[Federal Register Volume 66, Number 34 (Tuesday, February 20, 2001)]
[Notices]
[Pages 10922-10926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4115]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24857; 813-258]


GFInet inc. and Magnetic Holdings International (DE) LLC; Notice 
of Application

February 13, 2001.
Agency: Securities and Exchange Commission (``Commission'').

Action: Notice of application for an order under sections 6(b) and 6(e) 
of the Investment Company Act of 1940 (the ``Act'') exempting the 
applicants from all provisions of the Act, except section 9, section 17 
(other than certain provisions of paragraphs (a), (d), (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 
under the Act.

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Summary of Application: Applicants request an order to exempt an 
employees' securities company formed for the benefit of key employees 
of GFInet inc. (together with any entity that results from a 
reorganization of GFInet inc. into a different type of entity or into 
an entity organized under the laws of another jurisdiction 
(``GFInet'')) from certain provisions of the Act.

Filing Date: The application was filed on April 3, 2000, and amended on 
November 20, 2000 and February 7, 2001.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on March 12, 2001, 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 Commission's Secretary.

Addresses: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, 100 Wall Street, New York, NY 10005.

For Further Information Contact: Sara P. Crovitz, Senior Counsel, at 
(202) 942-0667, or Nadya Roytblat, Assistant Director, at (202) 942-
0564 (Division of Investment Management, Office of Investment Company 
Regulation).

[[Page 10923]]


Supplementary Information: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0101, (202) 942-8090.

Applicants' Representations

    1. GFInet is a business-to-business neutral electronic marketplace 
providing a fully interactive, Internet accessible, screen-based 
platform for trading corporate assets. GFInet is a wholly owned 
subsidiary of GFI Group, a New York corporation. GFI Group operates as 
a wholesale broker, through its wholly owned broker-dealer 
subsidiaries, providing brokerage services for securities, commodities, 
currency and derivative contracts to broker-dealers and other financial 
institutions.
    2. Magnetic Holdings International (DE) LLC (``Company'') is a 
Delaware limited liability company formed pursuant to a limited 
liabi8lity company agreement (``Investment Company Agreement''). 
Magnetic Holdings Management, LLC, a wholly owned subsidiary of GFI 
Group will be the manager of the Company (``Manager''). Applicants 
state that the Manager is not currently registered under the Investment 
Advisers Act of 1940 (``Investment Advisers Act'') but will so register 
if required to do so by the Investment Advisers Act or the rules 
thereunder.
    3. Applicants intend to establish the Company for the benefit of 
certain key employees to enable them to invest in a private offering of 
GFInet securities. The Company will be an ``employees' security 
company'' within the meaning of section 2(a)(13) of the Act and will 
operate as a closed-end management investment company. Participation in 
the Company will be voluntary.
    4. Applicants state that the Company will subscribe for a specified 
number of shares (``Subscription'') in a private offering of GFInet 
shares. The Company will invest solely in securities issued by GFInet, 
except that, pending complete investment of all capital contributions 
in GFInet securities, the Company may make certain investments in order 
to maintain the value of the received capital (``Temporary 
Investments''). Temporary Investments may include: (a) United States 
Government obligations with maturities of not longer than one year and 
one day, (b) commercial paper with maturities no longer than six months 
and one day and having a rating, assigned to such commercial paper by a 
nationally recognized statistical rating organization, equal to one of 
the two highest ratings categories assigned by such organization; or 
(c) shares of a money market mutual fund.\1\
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    \1\ The Company will not acquire any security issued by a 
registered investment company, if, immediately after such 
acquisition, (a) the Company (and any investment company or 
investment companies controlled by it) would own more than 3% of the 
outstanding voting stock of such company, or (b) securities issued 
by the registered investment company and all other registered 
investment companies have an aggregate value in excess of 10% of the 
value of the total assets of the Company.
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    5. Units of interest in the Company (``Units'') \2\ will be offered 
only to eligible investors (``Eligible Investors''), which will consist 
of: (a) ``Eligible Employees'' (as defined below), (b) a trust of which 
all of the trustees, grantors, and/or beneficiaries are Eligible 
Employees or of which the beneficiaries are spouses or children and/or 
step-children residing in the same household as the Eligible Employees, 
including self-directed retirement plan trusts (``Eligible Trusts''), 
(c) partnership, corporations or other entities, all of the voting 
power of which is controlled by Eligible Employees (``Eligible 
Entities''), (d) the spouse and children and step-children over the age 
of 21 of an Eligible Employee if they reside in the same household as 
the Eligible Employee (``Immediate Family Members''), and (e) GFInet or 
an entity that directly or indirectly controls, is controlled by, or is 
under common control with GFInet (``Affiliated Companies''). Each 
Eligible Investor must be an ``accredited investor'' as defined in rule 
501(a) of Regulation D under the 1933 Act, and, in the case of an 
Eligible Employee or Immediate Family Member, must meet the income 
requirements set forth in rule 501(a)(6) of Regulation D (``Accredited 
Investor''). The terms of the Company will be fully disclosed to each 
Eligible Investor and a copy of the Investment Company Agreement and 
any other organization documents will be provided to each Eligible 
Investor at the time the Eligible Investor is invited to participate in 
the Company.
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    \2\ Units will be offered and sold by the Company in reliance 
upon the exemption from registration under the Securities Act of 
1933 (``1933 Act'') contained in section 4(2) or pursuant to 
Regulation D under the 1933 Act. No fee of any kind will be charged 
in connection with the sale of Units of the Company.
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    6. Eligible Employees include only such persons who at the time the 
Company offers Units are (a) current or former employees, officers, or 
directors of GFInet or an Affiliated Company; (b) principals or other 
professionals employed by GFInet or an Affiliated Company who provide 
certain consulting or other services to clients of GFInet or of such 
Affiliated Company, (c) key administrative employees of GFInet, or (d) 
a small number of other employees of GFInet who are involved in 
managing the day-to-day affairs of the Company. Applicants state that 
Eligible Employees have sufficient knowledge, education, training, 
sophistication and experience in the financial services businesses, or 
in administrative, financial, accounting or operational activities 
related thereto, to be capable of evaluating the risk of an investment 
in the Company.
    7. A separate account will be established and maintained for each 
Eligible Investor who invests in the Company (``Member''). A Member's 
capital account is equal initially to the initial capital contribution 
made by the Member. Net income or net loss of the Company will be 
determined and credited at least annually to the respective capital 
accounts and sub-accounts of the Members in proportion to their 
respective contributed capital in the Company. Members will not be 
entitled to redeem their Units in the Company. Under the terms of the 
Investment Company Agreement, a Member will have only limited rights to 
transfer Units to Immediate Family Members or other Eligible Investors, 
with the consent of the Manager. In no event will any person become a 
Member unless that person is an Eligible Investor.
    8. The Investment Company Agreement provides that the Manager may 
require a member to withdraw from the Company: (a) If the Member fails 
to make all or any portion of one of the contributions required under 
the Investment Company Agreement; (b) if a Member ceases to be an 
Accredited Investor; (c) if the Company were to be subject to possible 
adverse tax consequences were a particular Member to remain a Member; 
(d) if the continued membership of the Member would violate applicable 
law or regulations or require the Company to register as an investment 
company under the federal securities laws; (e) a Member is convicted or 
pleads nolo contendere to a crime, or commits a fraud or defalcation, 
against the Company, GFInet or any Affiliated Company; (f) a Member 
competes with, solicits the employees, customers or accounts of, or 
misappropriates the trade secrets of GFInet or any Affiliated Company; 
(g) the Member's employment is terminated for cause or the Member 
terminates employment prior to the end of the term of any employment 
agreement with GFInet or any Affiliated Company; (h) a Member becomes 
disabled for specific periods of time; (i) a Member becomes

[[Page 10924]]

subject to certain insolvency events as described in the Investment 
Company Agreement; (j) a Member dies or a Member's Units are held by an 
entity that liquidates, dissolves, or otherwise ceases operations 
without transferring the Units to Eligible Investors.
    9. If a Member is required to withdraw, the Company may, in its 
sole discretion, require such Member to sell his Units to any person or 
entity designated by the Company who is eligible to participate in the 
Company. The value of the withdrawing Member's Units will be at least 
the lesser of (a) the amount actually paid by the Member to acquire the 
Units (plus interest, as determined by the Manager); or (b) the fair 
market value of the Units as determined at the time of repurchase by 
the Manager.
    10. The terms of the withdrawals will be fully disclosed to each 
Eligible Investor at the time the Eligible Investor is invited to 
participate in the Company. The Company will send its Members an annual 
report regarding its operations, containing financial statements 
audited by independent accountants. The Company will maintain a file 
containing any financial statements and other information received from 
GFInet or issuers of Temporary Investments, if any, held by the 
Company, and will make such file available for inspection by Members. 
In addition, within 90 days after the end of each fiscal year, or as 
soon as practicable thereafter, the Company will transmit to each 
Member a report indicating his share of the income or losses of the 
Company for federal income tax purposes.
    11. The Company expects to liquidate upon the initial public 
offering of GFInet securities or upon the end of any lock-up period 
that may be imposed upon the Company in connection with any public, 
firm commitment, underwritten, initial public offering pursuant to an 
effective registration statement under the 1933 Act. The Company may be 
dissolved upon such other circumstances as shall be fully disclosed in 
the Investment Company Agreement.
    12. No sales load will be charged in connection with investment in 
the Company, no fees will inure to the benefit of GFInet or the 
Manager, and the Company will not be promoted by persons seeking to 
profit from investment in the Company. No compensation will be paid by 
the Company to the directors or officers of GFInet or the Manager for 
their services to the Company other than reimbursement for reasonable 
and necessary out-of-pocket expenses incurred during the course of 
conducting the business of the Company.

Applicants' Legal Analysis

    1. Section 6(b) of the Act provides, in part, that the Commission 
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 Commission 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 employees' securities 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 an investment company 
that is not registered under section 8 of the Act from selling or 
redeeming its 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 
Commission, 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) of the Act for 
an exemption from all provisions of the Act except section 9, section 
17 (other than certain provisions of paragraphs (a), (d), (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 requests an exemption from section 17(a) to permit the 
Company (a) to purchase from GFInet securities to be issued by GFInet; 
(b) to sell to GFInet, or any affiliated person thereof (or any 
affiliated person of such an affiliated person) GFInet securities or 
Temporary Investments previously acquired by the Company; and (c) to 
participate as a selling security-holder in a public offering of GFInet 
securities or in which GFInet or any affiliated person thereof (or any 
affiliated person or an affiliated person) acts as or represents a 
member of the selling group.
    4. Applicants state that an exemption from section 17(a) is 
consistent with the protection of investors and the purposes of the 
Act. Applicants state that Company will ultimately be entirely invested 
in securities of GFInet. Applicants state that Members will be informed 
of the risks inherent in investing in the Company, the extent of the 
Company's dealings with GFInet, and the details of such investment. 
Applicants also state that, as financially sophisticated professionals, 
the Eligible Investors will be able to evaluate the attendant risks. 
Applicants assert that the community of interest among the Members and 
GFInet will provide the best protection against any risk of abuse.
    5. Section 17(d) of the Act and rule 17d-1 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 Commission. Applicants request 
approval to permit the Company to make investments in which GFInet, or 
any affiliated person of the Company or GFInet, or an affiliated person 
of such person, is a participant or plans concurrently or otherwise 
directly or indirectly to become a participant.
    6. Applicants submit that any joint investments will not involve 
abuses of the type section 17(d) and rule 17d-1 were designed to 
prevent. Applicants state that the Company will participate in the 
purchase of GFInet shares on the same terms as those offered to any 
affiliated person or unrelated party. Applicants note that the Company 
will primarily be organized for the benefit of the Eligible Investors, 
as an incentive for them to remain with GFInet and for the generation 
and maintenance of goodwill.
    7. 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. Rule 17f-2 
under the Act specifies the requirements that must be satisfied for a 
registered management investment company to act as a custodian of its 
own investments. Applicants request an exemption from section 17(f) and 
rule 17f-2 to permit the following exceptions from the

[[Page 10925]]

requirements of rule 17f-2: (a) compliance with paragraph (b) of the 
rule may be achieved through safekeeping in the locked files of the 
Manager or GFInet; (b) for purposes of paragraph (d) of the rule: (i) 
employees, the Manager or GFInet will be deemed employees of the 
Company, (ii) officers of the Company or the Manager or GFInet will be 
deemed to be officers of such Company; and (iii) the Manager or the 
directors of the Manager or GFInet will be deemed to be the board of 
directors of the Company; and (c) instead of the verification procedure 
under paragraph (f) of the rule, verification will be effected 
quarterly by two employees of GFInet or the Manager. Applicants expect 
that the Company's investments in GFInet securities will be evidenced 
only by non-negotiable share certificates and the Company's Temporary 
Investments, if any, will be evidenced only by book-entry, rather than 
negotiable certificates. Applicants assert that these instruments are 
most suitably kept in the Company's files, where they can be referred 
to as necessary.
    8. 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 
relief to permit the Manager's officers and directors, who may be 
deemed interested persons, to take actions and make determinations as 
set forth in the rule. Applicants state that, because it is likely that 
all of the officers and directors of the Manager will be affiliated 
persons, the Company could not comply with rule 17g-1 without the 
requested relief. Applicants also state that the Company will comply 
with all other requirements of rule 17g-1.
    9. Section 17(j) and 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 
requiring that every person of the investment company report personal 
securities transactions. Applicants request an exemption from the 
provisions of rule 17j-1, except for the anti-fraud provisions of rule 
17j-1(b), because they are unnecessarily burdensome as applied to the 
Company.
    10. 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 
Commission and mail to their shareholders certain periodic reports and 
financial statements. Applicants contend that the forms prescribed by 
the Commission for periodic reports have little relevance to the 
Company and would entail administrative and legal costs that outweigh 
any benefit to the Members. Applicants request exemptive relief to the 
extent necessary to permit the Company to report annually to its 
Members in the manner prescribed for the Company in the Investment 
Company Agreement. Applicants also request an exemption from section 
30(h) to the extent necessary to exempt the officers and directors of 
the Manager or others who may be deemed members of an advisory board of 
the Company from filing Forms 3, 4 and 5 under section 16(a) of the 
Securities Exchange Act of 1934 (``1934 Act'') with respect to their 
ownership of Units in the Company. Applicants assert that, because 
there will be no trading market and the transfer of Units is 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) and rule 17d-1 to which the Company is a party (the 
``Section 17 Transactions'') will be effected only if the Manager 
determines that: (a) the terms of the transaction, including the 
consideration to be paid or received, are fair and reasonable to the 
Members of the Company and do not involve overreaching of the Company 
or its Members on the part of any person concerned; and (b) the 
transaction is consistent with the interests of the Members of the 
Company, the Company's organizational documents and the Company's 
reports to its Members.
    In addition, the Manager of the Company will record and preserve a 
description of Section 17 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 
Company and at least two years thereafter, and will be subject to 
examination by the Commission and its staff. All such records will be 
maintained in an easily accessible place for at least the first two 
years.
    2. If purchases or sales are made from or to an entity affiliated 
with the Company by reason of a 5% or more investment in such entity by 
the officers, directors or employees of the Manager, such officers, 
directors, or employees will not participate in the determination of 
whether or not to make such investment available to the Members of the 
Company.
    3. In connection with the Section 17 Transactions, the Manager 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 Company, or any affiliated person of such a person, 
promoter or principal underwriter.
    4. The Manager of the Company will not make available to Members of 
the Company any investment in which a ``Coinvestor'' (as defined below) 
has acquired or proposes to acquire the same class of securities of the 
same issuer, if the investment involves a joint enterprise or other 
joint arrangement within the meaning of rule 17d-1 in which the Company 
and the Coinvestor are participants, unless any such Coinvestor, prior 
to disposing of all or part of its investment (a) gives the Members of 
the Company holding such investment 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 Members of the 
Company holding such investment have the opportunity to dispose of 
their investment prior to or concurrently with, and on the same terms 
as, and pro rata with, the Coinvestor. The term ``Coinvestor'' means 
any person who is: (a) an ``affiliated person'' (as such term is 
defined in section 2(a)(3) of the Act) of the Company; (b) the Manager 
and any entities controlled by the Manager; (c) a current or former 
officer, director or employee of the Manager; (d) an investment vehicle 
offered, sponsored, or managed by the Manager or an affiliated person 
of the Manager; or (e) a company in which the Manager or an officer or 
director of the Manager acts as an officer, director, or 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, will not be deemed to limit or prevent the 
disposition of an investment by a Coinvestor: (a) to its direct or 
indirect wholly owned subsidiary, to any company (a ``parent'') of 
which such

[[Page 10926]]

Coinvestor 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 such Coinvestor or a trust or other 
investment vehicle established for any such family member; (c) when the 
investment is comprised of securities that are listed on any exchange 
registered as a national securities exchange under section 6 of the 
1934 Act; or (d) when the investment is comprised of securities that 
are national market system securities pursuant to section 11A(a)(2) of 
the 1934 Act and rule 11Aa2-1 under the 1934 Act.
    5. The Company will send to each Member who had an interest in the 
Company at any time during the fiscal year then ended, Company 
financial statements audited by independent accountants. At the end of 
each fiscal year, the Manager will make a valuation or have a valuation 
made of all of the assets of the Company as of such fiscal year end in 
a manner consistent with customary practice with respect to the 
valuation of assets of the kind held by the Company. In addition, 
within 90 days after the end of each fiscal year of the Company or as 
soon as practicable thereafter, the Manager will send a report to each 
person who was a Member at any time during the fiscal year then ended, 
setting forth such tax information as shall be necessary for the 
preparation by the Member of his or its federal and state income tax 
returns and a report of the investment activities of the Company during 
such year.
    6. The Company will maintain and preserve, for the life of the 
Company and at least two years thereafter, such accounts, books, and 
other documents as constitute the record forming the basis for the 
financial statements and annual reports of the Company to be provided 
to the Members, and agree that all such records will be subject to 
examination by the Commission and its staff. All such records will be 
maintained in an easily accessible place for at least the first two 
years.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4115 Filed 2-16-01; 8:45 am]
BILLING CODE 8010-01-M