[Federal Register Volume 63, Number 166 (Thursday, August 27, 1998)]
[Notices]
[Pages 45882-45886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23072]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23396; 813-176]


Hambrecht & Quist Employee Venture Fund, L.P., et at.; Notice of 
Application

August 21, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under sections 6(b) and 6(e) 
of the Investment Company Act of 1940 (``Act'') exempting the 
applicants from all provisions of the Act, except section 9, sections 
17 (other than certain provisions of paragraphs (a), (d), (e), (f), 
(g), and (j)) and 30 (other than certain provisions of paragraphs (a), 
(b), (e), and (h)), sections 36 through 53, and the rules and 
regulations under the Act.

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SUMMARY OF APPLICATION: Applicants request an order to exempt certain 
limited partnership formed for the benefit of key employees of 
Hambrecht & Quist Group (``H&Q Group'') and its affiliates from certain 
provisions of the Act. Each partnership will be an employees' 
securities company within the meaning of section 2(a)(13) of the Act.

APPLICANTS: Hambrecht & Quist Employee Venture Fund, L.P. (``Initial 
Partnership''), and H&Q Group, on behalf of other partnerships or other 
investment vehicles that may be formed in the future (``Other 
Partnerships'') (together with the Initial Partnership, the 
``Partnerships'').

FILING DATES: The application was filed on October 28, 1997. Applicants 
have agreed to file an amendment to the application, the substance of 
which is incorporated in this notice, 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 September 15, 
1998, and should be accompanied by proof of service on applicants, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, One Bush Street, San Francisco, California 94104.

FOR FURTHER INFORMATION CONTACT: J. Amanda Machen, Senior Counsel, at 
(202) 942-7120, or Christine Greenlees, Branch Chief, (202) 942-0564 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. H&Q Group, a holding company, operates as an investment bank 
through its subsidiaries. Its principal wholly-owned subsidiary is 
Hambrecht & Quist LLC, a broker-dealer registered under the Securities 
Exchange Act of 1934 (``Exchange Act'') and an investment adviser 
registered under the Investment Advisers Act of 1940 (``Advisers 
Act''). H&Q Group and its affiliates, as defined in rule 12b-2 of the 
Exchange Act (``Affiliates''), are referred to this notice collectively 
as ``H&Q'' and individually as an ``H&Q entity.''
    2. H&Q proposes to offer various investment programs for the 
benefit of certain key employees. The programs may be structured as 
different Partnerships or as separate plans within the same 
Partnership. Each Partnership will be a limited partnership or limited 
liability company formed as an ``employees'' securities company'' 
within the meaning of section 2(a)(13) of the Act, and will operate as 
a closed-end, non-diversified, management investment company. The 
Partnerships will be established primarily for the benefit of highly 
compensated employees of H&Q as part of a program designed to create 
capital building opportunities that are competitive with those at other 
investment banking firms and to facilitate the recruitment of high 
caliber professionals. Participation in a Partnership will be 
voluntary.
    3. H&Q Plan Management, LLC, a Delaware limited liability company, 
will act as the general partner of the Initial Partnership (together 
with any Affiliate that controls, is controlled by or is under common 
control with H&Q Group and that acts as a Partnership's general 
partner, the ``General Partner''). The General Partner will manage, 
operate, and control each of the Partnerships; however, the General 
Partner will be authorized to delegate management responsibility to H&Q 
or to a committee of H&Q employees. An H&Q entity will act as the 
investment adviser to a Partnership and will be registered as an 
investment adviser under the Advisers Act.
    4. Interests in the Partnerships (``Interests'') will be offered 
without registration in reliance on section 4(2) of the Securities Act 
of 1933 (the ``Securities Act''), or Regulation D under the Securities 
Act, and will be sold without a sales load only to ``Eligible 
Employees'' and ``Qualified Participants,'' in each case as defined 
below (collectively, ``Participants''). Prior to offering Interests to 
an Eligible

[[Page 45883]]

Employee, the General Partner must reasonably believe that the Eligible 
Employee will be a sophisticated investor capable of understanding and 
evaluating the risks of participating in the Partnership without the 
benefit of regulatory safeguards. An Eligible Employee is (i) an 
individual who is a current or former employee, officer, director, or 
``Consultant'' of H&Q and, except for certain individuals who manage 
the day-to-day affairs of the Partnership in question (``Managing 
Employees''), meets the standards of an accredited investor under rule 
501(a)(6) of Regulation D under the Securities Act, or (ii) an entity 
that is a current or former ``Consultant'' of H&Q and meets the 
standards of an accredited investor under rule 501(a) of Regulation 
D.\1\ Eligible Employees will be experienced professionals in the 
investment banking and securities businesses, or in related 
administrative, financial, accounting, legal, or operational 
activities.
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    \1\ A ``Consultant'' is a person or entity whom H&Q has engaged 
on retainer to provide services and professional expertise on an 
ongoing basis as a regular consultant or as a business or legal 
adviser and who shares a community of interest with H&Q and H&Q 
employees.
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    5. Managing Employees, who also will qualify as Eligible Employees, 
will have primary responsibility for operating the Partnership. These 
responsibilities will include, among other things, identifying, 
investigating, structuring, negotiating, and monitoring investments for 
the Partnership, communicating with the Limited Partners of the 
Partnership, maintaining the books and records of the Partnership, and 
making recommendations with respect to investment decisions by the 
General Partner. Each Managing Employee will (a) be closely involved 
with and knowledgeable with respect to the Partnership's affairs, (b) 
be an officer or employee of H&Q, and (c) have reportable income from 
all sources (including any profit shares and bonuses) in the calendar 
year immediately preceding the Employee's participation in the 
Partnership in excess of $120,000 and have a reasonable expectation of 
reportable income of at least $150,000 in the years in which the 
Employee invests in a Partnership.
    6. A Qualified Participant (a) is an Eligible Family Member or 
Qualified Entity (in each case as defined below) of an Eligible 
Employee, and (b) if the individual or entity is purchasing an Interest 
from a Partner or directly from the Partnership, comes within one of 
the categories of an ``accredited investor'' under rule 501(a) of 
Regulation D.\2\ An ``Eligible Family Member'' is a spouse, parent, 
child, spouse of child, brother, sister, or grandchild of an Eligible 
Employee. A ``Qualified Entity'' is: (a) a trust of which the trustee, 
grantor, and/or beneficiary is an Eligible Employee; (b) a partnership, 
corporation, or other entity controlled by an Eligible Employee; \3\ or 
(c) a trust or other entity established for the benefit of Eligible 
Family Members of an Eligible Employee.
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    \2\ ``Partner'' means any partner of a Partnership, including 
the General Partner.
    \3\ The inclusion of partnerships, corporations, or other 
entities controlled by an Eligible Employee in the definition of 
``Qualified Entities'' is intended to enable Eligible Employees to 
make investments in the Partnerships through personal investment 
vehicles for the purpose of personal and family investment and 
estate planning objectives. Eligible Employees will exercise 
investment discretion or control over these investment vehicles, 
thereby creating a close nexus between H&Q and these investment 
vehicles. In the case of a partnership, corporation, or other entity 
controlled by a Consultant entity, individual participants will be 
limited to senior level employees, members, or partners of the 
Consultant who will be required to qualify as an ``accredited 
investor'' under rule 501(a)(6) of Regulation D and who will have 
access to the General Partner or H&Q.
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    7. The terms of a Partnership will be fully disclosed to each 
Eligible Employee and, if applicable, to a Qualified Participant of the 
Eligible Employee, in a limited partnership agreement (the ``Limited 
Partnership Agreement''), which will be furnished at the time the 
Eligible Employee is invited to participate in the Partnership. Each 
Partnership will send audited financial statements to each Participant 
within 120 days or as soon as practicable after the end of its fiscal 
year. In addition, each Participant will receive a copy of Schedule K-1 
showing the Participant's share of income, credits, deductions, and 
other tax items.
    8. Interests in a Partnership will be non-transferable except with 
the prior written consent of the General Partner. No person will be 
admitted into a Partnership as a Partner unless the person is am 
Eligible Employee, a Qualified Participant of an Eligible Employee, or 
an H&Q entity.
    9. An Eligible Employee's interest in a Partnership may be subject 
to repurchase or cancellation if: (a) the Eligible Employee's 
relationship with H&Q is terminated for cause; (b) the Eligible 
Employee becomes a consultant to or joins any firm that the General 
Partner determines, in its reasonable discretion, is competitive with 
any business of H&Q or (c) the Eligible Employee voluntarily resigns 
from employment with H&Q. Upon repurchase or cancellation, the General 
Partner will pay to the Eligible Employee at least the lesser of (a) 
the amount paid by the Eligible Employee to acquire the Interest (plus 
interest, as determined by the General Partner), and (b) the fair 
market value of the Interest as determined at the time of repurchase or 
cancellation by the General Partner. The terms of any repurchase or 
cancellation will apply equally to any Qualified Participant of an 
Eligible Employee.
    10. Subject to the terms of the applicable Limited Partnership 
Agreement, a Partnership will be permitted to enter into transactions 
involving (a) an H&Q entity, (b) a portfolio company, (c) any Partner 
or any person or entity affiliated with a Partner, (d) an investment 
fund or separate account that is organized for the benefit of investors 
who are not affiliated with H&Q and over which an H&Q entity will 
exercise investment discretion (``Third Party Fund''), or (e) any 
partner or other investor of a Third Party Fund that is not affiliated 
with H&Q (a ``Third Party Investor''). These transactions may include a 
Partnership's purchase or sale of an investment or an interest from or 
to any H&Q entity or Third Party Fund, acting as principal. Prior to 
entering into these transactions, the General Partner must determine 
that the terms are fair to the Partners.
    11. A Partnership will not invest more than 15% of its assets in 
securities issued by registered investment companies (with the 
exception of temporary investments in money market funds). A 
Partnership will not acquire any security issued by a registered 
investment company if immediately after the acquisition, the 
Partnership will own more than 3% of the outstanding voting stock of 
the registered investment company.
    12. An H&Q entity (including the General Partner) acting as agent 
or broker may receive placement fees, advisory fees, or other 
compensation from a Partnership in connection with a Partnership's 
purchase or sale of securities, provided the placement fees, advisory 
fees, or other compensation are ``usual and customary.'' Fees or other 
compensation will be deemed ``usual and customary'' only if (a) the 
Partnership is purchasing or selling securities with other unaffiliated 
third parties, including Third Party Funds, (b) the fees or 
compensation being charged to the Partnership are also being charged to 
the unaffiliated third parties, including Third Party Funds, and (c) 
the amount of securities being purchased or sold by the Partnership 
does not exceed 50% of the total amount of securities being purchased 
or sold by the

[[Page 45884]]

Partnership and the unaffiliated third parties, including Third Party 
Funds. H&Q entities, including the General Partner, also may be 
compensated for services to entities in which the Partnerships invest 
and to entities that are competitors of these entities, and may 
otherwise engage in normal business activities.

Applicant's Legal Analysis

    1. Section 6(b) of the Act provides, in part, that the SEC will 
exempt employees' securities companies from the provisions of the Act 
to the extent that the exemption is consistent with the protection of 
investors. Section 6(b) provides that the SEC will consider, in 
determining the 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 employee's 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 7, 
certain provisions of the Act, as specified by the SEC, will be 
applicable to the company and other persons dealing with the company as 
though the company were registered under the Act. Applicants request an 
order under sections 6(b) and 6(e) exempting the Partnerships from all 
provisions of the Act, except section 9, section 17 (other than certain 
provisions of paragraphs (a), (d), (e), (f), (g), and (j)), section 30 
(other than certain provisions of paragraphs (a), (b), (e), and (h)), 
sections 36 through 53, and the rules and regulations thereunder.
    3. Section 17(a) generally prohibits any affiliated person of a 
registered investment company, or any affiliated person of an 
affiliated person, acting as principal, from knowingly selling or 
purchasing any security or other property to or from the company. 
Applicants request an exemption from section 17(a) to permit: (a) an 
H&Q entity or a Third Party Fund, acting as principal, to engage in any 
transaction directly or indirectly with any Partnership or any company 
controlled by the Partnerships; (b) any Partnership to invest in or 
engage in any transaction with any H&Q entity, acting as principal, (i) 
in which the Partnership, any company controlled by the Partnership, or 
any H&Q entity or Third Party Fund has invested or will invest, or (ii) 
with which the Partnership, any company controlled by the Partnership, 
or any H&Q entity or Third Party Fund is or will become otherwise 
affiliated; and (c) any Third Party Investor, acting as principal, to 
engage in any transaction directly or indirectly with a Partnership or 
any company controlled by the Partnership.
    4. Applicants state than an exemption from section 17(a) is 
consistent with the protection of investors and is necessary to promote 
the purpose of the Partnerships. Applicants state that the Participants 
in each Partnership will be fully informed of the extent of the 
Partnership's dealings with H&Q. Applicants also state that, as 
professionals employed in the investment banking and securities 
businesses, Participants will be able to understand and evaluate the 
attendant risks. Applicants assert that the community of interest among 
the Participants and H&Q will provide the best protection against any 
risk of abuse.
    5. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person or principal underwriter of a registered 
investment company, or any affiliated person of an affiliated person or 
principal underwriter, acting as principal, from participating in any 
joint arrangement with the company unless authorized by the SEC. 
Applicants request exemptive relief to permit affiliated persons of 
each Partnership, or affiliated persons of any of these persons, to 
participate in any joint arrangement in which the Partnership or a 
company controlled by the Partnership is a participant.
    6. Applicants submit that it is likely that suitable investments 
will be brought to the attention of a Partnership because of its 
affiliation with H&Q, H&Q's large capital resources, and its experience 
in structuring complex transactions. Applicants also submit that the 
types of investment opportunities considered by a Partnership often 
require each investor to make funds available in an amount that may be 
substantially greater than what a Partnership may make available on its 
own. Applicants contend that, as a result, the only way in which a 
Partnership may be able to participate in these opportunities may be to 
co-invest with other persons, including its affiliates. Applicants note 
that each Partnership will be organized for the benefit of Eligible 
Employees as an incentive for them to remain with H&Q and for the 
generation and maintenance of goodwill. Applicants believe that, if co-
investments with H&Q are prohibited, the appeal of the Partnerships 
would be significantly diminished. Applicants assert that Eligible 
Employees wish to participate in coinvestment opportunities because 
they believe that (a) the resources of H&Q enable it to analyze 
investment opportunities to an extent that individual employees would 
not be able to duplicate, (b) investments made by H&Q will not be 
generally available to investors even of the financial status of the 
Eligible Employees, and (c) Eligible Employees will be able to pool 
their investment resources, thus achieving greater diversification of 
their individual investment portfolios.
    7. Applicants assert that the flexibility to structure co-
investments and joint investments will not involve abuses of the type 
section 17(d) and rule 17d-1 were designed to prevent. Applicants state 
that the concern that permitting co-investments by H&Q and a 
Partnership might lead to less advantageous treatment of the 
Partnership should be mitigated by the fact that H&Q will be acutely 
concerned with its relationship with the investors in the Partnership, 
and the fact that senior officers and directors of H&Q entities will be 
investing in the Partnership. In addition, applicants assert that 
strict compliance with section 17(d) would cause the Partnership to 
forego investment opportunities simply because a Participant or other 
affiliated person of the Partnership (or any affiliate of the 
affiliated person) made a similar investment.
    8. Co-investments with Third Party Funds, or by an H&Q entity 
pursuant to a contractual obligation to a Third Party Fund, will not be 
subject to condition 3 below. Applicants note that it is common for a 
Third Party Fund to require that H&Q invest its own capital in Third 
Party Fund investments, and that the H&Q investments be subject to 
substantially the same terms as those applicable to the Third Party 
Fund. Applicants believe it is important that the interests of the 
Third Party Fund take priority over the interests of the Partnerships, 
and that the Third Party Fund not be burdened or otherwise affected by 
activities of the Partnerships. In addition, applicants assert that the 
relationship of a Partnership to a Third

[[Page 45885]]

Party Fund is fundamentally different from a Partnership's relationship 
to H&Q. Applicants contend that the focus of, and the rationale for, 
the protections contained in the requested relief are to protect the 
Partnerships from any overreaching by H&Q in the employer/employee 
context, whereas the same concerns are not present with respect to the 
Partnerships and a Third Party Fund.
    9. Section 17(e) and rule 17e-1 limit the compensation an 
affiliated person may receive when acting as agent or broker for a 
registered investment company. Applicants request an exemption from 
section 17(e) to permit an H&Q entity (including the General Partner) 
that acts as an agent or broker to receive placement fees, advisory 
fees, or other compensation from a Partnership in connection with the 
purchase or sale by the Partnership of securities, provided that the 
fees or other compensation is deemed ``usual and customary.'' 
Applicants state that for the purposes of the application, fees or 
other compensation that is charged or received by an H&Q entity will be 
deemed ``usual and customary'' only if (a) the Partnership is 
purchasing or selling securities with other unaffiliated third parties, 
including Third Party Funds, (b) the fees or compensation being charged 
to the Partnership are also being charged to the unaffiliated third 
parties, including Third Party Funds, and (c) the amount of securities 
being purchased or sold by the Partnership does not exceed 50% of the 
total amount of securities being purchased or sold by the Partnership 
and the unaffiliated third parties, including Third Party Funds. 
Applicants assert that, because H&Q does not wish it to appear as if it 
is favoring the Partnerships, compliance with section 17(e) would 
prevent a Partnership from participating in transactions where the 
Partnership is being charged lower fees than unaffiliated third 
parties. Applicants assert that the fees or other compensation paid by 
a Partnership to an H&Q entity will be the same as those negotiated at 
arm's length with unaffiliated third parties.
    10. Rule 17e-1(b) requires that a majority of directors who are not 
``interested persons'' (as defined in section 2(a)(19) of the Act) take 
actions and make approvals regarding commissions, fees, or other 
remuneration. Applicants request an exemption from rule 17e-1(b) to the 
extent necessary to permit each Partnership to comply with the rule 
without having a majority of the members of the General Partner who are 
not interested persons take actions and make determinations as set 
forth in the rule. Applicants state that because all the members of the 
General Partner will be affiliated persons, without the relief 
requested, a Partnership could not comply with rule 17e-1(b). 
Applicants state that each Partnership will comply with rule 17e-1(b) 
by having a majority of the members of the Partnership take actions and 
make approvals as are set forth in rule 17e-1. Applicants state that 
each Partnership will comply with all other requirements of rule 17e-1 
for the transactions described above in the discussion of section 
17(e).
    11. 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. Applicants request an exemption from section 17(f) and rule 
17f-1 to permit an H&Q entity to act as custodian of Partnership assets 
without a written contract, as would be required by rule 17f-1(a). 
Applicants also request an exemption from the rule 17f-1(b)(4) 
requirement that an independent accountant periodically verify the 
assets held by the custodian. Applicants believe that, because of the 
community of interest between H&Q and the Partnerships and the existing 
requirement for an independent audit, compliance with these 
requirements would be unnecessarily burdensome and expensive. 
Applicants will comply with all other requirements of rule 17f-1.
    12. 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 take certain actions and 
give certain approvals relating to fidelity bonding. Applicants request 
exemptive relief to permit the General Partner's officers and 
directors, who may be deemed interested persons, to take actions and 
make determinations set forth in the rule. Applicants state that, 
because all the members of the General Partner will be affiliated 
persons, a Partnership could not comply with rule 17g-1 without the 
requested relief. Specifically, each Partnership will comply with rule 
17g-1 by having a majority of the Partnership's directors take actions 
and make determinations as are set forth in rule 17g-1. Applicants also 
state that each Partnership will comply with all other requirements of 
rule 17g-1.
    13. 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 code 
of ethics and that every access person of a registered investment 
company report personal securities transactions. Applicants request an 
exemption from the provisions of rule 17j-1, except for the anti-fraud 
provisions of paragraph (a), because they are unnecessarily burdensome 
as applied to the Partnerships.
    14. Applicants request an exemption from the requirements in 
sections 30(a), 30(b), and 30(e), and the rules under those sections, 
that registered investment companies prepare and file with the SEC and 
mail to their shareholders certain periodic reports and financial 
statements. Applicants contend that the forms prescribed by the SEC for 
periodic reports have little relevance to the Partnerships and would 
entail administrative and legal costs that outweigh any benefit to the 
Participants. Applicants request exemptive relief to the extent 
necessary to permit each Partnership to report annually to its 
Participants. Applicants also request an exemption from section 30(h) 
to the extent necessary to exempt the General Partner of each 
Partnership and any other persons who may be deemed to be members of an 
advisory board of a Partnership from filing Forms 3, 4, and 5 under 
section 16(a) of the Exchange Act with respect to their ownership of 
Interests in the Partnership. Applicants assert that, because there 
will be no trading market and the transfers of Interests will be 
severely restricted, these filings are unnecessary for the protection 
of investors and burdensome to those required to make them.

Applicants' Conditions

    Applicants agree that any 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) of the Act and rule 17d-1 under the Act to which a 
Partnership is a party (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 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

[[Page 45886]]

Partner will record and preserve a description of the Section 17 
Transactions, the General Partner's findings, the information or 
materials upon which the General Partner's findings are based, and the 
basis for the findings. All records relating to an investment program 
will be maintained until the termination of the investment program and 
at least two years thereafter, and will be subject to examination by 
the SEC and its staff.\4\
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    \4\ Each Partnership will preserve the accounts, books and other 
documents required to be maintained in an easily accessible place 
for the first two years.
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    2. In connection with the Section 17 Transactions, the General 
Partner will adopt, and periodically review and update, procedures 
designed to ensure that reasonable inquiry is made, prior to the 
consummation of any Section 17 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 a ``Co-Investor'' (as defined below) has 
acquired 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 or rule 17d-1 in which the 
Partnership and a Co-Investor are participants, unless any such Co-
Investor, prior to disposing of all or part of its investment, (a) 
gives the General Partner sufficient, but not less than one day's, 
notice of its intent to dispose of its investment, and (b) refrains 
from disposing of its investment unless 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 Co-
Investor. The term ``Co-Investor'' with respect to any Partnership 
means any person who is: (a) an ``affiliated person'' (as defined in 
section 2(a)(3) of the Act) of the Partnership (other than a Third 
Party Fund); (b) H&Q (c) an officer or director of H&Q or (d) an 
entity (other than a Third Party Fund) in which the General Partner 
acts as general partner or has a similar capacity to control the sale 
or other disposition of the entity's securities. The restrictions 
contained in this condition, however, shall not be deemed to limit to 
prevent the disposition of an investment by a Co-Investor: (a) to its 
direct or indirect wholly-owned subsidiary, to any company (a 
``parent'') of which the Co-Investor is a direct or indirect wholly-
owned subsidiary, or to a direct or indirect wholly-owned subsidiary of 
its parent; (b) to immediate family members of the Co-Investor or a 
trust or other investment vehicle established for any 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; (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; or 
(e) when the investment is comprised of securities that are listed on 
or traded on any foreign securities exchange or board of trade that 
satisfies regulatory requirements under the law of the jurisdiction in 
which such foreign securities exchange or board of trade is organized 
similar to those that apply to a national securities exchange or a 
national market system for securities.
    4. Each Partnership and the General Partner will maintain and 
preserve, for the life of each 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 Participants in the Partnership, and each annual 
report of the Partnership required to be sent to the Participants, and 
agree that all such records will be subject to examination by the SEC 
and its staff.\5\
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    \5\ Each Partnership will preserve the accounts, books and other 
documents required to be maintained in an easily accessible place 
for the first two years.
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    5. The General Partner of each Partnership will send to each 
Participant in the Partnership who had an interest in any capital 
account of the Partnership, at any time during the fiscal year then 
ended, Partnership financial statements audited by the Partnership's 
independent accountants. At the end of each fiscal year, the General 
Partner will make a valuation or have a valuation made of all of the 
assets of the Partnership as of the fiscal year end in a manner 
consistent with customary practice with respect to the valuation of 
assets of the kind held by the Partnership. In addition, within 120 
days after the end of each fiscal year of each Partnership or as soon 
as practicable thereafter, the General Partner of the Partnership will 
send a report to each person who was a Participant in the Partnership 
at any time during the fiscal year then ended, setting forth such tax 
information as shall be necessary for the preparation by the 
Participant of his or its federal and state income tax returns, and a 
report of the investment activities of the Partnership during that 
year.
    6. In any case where purchases or sales are made by a Partnership 
from or to an entity affiliated with the Partnership by reason of a 5% 
or more investment in the entity by an H&Q director, officer, or 
employee, the individual will not participate in the Partnership's 
determination of whether or not to effect the purchase or sale.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-23072 Filed 8-26-98; 8:45 am]
BILLING CODE 8010-01-M