[Federal Register Volume 67, Number 204 (Tuesday, October 22, 2002)]
[Notices]
[Pages 64929-64933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26780]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 25768; 813-240]
GDC Partners Fund, LLC, et al.; Notice of Application
October 15, 2002.
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 (``Act'') exempting applicant
from all provisions of the Act and the rules and regulations under the
Act, except section 9, section 17 (other than certain provisions of
paragraphs (a), (d), (f), (g), and (j)), section 30 (except for certain
provisions of paragraphs (a), (b), (e), and (h)), and section 36
through 53, and the rules and regulations under those sections.
-----------------------------------------------------------------------
SUMMARY OF APPLICATION: Applicants request an order to exempt certain
limited liability companies and other entities formed for the benefit
of eligible current and former employees of Gibson, Dunn & Crutcher LLP
(``GDC'') and its affiliates from certain provisions of the Act. Each
such entity will be an ``employees' securities company'' within the
meaning of section 2(a)(13) of the Act.
APPLICANTS: GDC Partners Fund, LLC (``Fund'') and GDC.
FILING DATES: The application was filed on March 6, 2000, and amended
on October 15, 2002.
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 applicant with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on November 11, 2002, 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 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. Applicant, 333 South Grand Avenue, Los Angeles, CA 90071.
FOR FURTHER INFORMAITON CONTACT: John L. Sullivan, Senior Counsel, at
(202)
[[Page 64930]]
942-0681, or Nadya B. Roytblat, Assistant Director, at (202) 942-0564
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Branch, 450 Fifth Street, NW.,
Washington, DC 20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. The Fund is a Delaware limited liability company formed pursuant
to a limited liability company agreement (``Investment Fund
Agreement''). The applicants may in the future offer additional pooled
investment vehicles identical in all material respects (other than form
of organization, investment objective and strategy) to the Fund (each,
a ``Subsequent Fund'') (together, the Fund and the Subsequent Fund are
sometimes referred to as the ``Investment Funds''). The applicants
anticipate that each Subsequent Fund will also be structured as a
limited liability company, although a Subsequent Fund could be
structured as a domestic or offshore general partnership, limited
partnership or corporation. Each Investment Fund will operate as a non-
diversified, closed-end management investment company.
2. The Fund was established to enable the Eligible Investors (as
defined below) to participate in certain investment opportunities that
come to the attention of GDC, a law firm organized as a California
limited liability partnership. The investment opportunities may include
separate accounts with registered and unregistered investment advisers,
investments in other pooled investment vehicles such as registered
investment companies, investment companies exempt from registration
under the Act, commodity pools, and other securities investments (each
particular investment being referred to herein as an ``Investment.'').
Participation as investors in an Investment Fund will allow the
Eligible Investors, as defined below, who are members of the Investment
Fund (each, a ``Member'') to diversify their investments and to have
the opportunity to participate in investments that might not otherwise
be available to them or that might be beyond their individual means.
3. Interests in an Investment Fund (``Units'') will be offered and
sold in reliance upon the exemption from registration under the
Securities Act of 1933 (the ``Securities Act'') contained in Section
4(2) of the Securities Act or Regulation D under the Securities Act.
Units will be offered only to GDC, any entity controlling, controlled
by, or under common control with GDC (``GDC Entity'') or persons (each
an ``Eligible Investor'') who meet the following criteria: (a) Current
or former partners of, or key administrative employees of, GDC or a GDC
Entity (``Eligible Employees''), the immediate family members of
Eligible Employees, which are parents, children, spouses of children,
spouses, and siblings, including step or adoptive relationships
(``Immediate Family Members''), and trusts or other entities the sole
beneficiaries of which consist of Eligible Employees or their Immediate
Family Members (``Eligible Trusts''); and (b) who are (i) ``accredited
investors'' as that term is defined in Regulation D under the
Securities Act, and (ii) sophisticated in investment matters. Any GDC
Entity that acquires interests in an Investment Fund will be an
accredited investor.
4. An Eligible Employee or Immediate Family Member must meet the
standards of an ``accredited investor'' in rule 501(a)(5) or 501(a)(6)
of Regulation D under the Securities Act, and an Eligible Trust must be
an accredited investor under rule 501(a) of Regulation D. An Eligible
Investor must have sufficient knowledge, sophistication and experience
in business and financial matters to be capable of evaluating the
merits and risk of an investment in an Investment Fund and be able to
bear the economic risk of such investment and to afford a complete loss
of such investment.
5. An Investment Fund will have an investment committee
(``Investment Committee'') which will consist of not less than two
persons (``Managers''), all of whom will also be Members. The chief
function of the Investment Committee will be to review and select
Investments for the Investment Fund.
6. The specific investment objectives and strategies for a
particular Investment Fund will be set forth in an informative
memorandum relating to the Units offered by the Investment Fund, and
each Eligible Investor will receive a copy of the informative
memorandum before making an investment in the Investment Fund. The
terms of an Investment Fund will be disclosed to each Eligible Investor
at the time the investor is invited to participate in the Investment
Fund. Each Investment Fund will send its Members an annual report
regarding its operations. The annual report of the Investment Fund will
contain audited financial statements. In addition, the Investment Fund
will transmit a report to each Member setting out information with
respect to the Member's distributive share of income, gains, losses,
credits and other items for federal income tax purposes, resulting from
the operation of the Investment Fund during that year.
7. Members will not be entitled to redeem their respective
interests in an Investment Fund. A Member will be permitted to transfer
his or her interest only with the express consent of the Managers and
then only to a GDC Entity or an Eligible Investor. No fee of any kind
will be charged in connection with the sale of Units of an Investment
Fund.
8. The Investment Fund Agreement provides that the Managers may
require a Member to withdraw from the Fund if they, in their sole
discretion, deem such withdrawal in the best interest of the Investment
Fund. Upon withdrawal, a Member will be paid at least the lesser of (a)
the amount actually paid by the Member to acquire the Units, or (b) the
fair market value of the Units determined in good faith by the
Managers.
9. An Investment Fund will not acquire any security issued by a
registered investment company if immediately after the acquisition, the
Investment Fund would own more than 3% of the total outstanding voting
stock of the registered investment company.
10. Administration of each Investment Fund will be vested in the
Managers. The Investment Fund Agreement provides that the Fund will
bear its own expenses or that such expenses shall be borne by GDC. An
Investment Fund may reimburse GDC for direct costs of disbursements and
expenses incurred by GDC on behalf of the Investment Fund. No
management fee or other compensation will be paid by the Investment
Fund or the Members to the Managers or the Investment Committee.
11. An Investment Fund will not borrow from any person if the
borrowing would cause any person not named in section 2(a)(13) of the
Act to own any outstanding securities of the Investment Fund (other
than short-term paper). All borrowings by an Investment Fund with
respect to the funding of Investments will be non-recourse to the
Members but generally will be secured by a pledge of the Members'
respective capital accounts and unfunded capital commitments. If GDC or
a GDC entity makes a loan to an Investment Fund, the lender will be
entitled to receive interest at a rate that is permissible under
applicable banking or tax regulations, provided that the rate will be
no less favorable to the borrower than the rate obtainable on an arm's
length basis.
[[Page 64931]]
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 give due
weight to, 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,
the disposition of the proceeds of the securities issued by the
company, the character of securities in which those proceeds will be
invested, and the existence of any 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 (other than short-term
paper) 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 of the Act 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
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 section 6(b) and 6(e) of the Act
exempting an Investment Fund 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)), and sections 36 through 53 of the
Act, and the rules and regulations under those sections.
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 an
Investment Fund (a) to invest in companies, partnerships or other
investment vehicles offered, sponsored or managed by GDC or any
affiliated person as defined in section 2(a)(3) of the Act, (b) to
invest in securities of issuers for which GDC or any affiliated person
thereof may perform or have performed legal services and from which
they may have received fees, (c) to purchase interests in any company
or other investment vehicle (i) in which GDC or its partners or
employees owns 5% or more of the voting securities, or (ii) that is
otherwise an affiliated person of the Investment Fund or GDC; and (d)
to participate as a selling securityholder in a public offering in
which GDC or any affiliated person thereof acts as or represents as
counsel a member of the selling group or the issuer or underwriter of
such securities.
4. Applicants state that the exemption sought from section 17(a) is
consistent with the protection of investors and the purposes of the
Act. Applicants state that the Members will be informed of the possible
extent of the dealings by the issuer of such Investments and its
sponsors with GDC or any affiliated person thereof. Furthermore, since
the Members are experienced professionals acting on behalf of financial
services businesses, they will be able to evaluate the risks associated
with such dealings. Applicants also assert that the community of
interest among the Members and GDC will serve to reduce any risk of
abuse in transactions involving an Investment Fund and GDC or any
affiliated person thereof.
5. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
any affiliated person of a registered investment company, or any
affiliated person of an affiliated person, acting as principal, from
participating in any joint enterprise, or other joint arrangement, with
the company, unless approved by the Commission. Applicants request
relief to permit an Investment Fund to engage in transactions in which
an affiliated person of the Investment Fund or an affiliated person of
such person participates as a joint or a joint and several participant
with the Investment Fund.
6. Applicants submit that strict compliance with section 17(d)
would cause an Investment Fund to forego investment opportunities
simply because a Member, GDC or other affiliated persons of the
Investment Fund also had or contemplated making a similar investment.
Applicants also contend that because certain attractive investment
opportunities require that each participant make available funds in an
amount that may be substantially greater than that available to the
investor alone, there may be certain attractive opportunities of which
an Investment Fund may be unable to take advantage except as a co-
participant with other persons, including affiliates. 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.
7. The Investment Funds may be given the opportunity to co-invest
with entities to which GDC provides, or has provided services, and from
which it may have received fees, but which are not affiliated persons
of the Fund or GDC or affiliated persons of such affiliated persons.
Applicants believe that such entities should not be treated as Co-
Investors (as defined below) for purposes of condition 4 below. When
such entities permit others to co-invest with them, it is common for
the transaction to be structured such that all investors have the
opportunity to dispose of their investment at the same time. It is
important to GDC that the interests of its clients take priority over
the interests of the Investment Funds and that the activities of its
clients not be burdened by activities of the Investment Funds. In
addition, applicants assert that the relationship of an Investment Fund
to a client of GDC is fundamentally different from such Investment
Fund's relationship to GDC and its affiliated persons. Applicants
contend that the focus of, and the rationale for, the protections
contained in the requested relief are to protect the Investment Funds
from overreaching by GDC and its affiliated persons, whereas the same
concerns are not present with respect to the Investment Funds vis-
[agrave]-vis unaffiliated persons of GDC or the Investment Fund who are
clients of GDC.
8. Section 17(f) of the Act requires a registered investment
company to place and maintain its securities only in the custody of
certain qualified custodians.
Applicants request an exemption from the requirements contained in
section 17(f) and in rule 17f-2 thereunder to permit the following
exceptions from rule 17f-2: (a) Compliance with paragraph (b) of the
rule may be achieved through safekeeping in the locked files of GDC or
of a partner of GDC; (b) for purposes of paragraph (d) of the rule, (i)
employees of GDC will be deemed to be employees of the Investment
Funds, (ii) the Managers of an Investment Fund will be deemed to be
officers of such Investment Fund and (iii) the Managers of an
Investment Fund will be deemed to be board of directors of such
Investment Fund, and (c) instead of the verification procedure under
paragraph (f) of the rule,
[[Page 64932]]
verification will be effected quarterly by two employees of GDC.
Applicants expect that many of the Investment Funds' investments will
be evidenced only by partnership agreements or similar documents,
rather than by negotiable certificates that could be misappropriated.
Applicants assert that these instruments are most suitably kept in
GDC's files, where they can be referred to as necessary.
9. Section 17(g) of the Act and rule 17g-1 under the Act 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 certain persons, none of whom is an interested
person of an Investment Fund (as defined in section 2(a)(19) of the
Act), take certain actions and make certain approvals concerning
bonding. Applicants request exemptive relief so that such actions and
approvals required to be taken may be taken by the Managers regardless
of whether they are deemed to be an ``interested person'' of an
Investment Fund, as each is likely to be considered an interested
person of the Investment Fund. Applicants could not comply with rule
17g-1 absent such relief. Applicants also request an exemption from the
requirement contained in rule 17g-1 that an investment company must
have a majority of directors who are not ``interested persons'' of the
company, that those disinterested persons select and nominate any other
disinterested directors, and that any legal counsel of such
disinterested persons be independent.
10. Section 17(j) of the Act and paragraph (b) of rule 17j-1 under
the Act 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 each registered investment
company to adopt a written code of ethics and to monitor all
transactions of each access person of such investment company.
Applicants request an exemption from the provisions of rule 17j-1,
except for the antifraud provisions of paragraph (b), because they are
unnecessarily burdensome as applied to an Investment Fund. Requiring an
Investment Fund to adopt a written code of ethics and requiring access
persons to report each of their securities transactions would be time-
consuming and expensive and would serve little purpose in light of,
among other things, the community of interests among the Members of the
Investment Fund by virtue of their common association with GDC.
11. Applicants request an exemption from the requirements in
sections 30(a), 30(b) and 30(e) of the Act, and the rules and
regulations thereunder, that registered investment companies 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 an
Investment Fund and would entail administrative and legal costs that
outweigh any benefit to the Members. Applicants request exemptive
relief to the extent necessary to permit an Investment Fund to report
annually to its Members in the manner described in the application.
Applicants also request an exemption from section 30(h) of the Act to
the extent necessary to exempt the Managers and any other persons who
may be deemed to be members of an advisory board of an Investment Fund
from filing Forms 3, 4 and 5 under section 16 of the Securities
Exchange Act of 1934, as amended (``Exchange Act''), with respect to
their ownership of Units in the Investment Fund. Applicants assert
that, because there is no trading market for Units and the
transferability of Units is severely restricted, these filings are
unnecessary for the protection of investors and burdensome to those
required to file them.
Applicants' Conditions
1. Each proposed transaction, to which an Investment Fund is a
party, otherwise prohibited by section 17(a) or section 17(d) and rule
17d-1 (the ``Section 17 Transactions'') will be effected only if the
Investment Committee determines that (a) the terms of the transaction,
including the consideration to be paid or received, are fair and
reasonable to Members of the Investment Fund and do not involve
overreaching of the Investment Fund or its Members on the part of any
person concerned, and (b) the transaction is consistent with the
interests of the Members of the Investment Fund, the Investment Fund's
organizational documents and the Investment Fund's reports to its
Members.
In addition, the Investment Committee will record and preserve a
description of such Section 17 Transactions, the findings of the
Investment Committee, the information or materials upon which the
findings are based, and the basis therefore. All such records will be
maintained for the life of the Investment Fund 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. The Investment Committee 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 Investment Fund or any
affiliated person of such person, promoter or principal underwriter.
3. An Investment Fund will maintain and preserve, for the life of
the Investment Fund and at least two years thereafter, such accounts,
books and other documents constituting the record forming the basis for
the audited financial statements and annual reports of the Investment
Fund to be provided to the Members, and agrees 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.
4. The Investment Committee will not purchase for an Investment
Fund 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 of rule 17d-1 in which the
Investment Fund and the Co-Investor are participants, unless any such
Co-Investor, prior to disposing of all or part of its investment, (a)
gives the Investment Fund 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 Investment
Fund holding such investment has the opportunity to dispose of its
investment prior to or concurrently with, on the same terms as, and on
a pro rata basis with the Co-Investor. The term ``Co-Investor'' with
respect to the Investment Fund means any person who is (a) an
affiliated person of the Investment Fund, (b) GDC and any GDC Entity,
(c) a current or former partner or employee of GDC or a GDC Entity, (d)
a company in which a member of the Investment Committee, GDC or a GDC
Entity acts as an officer, director, or general partner, or has a
similar capacity to control the sale or disposition of the company's
securities, or (e) an investment vehicle offered, sponsored, or managed
by GDC.
The restrictions contained in this condition, however, shall not be
deemed to limit or prevent the disposition of an investment by a Co-
[[Page 64933]]
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 established for the benefit of any such family
member, (c) when the investment is comprised of securities that are
listed on a national securities exchange registered under section 6 of
the Exchange Act, or (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.
5. An Investment Fund will send to each Member who had an interest
in the Investment Fund at any time during the fiscal year then ended,
financial statements audited by the Investment Fund's independent
accountants. At the end of each fiscal year, the Investment Committee
will make a valuation or have a valuation made of all of the assets of
the Investment Fund 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 Investment Fund. In addition, within 90 days after the
end of each fiscal year of the Investment Fund or as soon as
practicable thereafter, the Investment Fund 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 her federal and state income tax
returns and a report of the investment activities of the Investment
Fund during such year.
6. In any case where purchases or sales are made from or to an
entity affiliated with an Investment Fund by reason of a 5% or more
investment in the entity by GDC, a GDC Entity or a GDC or GDC Entity's
partner or employee, such individual will not participate in the
Investment Committee'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. 02-26780 Filed 10-21-02; 8:45 am]
BILLING CODE 8010-01-P