[Federal Register Volume 85, Number 248 (Monday, December 28, 2020)]
[Notices]
[Pages 84397-84403]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28492]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 34143; File No. 813-00397]
Citadel Enterprise Americas LLC (formerly Citadel LLC) and CEIF
LLC; Notice of Application
December 18, 2020.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice.
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Notice of application for an order under sections 6(b) and 6(e) of
the Investment Company Act of 1940 (the ``Act'') granting an exemption
from all provisions of the Act, except section 9 and sections 36
through 53 and the rules and regulations under those sections. With
respect to sections 17 and 30 of the Act, and the rules and regulations
thereunder, and rule 38a-1 under the Act, the exemption is limited as
set forth in the application.
Summary of Application: Applicants request a superseding order under
sections 6(b) and 6(e) of the Act that amends and restates an existing
order (``Existing Order'') \1\ to exempt certain limited liability
companies, limited partnerships, companies and other
[[Page 84398]]
investment vehicles formed for the benefit of eligible employees of
Citadel Enterprise Americas LLC and its affiliates (``ESC Funds'') from
certain provisions of the Act. Each ESC Fund will be an ``employees'
securities company,'' as defined in section 2(a)(13) of the Act. The
requested order would (i) reflect general, clarifying updates to the
incentive program pursuant to which Eligible Employees (defined below)
are issued unvested membership interests, (ii) to permit voluntary
capital contributions by Eligible Employees to certain ESC Funds, and
(iii) to clarify that Eligible Employees may continue to be issued
interests and/or make capital contributions to the ESC Fund in which it
is invested after such Eligible Employee's employment with Citadel has
terminated. The terms and conditions of the application are materially
the same as the terms and conditions of the Existing Order.
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\1\ Citadel LLC and CEIF LLC, Investment Company Act Release
Nos. 30589 (July 3, 2013) (notice) and 30637 (July 30, 2013)
(order).
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Applicants: Citadel Enterprise Americas LLC and CEIF LLC (``CEIF'').
Filing Dates: The application was filed on December 13, 2019, and
amended on May 7, 2020, July 10, 2020, and October 15, 2020.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by emailing the Commission's
Secretary at [email protected] and serving applicants with a
copy of the request by email. Hearing requests should be received by
the Commission by 5:30 p.m. on January 12, 2021, and should be
accompanied by proof of service on applicants, in the form of an
affidavit or, for lawyers, a certificate of service. Pursuant to rule
0-5 under the Act, hearing requests should state the nature of the
writer's interest, any facts bearing upon the desirability of a hearing
on the matter, the reason for the request, and the issues contested.
Persons who wish to be notified of a hearing may request notification
by emailing the Commission's Secretary.
ADDRESSES: The Commission: [email protected]. Applicants: c/o
David Form, by email to [email protected].
FOR FURTHER INFORMATION CONTACT: Joseph Toner, Senior Counsel, at (202)
551-7595, or David Nicolardi, Branch Chief, at (202) 551-6825 (Division
of Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's website by searching for the file number, or an applicant
using the Company's name box, at http://www.sec.gov/search/search.htm
or by calling (202) 551-8090.
Applicants' Representations:
1. Citadel is a global financial institution with a diverse
business platform which includes two separate and distinct unites: (i)
A global investment firm and (ii) a global market maker. Citadel
Enterprise Americas LLC, a Delaware limited liability company, and its
``Affiliates,'' as defined in rule 12b-2 under the Securities Exchange
Act of 1934 (``Exchange Act'') other than an ESC Fund are referred to
collectively as ``Citadel'' or ``Citadel Entities.''
2. Citadel has established CEIF, a Delaware limited liability
company, and will establish any other ESC Funds (collectively with
CEIF, the ``ESC Funds'' and each, an ``ESC Fund'') for the benefit of
Eligible Employees (defined below) as part of a program to create
capital building opportunities that are competitive with those at other
financial services firms and to facilitate the recruitment and
retention of high caliber professionals. Each of the ESC Funds will be
a limited liability company, limited partnership, corporation, business
trust or other entity organized under the laws of the state of Delaware
or another U.S. jurisdiction. Each ESC Fund will be identical in all
material respects (other than investment objectives and strategies,
vesting terms, form of organization and related structural and
operative provisions contained in the constitutive documents of such
ESC Funds). Each ESC Fund is or will be an ``employees' security
company'' as such term is defined in section 2(a)(13) of the Act and
will operate as a diversified or non-diversified management investment
company. Citadel will control the ESC Funds within the meaning of
section 2(a)(9) of the Act.
3. The Managing Member \2\ of each ESC Fund will be an Affiliate of
Citadel Enterprise Americas LLC. Any member or partner of, or other
investor in, an ESC Fund is a ``Member.'' The Managing Member of each
ESC Fund will manage, operate and control such ESC Fund, however, it
will be authorized to delegate investment management responsibility
with respect to the acquisition, management and disposition of
Portfolio Investments (defined below) to a Citadel Entity. Any Citadel
Entity that is delegated the responsibility of making investment
decisions for an ESC Fund will be registered as an investment adviser
under the Investment Advisers Act of 1940 (the ``Advisers Act''), if
required under applicable law.
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\2\ ``Managing Member'' means an Affiliate of Citadel Enterprise
Americas LLC that is a managing member or manager of an ESC Fund
(there being no distinction between the obligations of a managing
member versus a manager of an ESC Fund) or acts in a similar
capacity and is the functional equivalent of the ESC Funds' board of
directors.
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4. The Managing Member, a Member, Citadel or any employees of the
Managing Member or Citadel will be eligible to receive any
compensation, or any performance-based fee or profits allocation (such
as a ``carried interest'' \3\). All ESC Fund investments (which may be
made directly or through a Citadel Third Party Fund \4\) are referred
to as ``Portfolio Investments.''
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\3\ A ``carried interest'' is a fee paid or allocation made to
the Managing Member, a Member or the Citadel Entity acting as the
investment adviser to an ESC Fund based on net gains in addition to
the amount allocable to such entity in proportion to its invested
capital. A Managing Member, Member or Citadel Entity that is
registered as an investment adviser under the Advisers Act may be
paid or allocated carried interest only if permitted by rule 205-3
under the Advisers Act.
\4\ ``Citadel Third Party Fund'' means an investment fund or
separate account, organized in part for the benefit of investors who
are not Affiliates of Citadel, over which a Citadel Affiliate
exercises investment discretion.
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5. Interests in an ESC Fund will be issued without registration in
transactions under a claim of exemption pursuant to section 4(a)(2) of
the Securities Act of 1933 (the ``Securities Act''), Regulation D and/
or Regulation S \5\ and may be acquired only by (i) ``Eligible
Employees'' or (ii) at the request of Eligible Employees and in the
discretion of the Managing Member of an ESC Fund, by Qualified
Participants (defined below) of such Eligible Employees. Prior to
issuing Interests (defined below) to an Eligible Employee or a
Qualified Investment Vehicle (defined below) or prior to permitting an
Eligible Employee or a Qualified Investment Vehicle to make an
additional capital contribution, the Managing Member must reasonably
believe that each Eligible Employee (or the Eligible Employee relating
to the Qualified Investment Vehicle) is a sophisticated investor
capable of understanding and evaluating the risks of participation in
an ESC Fund (or class thereof) without the benefit of regulatory
safeguards.
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\5\ An offer may be made pursuant to Regulation S to Eligible
Employees who are not U.S. residents.
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6. An ``Eligible Employee'' is an individual who is (i) a current
or former employee, officer or partner of Citadel or a director of
Citadel that is an ``interested person'' (as defined in Section
2(a)(19) of the Act) of Citadel
[[Page 84399]]
and (ii) meets the standards of an ``accredited investor'' under rule
501(a)(5) or (6) of Regulation D (``Accredited Investor''). A
``Qualified Participant'' is an entity that (i) is a Qualified
Investment Vehicle and (ii) if such entity is purchasing an Interest
directly from an ESC Fund, comes within one of the categories of an
``accredited investor'' under rule 501(a) of Regulation D. A
``Qualified Investment Vehicle'' is (a) a trust of which the trustee,
grantor and/or beneficiary is an Eligible Employee and over which the
Eligible Employee or their designee exercises investment discretion, or
(b) a partnership, corporation or other entity controlled by an
Eligible Employee. Eligible Employees and/or their Qualified Investment
Vehicle that are not accredited investors will not be permitted to
invest in an ESC Fund.
7. The terms of an ESC Fund will be fully disclosed to each
Eligible Employee and, if applicable, a Qualified Participant, prior to
the time such Eligible Employee is admitted to the ESC Fund. Each
Eligible Employee and Qualified Participant will be furnished with the
offering documents, including a copy of the operating agreement or
other organizational documents (``Operating Agreement'') for the
relevant ESC Fund. The Managing Member of each ESC Fund will send to
each person who was a Member having an Interest in the ESC Fund at any
time during the fiscal year then ended (except for the first year of
operations of an ESC Fund if no investment activities took place in
such fiscal year), audited financial statements with respect to those
ESC Funds in which the Member held Interests within 120 days after the
end of the fiscal year, or as soon as practicable thereafter. For
purposes of this requirement ``audit'' shall have the meaning defined
in rule 1-02(d) of Regulation S-X. In addition, as soon as practicable
after the end of each tax year of an ESC Fund, a report will be
transmitted to each Member showing such Member's share of income,
gains, losses, credits, deductions, and other tax items for U.S.
federal income tax purposes, resulting from such ESC Fund's operations
during that year.
8. Interests in each ESC Fund will be non-transferable except (i)
to the extent cancelled or (ii) with the prior written consent of the
Managing Member, and, in any event, no person or entity will be
admitted into an ESC Fund as a Member unless such person or entity is
(a) an Eligible Employee, (b) a Qualified Participant of an Eligible
Employee, or (c) a Citadel Entity, including Citadel Enterprise
Americas LLC. Interests in these ESC Funds will be issued without a
sales load or similar fee.
9. Ownership interests (``Interests'') in an ESC Fund may be
acquired on a voluntary basis or through an incentive program pursuant
to which incentive awards of cash and/or unvested membership interests
are issued to Eligible Employees (the ``Program''). Interests in a
``Program ESC Fund'' may be acquired (i) through the Program or (ii) to
the extent permitted by the Managing Member, by voluntary capital
contributions from an Eligible Employee. Pursuant to the Program,
Eligible Employees may be issued incentive awards on the basis of,
among other things, personal performance and/or firm-wide or relevant
team performance results. An Eligible Employee may voluntarily acquire
an Interest in a non-Program ESC Fund or, to the extent permitted by
the Managing Member, in a Program ESC Fund. To the extent permitted by
the Managing Member, an Eligible Employee and/or its Qualified
Participant may be issued additional Interests (whether vested or
unvested) and/or may make additional capital contributions to the ESC
Fund in which it is invested after such Eligible Employee's employment
with Citadel has terminated.
10. Both Program ESC Funds and non-Program ESC Funds may be offered
as part of an investment program that includes vesting and cancellation
provisions. In such circumstances, some or all of an Eligible
Employee's Interest at the commencement of the investment program will
be treated as being ``unvested,'' and ``vesting'' will occur only as
certain conditions are satisfied under the terms of the investment
program. The portion of an Eligible Employee's Interest that is
``unvested'' at the time of termination of such Eligible Employee's
employment by Citadel may be subject to (a) cancellation and/or (b) the
imposition of different terms and conditions, which would be described
in the Operating Agreement and/or offering documents of the relevant
ESC Fund and/or in other written correspondence issued to such Eligible
Employee.
11. With respect to Program ESC Funds, a Member will become vested
in his/her unvested membership interests if (a) he/she remains employed
by Citadel through a specified date (the ``Determination Date'') and
he/she has satisfied, among other things, all of the certain applicable
conditions (including non-competition, non-solicitation, non-disclosure
and notice conditions) imposed on him/her throughout his/her employment
up to the specified date or (b) in the case of certain specified
Eligible Employees, he/she ceases to be employed by Citadel prior to
the specified date but he/she has satisfied, among other things, all of
the conditions, if any, imposed on him/her during his/her employment
with Citadel and through any applicable post-employment period and
affirms his/her compliance with the conditions, as applicable. Non-
Program ESC Funds may or may not provide for vesting provisions. An
Eligible Employee that purchases an Interest in a non-Program ESC Fund
or makes a voluntary capital contribution to a Program ESC Fund will
immediately vest in the portion of the Interest in such ESC Fund
attributable to such purchase or contribution.
12. With respect to a non-Program ESC Fund that does not provide
for vesting provisions, an Eligible Employee's entire Interest may be
subject to repurchase by the Managing Member and/or the imposition of
different terms and conditions upon termination of such Eligible
Employee's employment by Citadel, as described in the Operating
Agreement and/or offering documents related to the relevant ESC Fund
and/or in other written correspondence issued to such Eligible
Employee. Upon any repurchase of an Eligible Employee's vested
membership interest, the Managing Member will at a minimum pay to the
Eligible Employee the lesser of (a) the amount actually paid by the
Eligible Employee to acquire the vested membership interest plus
interest, provided that any prior distributions are subtracted from
such combined amount, and (b) the fair market value of such vested
membership interest as determined at the time of repurchase by the
Managing Member in accordance with the relevant ESC Fund's valuation
policies and procedures. The terms of any repurchase or cancellation of
Interests will apply equally to any Eligible Employee and any Qualified
Participant of such Eligible Employee.
13. With respect to Program ESC Funds, a Member who remains
employed by Citadel may make a request to defer redemption of its
unvested membership interests from the relevant Program ESC Fund beyond
the relevant Determination Date, subject to approval by Citadel. If a
Member does not make such a request, or Citadel does not approve such
request, that portion of a Member's Interest attributable to such
unvested membership interests will be mandatorily redeemed as soon as
reasonably practicable following the
[[Page 84400]]
relevant Determination Date.\6\ Citadel will endeavor to treat Members
consistently in making the determination to approve such requests. A
vested membership interest in a Program ESC Fund (including a vested
membership interest received in respect of a voluntary capital
contribution to such Program ESC Fund by an Eligible Employee) may be
redeemed as of any calendar quarter-end upon not less than seventy
days' prior written notice or according to such other terms as may be
described in such Program ESC Fund's Operating Agreement and/or
offering documents or election form, subject to the availability of
liquidity (including suspensions on withdrawals) in respect of the
Citadel Third Party Funds in which the relevant Participation Points
ESC Fund is invested.
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\6\ In the event of such a mandatory redemption, subject to the
availability of liquidity (including suspensions on withdrawals) in
respect of the Citadel Third Party Funds in which the relevant
Program ESC Fund is invested, the balance of such Member's capital
account in such Program ESC Fund relating to such redeemed Interest,
as adjusted through the date of such redemption, will be distributed
to such Member.
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14. Subject to the terms of the applicable Operating Agreement and/
or offering documents, an ESC Fund will be permitted to enter into
transactions involving (i) a Citadel Entity, (ii) any Member or person
or entity affiliated with a Member or (iii) a Citadel Third Party Fund.
Prior to entering into any of these transactions, the Managing Member
will make the findings required in Condition 1 below. A Citadel Entity
(including the Managing Member) also may provide a full range of
financial, asset management or other services, and may also provide
financing in the form of debt, equity or other financial instruments,
and receive fees or other compensation and expense reimbursement in
connection therewith, from entities in which an ESC Fund (directly or
indirectly) makes an investment, from competitors of such entities or
from other unaffiliated persons or entities.
15. The investment objective of each ESC Fund and whether it will
operate as a diversified or non-diversified and open-end or closed-end
registered investment vehicle may vary from ESC Fund to ESC Fund, and
will be set forth in the offering documents relating to the specific
ESC Funds. Each ESC Fund (directly or indirectly through its
investments in Citadel Third Party Funds) may engage in various
investment strategies implemented by Citadel in markets around the
world. An ESC Fund may invest directly in securities (including
exchange-traded funds, mutual funds and index funds) and similar
investments and/or may invest all or substantially all of its assets in
Citadel Third Party Funds.\7\ An ESC Fund will not acquire any security
issued by a registered investment company if immediately after the
acquisition such ESC Fund will own more than 3% of the outstanding
voting stock of the registered investment company.
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\7\ Applicants are not requesting any exemption from any
provision of the Act or any rule thereunder that may govern the
eligibility of an ESC Fund to invest in an entity relying on section
3(c)(1) or 3(c)(7) of the Act or any such entity's status under the
Act.
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16. The offering documents will set forth, if applicable, whether
the Managing Manager or a Citadel Entity will make any capital
contributions or loans to such ESC Fund, and, if so, the terms
applicable to the Managing Member's or the Citadel Entity's investment
in such ESC Fund or its extension of credit to such ESC Fund, provided
that the interest rate applicable to any such loan made to an ESC Fund
will be no less favorable to such ESC Fund than the rate obtainable in
an arm's-length transaction, provided, further, that any indebtedness
of such ESC Fund will be the debt of such ESC Fund and without recourse
to the Members. An Eligible Employee will not borrow from any person if
such borrowing would cause any person not named in section 2(a)(13) of
the Act to own outstanding securities of an ESC Fund (other than short-
term paper). No ESC Fund will borrow from any person if the borrowing
would cause any person not named in section 2(a)(13) of the Act to own
outstanding securities of the ESC Fund (other than short-term paper).
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 employees' securities companies 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 (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) of the Act provides that the
Commission may determine as necessary or appropriate in the public
interest or for the protection of investors that, in connection with
any order exempting an investment company from section 7 of the Act,
certain provisions of the Act will be applicable to such investment
company and to other persons in their transactions and relations with
such investment company, as though such investment company were a
registered investment company. Applicants request an order under
sections 6(b) and 6(e) of the Act that amends and restates the Existing
Order exempting the Applicants and any ESC Funds from all provisions of
the Act, except section 9 and sections 36 through 53, and the rules and
regulations under the Act. With respect to sections 17 and 30 of the
Act, and the rules and regulations thereunder, and rule 38a-1 under the
Act, the exemption is limited as set forth in the application.
3. Section 17(a) of the Act, among other things, 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 investment company. Applicants request an exemption from
section 17(a) to the extent necessary to: (a) Permit a Citadel Entity
or a Citadel Third Party Fund (or any affiliated person of such Citadel
Entity or Citadel Third Party Fund), or any affiliated person of an ESC
Fund (or affiliated persons of such persons) acting as principal, to
engage in any transaction directly or indirectly with any ESC Fund or
any company controlled by such ESC Fund; and (b) permit any ESC Fund to
invest in or engage in any transaction with any Citadel Entity or
Citadel Third Party Fund, acting as principal: (i) in which such ESC
Fund, any company controlled by such ESC Fund or any Citadel Entity or
Citadel Third Party Fund has invested or will invest; or (ii) with
which such ESC Fund, any company controlled by such ESC Fund or any
Citadel Entity or Citadel Third
[[Page 84401]]
Party Fund is or will otherwise become affiliated.
4. Applicants submit that an exemption from section 17(a) is
consistent with the purposes of each ESC Fund and the protection of
investors, and is necessary to promote the basic purpose of such ESC
Fund. Applicants state that the Members of each ESC Fund will be fully
informed of the possible extent of such ESC Fund's dealings with
Citadel and of the potential conflicts of interest that may exist, and,
as professionals with experience in investing, financial planning,
securities brokerage, investment banking, asset management, business
operations, banking, cash management or trust services or other similar
areas, or in administrative, financial, tax, legal, accounting or
operational activities related thereto, will be able to understand and
evaluate the attendant risks. Applicants assert that the community of
interest among the Members in each ESC Fund and Citadel is the best
insurance against any risk of abuse.
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 such person, acting as principal, from
participating in any joint enterprise or joint arrangement with the
company unless authorized by the Commission. Applicants request relief
to the extent necessary to permit affiliated persons of each ESC Fund
(including the Managing Member, Citadel, and/or a Citadel Third Party
Fund), or affiliated persons of any of these persons to participate in,
or effect any transaction in connection with, any joint enterprise or
other joint arrangement or profit-sharing plan in which an ESC Fund or
a company controlled by such ESC Fund is a participant.
6. Applicants assert that compliance with section 17(d) would cause
an ESC Fund to forego investment opportunities simply because a Member
in an ESC Fund or any other affiliated person of such ESC Fund (or any
affiliate of such a person) also had, or contemplated making, a similar
investment. Applicants also submit that co-investment opportunities
with Citadel are advantageous to Eligible Employees because (a) the
resources of Citadel enable it to analyze investment opportunities to
an extent that Eligible Employees would have neither the time nor
resources to duplicate, (b) investments made by Citadel will not be
generally available to investors even if the financial status of the
Eligible Employees would enable them to otherwise participate in such
opportunities, and (c) Eligible Employees will be able to pool their
resources in co-investments, thus achieving greater diversification of
their individual portfolios. Applicants note that each ESC Fund will
primarily be organized for the benefit of Eligible Employees as an
incentive for them to remain with Citadel and for the generation and
maintenance of goodwill through an investment in Citadel Third Party
Funds. Applicants assert that the flexibility to structure co-
investments and joint investments as described in the application will
not involve abuses of the type section 17(d) and rule 17d-1 were
designed to prevent.
7. All side-by-side investments held by Citadel Entities will be
subject to the restrictions contained in Condition 3 except for side-
by-side investments held by a Citadel Third Party Fund, or by a Citadel
Entity in a transaction in which the Citadel investment was made
pursuant to a contractual obligation to a Citadel Third Party Fund.\8\
Applicants note that Citadel is likely to invest a portion of its own
capital in Citadel Third Party Fund investments or on a side-by-side
basis (which Citadel investments will be subject to substantially the
same terms as those applicable to such Citadel Third Party Fund, except
as otherwise disclosed in the offering documents and/or Operating
Agreement of the relevant ESC Fund). In addition, applicants assert
that the relationship of an ESC Fund to a Citadel Third Party Fund is
fundamentally different from such ESC Fund's relationship to Citadel.
Applicants contend that the focus of, and the rationale for, the
protections contained in the requested relief are to protect the ESC
Funds from any overreaching by Citadel in the employer/employee
context, whereas the same concerns are not present with respect to the
ESC Funds vis-[agrave]-vis the investors in a Citadel Third Party Fund.
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\8\ Such Citadel investment will only be exempt from Condition 3
to the extent that the investment was necessitated by the
contractual obligation to the Citadel Third Party Fund.
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8. Section 17(f) of the Act designates the entities that may act as
investment company custodians, and rule 17f-1 under the Act imposes
certain requirements when the custodian is a member of a national
securities exchange. Applicants request an exemption from section 17(f)
and rule 17f-1 to the extent necessary to permit a Citadel Entity to
act as custodian without a written contract because there will be such
a close association between each ESC Fund and Citadel that requiring a
detailed written contract would expose the ESC Funds to unnecessary
burden and expense. Applicants also request an exemption from the rule
17f-1(b)(4) requirement that an independent accountant periodically
verify the assets held by the custodian as Applicants do not believe
the expense of such verifications is warranted given the community of
interest of all the parties involved and the existing requirement for
an independent audit, compliance with the rule's requirement would be
unnecessary. Except as requested, each ESC Fund will otherwise comply
with the provisions of rule 17f-1.
9. Applicants also request an exemption from section 17(f) and rule
17f-2 to permit the following exceptions from the requirements of rule
17f-2: (a) An ESC Fund's investments may be kept in the locked files of
the Managing Member (or a Citadel Entity) for purposes of paragraph (b)
of the rule; (b) for purposes of paragraph (d) of the rule, (i)
employees of the Managing Member (or a Citadel Entity) will be deemed
to be employees of the ESC Funds, (ii) officers or managers of the
Managing Member of an ESC Fund (or a Citadel Entity) will be deemed to
be officers of the ESC Fund, and (iii) the Managing Member will be
deemed to be the board of directors of the ESC Fund; and (c) in place
of the verification procedure under paragraph (f) of the rule,
verification will be effected quarterly by two high level employees of
the Managing Member (or another Citadel Entity), each of whom is a
member of the administrative, legal, and/or compliance function for
Citadel and has specific knowledge of the custody requirements,
policies, and procedures of the ESC Funds. Applicants expect that with
respect to certain ESC Funds, most of their investments may be
evidenced only by partnership agreements, participation agreements or
similar documents, rather than by negotiable certificates that could be
misappropriated. Applicants believe that, for such an ESC Fund, these
instruments are most suitably kept in the locked files of the Managing
Member (or a Citadel Entity), where they can be referred to as
necessary. Applicants will comply with all other provisions of rule
17f-2, including the recordkeeping requirements of paragraph (e).
10. 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 a majority of directors who are not interested
persons
[[Page 84402]]
take certain actions and give certain approvals relating to fidelity
bonding. Applicants request an exemption to permit the Managing Member,
regardless of whether it is deemed an interested person of the ESC
Funds, to take actions and make determinations set forth in the rule.
Applicants state that the ESC Funds are unable to comply with Rule 17g-
1 because the ESC Funds will not have boards of directors and the
Managing Member of the ESC Fund will be an interested person of the ESC
Funds. Applicants also state that the ESC Funds will comply with all
other requirements of rule 17g-1, except that the Applicants request an
exemption from the requirements of paragraphs (g) and (h) of rule 17g-1
(relating to the filing of copies of fidelity bonds and related
information with the Commission and relating to the provision of
notices to the board of directors), and an exemption from the
requirements of paragraph (j)(3) of rule 17g-1 that the ESCs comply
with the fund governance standards defined in rule 0-1(a)(7).
11. 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 every registered investment
company adopt a written code of ethics and that every access person of
a registered investment company report personal securities
transactions. Applicants request an exemption from the provisions of
rule 17j-1, except for the anti-fraud provisions of paragraph (b),
because they are unnecessary and burdensome as applied to the ESC
Funds.
12. Applicants request an exemption from the requirements in
sections 30(a), 30(b), and 30(e) of the Act, 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 an ESC
Fund and would entail administrative and legal costs that outweigh any
benefit to the Members of such ESC Fund. Applicants request exemptive
relief to the extent necessary to permit each ESC Fund to report
annually to its Members. Applicants also request an exemption from
section 30(h) of the Act to the extent necessary to exempt the Managing
Member of each ESC Fund, directors and officers of the Managing Member
and any other persons who may be deemed to be members of an advisory
board or an investment adviser (and affiliated persons thereof) of such
ESC Fund from filing Forms 3, 4, and 5 under section 16 of the Exchange
Act with respect to such ESC Fund. Applicants assert that, because
there will be no trading market and the transfers of Interests will be
severely restricted, these filings are unnecessary for the protection
of investors and burdensome to those required to make them.
13. Rule 38a-1 requires investment companies to adopt, implement
and periodically review written policies and procedures reasonably
designed to prevent violation of the federal securities laws and to
appoint a chief compliance officer. Each ESC Fund will comply will rule
38a-1(a), (c) and (d), except that (a) because the ESC Funds do not
have a board of directors, the Managing Member will fulfill the
responsibilities assigned to a board of directors under the rule, (b)
because the Managing Member does not have any disinterested members,
approval by a majority of the disinterested board members required by
rule 38a-1 will not be obtained, and (c) because the ESC Funds do not
have any independent directors, the ESC Funds will comply with the
requirement in rule 38a-1(a)(4)(iv) that the chief compliance officer
meet with the independent directors by having the chief compliance
officer meet with the Managing Member. Each ESC Fund has adopted
written policies and procedures reasonably designed to prevent
violations of the terms and conditions of the application and appointed
a chief compliance officer.
Applicants' Conditions: Applicants agree that any order granting the
requested relief will be subject to the following conditions:
1. Each proposed Section 17 Transaction \9\ will be effected only
if the Managing Member determines that:
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\9\ ``Section 17 Transaction'' means a transaction that is
otherwise prohibited by section 17(a), section 17(d) and/or rule
17d-1 under the Act to which an ESC Fund is a party.
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(a) the terms of the Section 17 Transaction, including the
consideration to be paid or received, are fair and reasonable to the
Members of the ESC Fund and do not involve overreaching of the ESC Fund
or its Members on the part of any person concerned; and
(b) the Section 17 Transaction is consistent with the interests of
the Members of the ESC Fund, the ESC Fund's organizational documents
and the ESC Fund's reports to its Members.
(b) the Section 17 Transaction is consistent with the interests of
the Memberws of the ESC Fund, the ESC Fund's organizational documents
and the ESC Fund's reports to its Members.
In addition, the Managing Member will record and will preserve a
description of all Section 17 Transactions, the Managing Member's
findings, the information or materials upon which the findings are
based and the basis for the findings. All such records will be
maintained for the life of the ESC Fund and at least six years
thereafter, and will be subject to examination by the Commission and
its staff. Each ESC Fund will preserve the accounts, books and other
documents required to be maintained in an easily accessible place for
at least the first two years.
2. The Managing Member 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 any ESC Fund, or any
``affiliated person'' of such an ``affiliated person,'' promoter or
principal underwriter.
3. The Managing Member of each ESC Fund will not cause any of the
funds of the ESC Fund to be invested in any investment in which a Co-
Investor \10\ has acquired or proposes to acquire the same class of
securities of the same issuer and where the investment involves a joint
enterprise or other joint arrangement within the meaning of rule 17d-1
in which the ESC Fund and the Co-Investor are participants, unless
prior to such investment any such Co-Investor, prior to disposing of
all or part of its investment: agrees to (a) give the Managing Member
sufficient, but not less than one day's notice of its intent to dispose
of its investment; and (b) refrain from disposing of its investment
unless the ESC Fund has the opportunity to dispose of its investment
prior to or concurrently with, and on the same terms as, and pro rata
with, the Co-Investor.
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\10\ ``Co-Investor'' means with respect to any ESC Fund, any
person who is: (a) An ``affiliated person'' (as defined in section
2(a)(3) of the Act) of the ESC Fund (other than a Citadel Third
Party Fund); (b) a Citadel Entity; (c) an officer, director or
partner of a Citadel Entity; or (d) an entity (other than a Citadel
Third Party Fund) for which the Managing Member or an Affiliate acts
as a managing member or in a similar capacity so as to control the
sale or other disposition of the entity's investments.
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The restrictions contained in this condition, however, shall not be
[[Page 84403]]
deemed to limit or prevent the disposition of an investment by a Co-
Investor:
(a) To its direct or indirect wholly-owned subsidiary, to a Parent
\11\ of which the Co-Investor is a direct or indirect wholly-owned
subsidiary or to a direct or indirect wholly-owned subsidiary of such
Parent;
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\11\ ``Parent'' means any company of which an entity is a direct
or indirect wholly-owned subsidiary.
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(b) to immediate family members of the Co-Investor or to a trust or
other investment vehicle established for any such family member; and
(c) when the investment is comprised of securities that are (i)
listed on any exchange registered as a national exchange under section
6 of the Exchange Act; (ii) NMS stocks, pursuant to section 11A(a)(2)
of the Exchange Act and rule 600(a) of Regulation NMS thereunder; (iii)
government securities as defined in section 2(a)(16) of the Act, or
(iv) listed or traded on any foreign securities exchange or board of
trade that satisfies regulatory requirements under the law of the
jurisdiction in which such foreign securities exchange or board of
trade is organized similar to those that apply to a national securities
exchange or a national market system for securities.
4. Each ESC Fund and its Managing Member will maintain and
preserve, for the life of such ESC Fund and at least six years
thereafter, such accounts, books, and other documents as constitute the
record forming the basis for the audited financial statements that are
to be provided to the Members of such ESC Fund, and each annual report
of such ESC Fund required to be sent to such Members, and agree that
all such records will be subject to examination by the Commission and
its staff. Each ESC Fund will preserve the accounts, books and other
documents required to be maintained in an easily accessible place for
the first two years after the life of such ESC Fund.
5. Within 120 days after the end of the fiscal year of each ESC
Fund, or as soon as practicable thereafter, the Managing Member of each
ESC Fund will send to each person who was a Member having an Interest
in the ESC Fund at any time during the fiscal year then ended (except
for the first fiscal year of operations of an ESC Fund if no investment
activities took place in such fiscal year), audited financial
statements with respect to those ESC Funds in which the Member held
Interests. At the end of each fiscal year, the Managing Member will
make a valuation or have a valuation made of all of the assets of the
ESC 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 ESC Fund. In addition, within 120 days after the end of
each fiscal year of each ESC Fund or as soon as practicable thereafter,
the Managing Member 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, her or its U.S. federal and state income tax returns and a report
of the investment activities of the ESC Fund during that fiscal year.
6. If an ESC Fund makes purchases from, or sales to, an entity
affiliated with the ESC Fund by reason of an officer, director or
employee of Citadel (a) serving as an officer, director, managing
member, general partner or investment adviser of the entity, or (b)
having a 5% or more investment in the entity, such individual will not
participate in the ESC Fund's determination of whether or not to effect
the purchase or sale.
For the Commission, by the Division of Investment Management,
under delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28492 Filed 12-23-20; 8:45 am]
BILLING CODE 8011-01-P