may include certain types of closed-
end private investment funds that typically are excepted from the 
definition of ``investment company'' under section 3(c)(1) or, 
potentially, section 3(c)(7) of the Act (``Acquisition Funds''). 
Acquisition Funds typically invest directly in portfolio companies 
identified by the general partners of the Acquisition Funds (the 
``Portfolio Companies''). Portfolio Companies may be subject to 
leveraged buyouts, may require venture financing, or may otherwise 
require growth capital. Certain of the Acquisition Funds may also make 
other types of investments, including real estate-related investments 
and investments in emerging market opportunities.
    3. The Partnership currently consists of the General Partner, which 
is a Delaware corporation and a wholly-owned subsidiary of BSC, and 
BSC, which is currently acting as the Partnership's sole limited 
partner. The General Partner has registered as an investment adviser 
under the Advisers Act. The Partnership is soliciting subscriptions 
from a number of its employees, officer, and directors (``Eligible 
Employees,'' as defined below) to acquire limited partnership interests 
in the Partnership; however, such Eligible Employees have not yet been 
admitted to the Partnership as limited partners (``Limited Partners''). 
Upon the occurrence of certain events, including receipt by the 
Partnership of the order requested herein, the Eligible Employees will 
be admitted into the Partnership as Limited Partners (the ``Closing''), 
and, pursuant to the subscription agreements, as such time the Limited 
Partners will be required to make their initial cash capital 
contribution to the Partnership, which the Partnership in turn will use 
to acquire the interests in the Acquisition Funds previously subscribed 
for by Bear Stearns.\1\ Bear Stearns has entered into subscription 
agreements with respect to seven Acquisition Funds identified for 
investment by the Partnership. These subscription agreements were 
entered into in the expectation that at the time Eligible Employees are 
first admitted to the Partnership: (i) all the rights and obligations 
arising under these subscription agreements will be transferred to the 
Partnership; (ii) the Partnership will be admitted as a Limited Partner 
to each of the Acquisition Funds or will otherwise succeed to the 
economic interest in the Acquisition Funds previously held by Bear 
Stearns; and (iii) Bear Stearns will be reimbursed by the Partnership 
for its net cash contribution for any funds previously advanced by Bear 
Stearns in respect of its subscription agreements with such Acquisition 
Funds.
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    \1\ Bear Stearns presently has not determined whether Subsequent 
Partnerships will in fact be formed and offered to Eligible 
Employees. To the extent that Subsequent Partnership are formed and 
offered, it is expected that their purpose, structure, and manner of 
operation will be substantially similar to the purpose, structure, 
and manner of operation of the Partnership. Each Subsequent 
Partnership will observe all of the terms and conditions of the 
application.
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    4. The purpose of the Partnership is to enable certain key 
personnel of Bear Stearns to pool their investment resources and to 
receive the benefit of investing in a portfolio of Acquisition Funds, 
without the necessity of each investor seeking to identify such 
opportunities and to analyze their investment merit. In addition, the 
pooling of resources should allow the investors to participate in 
investment opportunities that ordinarily would not be available to them 
as individual investors. The Partnership will seek to reward and retain 
current key personnel and, through the potential formation of 
Subsequent Partnerships, to attract other individuals to Bear Stearns.
    5. Interests in the Partnership will be offered without 
registration under a claim of exemption under section 4(2) of the 
Securities Act of 1933 (``Securities Act'') \2\ and will be offered and 
sold only to Eligible Employees of Bear Stearns or trusts established 
for their benefit or for the benefit of their immediate family. To be 
an Eligible Employee, an individual must be at the time of subscription 
a managing director or senior managing director of Bear Stearns (which 
represent the two most senior categories of professional employees 
within Bear Stearns) or a Bear Stearns director or senior officer, and 
such individual must also be an ``accredited investor'' meeting the 
income requirements set forth in rule 501(a)(6) of Regulation D under 
the Securities Act.\3\ All Eligible Employees

[[Page 26597]]

will be offered interests in the Partnership, but no Eligible Employee 
will be required to invest in the Partnership.
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    \2\ Section 4(2) exempts transactions by an issuer not involving 
any public offering from the Securities Act's registration 
requirement.
    \3\ The sole exception to these offering and eligibility 
requirements is that three BSC employees who are not accredited 
investors but who have been intimately involved in the organization 
of the Partnership and the investment program contemplated thereby 
will be offered the opportunity to invest in the Partnership. Each 
employee who is not an accredited investor pursuant to the income 
requirements set forth in rule 501(a)(6) of Regulation D will have 
had reportable income from all sources (including any profit shares 
or bonus) in the calendar year immediately preceding such person's 
admission as a Limited Partner in excess of $120,000 and will have a 
reasonable expectation of reportable income in the years in which 
such person will be required to make capital contributions of at 
least $150,000.
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    6. The management and control of the Partnership, including all 
investment decisions to be made on a going-forward basis, will be 
vested exclusively in the General Partner, and the Limited Partners 
will have no part in the management and control of the Partnership and 
will have no authority or right to act on behalf of the Partnership in 
connection with any matter. The business and affairs will be managed by 
or under the direction of the board of directors of the General Partner 
(the ``Board''); thus, the Board indirectly will manage and control the 
Partnership. The Board will, among other things, act as the advisory 
committee of the Partnership responsible for approving all investment 
decisions. The Board is composed exclusively of senior officers of BSC 
or one of its principal operating subsidiaries. Each member of the 
Board qualifies as an Eligible Employee, and each initial member of the 
Board will invest as a Limited Partner.
    7. Except with respect to the reimbursement of expenses, the 
General Partner will not receive any form of management fee or other 
form of compensation for acting as the General Partner. Instead, it, or 
any other entity within Bear Stearns incurring such expenses, will be 
reimbursed for actual organization expenses up to a specified amount 
and for normal operating expenses, including rent, salaries of its 
personnel, expenses incurred by its personnel in investigating 
investment opportunities, communications and travel expenses, and an 
allocated share of corporate overhead, subject to a ceiling of 0.5% of 
Total Commitments (as defined below) each year. The Partnership also 
will pay certain enumerated expenses of the General partner and the 
Partnership incurred in connection with the operation and dissolution 
of the Partnership. The nature of the General Partner's interest in the 
Partnership (which is expected to represent at least a 1.0% Percentage 
Interest, as defined below), will not entitle it to a carried interest 
or other special or preferred distribution rights. The General Partner 
will be entitled to distributions from the Partnership solely in 
accordance with its Percentage Interest.
    8. Pursuant to subscription agreements to be entered into by the 
General Partner and each of the Limited Partners (together, the 
``Partners''), a maximum total commitment (``Total Commitment'') will 
be established for each Partner in connection with that Partner's 
investment in the Partnership. Each Limited Partner's Total Commitment 
will consist of (i) a capital commitment (``Capital Commitment'') equal 
to 50% of the Limited Partner's Total Commitment and (ii) an equal 
amount of debt of the Partnership (other than amounts attributable to 
accrued and unpaid interest) outstanding under a credit agreement to be 
entered into between Bear Stearns and the Partnership (``BSC Credit 
Facility''). The Total Commitment for all Partners will represent an 
amount sufficient to fund the purchase price payable by the partnership 
for the purchase of interests in the previously identified Acquisition 
Funds, the aggregate unpaid capital commitments made in respect of the 
Partnership's subscription agreements with the Acquisition Funds, as 
well as organization and ongoing administrative expenses.\4\
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    \4\ Acquisition Funds tend to make capital calls on their 
limited partners periodically on an as-needed basis in connection 
with particular investment in one or more Portfolio Companies. To 
accommodate anticipated liquidity concerns of the Limited Partners 
and to avoid drawing their capital substantially in advance of the 
funding requirements established by the Acquisition Funds, the 
partnership has determined to draw down the Limited Partners' 
capital over time, roughly in parallel fashion to capital calls 
issued by the Acquisition Funds.
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    9. Concurrently with the Closing, the partnership will enter into 
an agreement with Bear Stearns creating the BSC Credit Facility, a line 
of credit with a maximum availability equal to the sum of (i) 50% of 
the aggregate Total Commitment of each Limited Partner and (ii) accrued 
and unpaid interest thereon. Indebtedness under the BSC Credit Facility 
will be debt of the Partnership and without recourse to the Partners. 
Because the Partners may not share in the debt proportionately, 
indebtedness under the BSC Credit Facility will be allocated to each 
Partner separately, and each Partner's share of interest expense and 
cash distributions from the Partnership will be calculated separately 
to reflect that Partner's allocable share of that indebtedness.
    10. Advances from Bear Sterns under the BSC Credit Facility will 
bear interest based on prevailing LIBOR rates plus an applicable margin 
(initially expected to be 100 basis points). The terms of the BSC 
Credit Facility will be no less favorable to the Limited Partners than 
those that generally would be obtained by the Limited Partners on an 
arm's length basis.
    11. The Partnership will not be permitted to make investments other 
than investments in (i) Acquisition Funds, (ii) temporary investments 
in specified short-term government securities, certificates of deposit, 
commercial paper and similar securities, as well as money market funds 
(including funds managed, sponsored, or underwritten by Bear Stearns) 
that invest in such securities (``Temporary Investments''),\5\ or (iii) 
securities or other property that may be distributed by Acquisition 
Funds to their limited partners (including securities for which 
securities so distributed may be exchanged or into which securities so 
distributed may be converted).
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    \5\ The Partnership will not acquire any security issued by a 
registered investment company if immediately after such acquisition 
the Partnership will own more than 3% of the outstanding voting 
stock of the registered investment company.
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    12. No Bear Stearns Related Person (as defined below) other than 
the Partnership is making an investment in any of the Acquisition Funds 
that have been identified for transfer to the Partnership as of the 
Closing Date and, except as described below, a Bear Stearns Related 
Person will not, at any time a Partnership is not fully invested, be 
permitted to make investments in Acquisition Funds without having first 
offering the opportunity to make the investment to the Partnership 
(``obligation to offer''). A ``Bear Stearns Related Person'' means the 
General Partner, The Bear Stearns Companies Inc., and any other person 
in which at least 80% of the ownership interest is beneficially owned 
directly or indirectly by The Bear Stearns Companies Inc., as well as 
any investment fund managed by any of the foregoing.
    13. Certain investments are not subject to the ``obligation to 
offer.'' These investments include (i) An investment made by a Bear 
Stearns Related Person pursuant to an offer made only to BSC or one of 
its subsidiaries, (ii) an investment that constitutes compensation for 
providing investment banking or other services, (iii) an investment 
made by any Bear Stearns Related Person in its underwriting capacity or 
in connection with broker-dealer activities, or (iv) an investment made 
in connection with the purchase of a portfolio of securities from 
another entity.\6\
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    \6\ Applicants expect that there may be co-investments by the 
Partnership with one or more of its affiliated entities. For 
example, the Partnership and a Bear Stearns Related Person may co-
invest in an Acquisition Fund. In all events, transactions to which 
the Partnership is a party that would otherwise be prohibited by 
section 17(d) of the Act and rule 17d-1 thereunder will be effected 
only in compliance with the conditions applicable to such 
transactions that are specified below.

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[[Page 26598]]

    14. Any transactions involving Bear Stearns, an Acquisition Fund, 
affiliates of Acquisition Funds, any Portfolio Company, or any Partner 
or person or entity related to any Partner must be on terms no less 
favorable to the Partnership than generally are afforded to unrelated 
third parties in comparable transactions. Such transactions may include 
the purchase or sale by the Partnership of an investment from or to any 
Bear Stearns affiliate, acting as principal, or borrowings of the 
Partnership pursuant to the BSC Credit Facility. With respect to any 
investment purchased by the Partnership from Bear Stearns, acting as 
principal, the Partnership will acquire the investment for no more than 
Bear Stearns' net cash contribution, plus carrying costs and certain 
organizational expenses. The Partnership does not presently expect that 
it will acquire investments from Bear Stearns, acting as principal, 
other than in connection with acquisitions of interests in Acquisition 
Funds that previously have been acquired by Bear Stearns and designated 
by Bear Stearns and the General Partner at the time of acquisition for 
resale to the Partnership, and, potentially, in connection with the 
purchase of Temporary Investments.
    15. Bear Stearns may provide investment banking or management or 
other services to, and receive related fees or other compensation and 
expense reimbursement from, entities in which a Partnership makes an 
investment or competitors of such entities. Such fees or other 
compensation may include, without limitation, advisory fees, 
organization or success fees, financing fees, management fees, 
performance-based fees, fees for brokerage and clearing services, and 
compensation in the form of carried interests entitling Bear Stearns to 
share disproportionately in income or capital gains or similar 
compensation.
    16. Upon admission into the Partnership, each participant will 
become a Limited Partner and, as such, will participate pro rata with 
other Limited Partners in making Partnership investments and paying 
Partnership expenses (other than interest on borrowing from Bear 
Stearns, as discussed above). Each Limited Partner will also be 
entitled to a pro rata share of Partnership allocations and 
distributions. Distributions of amounts received from the Acquisition 
Funds will be made, and items of income, gain, loss, and deduction 
attributable to the Acquisition Funds will be allocated ratably among 
the Partners in accordance with their percentage interests, which will 
equal each Partner's Total Commitment as a percentage of all Total 
Commitments of the Partners (``Percentage Interests'').
    17. For a Limited Partner who is an employee of Bear Stearns at the 
time of distributions, the Limited Partner's Percentage Interest of 
available cash, net of expenses, will be applied in the following 
order: (i) To fund aggregate distributions each year equal to the 
combined federal, New York State, and New York City income tax on items 
of income of the Partnership calculated at the highest rates applicable 
to individuals for the type of income at issue (``Tax Distributions''); 
(ii) to pay in full the Limited Partner's share of accrued interest on 
any outstanding indebtedness under the BSC Credit Facility; (iii) to 
repay the Limited Partner's share of the principal amount of any 
outstanding indebtedness under the BSC Credit Facility; and (iv) to 
fund distributions to the Partner.
    18. A Limited Partner whose employment with Bear Stearns is 
terminated for other than death, disability, or retirement and who 
honors his or her obligation to fund Capital Commitments as described 
below will no longer share in the 50% portion of the post-termination 
distributions corresponding to the portion of the investment that was 
initially funded with the proceeds of the BSC Credit Facility, but 
otherwise will be treated as a Limited Partner who remains employed by 
Bear Stearns. To achieve this result, such a Limited Partner's 
Percentage Interest of available cash, net of expenses, will be applied 
in the following order: (i) To fund Tax Distributions to the Limited 
Partner; (ii) to fund Tax Distributions to Bear Stearns in respect of 
the 50% portion of the distribution not paid to the Limited Partner; 
(iii) to pay in full the Limited Partner's share of accrued interest on 
any outstanding indebtedness under the BSC Credit Facility; (iv) to 
repay the Limited Partner's share of the principal amount of any 
outstanding indebtedness under the BSC Credit Facility; (v) to fund a 
distribution to the Limited Partner equal to such Limited Partner's 
``Catch-Up Amount,'' as defined below; and (vi) to fund distributions 
50% to the Limited Partner and 50% to Bear Stearns.\7\
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    \7\ The Catch-Up Amount of a Limited Partner shall equal an 
amount based on the assumption that the distributions to such 
Limited Partner were determined for such period without regard to 
distributions made to cover payments of interest on and principal of 
indebtedness under the BSC Credit Facility, and taxes on 
distributions not made to the Limited Partner. The Catch-Up Amount 
is intended to reverse the effects of using the investment return to 
repay the attributable share of the BSC Credit Facility of a Limited 
Partner who has ceased to be employed by Bear Stearns. Cash for each 
investment is provided to the Partnership 50% from the Limited 
Partner's Capital Commitment and 50% from BSC Credit Facility 
proceeds. All distributions, after funding tax distributions, are 
first applied to pay principal and interest on the BSC Credit 
Facility. After the BSC Credit Facility is repaid, for a Limited 
Partner who has ceased to be employed by Bear Stearns, additional 
proceeds from the entire investment are first distributed to the 
Limited Partner through the Catch-Up Amount provision (up to the 
amount applied to make payments on the BSC Credit Facility) and then 
are distributed 50% to the Limited Partner and 50% to Bear Stearns. 
The effect is generally to put the Limited Partner in the same 
position in which he or she would have been had the investment not 
been leveraged in the first place.
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    19. If a Limited Partner's employment with Bear Stearns is 
terminated by reason of the disability or retirement of the Limited 
Partner, the Limited Partner will retain his or her entire Interest 
following the termination as though he or she were still an employee. 
In the case of the death of the Limited Partner, (i) the Limited 
Partner's estate will receive the economic rights of such Interest but 
will not be admitted to the Partnership as a Limited Partner, without 
the consent of the General Partner, and (ii) the estate of the Limited 
Partners will have the option to cease making capital contributions, in 
which case the estate's Interest will relate solely to assets of the 
Acquisition Funds at the time of death, and (iii) the estate will have 
the right to receive cash from the General Partner in an amount equal 
to the fair market value of the Limited Partner's Interest in the 
Partnership, as determined by the General Partner.
    20. If a Limited Partner ceases to be employed by Bear Stearns for 
any reason other than death, disability, or retirement, and at that 
time all Capital Commitments of the Limited Partner have been fully 
funded, the Limited Partner will retain, following the termination of 
employment, his or her entire interest in assets of the Partnership 
acquired with his or her Capital Commitments, but will not retain any 
interest in assets of the Partnership acquired with the proceeds of the 
BSC Credit Facility. If a Limited Partner's employment with Bear 
Stearns is terminated other than for death, disability, or retirement, 
and at that time the Limited Partner has an unfunded Capital 
Commitment, the Limited Partner will be required to make a capital 
contribution to the Partnership equal to the Limited Partner's undrawn 
Total Commitment. Amounts contributed upon termination will be

[[Page 26599]]

invested in Temporary Investments, pending investment in the 
Acquisition Funds. All income or loss from such Temporary Investments 
will be allocated, and cash (net of expenses and reserves for future 
expenses) produced by such investments will be distributed, to that 
Limited Partner, but otherwise such a Limited Partner will be treated 
as if his or her Capital Commitment had been fully funded at the 
termination of employment. If the Limited Partner fails to make such 
required capital contribution, the Partnership may then immediately 
redeem such Limited Partner's Interest at a price equal to the lesser 
of (i) the amount of such Limited Partner's capital account as 
reflected on the books and records of the Partnership, and (ii) the 
fair value of such Limited Partner's Interest (as determined by the 
General Partner), in each case measured as of the date of termination 
of such Limited Partner. Except as the Partnership and the Limited 
Partner may otherwise agree, the redemption price will be paid in the 
form of a note from the Partnership, bearing interest at three-month 
LIBOR, that will mature upon dissolution of the Partnership. Interest 
on the note will accrue and be payable at maturity.\8\ To avoid 
unfairly disadvantaging departing Limited Partners who honor their 
Capital Commitments as compared to those who do not, the amount payable 
under the note will in no event exceed the amounts that would have been 
payable in respect of a Limited Partner's Interest (after giving effect 
to amounts advanced by Bear Stearns in respect of any unfunded Capital 
Commitment) had such Limited Partner made the required capital 
contribution upon his or her termination.
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    \8\ Applicants believe that deferring maturity of the note until 
dissolution of the Partnership is consistent with the protection of 
investors because the timing of the dissolution of the Partnership 
is outside the control of Bear Stearns and Bear Stearns has no 
incentive to defer dissolution of the Partnership, and the holders 
of the notes are not being treated any differently from other 
Limited Partners, who also will await dissolution for their final 
distributions.
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Applicants' Legal Analysis

    1. Section 6(b) provides that the SEC shall exempt employees' 
securities companies from the provisions of the Act to the extent that 
such exemption is consistent with the protection of investors. Section 
2(a)(13) defines an employees' security company, among other things, as 
any investment company all of the outstanding securities of which are 
beneficially owned by the employees or persons on retainer of a single 
employer or affiliated employers or by former employees of such 
employers; or by members of the immediate family of such employees, 
persons on retainer, or former employees.
    2. Applicants request an order under section 6(b) of the Act 
granting an exemption from all provisions of the Act, except section 7, 
8(a), 9, 17 (except for certain provisions of sections 17 (a), (d), 
(f), (g), and (j) as described herein), and 36 through 53, and the 
rules and regulations thereunder. Applicants assert that the order 
requested pursuant to section 6(b) of the Act is consistent with the 
protection of investors. Applicants believe that a substantial 
community of economic and other interests exists among Bear Stearns, 
the members of the Board, the officers of the General Partner, and the 
Limited Partners, taking into consideration the form of organization of 
the Partnership and the absence of any public investors. Applicants 
note that the capital structure of the Partnership will be such that 
the General Partner will contribute substantial capital to the 
Partnership but will not receive any special or preferred distribution 
rights with respect to its interest in the Partnership; indeed, neither 
the General Partner nor any Bear Stearns affiliate will receive any 
form of sales load or management or advisory fee from the Partnership 
or any of the Limited Partners. Applicants state that the community of 
interest between Bear Stearns and the Partnership will be enhanced 
further by the existence of the BSC Credit Facility, since Bear Stearns 
will bear a substantial portion of the risk of loans made thereunder, 
given that such loans will be nonrecourse to the Partners and payable 
only out of the assets of the Partnership. Finally, applicants believe 
Bear Stearns will have a substantial stake in the success of the 
Partnership given the concern of Bear Stearns with the morale of its 
key personnel, a substantial number of which are expected to invest in 
the Partnership.
    3. Section 17(a) provides, in relevant part, that it is unlawful 
for any affiliated person of a registered investment company, acting as 
principal, to sell any security or other property to such registered 
investment company or to purchase from such registered investment 
company any security or other such property. Applicants request an 
exemption from section 17(a) of the Act to the extent necessary to 
permit a Partnership to: (a) Acquire interests in Acquisition Funds 
from Bear Stearns on a principal basis; (b) purchase interests in an 
Acquisition Fund in which Bear Stearns already owns an interest or 
where such Acquisition Fund (or, in certain circumstances, one of its 
Portfolio Companies) is otherwise affiliated with Bear Stearns or a 
Partnership; (c) sell, put or tender, or grant options in securities or 
interests in a company or other investment vehicle back to such entity, 
where such entity is affiliated with Bear Stearns; (d) participate as a 
selling security holder in a public offering that is underwritten by 
Bear Stearns or in which Bear Stearns acts as a member of the 
underwriting group; and (e) make money market fund or other short-term 
investments.
    4. Applicants assert that, without the requested relief, the 
Partnerships would be precluded from acquiring interests in Acquisition 
Funds previously subscribed for by Bear Stearns. Applicants note that 
following commencement of the offering of Interests to Limited Partners 
by the delivery of offering materials, there will be no discretion 
regarding which interests in Acquisition Funds previously acquired by 
Bear Stearns will be sold to the Partnership the Acquisition Funds 
described in the offering materials have been designated for sale to 
the Partnership since the time the investments were made, and will be 
sold for a price not to exceed Bear Stearns' net cash contribution plus 
carrying costs and certain organizational expenses. Applicants argue 
that this arrangement should ensure the fairness and reasonableness of 
the purchase of interests in the Acquisition Funds.
    5. Applicants state that relief is also requested to permit a 
Partnership the flexibility to deal with its portfolio of Acquisition 
Funds, and, in particular, securities in Portfolio Companies that may 
be distributed from time to time by the Acquisition Funds to their 
limited partners, in the manner the General Partner deems most 
advantageous. Applicants contend that relief from section 17(a) is 
necessary since underwritten public offerings typically involve 
purchases of each underwriter, on several basis, from each selling 
security hold of a portion of the securities sold by each such security 
holder. Applicants expect that the short-term investments described 
above may be purchased from, or sold to, Bear Stearns at market value 
without payment of fees by the Partnership. In connection with money 
market fund investments in funds advised or administered by Bear 
Stearns, applicants state that the assets will be subject to an 
advisory and/or administrative fee on the same basis as those charged 
to and paid by unaffiliated persons participating in the same fund or 
transactions.

[[Page 26600]]

    6. Applicants represent that the Partners will have been fully 
informed of the possible extent of the dealings by the Partnership, the 
Acquisition Funds, and the Portfolio Companies with Bear Stearns. 
Applicants assert that, as professionals employed in the securities 
business, the Partners will be able to understand and evaluate the 
attendant risks. Applicants believe that the community of interest 
among the Partners, on the one hand, and Bear Stearns, on the other 
hand, is the best safeguard against any risk of abuse in this regard.
    7. Section 17(d) makes it unlawful for any affiliated person of a 
registered investment company, acting as principal, to effect any 
transaction in which such company, or a company controlled by such 
company, is a joint or joint and several participants with the 
affiliated person in contravention of SEC rules. Rule 17d-1 provides 
that the SEC may approve a transaction subject to section 17(d) after 
considering whether the participation of such registered company is 
consistent with the provisions, policies, and purposes of the Act and 
the extent to which such participation is on a basis different from or 
less advantageous than that of other participants.
    8. Applicants request an order under section 17(d) and rule 17d-1 
to the extent necessary to permit the Partnerships to engage in 
transactions in which affiliated persons of the Partnerships may also 
be participants. Applicants believe that the concern that permitting 
joint investments with BSC or another Bear Stearns vehicle and/or an 
affiliate of either of them on the one hand, and a Partnership on the 
other, might lead to disadvantageous treatment of the Partnership will 
be mitigated by the fact that Bear Stearns is acutely concerned with 
its relationship with the key employees who are expected to invest in 
the Partnership.
    9. In addition, applicants believe the agreement of Bear Stearns to 
lend substantial funds to the Partnership creates opportunities for the 
Limited Partners to leverage their investment capital to a greater 
degree than would be possible normally in transactions organized by 
non-affiliated third parties. Applicants note that the nonrecourse 
loans from Bear Stearns to the Partnership will provide the Partnership 
with the ability to make a greater number of investments or larger 
investments than would be possible if the Partnership has only its own 
equity capital to invest. Applicants state that Bear Stearns will bear 
a substantial portion of the risk of repayment of such loans since the 
loans will be (i) nonrecourse to the Partners, (ii) generally payable 
prior to maturity only out of 50% of the Partnership's cash available 
for distribution after repayment of accrued interest and taxes and 
certain other expenses, and (iii) payable at maturity only out of the 
Partnership's assets. Applicants contend that all of the foregoing 
factors suggest that the policy considerations underpinning section 
17(d) are not present here.
    10. Section 17(f) provides that the securities and similar 
investments of a registered management investment company must be 
placed in the custody of a bank, a member of a national securities 
exchange, or the company itself in accordance with SEC rules. Rule 17f-
1 under the Act specifies the requirements that must be satisfied for a 
registered management investment company to use a broker-dealer as 
custodian. Applicants request an exemption from section 17(f) and rule 
17f-1 to the extent necessary to permit Bear Stearns to act as 
custodian without a written contract. Applicants believe that, because 
there is such a close association between the Partnership and Bear 
Stearns, requiring a detailed written contract would subject the 
Partnership to unnecessary burden and exposure. Applicants also request 
an exemption from the terms of rule 17f-1(b)(4), which requires an 
independent accountant to periodically verify by actual examination the 
securities and investments of a registered management investment 
company using a broker-dealer as custodian. Applicants do not believe 
the expense of retaining an accountant to conduct such verifications is 
warranted given the community of interest of all the parties involved 
and the existing requirement for an independent annual audit.
    11. Section 17(g) and rule 17g-1 generally require the bonding of 
officers and employees of a registered investment company who have 
access to securities or funds of the company. Applicants request an 
exemption from section 17(g) and rule 17g-1 to the extent necessary to 
permit the Partnership to comply with rule 17g-1 without the necessity 
of having a majority of the members of the Board who are not 
``interested persons,'' as that term is defined in section 2(a)(19) of 
the Act, take such actions and make such approvals as are set forth in 
the 17g-1. Applicants state that, because all the members of the 
related Board will be affiliated persons, a Partnership could not 
comply with rule 17g-1 without the requested relief.
    12. Section 17(j) and rule 17j-1 require every registered 
investment company, its adviser, and its principal underwriter to adopt 
a written code of ethics with provisions reasonably designed to prevent 
fraudulent activities, and to institute procedures to prevent 
violations of the code. Section 17(j) and paragraph (a) of rule 17j-1 
also make it unlawful for certain persons to engage in fraudulent, 
deceitful, or manipulative practices in connection with the purchase or 
sale of a security held or to be acquired by an investment company. 
Applicants request an exemption from section 17(j) and rule 17j-1 
(except rule 17j-1(a)) because the requirements contained therein are 
burdensome and unnecessary. Applicants believe that requiring each 
Partnership to adopt a written code of ethics and requiring access 
persons to report each of their securities transactions would be time 
consuming and expensive, and would serve little purpose in light of, 
among other things, the community of interest among the Partners of 
such Partnership by virtue of their common association in Bear Stearns 
and the substantial and largely overlapping protection afforded by the 
conditions with which such Partnerships have agreed to comply.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Each proposed transaction otherwise prohibited by section 17(a) 
or section 17(d) and rule 17d-1 to which a Partnership is party (the 
``Section 17 Transactions'') will be effected only if the Board, 
through the General Partner, determines that: (a) The terms of the 
transaction, including the consideration to be paid or received, are 
fair and reasonable to the Partners and do not involve overreaching of 
the Partnership or its Partners on the part of any person concerned; 
and (b) the transaction is consistent with the interests of the 
Partners, the Partnership's organizational documents, and the 
Partnership's reports to its Partners. In addition, the General Partner 
will record and preserve a description of such affiliated transactions, 
the Board's findings, the information or materials upon which the 
board's findings are based, and the basis therefor. All such records 
will be maintained for the life of such Partnership and at least two 
years thereafter, and will be subject to examination by the SEC and its 
staff.\9\
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    \9\ The Partnership will preserve the accounts, books, and other 
documents required to be maintained in an easily accessible place 
for the first two years.
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    2. In connection with Section 17 Transactions, the Board, through 
the General Partner, will adopt, and

[[Page 26601]]

periodically review and update, procedures designed to ensure that 
reasonable inquiry is made, prior to the consummation of any such 
transaction, with respect to the possible involvement in the 
transaction of any affiliated person or promoter of or principal 
underwriter for the Partnership, or any affiliated person of such a 
person, promoter, or principal underwriter.
    3. The Partnership and the General Partner will maintain and 
preserve, for the life of the Partnership and at least two years 
thereafter, such accounts, books, and other documents as constitute the 
record forming the basis for the audited financial statements that are 
to be provided to the Partners, and each annual report of the 
Partnership required to be sent to the Partners, and agree that all 
such records will be subject to examination by the SEC and its 
staff.\10\
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    \10\ The Partnership will preserve the accounts, books, and 
other documents required to be maintained in an easily accessible 
place for the first two years.
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    4. The General Partner will send to each person who was a Partner 
at any time during the fiscal year then ended, Partnership financial 
statements audited by the Partnership's independent accountants. In 
addition, within 90 days after the end of each fiscal year of the 
Partnership or as soon as practicable thereafter, the General Partner 
shall send a report to each person who was a Partner at any time during 
the fiscal year then ended, setting forth such tax information as shall 
be necessary for the preparation by the Partner of his or its federal 
and state income tax returns and a report of the investment activities 
of the Partnership during such year. To the extent that a valuation of 
any interest in the Partnership is required by the terms of the 
Partnership Agreement or otherwise, such valuation will be made by the 
General Partner or by independent third parties appointed by the 
General Partner and deemed qualified by the General Partner to render 
an opinion as to the value of Partnership assets, using such methods 
and considering such information relating to the investments, assets, 
and liabilities of the Partnership as the General Partner or the 
independent third party, as the case may be, may reasonably determine 
and, in the case of the General Partner, consistent with its fiduciary 
duty to the Limited Partners.
    5. In any case where purchases or sales are made by a Partnership 
from or to an entity affiliated with such Partnership by reason of a 5% 
or more investment in such entity by a Bear Stearns advisory director, 
director, officer, or employee, such individual will not participate in 
the Partnership's determination of whether or not to effect such 
purchase or sale.
    6. The General Partner of each Partnership will not invest the 
funds of the Partnership in any investment in which a ``Co-Investor,'' 
as defined below, has acquired or proposes to acquire an investment in 
the same issuer, where the investment involves a joint enterprise or 
other joint arrangement within the meaning of rule 17d-1 in which such 
Partnership and the Co-Investor are participants, unless such Co-
Investor, prior to disposing of all or part of its investment, (a) 
gives such General Partner sufficient, but not less than one day, 
notice of its intent to dispose of its investment; and (b) refrains 
from disposing of its investment unless such Partnership has the 
opportunity to dispose of such Partnership's investment prior to or 
concurrently with, on the same terms as, and pro rata with, the Co-
Investor. The term ``Co-Investor,'' with respect to any Partnership, 
means any person who is: (a) an ``affiliated person'' (as such term is 
defined in the Act) of such Partnership; (b) an entity within Bear 
Stearns; (c) an officer or director of an entity within Bear Stearns; 
or (d) a company in which the General Partner of such Partnership acts 
as a general partner or has a similar capacity to control the sale or 
other disposition of the company's securities. The restrictions 
contained in this condition, however, shall not be deemed to limit or 
prevent the disposition of an investment by a Co-Investor: (a) to its 
direct or indirect wholly-owned subsidiary, or to a direct or indirect 
wholly-owned subsidiary of its parent; (b) to immediate family members 
of such Co-Investor or a trust or other investment vehicle established 
for any such family member; (c) when the investment is comprised of 
securities that are listed on any exchange registered as a national 
securities exchange under section 6 of the Exchange Act; or (d) when 
the investment is comprised of securities that are national market 
system securities pursuant to section 11A(a)(2) of the Exchange Act and 
rule 11Aa2-1 thereunder.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12548 Filed 5-13-97; 8:45 am]
BILLING CODE 8010-01-M