[Federal Register Volume 69, Number 53 (Thursday, March 18, 2004)]
[Notices]
[Pages 12874-12876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6108]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-2222/803-169]


Excelsior Venture Partners III, LLC, et al.; Notice of 
Application

March 12, 2004.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Advisers Act of 1940 (``Advisers Act'').

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Applicants: Excelsior Venture Partners III, LLC (``Excelsior''), U.S. 
Trust Company, N.A., on behalf of its separately identified division, 
U.S. Trust Company, N.A. Asset Management Division (the ``Investment 
Adviser'') and United States Trust Company of New York, on behalf of 
its separately identified division, U.S. Trust-New York Fund Asset 
Management Division (the ``Investment Sub-Adviser,'' and together with 
Excelsior and the Investment Adviser, each an ``Applicant,'' and 
collectively, the ``Applicants'').

Relevant Advisers Act Sections: Exemption requested under section 206A 
from section 205(a)(1).
Summary of Application: Applicants seek an order permitting Excelsior 
to make in-kind distributions of its portfolio securities to members of 
Excelsior and, in connection with these distributions, deem gains or 
losses on the distributed securities to be realized, for purposes of 
calculating the Investment Adviser's and Investment Sub-Adviser's 
performance compensation.

Filing Dates: The application was filed on April 26, 2002, and amended 
on July 8, 2002, May 6, 2003, and November 26, 2003.

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 the 
Applicants with copies of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m., on April 5, 2004, 
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, NW., Washington, DC 20549. 
Applicants, Excelsior Venture Investors III, LLC, United States Trust 
Company of New York, and U.S. Trust Company N.A., 114 West 47th Street, 
New York, New York 10036.

FOR FURTHER INFORMATION CONTACT: Daniel S. Kahl, Senior Counsel, or 
Jamey G. Basham, Special Counsel, at (202) 942-0719 (Division of 
Investment Management, Office of Investment Adviser 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.

Applicants' Representations

    1. Excelsior is a limited liability company organized under the 
laws of Delaware and is a business development company as defined in 
Section 202(a)(22) of the Advisers Act (``BDC''). Excelsior has an 
effective registration statement on Form N-2 on file with the SEC. The 
investment objective of Excelsior is to seek long-term capital 
appreciation by primarily investing in private domestic companies in 
which the equity is closely held by company founders, management or a 
limited number of institutional investors. Excelsior also intends to 
invest, to a lesser extent, in domestic and international venture 
capital, buyout and other private equity funds managed by third 
parties, negotiated private investments in public companies and foreign 
companies in which the equity is closely held by company founders, 
management or a limited number of institutional investors. The 
foregoing investments are referred to collectively herein as ``Direct 
Investments.''
    2. U.S. Trust Company, N.A. Asset Management Division is a 
separately identified division of U.S. Trust Company, N.A., a national 
bank organized under the laws of the United States. U.S. Trust Company, 
N.A. Asset Management Division serves as Excelsior's investment adviser 
pursuant to an investment advisory agreement with Excelsior. U.S. 
Trust--New York Fund Asset Management Division is a separately 
identified division of United States Trust Company of New York, a state 
chartered bank and trust company. U.S. Trust--New York Fund Asset 
Management Division serves as the investment sub-adviser to Excelsior 
pursuant to an investment sub-advisory agreement among the Investment 
Sub-Adviser, the Investment Adviser and Excelsior. U.S. Trust Company, 
N.A. and United States Trust Company of New York are wholly-owned 
subsidiaries of U.S. Trust Corporation, a registered bank holding 
company. U.S. Trust Corporation and its subsidiaries are referred to 
collectively herein as ``U.S. Trust.'' \1\ Under the supervision of 
Excelsior's board of managers (the ``Board of Managers''), the 
Investment Adviser and Investment Sub-Advisers are responsible for 
finding, evaluating, structuring and monitoring Excelsior's investments 
and for providing or arranging for management and administrative 
services for Excelsior. The Investment Adviser and the Investment Sub-
Adviser are each registered as an investment adviser under the Advisers 
Act.
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    \1\ The Investment Adviser and Investment Sub-Adviser, as 
separately identified divisions, are part of the U.S. Trust 
Corporation subsidiaries.
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    3. Pursuant to Excelsior's Limited Liability Company Operating 
Agreement (the ``Operating Agreement''), the business and affairs of 
Excelsior are managed under the direction of its Board of Managers. The 
Board of Managers consists of four persons and, as required by Section 
56(a) of the Investment Company Act of 1940, three of the managers are 
not ``interested persons'' of Excelsior within the meaning of Section 
2(a)(19) of such Act.
    4. Excelsior's members consist of individual and institutional 
investors and one registered investment company which functions as a 
feeder fund, Excelsior Venture Investors III, LLC (the ``Feeder 
Fund''). Investors with accounts established at U.S. Trust hold 
approximately 92% of the units of membership interest in Excelsior and 
approximately 97% of the units in the Feeder Fund. Most other members 
of

[[Page 12875]]

Excelsior and the Feeder Fund are investors with accounts at Charles 
Schwab and Co., Inc., a registered broker-dealer and an affiliate of 
U.S. Trust Corporation. Each member of Excelsior other than the Feeder 
Fund met certain requirements, including that such investor's net 
assets were valued at $1,000,000 or more, and that the amount 
subscribed for did not exceed 10% of such investor's net assets. The 
Feeder Fund holds approximately 63.48% of the net assets of Excelsior. 
Each member of the Feeder Fund met certain requirements, including that 
such investor's net assets were valued at $500,000 or more, and that 
the amount subscribed for did not exceed 10% of such investor's net 
assets.
    5. The Operating Agreement provides that items of income, gain, 
loss, deduction and expense of Excelsior will be determined and 
allocated as of the end of each tax year (typically December 31) to 
reflect the economic interests of its members and the Investment 
Adviser. Capital gains are allocated first to the Investment Adviser 
until the cumulative amount of all gains allocated to the Investment 
Adviser from the commencement of operations equals the Incentive 
Carried Interest calculated through the end of the period for which the 
allocation is being made.\2\ The Investment Adviser will distribute a 
portion of the Incentive Carried Interest to the Investment Sub-
Adviser. All remaining items of income, gain, loss, deduction and 
expense are allocated to Excelsior members pro rata in accordance with 
their capital investments.
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    \2\ The ``Incentive Carried Interest'' is an amount equal to 20% 
of the excess, if any, of the cumulative amount of all capital gains 
realized by Excelsior on Direct Investments from the commencement of 
operations through the end of the period for which the allocation is 
being made over the sum of (x) the cumulative amount of all capital 
losses realized by Excelsior on all investments of any type from the 
commencement of operations through the end of such period; (y) the 
excess, if any, of the aggregate amount of unrealized capital 
depreciation on all investments of any type over the aggregate 
amount of all unrealized capital appreciation on all investments of 
any type determined as of the close of such period; and (z) the 
excess, if any, of the cumulative amount of all expenses of any type 
incurred by Excelsior over the cumulative amount of all income of 
any type earned by Excelsior, in each case from the commencement of 
operations through the end of such period.
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    6. The Operating Agreement provides for the distribution of all 
cash and other property, including an in-kind distribution of 
securities, received by Excelsior that the Board of Managers does not 
expect to use in the operation of Excelsior's business. The Investment 
Adviser generally will be entitled to a distribution equal to the 
Incentive Carried Interest. Excelsior's members generally will be 
entitled to all amounts remaining for distribution pro rata in 
accordance with their capital investments.
    7. The Operating Agreement provides that (i) Any property that is 
distributed in kind to one or more members shall be deemed to have been 
sold for cash equal to its fair market value, (ii) the unrealized gain 
or loss inherent in such property shall be treated as recognized gain 
or loss for purposes of determining profits and losses, (iii) such gain 
or loss shall be allocated pursuant to the Operating Agreement, and 
(iv) such in-kind distribution shall be made after giving effect to 
such allocation. To date, however, no in-kind distributions have been 
made by Excelsior.
    8. Excelsior's Board of Managers will declare an in-kind 
distribution when it determines that such distribution is in the best 
interests of Excelsior and its members. Each member will be allocated 
securities distributed in kind in proportion to the member's ownership 
interest in Excelsior. Cash will be distributed in lieu of fractional 
share interests.
    9. Securities distributed in kind by Excelsior in conjunction with 
this Application will be listed on a national securities exchange or on 
the NASDAQ Stock Market and will not be subject to legal or contractual 
restrictions on their resale. These securities will be valued at the 
average of the closing bid and ask price, or in the case of exchange 
traded securities the closing price, of the five days immediately 
preceding the distribution. Market liquidity will be an important 
factor in declaring distributions and Excelsior will not distribute 
securities at any one time in an amount that is more than 5% of the 
outstanding shares of an issuer. In those relatively infrequent 
situations when this restriction does not permit all of Excelsior's 
holdings of an issuer to be distributed at one time, Applicants will 
closely monitor the market prior to any subsequent distribution to 
assure that the prior distribution is no longer significantly impacting 
the price of the securities. Excelsior's Board of Managers will, in 
acting upon each proposed distribution, consider whether a distribution 
of cash proceeds from a sale of securities would be of greater benefit 
to its members, including the Feeder Fund, than a distribution of the 
securities in more than one distribution, as described above.
    10. At the time Excelsior's Board of Managers declares an in-kind 
distribution, the Feeder Fund's Board of Managers will simultaneously 
declare an in-kind distribution having the same record date and 
distribution date to its members. From the securities allocated to the 
Feeder Fund, Feeder Fund members will be entitled to receive shares, 
and cash-in-lieu of fractional share interests, in proportion to their 
interests in the Feeder Fund. The Feeder Fund will notify Excelsior of 
the number of shares to be distributed and the amount of cash-in-lieu 
payments to be made to each Feeder Fund member and will instruct 
Excelsior to make a distribution directly to Feeder Fund members as of 
the distribution date. The Applicants will provide notice to Excelsior 
and Feeder Fund members of the in-kind distribution and will facilitate 
obtaining members' brokerage instructions or establishing a brokerage 
account for the receipt of the securities distributed in kind. Any 
cash-in-lieu payment for fractional securities will be made within five 
business days of the distribution date to all Excelsior members and 
Feeder Fund members.

Applicants' Legal Analysis

    1. Section 205(a)(1) of the Advisers Act prohibits any investment 
adviser, unless exempt from registration pursuant to section 203(b), 
from entering into a contract that provides for compensation based upon 
``a share of capital gains upon or capital appreciation of the funds or 
any portion of the funds of the client,'' commonly referred to as a 
``performance fee.''
    2. Section 205(b)(3) of the Advisers Act excepts from the 
performance fee prohibition of section 205(a)(1) a contract between an 
investment adviser and a BDC that provides for compensation not in 
excess of ``20 per centum of the realized capital gains upon the funds 
of the [BDC] over a specified period or as of definite dates, computed 
net of all realized capital losses and unrealized capital 
depreciation.'' Applicants assert that section 205(b)(3) recognizes the 
appropriateness of a performance fee as compensation for advisers' 
activities in light of the special nature of BDCs.
    3. Section 205(b)(3) of the Advisers Act, however, permits a 
performance fee only with respect to realized capital gains and does 
not contemplate the procedures set forth in the Operating Agreement 
whereby unrealized gains or losses will be deemed to be realized under 
certain conditions for purposes of calculating the Incentive Carried 
Interest. Excelsior's performance fee is prohibited by section 
205(a)(1) and does not fall within the exception set out in section 
205(b)(3).
    4. Section 206A of the Advisers Act authorizes the SEC by order 
upon application to conditionally or unconditionally exempt any person 
or

[[Page 12876]]

transaction, or any class or classes of persons, or transactions, from 
any provision of the Advisers Act ``if and to the extent that such 
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 Advisers Act].''
    5. Applicants request that the SEC grant an exemption from section 
205(a)(1) of the Advisers Act to permit Excelsior to deem realized any 
unrealized gains or losses attributable to securities distributed in 
kind to its members for purposes of payment of the performance fee to 
the Investment Adviser and Investment Sub-Adviser.
    6. Applicants assert that their exemption from section 205(a)(1) is 
consistent with the standards of section 206A regarding investor 
protection and the purposes of the Advisers Act. Applicants argue that 
Congress has already found it appropriate to permit a performance fee 
in the case of an investment adviser to a BDC. Applicants argue further 
that, to the extent that section 205(b)(3) of the Advisers Act requires 
such a fee to be based on net realized capital gains, Applicants' 
proposal is consistent with the statutory purposes. Once the in-kind 
distribution is made, Excelsior's members and the members of the Feeder 
Fund will have the exclusive ability to liquidate such investments and 
realize any gains or losses. Applicants also assert that there should 
be no concern over the proper valuation of the securities upon which 
the fee is based, because Applicants are requesting exemptive relief 
only with respect to in-kind distributions of securities for which a 
trading market exists on a national securities exchange or on the 
NASDAQ Stock Market.
    7. Applicants state that they believe that it is in the best 
interests of the members of Excelsior and the members of the Feeder 
Fund, and in the public interest, for Excelsior to make in-kind 
distributions of securities. Applicants state that they believe that an 
in-kind distribution would enable Excelsior's members and the members 
of the Feeder Fund to maximize their investment. First, Applicants 
state that the alternative to an in-kind distribution is the sale of 
the securities and argue that such sales may have a negative effect on 
the price of the shares in the market. Second, Applicants represent 
that the securities to be distributed will be freely transferable and 
will not be subject to either legal or contractual restrictions on 
their sale. Moreover, Applicants represent that a distribution of 
securities will not constitute a taxable event with respect to 
Excelsior, its members, and members of the Feeder Fund, so that the 
members of Excelsior and the Feeder Fund will, in determining whether 
to hold or sell the securities, control the timing of realization of 
capital gains or losses. Finally, Applicants assert that as a venture 
capital fund, Excelsior and its advisers have not held themselves out 
as having experience with respect to publicly traded securities, and 
therefore its members do not lose any benefit of management expertise 
by receiving an in-kind distribution of securities.

Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The relief will only apply to the distribution in kind by 
Excelsior of securities that are traded on a national securities 
exchange or on the NASDAQ Stock Market and are subject to no legal or 
contractual restriction on their sale.
    2. Securities distributed in kind pursuant to the relief will be 
valued at the average of the closing bid and asked price (or in the 
case of exchange-traded securities, the closing sale price) at which 
the relevant securities were quoted on the relevant exchange or system 
during the five trading days immediately preceding the distribution. 
Members will receive notice of the basis for the valuation at the time 
of or before distribution.
    3. Excelsior agrees to use all reasonable endeavors to ensure that 
securities that are the subject of an in-kind distribution are 
transferred to its members as soon as practicable following their 
valuation in connection with the allocation of the Incentive Carried 
Interest, and in any event within 30 days thereof.\3\ Distributions 
will be recommended by Applicants, and the Board of Managers of 
Excelsior will approve each distribution and establish its record date, 
which will also be the valuation date. Prior to an in-kind 
distribution, members who are not account holders at U.S. Trust will be 
requested to provide brokerage instructions or establish an account if 
necessary, and procedures will be followed to assure that members who 
respond on a timely basis will receive the portfolio securities 
promptly. Members that hold accounts at U.S. Trust will receive 
distributions within five (5) business days of the record date.
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    \3\ Excelsior will make the same efforts to distribute 
securities to members of the Feeder Fund as it does for its own 
members.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6108 Filed 3-17-04; 8:45 am]
BILLING CODE 8010-01-P