[Federal Register Volume 62, Number 175 (Wednesday, September 10, 1997)]
[Notices]
[Pages 47706-47709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23953]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22808; 813-154]
Credit Suisse First Boston, Inc.; Notice of Application
September 3, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for order under sections 6(b) and 6(e) of
the Investment Company Act of 1940 (the ``Act'') granting an exemption
from all provisions of the Act, except section 9, section 17 (except
for certain provisions of paragraphs (a), (d), (f), (g), and (j) of
section 17), sections 36 through 53, and the rules thereunder.
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SUMMARY OF APPLICATION: Applicant Credit Suisse First Boston, Inc.
requests an order to exempt certain investment funds formed for the
benefit of key employees of applicant and its affiliates from most of
the provisions of the Act, and to permit the funds to engage in certain
joint arrangements. Each fund will be an ``employees' securities
company'' as defined in section 2(a)(13) of the Act.
FILING DATES: The application was filed on October 9, 1996, and amended
on March 17, June 13, and July 15, 1997. Applicant has agreed to file
an amendment during the notice period, the substance of which is
included in this notice.
HEARING OF NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on September 26,
1997, and should be accompanied by proof of service on applicant, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicant, 11 Madison Avenue, New York, New York 10010.
FOR FURTHER INFORMATION CONTACT: H.R. Hallock, Jr., Special Counsel, at
(202) 942-0564, 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 by
writing the SEC's Public Reference Branch at 450 Fifth Street, NW.,
Washington, DC 20549, or by telephone at (202) 942-8090.
Applicant's Representations
1. Applicant, a Delaware corporation, is a subsidiary of Credit
Suisse First Boston, a Swiss bank. Credit Suisse First Boston is in
turn a subsidiary of Credit Suisse Group (formerly CS Holding), a
publicly-held Swiss corporation. Applicant and its affiliates (as
defined in rule 12b-2 under the Securities Exchange Act of 1934 (the
``1934 Act'')) (the ``CSFB Companies'') provide a range of banking,
investment, and financial services to corporations, governments, and
other clients throughout the world. Credit Suisse First Boston
Corporation (``CSFB Corporation''), a registered broker-dealer under
the 1934 Act and a registered investment adviser under the Investment
Advisers Act of 1940, is one of applicant's principal subsidiaries.
2. Applicant proposes to form one or more limited partnerships,
business trusts or limited liability companies (``Partnerships'').\1\
The Partnerships, each of which will operate as a closed-end investment
company, will enable certain key employees of the CSFB Companies to
participate in investment opportunities that come to the Companies'
attention. The investment objectives and strategies for each
Partnership will be set forth in a private placement memorandum given
to investors in the Partnership (``Limited Partners'').
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\1\ The constituent agreements of the Partnerships are referred
to in this notice as ``limited partnership agreements.''
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3. Each Partnership will have a general partner or manager
(``General
[[Page 47707]]
Partner'') whose executive officers and directors will be employees of
CSFB Companies who are eligible to invest in the Partnership. The
General Partner will manage and make all investment decisions for the
Partnerships, except for certain responsibilities delegated to a
manager or administrator.
4. Interests in the Partnerships (``Units'') will be offered
without registration in reliance on section 4(2) or another exemption
in the Securities Act of 1933 (the ``1933 Act'') and will be sold
without a sales load. Units will be sold only (a) to current and former
officers, directors, employees, and persons on retainer of a CSFB
Company who have been approved to purchase Units by the General Partner
(``Eligible Employees''); (b) to immediate family members of such
Eligible Employees (``Qualified Family Members''), and (c) to trusts or
other investment vehicles established by such Eligible Employees for
their benefit and/or the benefit of their immediate families
(collectively with Eligible Employees and Qualified Family Members,
``Qualified Participants'').
5. Eligible Employees and Qualified Family Members must be
``accredited investors'' meeting the income requirements set forth in
rule 501(a)(6) of Regulation D under the 1933 Act. In addition, the
General Partner must reasonably believe, prior to offering Units to an
Eligible Employee or Qualified Family Member, that the individual is
capable of evaluating the merits and risks of the partnership
investment and is able to bear the economic risk and afford a complete
loss of the investment.
6. The General Partner may be paid an annual management fee by the
Partnership. The General Partner or another CSFB Company also may
receive a performance-based fee (``carried interest''), based on
Partnership gains and losses, as well as other compensation, such as
fees in connection with Partnership investments. CSFB Corporation and
other CSFB Companies may be compensated for services to companies in
which the Partnerships invest and may otherwise engage in normal
business activities that conflict with the interests of the
Partnerships. Applicant believes these conflicts will be mitigated by
the community of interest among the CSFB Companies and the Limited
Partners.
7. Partnership net profits and losses will be allocated to the
General Partner and the Limited Partners in the same proportion as
their respective paid-in capital to the Partnership, except that
Limited Partner capital accounts will not be reduced below zero, the
General Partner may receive a carried interest, and certain adjustments
may be made for federal income tax purposes. A General Partner or
another CSFB Company may contribute capital to a Partnership in an
amount up to 10 times the amount contributed by Limited Partners. The
General Partner or other CSFB Company may receive, instead of an
allocation of profits and losses, a cumulative return on part of such
contribution at a rate based on the prime lending rate or similar
measure. A CSFB Company also may lend money to a Partnership at an
annual rate no less favorable than the rate obtainable on an arm's-
length basis.
8. Partnerships generally will co-invest with CSFB Companies in
investment funds sponsored or advised by the CSFB Companies or third
parties, or directly in securities of operating companies. A
Partnership will co-invest side-by-side and pro rata with, and on at
least as favorable terms as, a CSFB Company. A co-investment by a
Partnership generally will not exceed 50% of the combined investments
of the Partnership and CSFB Company. In the event a Partnership
participates in an investment in which no CSFB Company participates but
in connection with which a CSFB Company may receive some economic
benefit, the Partnership will invest the lesser of (a) 20% of the total
investment made by all investors, (b) 20% of the Partnership's
committed capital, and (c) the largest investment made by any other
investor not affiliated with CS First Boston.
9. Limited Partners will not be allowed to transfer their Units
without the consent of the General Partner, and then only to Qualified
Participants. If a limited Partner terminates employment with a CSFB
Company, the Units may be redeemed by the Partnership or purchased by
the CSFB Company. The terms of such redemptions or purchases, including
the possibility of forfeiture for failure to make required capital
contributions, will be fully disclosed when Partnership Units are
offered. The purchase or redemption price will not be less than the
lower of (a) the amount invested plus interest or (b) the fair value
(as determined by the General Partner) of the Units at the end of the
Partnership's fiscal year in which such termination occurs, less any
amounts forfeited for failure to make required capital contributions.
The General Partner will limit any forfeiture to not more than 25% of a
defaulting Limited Partner's capital account balance.
10. Partnerships will have a scheduled term that may be extended
for additional periods by the General Partner or by vote of the Limited
Partners. A Partnership will be dissolved upon (a) the Partnership's
insolvency or sale of substantially all of its assets; (b) a
determination by the General Partner that continued operation of the
Partnership might be inconsistent with its fundamental investment
purpose or involve a violation of law; (c) the vote of Limited Partners
holding a majority of Units; or (d) the Limited Partners' failure to
replace a General Partner. In the event of dissolution, the
Partnership's net assets will be distributed to partners pro rata based
on their respective capital accounts as provided in the limited
partnership agreement.
11. The General Partner will send the Limited Partners of each
Partnership annual reports regarding its operations, investment
activities, and current valuation of assets. Except for Partnerships
formed to make a single investment, such reports will contain audited
financial statements with disclosure of outstanding borrowings. The
General Partner also will send annual reports to Limited Partners
setting forth tax information necessary for the preparation of tax
returns.
Applicant's Legal Analysis
1. Section 6(b) of the Act provides, in part, 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 6(b) provides that the Commission shall consider, in
determining which provisions of the Act from which the company should
be exempt, the company's form of organization and capital structure,
the persons owning and controlling its securities, the price of the
company's securities and the amount of any sales load, how the
company's funds are invested, and the relationship between the company
and the issuers of the securities in which it invests. Section 2(a)(13)
defines an employees' security company, in relevant part, as any
investment company all of whose securities are beneficially owned (a)
by current or former employees, or persons on retainer, of one or more
affiliated employers, (b) by immediate family members of such persons,
or (c) by such employer or employers together with any of the persons
in (a) or (b).
2. Section 7 of the Act generally prohibits investment companies
that are not registered under section 8 from selling or redeeming their
securities. Section 6(e) provides that, in connection with any order
exempting an investment company from any provision of section
[[Page 47708]]
7, certain provisions of the Act, as specified by the SEC, shall be
applicable to the company and other persons dealing with the company as
though such company were registered under the Act. Applicant requests
an order under sections 6(b)) and 6(e) exempting the Partnerships from
all provisions of the Act except section 9, section 17 (except for
certain provisions of sections 17(a), (d), (f), (g), and (j)), sections
36 through 53, and the rules and regulations thereunder.
3. Applicant believes that, under the factors set forth in section
6(b)), it is appropriate to grant the requested exemption. Applicant
notes that all directors and senior officers of the General Partner
will be eligible employees, all Limited Partners will be Qualified
Participants, and the General Partner itself will invest in the
Partnerships. Applicant also notes that Units will be sold without a
sales load and that no compensation will be paid to the General Partner
other than as provided in the limited partnership agreement.
4. Applicant submits that the protections of the Act generally are
unnecessary in view of the community of interest among the CSFB
Companies and the Limited Partners. Applicant also notes that the CSFB
Companies generally will invest side by side with the Partnerships, and
the Partnerships will be managed by persons who will also be Limited
Partners and not third parties seeking to benefit from providing
services to or engaging in transactions with the Partnership. Applicant
states that the Partnerships are designed to provide capital building
opportunities to key employees that are competitive with those at other
financial services firms and to facilitate the recruitment of high
caliber professionals. Applicant notes that the Partnerships will
benefit the Limited Partners by providing the opportunity to
participate in investments that would not otherwise be available to
them.
5. Applicant contends that requiring the Partnerships to comply
with various provisions of the Act would be unnecessarily burdensome.
Applicant asserts that the Partnerships' operation is not likely to
present the abuses the Act is intended to address, and that the limited
partnership agreements will provide substantial protection to the
Limited Partners, including specific requirements regarding appraisals
and access to Partnership reports and limits on the authority of the
General Partner. Applicant also believes that Eligible Employees and
Qualified Family Members, as financially sophisticated persons,
generally do not require the protections of the Act.
6. Section 17(a) generally prohibits any affiliated person of a
registered investment company, or any affiliated person of such person,
acting as principal, from knowingly selling or purchasing any security
or other property to or from such company. Applicant requests an
exemption from section 17(a) to permit a Partnership generally to
purchase securities owned or issued by, and to sell securities and lend
money to: (a) Any CSFB Company or other affiliated person of applicant
(a ``Section 17(a) Affiliate''); (b) entities sponsored, managed, or
advised by a Section 17(a) Affiliate; (c) entities whose securities are
underwritten by a Section 17(a) Affiliate or an affiliated person of
such Affiliate; and (d) entities with certain other business
relationships with Section 17(a) Affiliates.
7. Applicant submits that the requested exemptions from section
17(a) are consistent with the purposes of the Partnerships and the
protection of investors. Applicant believes that an exemption from
section 17(a) is necessary to enable the Partnerships to participate in
attractive investments that may be offered by CSFB Companies. Applicant
asserts that the private placement memorandum will describe the
possible extent of a Partnership's dealings with Section 17(a)
Affiliates, and the Limited Partners will be able to evaluate the risks
associated with those dealings. Applicant also asserts that the
community of interest among the Limited Partners and CSFB companies
will reduce the risk of abuse in such transactions.
8. Section 17(d) and rule 17d-1 prohibit any affiliated person or
principal underwriter of a registered investment company, or any
affiliated person of such person or principal underwriter, acting as
principal, from participating in any joint arrangement with the company
unless authorized by the SEC. Applicant requests exemptive relief to
permit a Partnership to invest in an entity in which another
Partnership, CSFB Company, or certain affiliated persons also invest.
Applicant submits that the requested relief for co-investments is
consistent with section 17(d)'s objective of preventing an investment
company affiliate from causing the company to participate in a joint
endeavor on a disadvantageous basis. Applicant also submits that the
community of interest among the Limited Partners and the CSFB companies
makes it unlikely that a co-investor would enter into a transaction
with a Partnership with an intent to disadvantage the Partnership. In
addition, applicant claims that strict compliance with section 17(d)
and rule 17d-1 would prevent the Partnerships from participating in
attractive investments solely because an affiliate of the Partnership
also may participate in the investment. Finally applicant contends that
the possibility that a Partnership may be disadvantaged by the
participation of an affiliate in a transaction will be minimized by
compliance with the lockstep procedures described above.
9. Section 17(f) designates the entities that may act as investment
company custodians, and rule 17f-1 imposes certain requirements when
the custodian is a member of a national securities exchange. To the
extent that a Partnership's assets may be held in custody by an
exchange member, applicant requests an exemption from the requirements
of paragraphs (a) and (c) of rule 17f-1 that the custodial agreement be
in writing and transmitted to the SEC. Applicant also requests an
exemption from the requirement of paragraph (b)(4) of rule 17f-1 that
independent accountants periodically verify the assets held by the
custodian. Applicant submits that, because of the community of interest
of the Partnerships and the CSFB Companies and applicant's commitment
to arrange for an annual audit, compliance with these requirements of
the rule would be unnecessarily burdensome and expensive.
10. Section 17(g) and rule 17g-1 generally require the bonding of
officers and employees of a registered investment company who have
access to its securities or funds. Rule 17g-1 requires that a majority
of directors who are not ``interested persons'' (as defined in section
2(a)(19)) take certain actions and give certain approvals relating to
fidelity bonding. Applicant requests relief from this requirement
because all the directors of the entity controlling the General Partner
will be interested persons, and the Partnerships therefore could not
comply with this bonding requirement. Applicant believes that the
community of interest among the directors and officers of the General
Partner, some of whom will likely be Limited Partners, and other
Limited Partners makes it unnecessary to comply with the requirements.
11. Section 17(j) and paragraph (a) of rule 17j-1 make it unlawful
for certain enumerated persons to engage in fraudulent or deceptive
practices in connection with the purchase or sale of a security held or
to be acquired by a registered investment company. Rule 17j-1 also
requires that every registered investment company adopt a written
[[Page 47709]]
code of ethics and that every access person of a registered investment
company report personal securities transactions. Applicant requests an
exemption from the provisions of rule 17j-1, except for the antifraud
provisions of paragraph (a), because they were unnecessarily burdensome
as applied to the Partnerships.
Applicant's Conditions
Applicant agrees that any order granting the requested relief shall
be subject to the following conditions:
1. Each proposed transaction involving a Partnership otherwise
prohibited by section 17(a) or section 17(d) of the Act and rule 17d-1
thereunder (the ``Section 17 Transactions'') will be effected only if
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 Limited Partners and do not involve overreaching of
the Partnership or its Limited Partners on the part of any person
concerned; and (b) the transaction is consistent with the interests of
the Limited Partners, the Partnership's organizational documents, and
the Partnership's reports to its Limited Partners. In addition, the
General Partner will record and preserve a description of such
affiliated transactions, its findings, the information or materials
upon which its findings are based, and the basis for the findings. All
such records will be maintained for the life of the Partnership and at
least two years thereafter, and will be subject to examination by the
SEC and its staff.\2\
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\2\ Each partnership will preserve the accounts, books and other
documents required to be maintained in an easily accessible place
for the first two years.
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2. In connection with Section 17 Transactions, the General Partner
will adopt, and periodically review and update, procedures designed to
ensure that reasonable inquiry is made, prior to the consummation of
any such transaction, with respect to the possible involvement in the
transaction of any affiliated person or promoter of or principal
underwriter for the Partnership, or any affiliated person of such
person, promoter, or principal underwriter.
3. The General Partner will not invest the funds of any Partnership
in any investment in which an Affiliated Co-Investor (as defined below)
has or proposes to acquire the same class of securities of the same
issuer, where the investment involves a joint enterprise or other joint
arrangement within the meaning of rule 17d-1 in which the Partnership
and an Affiliated Co-Investor are participants, unless any such
Affiliated Co-Investor, prior to disposing of all or part of its
investment, (a) gives the General Partner sufficient, but not less than
one day's, notice of its intent to dispose of its investment, and (b)
refrains from disposing of its investment unless the Partnership has
the opportunity to dispose of the Partnership's investment prior to or
concurrently with, on the same terms as, and pro rata with the
Affiliated Co-Investor. The term ``Affiliated Co-Investor'' means any
person who is: (a) An affiliated person of the Partnership (other than
an investment company or other fund which is offered, sponsored,
advised or managed by a CSFB Company and which includes investors who
are not CSFB Companies); (b) a CSFB Company; (c) an officer or director
of a CSFB Company, or (d) a company in which the General Partner of
such Partnership acts as 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 an Affiliated
Co-Investor: (a) To its direct or indirect majority-owned subsidiary,
to any company (a ``Parent'') of which the Affiliated Co-Investor is a
direct or indirect majority-owned subsidiary, or to a direct or
indirect majority-owned subsidiary of its Parent; (b) to immediate
family members of the Affiliated Co-Investor or a trust established for
any Affiliated Co-Investor or any such family member; or (c) when the
investment is comprised of securities that are (i) listed on a national
securities exchange registered under section 6 of the 1934 Act; (ii)
national market system securities pursuant to section 11A(a)(2) of the
1934 Act and rule 11Aa2-1 thereunder; or (iii) government securities as
defined in section 2(a)(16) of the Act.
4. Each Partnership and its General Partner will maintain and
preserve, for the life of each such 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 Limited Partners, and each annual report of such
Partnership required by the terms of the applicable partnership
agreement, to be sent to the Limited Partners, and agree that all such
records will be subject to examination by the SEC and its staff.\3\
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\3\ Each Partnership will preserve the accounts, books and other
documents required to be maintained in an easily accessible place
for the first two years.
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5. The General Partner will send Partnership financial statements
to each Limited Partner who had an interest in a Partnership at any
time during the fiscal year then ended. Except for Partnerships formed
to make a single investment, the statements will be audited by the
Partnership's independent accountants. At the end of each fiscal year,
the General Partners will make a valuation or have a valuation made of
all of the assets of the Partnership as of such fiscal year end. In
addition, within 90 days after the end of each fiscal year of each of
the Partnerships or as soon as practicable thereafter, the General
Partner shall send a report to each person who was a Limited Partner at
any time during the fiscal year then ended setting forth such tax
information as shall be necessary for the preparation by the Limited
Partner of his or her federal and state income tax returns, and a
report of the investment activities of the Partnership during each
year.
6. Whenever a Partnership makes a purchase from or sale to an
entity affiliated with a Partnership by reason of a 5% or more
investment in such entity by a CSFB Company director, officer, or
employee, or person on retainer, such individual will not participate
in the General Partner's determination of whether or not to effect such
purchase or sale.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23953 Filed 9-9-97; 8:45 am]
BILLING CODE 8010-01-M