[Federal Register Volume 65, Number 160 (Thursday, August 17, 2000)]
[Notices]
[Pages 50245-50249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20882]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-24596; 812-9618]
XSource, Inc.
August 11, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under sections 6(c), 17(b)
and 23(c) of the Investment Company Act of 1940 (the ``Act'') granting
an exemption from sections 17(a), 18(d), 21(b), 23(a) through (c), and
30 of the Act; and under section 17(d) of the Act and rule 17d-1 under
the Act permitting certain joint transactions.
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Summary of Application: Applicant proposes to operate as a managerial
strategic investment company (``MSIC'').
Filing Dates: The application was filed on May 31, 1995, and amended on
September 25, 1995, September 4, 1996, and January 20, 2000.
Hearing or Notification of Hearing: An order granting the application
will be issued unless to 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 5,
2000 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 5th Street N.W., Washington, D.C. 20549-
0609. Applicant, 153 East 53rd Street, Suite 5900, New York, New York,
10022.
FOR FURTHER INFORMATION CONTACT: Mary Kay Frech, 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 5th Street N.W., Washington, D.C.
20549 0102 (telephone 202-942-8090).
Applicant's Representations
1. Applicant, a Delaware corporation, is an indirect wholly-owned
subsidiary of Millicom International Cellular, S.A. (``Millicom''), a
Luxembourg corporation engaged in the cellular telephone business.
Applicant currently holds majority equity interests in nine companies
engaged in electronics, media, providing integrated network services
for telecommunication data and internet network businesses.\1\ The
present business of applicant dates back to 1993, when Millicom
transferred substantially all of its non-cellular operations to
applicant (then known as American Satellite Network, Inc., and later
known as Great Universal Incorporated).
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\1\ Currently, XSource's principal holdings include 100%
ownership of Get.2.Net Corporation, Integrated Systems and Internet
Solutions, Inc., Basset Telecom Solutions AB, Diator Netcom
Consultants AB, Multinational Automated Clearing House U.S.A. Inc.,
Netcom Consultants (UK) Ltd., Netcom Latin America BV, Netcom Asia
BV and Praesidium Incorporated as well as a 55% interest in Savera
Systems Incorporated. XSource also holds a 45% interest in Modern
Cartoons, Ltd. (together with wholly-owned and majority-owned
subsidiaries, ``Current Holdings'').
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2. In 2000, upon the exercise of certain warrants, applicant no
longer will be a wholly-owned subsidiary of Millicom and will become a
public company. At that time, applicant states that it plans to change
its business to operate as an MSIC. As an MSIC, applicant states that
it will provide a long-term source of financial support and managerial
assistance to public companies seeking to improve their
competitiveness. Applicant will acquire long-term substantial minority
equity holdings in selected public companies (``strategic portfolio
companies'') and then apply applicant's experience and resources to
help manage those companies. Applicant plans to be actively involved in
the management of the strategic portfolio companies through board
representation; by having applicant's officers and employees serve as
officers or consultants to the strategic portfolio companies; and by
providing direct financial assistance to the companies.
3. Applicant states that, as an MSIC, it may come within the
definition of investment company in section 3(a)(1)(C) of the Act
because more than 40% of applicant's holdings may consist of minority
interests that constitute ``investment securities,'' as that term is
defined in section 3(a)(2) of the Act. If applicant comes within the
definition of investment company in section 3(a)(1)(C) of the Act, and
is unable to rely on an exemptive rule under the Act, applicant will
register under the Act as a closed-end management investment company.
4. Applicant states that, although it would be registered under the
Act,
[[Page 50246]]
applicant will not hold itself out as being engaged in the business of
investing, reinvesting, owning, holding, or trading in securities.
Rather, applicant will hold itself out as being engaged in the
businesses of its portfolio companies. Applicant also states that at
least 50% of its assets will consist of greater than 25% holdings in
U.S. companies to which it makes available significant managerial
assistance. As part of these holdings, at least 25% of applicant's
assets will consist of greater than 25% holdings in its existing
subsidiaries. These companies will be engaged in the types of
businesses similar to applicant's current holdings. At least one
officer, director, employee or other person designated by applicant
will serve on the board of each company.
5. Applicant states that at least 40% of its assets will consist of
(a) no more than five holdings, each greater than 10%, in publicly held
U.S. companies to which applicant will make available significant
managerial assistance and which applicant will hold for at least two
years, and (b) other assets that are not investment securities. These
companies also will be engaged in the types of businesses similar to
applicant's current holdings. At least one officer, director, employee
or other person designated by applicant will serve on the board of each
company.
6. Applicant further states that no more than 10% of its assets
will consist of investment securities other than those described above,
and no more than 5% of its assets in this category will consist of
equity securities. In addition, applicant will have acquired at least
50% of its holdings either in a private placement directly from the
portfolio company or as a result of providing other financial
assistance directly to the portfolio company.
Applicant's Legal Analysis
1. Applicant states that, when it registers under the Act as a
closed-end investment company, it will need from various provisions of
the Act in order to operate as an MSIC. Specifically, applicant seeks
relief in order to be able to engage in certain transactions with its
affiliates, provide financing to its portfolio companies, raise
additional capital, and provide equity-based compensation to its
employees. Thus, applicant requests an exemption under sections 6(c),
17(b) and 23(c) of the Act from sections 17(a), 18(d), 21(b), 23(a)
through (c), and 30 of the Act; and under section 17(d) of the Act and
rule 17d-1 under the Act to permit certain joint transactions.
Applicant acknowledges that, if it does not register under the Act
within three years of the date the requested order is issued, the order
will terminate. Applicant also acknowledges that the Commission, as a
matter of normal practice, does not grant exemptive relief under the
Act unless there is shown a clear present need for the relief.
Applicant asserts that granting it the requested relief at this time
would be appropriate in light of the unique regulatory issues presented
by its proposal to operate as an MSIC.
2. Applicant believes that its activities as an MSIC will resemble
those of a business development company (``BDC''). BDCs, like
applicant, are publicly offered closed-end investment companies.
Applicant states that the Act includes a separate set of provisions for
BDCs designed to enable them to engage in such activities. Applicant
thus proposes to be governed by certain provisions of the Act
applicable to BDCs.\2\
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\2\ Applicant states that it would be unable to elect status as
a BDC because the Act limits the extent to which BDCs may invest in
large companies.
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Transactions With Affiliates
3. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
such person, from selling any security or other property to or
purchasing any security or other property from the investment company.
Section 17(d) of the Act and rule 17d-1 under the Act prohibit an
affiliated person of an investment company, acting as principal, from
participating in or effecting any transaction in connection with any
joint enterprise or joint arrangement in which the investment company
participates. Section 2(a)(3) of the Act defines ``affiliated person''
of another person to include any person directly or indirectly owning,
controlling, or holding with power to vote 5% or more of the
outstanding voting securities of the other person; any person 5% or
more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote by the other person; any
person directly or indirectly controlling, controlled by, or under
common control with, the other person; any officer, director, or
employee of a person; and in the case of an investment company, is
investment adviser.
4. Section 17(b) of the Act authorizes the Commission to exempt a
transaction from section 17(a) if the terms of the transaction,
including the consideration to be paid or received, are reasonable and
fair and do not involve overreaching on the part of any person, and the
transaction is consistent with the policy of each investment company
and the general purposes of the Act. Section 6(c) of the Act authorizes
the Commission to exempt any class of transactions 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 policy and provisions of the Act. Under
rule 17d-1, in passing on applications for orders under section 17(d),
the Commission considers whether the company's participation in the
proposed transaction is consistent with the provisions, policies, and
purposes of the Act, and the extent to which the participation is on a
basis different from or less advantageous than that of other
participants.
5. Applicant requests relief sections 6(c) and 17(b) from section
17(a) and an order pursuant to section 17(d) and rule 17d-1 to permit
transactions with certain affiliated persons of applicant that would be
permitted if applicant were a BDC. Applicant proposes to be governed by
certain provisions of section 57 of the Act, which establishes a
framework for transactions by BDCs with affiliates. Applicant believes
that complying with the provisions of the Act applicable to BDCs will
provide it with needed flexibility to operate as an MSIC consistent
with the protection of investors and that purposes of the Act.
6. Under section 57(a) of the Act, transactions between a BDC and
entities that control the BDC (``control affiliates''), as well as
transactions in which a BDC participates jointly with its control
affiliates, generally are prohibited. Under section 57(b) of the Act,
control affiliates include the BDC's officers, directors, and
employees, the BDC's investment adviser, principal underwriter, and any
shareholder that owns more than 25% of the BDC's outstanding
securities. Control affiliates also include persons that control any of
these entities. A BDC must seek exemptive relief from the Commission to
enter into a transaction with a control affiliate. Applicant will be
subject to section 57(a) of the Act, and is not seeking any relief to
be able to engage in transactions with its control affiliates.
7. Under section 57(d) of the Act, transactions between a BDC and
certain entities that are affiliated with the BDC (``non-control
affiliates''), as well as transactions in which a BDC participates
jointly with its non-control affiliates, generally are prohibited.
Under section 57(e) of the Act, non-control affiliates include any
shareholder that owns between 5% and 25% of the BDC's outstanding
voting securities (as well as executive officers,
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directors, and persons controlling, controlled by or under common
control with that shareholder), and any non-control affiliate of a
director, officer, employee, investment adviser, or principal
underwriter of the BDC.
8. Under section 67(f) of the Act, transactions between a BDC and
its non-control affiliates may be permitted, provided the BDC's board
of directors, including a majority of the independent directors who
have no financial interest in the transaction, approves the
transaction. The board of directors must determine that the terms of a
proposed transaction, including the consideration to be paid, are
reasonable and fair, and do not involve overreaching, and that the
transaction is consistent with the policies of the investment company
and the interests of shareholders. Accordingly, applicant would be able
to engage in transactions with its non-control affiliates upon approval
by its board of directors. Applicant states that its board of directors
thus would be able to approve, for example, a consulting arrangement
between a strategic portfolio company and an entity that held more than
5% of applicant's outstanding voting securities but that does not
control it.
9. Section 57 does not require approval for transactions between a
BDC and its ``downstream affiliates'' (i.e., the BDC's portfolio
companies and their affiliates). Applicant proposes, as an additional
safeguard against overreaching, that its transactions with ``downstream
affiliates'' will be approved in accordance with section 57(f).
10. Applicant will comply with section 57(h) of the Act which
requires the directors of a BDC to adopt, and periodically review and
update as appropriate, procedures reasonably designed to ensure that
reasonable inquiry is made, prior to consummation of any transaction in
which the BDC or a company controlled by the BDC proposes to
participate, with respect to the possible involvement in the
transaction of the persons described in sections 57(b) and (e).
11. Under section 57(m) of the Act, an executive officer of
applicant would be able to provide managerial assistance to a strategic
portfolio company, provided that the officer does not receive any
special compensation for providing these services.
12. Applicant also will comply with section 56 of the Act which
requires, among other things, that a majority of applicant's board of
directors be persons who are not interested persons of applicant.
Loans to Portfolio Companies
13. Section 21(b) of the Act prohibits a registered investment
company from lending money or property to any person that controls or
is under common control with the investment company. Section 21(b)
would prevent applicant from lending to a company that applicant
controls if applicant and the controlled company are deemed to be under
the common control of a person or entity that controls applicant.
Applicant will have controlling interests in certain of its current
subsidiaries and may control other portfolio companies. Applicant
states that an important means for it to improve the competitiveness of
its strategic portfolio companies would be by making loans to these
companies.
14. Section 62(2) of the Act permits a BDC to make a loan to a
company controlled by the BDC that is deemed to be under common control
with the BDC solely because a third person controls the BDC. Applicant
states that section 62(2) would not permit, for example, a loan to a
company that is controlled by a BDC's affiliate through the affiliate's
own holdings in the company. Applicant requests an exemption under
section 6(c) from section 21(b) to permit it to make loans to companies
controlled by applicant to the extent permitted under section 62(2) as
if applicant were a BDC.
Issuance of Common Stock Below Net Asset Value
15. Section 23(b) of the Act prohibits a registered closed-end
investment company from selling its common stock at a price below the
stock's current net asset value (``NAV''), except in certain limited
circumstances. This prohibition is intended to protect the shareholders
of the investment company from dilution when the company issues
additional securities. Applicant states that because close-end funds
often trade at a discount to NAV, a fund that is unable to issue shares
at below NAV may be unable to raise additional equity capital
subsequent to its initial public offering.
16. Section 63(2) of the Act permits a BDC to issue common stock at
less than NAV, provided that the BDC's directors and shareholders give
the necessary approvals. Applicant states that the nature of its
proposed operations, like those of a BDC, likely will require the
ability to raise additional capital in order to acquire additional
strategic portfolio companies or to provide financial assistance to the
companies. Applicant thus requests an exemption under section 6(c) from
section 23(b) to permit it to issue and sell its common stock at below
NAV to the extent it would be permitted to do so by section 63(2) of
the Act.
Incentive Compensation to Management
17. Applicant states that its management will be involved in the
affairs of its strategic portfolio companies through membership on the
board of directors, and by serving as officers or as monitors of the
portfolio companies. Applicant's management will be compensated for
their skills in facilitating the management of the strategic portfolio
companies. Applicant thus believes that it will be competing in the
labor market for the services not of investment advisers but rather of
operating company managers. Applicant asserts that these managers
routinely receive equity-based compensation such as stock options.
Applicant would like to attract talented managers by offering them
equity-based incentive compensation in the form of options for its
stock (``Options'') and stock appreciation rights (``SARs''). Applicant
believes that the use of such equity-based incentive compensation may
benefit its shareholders by aligning the interests of management with
the interests of shareholders.
18. Sections 18(d), 23(a) and (b) of the Act effectively prohibit a
registered investment company from providing equity-based compensation
to its management. Section 18(d) generally prohibits a fund from
issuing rights to purchase fund shares. Section 23(a) generally
prohibits a closed-end fund from issuing securities for services.
Section 23(b), as noted above, prohibits a registered closed-end fund
from selling common stock at below its current NAV.
19. Applicant requests an exemption under section 6(c) from
sections 18(d) and 23(a) and (b) of the Act to the extent necessary to
adopt an equity-based incentive compensation plan (``Plan'') for its
directors, officers and employees (``Participants'') that will provide
for the issuance of Options and SARs (collectively, ``Awards'').
20. Applicant states that the purpose of sections 18(d) and 23(a)
and (b) is to prevent the dilution to shareholders that results from
the issuance of Options or the issuance of securities for services.
Applicant states that its shareholders will be protected because the
Plan will have the following characteristics:
(a) The Plan would be implemented only if it is approved by
applicant's board of directors, including a majority of the independent
directors, and by applicant's shareholders. Proxy materials that would
be submitted to
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applicant's shareholders would include a concise, ``plain English''
description of the plan, including its potential dilutive effect, and
would comply with Item 10 of Schedule 14A under the Securities Exchange
Act of 1934 (``Exchange Act'').
(b) The Plan would be administered by a committee of at least two
independent directors (the ``Committee''). The issuance of Awards would
be approved as in the best interests of applicant and its shareholders
by a majority of applicant's independent directors and by a majority of
the directors who have no financial interest in the Plan.
(c) Awards would be issuable to independent directors under the
Plan. The issuance of Awards to independent directors would be approved
as in the best interests of applicant and its shareholders by a
majority of applicant's independent directors and by a majority of the
directors who have no financial interest in the Awards.
(d) The maximum number of shares of applicant's common stock that
would be issuable under the Plan would be 10% of applicant's
outstanding shares at the time the Plan is adopted. No participant
would receive Awards with respect to more than 35% of the shares that
may be issued under the Plan.
(e) SARs would be issued only in tandem with Options so that the
exercise of the SAR cancels the Option and vice versa. SARs would
expire no later than the Options to which they relate.
(f) The price of an Option would equal at least 100% of the fair
market value of applicant's common stock on the date the Option is
granted. SARs would not be exercised for more than 100% of the
appreciation of the underlying stock.
(g) Awards would be granted within 10 years of the date the Plan is
adopted or approved by applicant's shareholders, whichever is earlier.
Awards would expire within 10 years after the date of grant. Awards
would be nontransferable except by gift or bequest or for estate
planning purposes.
(h) A Participant would be able to pay for the stock to be received
upon the exercise of an Option with applicant's common stock. The
aggregate fair market value of the common stock would be equal to the
aggregate exercise price of any stock purchased upon the exercise of an
Option with such common stock, and the fair market value would be
equal, per share, to the price at which applicant's shareholders could
sell a share of applicant's common stock on an exchange or over the
counter. The amount payable upon the exercise of an SAR may be payable
in cash or applicant's stock or both, in the sole discretion of the
Committee. Applicant would pay cash or issue shares of its common
stock, or a combination of both, only if and to the extent that the
payment or issuance would not result in greater dilution of the
interests of existing shareholders than would occur if, instead of the
SARs, the Options to which they relate were exercised.
21. Section 23(c) of the Act prohibits a registered closed-end
investment company from purchasing any securities of which it is the
issuer except in the open market, pursuant to tender offers, or under
other circumstances as the SEC may permit to insure that the purchase
is made on a basis which does not unfairly discriminate against any
holders of the class or classes of securities to be purchased.
Applicant states that section 23(c) effectively would prevent
Participants from paying for stock to be received upon exercise of
Options under the Plan with shares of applicant's common stock.
Applicant thus requests an order under section 23(c) to permit it to
purchase shares of its common stock from Participants in the Plan in
connection with the exercise of an Option. Applicant states that the
plan will be structured to prevent discrimination against applicant's
shareholders because applicant will purchase its shares from a
participant at the fair market value at which all other shareholders
could sell their shares on an exchange or over the counter.
22. Applicant also requests an order pursuant to section 17(d) and
rule 17d-1 to permit the Plan. Rule 17d-1(c) defines a joint enterprise
to include any stock option or stock purchase plan. Applicant states
that the Plan is in the best interests of applicant's shareholders
because the Plan will help applicant attract and retain talented
professionals and help align the interests of management with the
interests of its shareholders.
Periodic Reporting Requirements
23. Section 30 of the Act requires each registered investment
company to file certain periodic reports with the SEC in lieu of the
reports required by Sections 13 or 15(d) of the Exchange Act. Section
30 reflects the determination that investors in investment companies
require different types of information than investors in business
corporations.
24. BDCs exempt from section 30. To qualify as a BDC, among other
things, a company must have a class of its equity securities registered
under Section 12 of the Exchange act or have filed a registration
statement pursuant to Section 12 of the Exchange Act. As a condition to
the requested order, applicant will have a class of its equity
securities registered under Section 12 of the Exchange Act. Because
applicant's operations will resemble those of a BDC, applicant asserts
that the periodic reports required by the Exchange Act would be more
useful to investors than the periodic reports required by section 30 of
the Act. Therefore, applicant requests an exemption under section 6(c)
from section 30 so that it may file its periodic reports as required
under the Exchange Act.
Applicant's Conditions
Applicant agrees that the requested order will be subject to the
following conditions:
Applicant's Assets
1. At least 50% of the value of applicant's assets will consist of
greater than 25% holdings in companies to which applicant makes
available significant managerial assistance (as defined in section
2(a)(47) of the Act) and which are organized under the laws of, and
have their principal places of business in, any state or states; as
part of such holdings, at least 25% of the value of applicant's assets
will consist of greater than 25% holdings in the Current Holdings, and
any other subsidiaries it held prior to its registration as an
investment company under the Act.
2. No more than 10% of applicant's assets will consist of
investment securities other than those described in conditions 1 and
3(a); the portion of such investment securities that will constitute
equity securities will not exceed 5% of applicant's assets.
3. The remainder of applicant's assets will consist of (a) greater-
than-10% investments in publicly held companies to which applicant
makes available significant managerial assistance (as defined in
section 2(a)(47)) and which are organized under the laws of, and have
their principal places of business in, any state or states, and (b)
other assets that are not investment securities. Applicant will hold no
more than five such greater-than-10% investments, and will hold each
such investment for a minimum of two years.
4. The companies described in conditions 1 and 3(a) (each a
``qualifying company'') will be engaged in types of businesses similar
to applicant's holdings while applicant was not an investment company,
and the expertise and focus of applicant's management will continue to
be on such businesses.
5. At least one officer, director or employee of, or other person
designated
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by, applicant will serve on the board of directors of each qualifying
company.
6. Applicant will have acquired at least 50% of its holdings either
in private placement directly from the qualifying company or as a
result of applicant providing other financial assistance directly to
such qualifying company.
7. Any decision by applicant to dispose of all or a portion of its
holdings in any qualifying company will not be based simply on the
market value of such holdings but rather on strategic and operational
considerations.
Applicant's Operations
8. Members of applicant's management will not be affiliated persons
of registered investment advisers, and applicant will not be an
affiliated person of a registered investment company.
9. Applicant will be engaged in the businesses of its portfolio
companies and will not hold itself out as being engaged in the business
of investing, reinvesting, owning, holding or trading in securities.
10. Applicant will have a class of its equity securities registered
under Section 12 of the Exchange Act.
11. Applicant will comply with sections 56, 57(a) through (i),
57(m), 57(o), 62(2), and 63(2) of the Act as if applicant were a BDC.
Incentive Compensation Plan
12. Applicant's board of directors will review the Plan at least
annually. In addition, the Committee periodically will review the
potential impact that the grant, exercise, or vesting of Awards could
have on applicant's earnings and NAV per share, such review to take
place prior to any decisions to grant Awards, but in no event less
frequently than annually. Adequate procedures and records will be
maintained to permit such review, and the Committee will be authorized
to take appropriate steps to ensure that neither the grant nor the
exercise or vesting of Awards would have any effect contrary to the
interests of applicant's shareholders. This authority will include, in
addition to the authority to prevent or limit the grant of additional
Awards, the authority to limit the number of Awards exercised in a
given period of time should the Committee conclude that applicant's
expenses, earnings or NAV might otherwise be excessively diluted. All
records maintained pursuant to this condition will be subject to
examination by the Commission and its staff.
13. The maximum number of shares of applicant's common stock
available for issuance under the Plan will be 10% of applicant's
outstanding common stock on the date the Plan is adopted. No
Participant will be granted Awards relating to more than 35% of the
shares reserved for issuance under the Plan.
14. Awards under the Plan will be issuable only to applicant's
directors, officers and employees. Awards will not be transferable or
assignable, except by will or the laws of descent and distribution, or
as the Committee may specifically approve to facilitate estate
planning.
15. The existence and nature of the Awards granted will be
disclosed in accordance with standards or guidelines adopted by the
Financial Accounting standards Board for operating companies and the
requirements of the Commission under Item 402 of Regulation S-K, Item 8
of Schedule 14A under the Exchange Act and Item 18 of Form N-2.
16. Applicant will have amended the terms of any equity-based
compensation plans adopted by applicant and grants made thereunder
prior to its reliance on the requested order to bring such plans and
grants into compliance with such order.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-20882 Filed 8-16-00; 8:45 am]
BILLING CODE 8010-01-M