[Federal Register Volume 63, Number 213 (Wednesday, November 4, 1998)]
[Notices]
[Pages 59607-59610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29470]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23510; 812-11146]


Merrill Lynch Private Equity Trust I, et al.; Notice of 
Application

October 29, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') requesting an exemption from section 
17(e) of the Act and under rule 17d-1 under the Act to permit certain 
joint transactions in accordance with section 17(d) and rule 17d-1 
under the Act.

-----------------------------------------------------------------------

Summary of Application: Applicants request an order to permit certain 
registered closed-end investment companies to co-invest with other 
investment vehicles managed by the same investment adviser, and the 
investment adviser to receive certain compensation in connection with 
these transactions.

Applicants: ML Private Equity Inc. (together with any investment 
adviser controlling, controlled by, or under common control with ML 
Private Equity Inc., the ``Advisers'') and Merrill Lynch Private Equity 
Trust I (the ``Fund'' and together with any future registered closed-
end investment company advised by the Advisers, the ``Funds'').

Filing Date: The application was filed on May 15, 1998, and amended on 
September 2, 1998. Applicants have agreed to file an amendment, 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 November 23, 
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 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: South Tower, World Financial Center, New York, New 
York 10080.

For Further Information Contact: Elaine M. Boggs, Senior Counsel, at 
(202) 942-0572, or Nadya B. Roytblat, Assistant Director, at (202) 942-
0564 (Office of Investment Company Regulation, Division of Investment 
Management).

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, 450 Fifth Street, N.W., Washington, 
D.C. 20549 (tel. 202-942-8090).

Applicant's Representations

    1. The fund will be a Delaware business trust and a privately 
offered closed-end investment company registered under the Act. ML 
Private Equity Inc. will register as an investment adviser under the

[[Page 59608]]

Investment Advisers Act of 1940 and will serve as the Fund's investment 
adviser. The Adviser also may serve as investment adviser to private 
accounts on a discretionary basis and as manager and/or investment 
adviser to other investment vehicles excepted from the definition of 
investment company by section 3(c)(1) or 3(c)(7) of the Act (``Private 
Funds'').\1\
---------------------------------------------------------------------------

    \1\ Private Funds may include certain employees' securities 
companies formed for the benefit of employees of Merrill Lynch & 
Co., Inc. If the Adviser acts as the general partner of a Private 
Fund, it may make a capital contribution in connection with the 
organization of the Private Fund and maintain an interest in the 
Private Fund.
---------------------------------------------------------------------------

    2. ML Private Equity Inc. is a wholly-owned subsidiary of Merrill 
Lynch & Co., Inc. (``ML & Co.''). Merrill Lynch, Pierce, Fenner & Smith 
Incorporated (``Merrill Lynch''), also a wholly-owned subsidiary of ML 
& Co., will act as placement agent for the Fund's shares.
    3. The Fund will have at least four trustees who are natural 
persons (``Individual Trustees'') and, in addition, the Adviser may 
serve as a trustee. Under the Fund's declaration of trust, the 
Individual Trustees will perform the duties imposed by the Act or the 
rules under the Act on directors of registered investment companies 
organized in corporate form and the Adviser as trustee will not be 
entitled to vote on any matters related to these duties.
    4. The Fund will invest in institutional investment funds excepted 
from the definition of investment company by section 3(c)(1) or 3(c)(7) 
of the Act (``Underlying Funds''). The Underlying Funds may include 
real estate partnerships, venture capital funds, leveraged buyout 
funds, and hedge funds. The Underlying Funds will be managed by 
individuals or entities that are not affiliated with the Adviser.
    5. Merrill Lynch will act as placement agent and financial adviser 
to the Underlying Funds and their sponsors. Merrill Lynch will receive 
compensation for its services from the sponsors (but not from the 
Underlying Funds). In general, fees for the combined financial advice 
and placement agency services range up to 2 percent of the proceeds of 
the offering for a new Underlying Fund, together with reimbursement of 
out-of-pocket transaction expenses.
    6. The Fund proposes to make investments in the Underlying Funds 
concurrently with one or more other Funds, the Private Funds, and ``ML 
Entities'' (``Co-Investments'').\2\ The Fund will not invest in an 
Underlying Fund unless at least 70 percent of the capital committed to 
the Underlying Fund is committed by investors that are not Funds, 
Private Funds, or ML Entities.
---------------------------------------------------------------------------

    \2\ ``ML Entities'' refers to the Advisers, ML & Co., any other 
entity controlling, controlled by, or under common control with ML & 
Co. and other entities (other than the Funds or the Private Funds) 
with respect to which ML & Co., or any entity controlling, 
controlled by, or under common control with ML & Co., is authorized 
to cause the entity to provide the opportunity for a Fund to 
participate in the sale of an investment as contemplated by 
condition 6 below.
---------------------------------------------------------------------------

Applicants' Legal Analysis

A. Co-Investments

    1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person of or principal underwriter for a registered 
investment company or any affiliated person of such person or principal 
underwriter (``second-tier affiliate''), acting as principal, from 
effecting any transaction in connection with any joint enterprise or 
other joint arrangement or profit sharing plan, in which the investment 
company participates unless the Commission by order approves the 
transaction. Under section 2(a)(3) of the Act, an affiliated person of 
another person includes any person directly or indirectly controlling, 
controlled by, or under common control with the other person and the 
investment adviser to an investment company. Applicants request an 
order pursuant to section 17(d) and rule 17d-1 to permit the Co-
Investments.
    2. In determining whether to approve a transaction under rule 17d-
1, the SEC considers whether the proposed transaction is consistent 
with the provisions, policies, and purposes of the Act, and the extent 
to which the participation of the investment companies is on a basis 
different from or less advantageous than that of the other 
participation. For the reasons stated below, applicants believe that 
the Co-Investments meet these standards.
    3. Applicants state that the proposed Co-Investments will not be 
less advantageous to any Fund than they are to any other Fund, Private 
Fund, or ML Entity since each Fund will be offered the opportunity to 
participate in the Co-Investments with each other participating Fund, 
Private Fund, or ML Entity on an identical basis. In addition, 
applicants state that oversight by the Individual Trustees as provided 
for in the conditions below will protect the Fund from overreaching by 
any affiliated person in a Co-Investment.

B. Payment of Compensation to Advisers

    1. Section 17(e) of the Act places limitations on the types and 
amounts of compensation that an affiliated person or second-tier 
affiliate of a registered investment company, acting as agent, may 
receive with respect to purchases and sales of securities by the 
investment company. Section 6(c) permits the SEC to exempt any person 
or transaction from any provision of the Act, if the exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
policies of the Act.
    2. Applicants request an exemption under section 6(c) from section 
17(e) to the extent that the section is applicable to compensation 
received by Merrill Lynch or an affiliate attributable to the purchase 
of the Underlying Funds by the Funds. The exemption would only be 
available to purchases of an Underlying Fund by a Fund in which neither 
Merrill Lynch nor any affiliate receives any commissions, fees, or 
other compensation from a Fund or an Underlying Fund in connection with 
the purchase.
    3. Applicants state that the limitations in section 17(e) were 
designed to prevent affiliates of registered investment companies from 
receiving excessive compensation attributable to portfolio transactions 
conducted by the investment companies. Applicants state that fees 
received by Merrill Lynch from a sponsor of an Underlying Fund will be 
identical with respect to each investor in an Underlying Fund for which 
Merrill Lynch acts as placement agent, regardless of the identity of 
the purchaser or whether it is affiliated with Merrill Lynch.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. A majority of the Individual Trustees of each Fund will not be 
``interested persons,'' as defined in section 2(a)(19) of the Act, of 
the Fund.
    2. A fund will not invest in an Underlying Fund unless at least 70 
percent of the capital committed to the Underlying Fund is committed by 
investors that are not Funds, Private Funds, or ML Entities.
    3. The Individual Trustees of each Fund participating in a Co-
Investment in an Underlying Fund, including a majority of the non-
interested Individual Trustees, will approve Co-Investments in advance. 
To facilitate the Individual Trustees' determinations, the

[[Page 59609]]

Adviser will provide the Individual Trustees of a Fund with periodic 
information listing all investments suitable for investment by the Fund 
which have been entered into by another Fund or, to the knowledge of 
the Adviser, a Private Fund or an ML Entity.
    4. (a) Before making a Co-Investment, the Adviser will make a 
preliminary determination as to whether each particular Co-Investment 
opportunity meets the Fund's investment objective, policies, and 
restrictions. The Adviser will maintain written records of the factors 
considered in any preliminary determination.
    (b) Following the making of the determination referred to in (a), 
information concerning the proposed Co-Investment will be distributed 
to the Individual Trustees. This information will be presented in 
written form and will include the name of each Fund, each Private Fund, 
and each ML Entity that, to the knowledge of the Adviser, may 
participate and the maximum amount offered to each entity.
    (c) Information regarding the Adviser's preliminary determinations 
referred to in (a) will be reviewed by the Individual Trustees, 
including a majority of the non-interested Individual Trustees. The 
Individual Trustees, including a majority of the non-interested 
Individual Trustees, will make an independent decision as to whether to 
participate and the extent of participation in a Co-Investment in an 
Underlying Fund based on the factors as are deemed appropriate under 
the circumstances. If a majority of the non-interested Individual 
Trustees of the Fund determines that the amount proposed to be invested 
by the Fund is not sufficient to obtain an investment position that 
they consider appropriate under the circumstances, the Fund will not 
participate in the Co-Investment. Similarly, the Fund will not 
participate in a Co-Investment if a majority of the non-interested 
Individual Trustees of the Fund determines that the amount proposed to 
be invested is an amount in excess of that which is determined to be 
appropriate under the circumstances, although the non-interested 
Individual Trustees may make a determination that the Fund take other 
than their allotted portion of an investment. A Fund will only make a 
Co-Investment if a majority of the non-interested Individual Trustees 
of the Fund prior to making the Co-Investment in an Underlying Fund 
conclude, after consideration of all information deemed relevant 
(including the extent to which such participation is on a basis 
different from or less advantageous than that of other participants and 
the extent to which an ML Entity has or will provide investment banking 
or other services to the Underlying Fund), that the investments by any 
other Fund, Private Fund, and/or ML Entity, as applicable, would not 
disadvantage the Fund in the making of the investment, in maintaining 
its investment position or in disposing of the investment, and that 
participation by the Fund would not be on a basis different from or 
less advantageous than that of the other Fund, Private Fund, and/or any 
ML Entity, as applicable. The non-interested Individual Trustees will 
maintain at the Fund's office written records of the factors considered 
in any decision regarding the proposed Co-Investment.
    (d) The non-interested Individual Trustees will, for purposes of 
reviewing each recommendation of the Adviser, request additional 
information from the Adviser as they deem necessary for the exercise of 
their reasonable business judgment, and they will also employ such 
experts, including lawyers and accountants, as they deem appropriate 
for the reasonable exercise of this oversight function.
    5. Co-Investments in equity interests in an Underlying Fund by a 
Fund with any other Fund, any Private Fund, and/or any ML Entity, as 
applicable, will consist of the same class of securities, including the 
same registration rights (if any), and other related rights, and will 
be purchased at the same unit consideration, and the approval of these 
transactions, including the determination of the terms of the 
transactions by the Fund's non-interested Individual Trustees, will be 
made in the same time period.
    6. A Fund will not participate in a Co-Investment in an Underlying 
Fund with another Fund, a Private Fund, or an ML Entity unless each 
other party agrees to permit the Fund to participate, in the manner set 
forth in this condition, in the disposition of (a) an interest in each 
Underlying Fund or (b) securities received through an in-kind 
distribution by the Underlying Fund. If a Fund, a Private Fund, or an 
ML Entity proposes to dispose of a security described in the preceding 
sentence, notice of the proposed sale will be given to the non-
interested Individual Trustees of the relevant Fund(s) at the earliest 
practical time. A Fund will participate in the disposition of the 
security on a lock-step basis with any other Fund, Private Fund, or an 
ML Entity, unless the non-interested Individual Trustees of a Fund 
determine that the Fund should not participate in the sale or not 
participate on a lock-step basis. A Fund need not participate on a 
lock-step basis in the disposition of securities sold by any other 
Fund, a Private Fund, or an ML Entity if the non-interested Individual 
Trustees of the Fund find that the retention or sale, as the case may 
be, of the securities is fair to the Fund and that the Fund's 
participation or choice not to participate in the sale on a lock-step 
basis is not the result of overreaching by any other Fund, any Private 
Fund, and/or an ML Entity, as applicable. If this finding is not made, 
then the relevant Fund must participate in the sale on the basis of a 
lock-step disposition. If at any time the result of a proposed 
disposition of any portfolio security held by a Fund would alter the 
proportionate holdings of each class of securities held by the other 
Funds, Private Funds, and/or an ML Entity, as applicable, holding the 
Co-Investment, then the non-interested Individual Trustees of the Fund 
or Funds involved must determine that this result is fair to the 
relevant Fund(s) and is not the result of overreaching by any other 
Fund, Private Fund, and/or ML Entity, as applicable. The non-interested 
Individual Trustees will record in the records of the Fund the basis 
for their decisions as to whether to participate in the sale.
    7. A decision by the Individual Trustees of a Fund (a) not to 
participate in a Co-Investment or (b) not to sell, exchange, or 
otherwise dispose of a Co-Investment in the same manner and the same 
time as another Fund, Private Fund, or ML Entity will include a finding 
that the decision is fair and reasonable to the Fund and not the result 
of overreaching of the Fund or its share holders by the other Fund, 
Private Fund and/or ML Entity, as applicable. The non-interested 
Individual Trustees of each Fund will be provided quarterly for review 
all information concerning Co-Investments made by the Funds, the 
Private Funds, and/or ML Entities, as applicable, including Co-
Investments in which the Fund declined to participate, so they may 
determine whether all Co-Investments made during the preceding quarter, 
including those Co-Investments they declined, complied with the 
conditions set forth above. In addition, the non-interested Individual 
Trustees of each Fund will consider at least annually the continuing 
appropriateness of the standards established for Co-Investments by the 
Fund, including whether the use of these standards continues to be in 
the best interest of the Fund and its share holders and does not 
involve overreaching of the Fund or its share holders on the part of 
any party concerned.
    8. No non-interested Individual Trustee of a Fund will be an 
affiliated person of a Private Fund or Underlying

[[Page 59610]]

Fund or have had, at any time since the beginning of the last two 
completed fiscal years of any Private Fund or Underlying Fund, a 
material business or professional relationship with any Private Fund or 
Underlying Fund.
    9. A Fund, each Private Fund, and/or ML Entity, as applicable, will 
bear its own expenses associated with the disposition of portfolio 
securities. The expenses, if any, of distributing and registering 
securities under the Securities Act of 1933 sold by the Fund, one or 
more Private Funds, and/or the ML Entity, as applicable, at the same 
time will be shared by the Fund, the selling Private Fund(s), and or 
each ML Entity, as applicable, in proportion to the relative amounts 
they are selling.
    10. Merrill Lynch and its affiliates will receive no commissions, 
fees, or other compensation from a Fund or an Underlying Fund in 
connection with a purchase by the Fund of an interest in the Underlying 
Fund.\3\
---------------------------------------------------------------------------

    \3\ This condition does not limit arrangements in which an 
Underlying Fund initially pays a placement fee to Merrill Lynch but 
is reimbursed or credited with such amount so that the sponsor of 
the Underlying Fund effectively bears the cost of the placement fee.
---------------------------------------------------------------------------

    11. The Fund will maintain all records required of it by the Act, 
and all records referred to or required under these conditions will be 
available for inspection by the Commission. The Fund will also maintain 
the records required by section 57(f)(3) of the Act as if the Fund was 
a business development company and the Co-Investments were approved by 
the non-interested Individual Trustees under section 57(f).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29470 Filed 11-3-98; 8:45 am]
BILLING CODE 8010-01-M