[Federal Register Volume 60, Number 13 (Friday, January 20, 1995)]
[Notices]
[Pages 4211-4218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1497]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20839; 813-132]
Morgan Stanley Capital Investors, L.P. and Morgan Stanley Group
Inc.; Notice of Application
January 13, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Morgan Stanley Capital Investors, L.P. (the ``Initial
Partnership''; and Morgan Stanley Group Inc. (``MSG'').
RELEVANT ACT SECTIONS: Applicants seek an order under sections 6(b) and
6(e) granting an exemption from all provisions of the Act except
section 9, certain provisions of sections 17 and 30, sections 36
through 53, and the rules and regulations thereunder.
SUMMARY OF APPLICATION: Applicants seek an order, on behalf of the
Initial Partnership and certain partnerships or investment vehicles
organized by MSG (together, the ``Partnerships'') that would grant an
exemption from most provisions of the Act, and would permit certain
affiliated and joint transactions. Each Partnership will be an
employees' securities company within the meaning of section 2(a)(13) of
the Act. Partnership interests will be offered to
[[Page 4212]] eligible employees, officers, directors, and advisory
directors of MSG and its affiliates.
FILING DATES: The application was filed on May 2, 1994, and amended on
July 20, 1994, September 26, 1994, and January 10, 1995.
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
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on February 8,
1995, and should be accompanied by proof of service on the 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, 1251 Avenue of the Americas, New York, NY 10020.
FOR FURTHER INFORMATION CONTACT:
Marc Duffy, Senior Attorney, at (202) 942-0656, or C. David Messman,
Branch Chief, 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
SEC's Public Reference Branch.
Applicants' Representations
1. MSG and its subsidiaries (collectively, the ``Morgan Stanley
Group'') constitute a global financial services firm. Morgan Stanley &
Co. Incorporated (``MS&Co''), a wholly-owned subsidiary of MSG, is the
principal broker-dealer affiliate of the Morgan Stanley Group and is
registered as a broker-dealer under the Securities Exchange Act of 1934
(the ``Exchange Act''). MS&Co. and MSG are registered as investment
advisers under the Investment Advisors Act of 1940 (the ``Advisers
Act'').
2. The Initial Partnership is a newly-formed Delaware limited
partnership and one of several anticipated investment vehicles that are
to be formed for the purpose of enabling certain employees, officers,
directors, and advisory directors of the Morgan Stanley Group to pool
their investment resources and to participate in various types of
investment opportunities, including venture capital and private equity
investments. The pooling of resources permits diversification and
participation in investments that usually would not be offered to
individual investors. The goal of the Partnerships is to reward and
retain key personnel by enabling them to participate in investment
opportunities that would not otherwise be available to them and to
attract other individuals to the Morgan Stanley Group.
3. The Partnerships will operate as non-diversified closed-end
management investment companies. The Partnerships will seek to achieve
a high rate of return through long-term capital appreciation in risk
capital opportunities. The Initial Partnership will co-invest alongside
two private equity funds (the ``Equity Funds'') that recently were
organized by the Morgan Stanley Group for third-party investors. The
Equity Funds are exempt from registration under the Act in reliance
upon section 3(c)(1) thereunder.\1\ Similarly, subsequent Partnerships
primarily will co-invest alongside other private investment funds
organized by the Morgan Stanley Group for third-party investors (such
private investment funds, collectively with the Equity Funds, are
referred to herein as the ``Investment Funds'').
\1\Section 3(c)(1) exempts from the definition of investment
company any issuer whose outstanding securities (other than short-
term paper) are beneficially owned by not more than one hundred
persons and is not making and does not presently propose to make a
public offering of its securities.
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4. The general partner or other manager of each Partnership (the
``General Partner'') will be registered as an investment adviser under
the Advisers Act. The General Partner of each Partnership also may
serve as the general partner or manager of the related Investment
Funds.
5. Interests in each Partnership will be offered without
registration under a claim of exemption pursuant to section 4(2) of the
Securities Act of 1933 (the ``Securities Act'').\2\ Interests will be
offered and sold only to (a) ``Eligible Employees'' of the Morgan
Stanley Group, or (b) trusts or other investment vehicles for the
benefit of such Eligible Employees and/or the benefit of their
immediate families (``Limited Partners''). To be an Eligible Employee,
an individual must be a current employee, officer, director, or
advisory director of an entity within the Morgan Stanley Group and,
except for certain individuals described in paragraph 6 below, an
``accredited investor'' meeting the income requirements set forth in
rule 501(a)(6) of Regulation D under the Securities Act. The
limitations on the class of persons who may acquire interests, in
conjunction with other characteristics of the Partnership, will qualify
the Partnership as an ``employees' securities company'' under section
2(a)(13) of the Act.
\2\Section 4(2) exempts transactions by an issuer not involving
any public offering from the Securities Act's registration
requirement.
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6. Eligible Employees who are not accredited investors but who
manage the day-to-day affairs of a Partnership may be permitted to
invest their own funds through the General Partner of the Partnership
if such individuals had reportable income from all sources in the
calendar year immediately preceding such person's participation in
excess of $120,000, and have a reasonable expectation of reportable
income in the years in which such person will be required to invest
his/her own funds of at least $150,000. These individuals will have
primary responsibility for operating the Partnership. Such
responsibility will include, among other things, identifying,
investigating, structuring, negotiating, and monitoring investments for
the Partnership, communicating with the Limited Partners, maintaining
the books and records of the Partnership, and making recommendations
with respect to investment decisions. Accordingly, all such individuals
will be closely involved with, and knowledgeable with respect to, the
Partnership's affairs and the status of Partnership investments.
7. Only a small proportion of the Morgan Stanley Group's personnel
qualify as Eligible Employees. The Eligible Employees are experienced
professionals in the investment banking, merchant banking, or
securities business, or in administrative, financial, accounting, or
operational activities related thereto. No Eligible Employee will be
required to invest in any Partnership.
8. The management and control of each Partnership, including all
investment decisions, will be vested exclusively in the General
Partner. The management and control of the General Partner, in turn,
will be vested, directly or indirectly, in MSG. Thus, the business and
affairs of each Partnership indirectly will be managed by or under the
direction of the board of directors or other committee serving similar
functions (the ``Board'') of an entity (the ``MS Subsidiary
Corporation'') that is directly or indirectly controlled by MSG and
directly controls the Partnership. Each Board, among other things, will
act as the investment committee of the Partnership responsible for
approving all investment and valuation decisions. Actions by the Board
generally will [[Page 4213]] require the vote of a majority of its
members. Each Board will be comprised exclusively of directors and
officers of the Morgan Stanley Group, each of whom is expected to
qualify as an Eligible Employee. The day-to-day affairs of each
Partnership will be managed by Eligible Employees who are officers or
employees of the Morgan Stanley Group.
9. With respect to the Initial Partnership, the partners thereof
currently consist of the General Partner and a wholly-owned subsidiary
of MSG, as sole limited partner (the ``MS Limited Partner''). The
Initial Partnership has obtained subscriptions from a number of
Eligible Employees to acquire limited partnership interests in the
Initial Partnership. Such Eligible Employees, however, have not yet
been admitted to the Partnership. As promptly as practicable after
receipt of the requested order, the Eligible Employees will be admitted
to the Initial Partnership as Limited Partners, and the limited
partnership interest held by the MS Limited Partner will be redeemed by
the Initial Partnership in full. Upon their admission into the Initial
Partnership, the Eligible Employees will be allocated their shares of
any investment made, and expense incurred, by the Initial Partnership
prior to their admission, and will be required to make capital
contributions to the Initial Partnership as if they had been Limited
Partners from the formation of the Initial Partnership.
10. The terms of each Partnership are expected to be based upon the
terms of the related Investment Fund, and corresponding or analogous
terms of each (or terms having substantially the same intent or effect)
are expected to be substantially identical, except as described below.
In addition, if the Partnership is required to co-invest ``lock-step''
with the related Investment Fund (which is generally expected to be the
case), various terms designed for the protection of the investors in
the related Investment Fund also will accrue to the benefit of the
Limited Partners. Such terms may include, for example, (a) limitations
with respect to the amounts permitted to be invested in the securities
of certain issuers, and the nature of investments permitted to be made,
by the related Investment Fund, and (6) limitations on the ability of
the General Partner and its affiliates to engage in certain types of
activities, such as the formation of a new Investment Fund or the
making of certain types of investments for its own account without
first having offered the investment opportunity to the related
Investment Fund. In any event, the terms of each Partnership will be
disclosed to the Eligible Employees at the time they are offered the
right to subscribe for interests in the Partnership. To the extent
there are differences between the terms of a Partnership and the
related Investment Fund, or the Partnership could be affected by the
terms of or actions taken with respect to the Investment Fund, such
differences or effects also will be disclosed to the Eligible
Employees.
11. The General Partner of each Partnership will have all powers
necessary, proper, suitable or advisable to carry out the purposes and
business of the Partnership. The General Partner of each Partnership
also may serve as the general partner or manager of the related
Investment Fund and, in such capacity, be vested exclusively with the
management and control of the Investment Fund.
12. The General Partner of each Partnership generally will have a
capital commitment to the Partnership equal to at least 1% of the
Partnership's aggregate capital commitment and thus will be required to
make capital contributions to the Partnership. In order for the General
Partner to meet its capital contribution requirements, Morgan Stanley
Group will be required to capitalize the MS Subsidiary Corporation with
sufficient funds (and, if the General Partner is organized as a limited
partnership or other non-corporate entity, the individual partners or
other investors of the General Partner also will be required to fund
their pro rata share of such capital contributions).
13. The General Partner of each Partnership, as the general partner
or manager of the related Investment Fund, will have a capital
commitment to such Investment Fund. Another entity within the Morgan
Stanley Group also may participate in such Investment Fund as a limited
partner or other investor on the same terms as other third-party
investors. In addition, individuals serving on the Board or managing
the day-to-day affairs of the Partnership may also elect to invest
their own funds as Limited Partners of the Partnership on the same
terms as other Eligible Employees.
14. The General Partner of each Partnership will pay its normal
operating expenses, including rent and salaries of its personnel and
certain expenses. To the extent any expenses are not borne by the
General Partner, the Partnership will be required to pay such expenses.
Such expenses may include, without limitation, the fees, commissions
and expenses of an entity within the Morgan Stanley Group for services
performed by such entity for such Partnership such as, for example,
brokerage or clearing services in the Partnership's portfolio
securities.
15. The General Partner of a Partnership may be paid an annual
management fee, generally determined as a percentage of assets under
management or aggregate commitments. The General Partner of a
Partnership also may be entitled to receive a performance-based fee (or
``carried interest'') of a specified percentage based on the gains and
losses of such Partnership's or each Limited Partner's investment
portfolio.\3\ Such percentage will not exceed that used in calculating
the General Partner's carried interest in the related Investment Fund.
All or a portion of the carried interest arising from Partnership
investments may be paid to the individuals who are partners of or
investors in the General Partner. In addition, the General Partner may
be entitled to other compensation from the Partnership as provided for
in the Partnership Agreement of the Partnership, such as acquisition
fees, disposition fees, structuring fees or other fees for additional
services rendered by the General Partner to the Partnership in
connection with the Partnership's affairs.
\3\A ``carried interest'' is an allocation to the General
Partner based on net gains in addition to the amount allocable to
the General Partner that is in proportion to its capital
contributions. Any carried interest will be structured to comply
with the requirements of rule 205-3 under the Advisers Act.
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16. Each Partnership generally will be required to invest ``lock-
step'' in investment opportunities in which the related Investment Fund
invests. In connection with any such investment opportunity, the amount
of the Partnership's do-investment will be determined in accordance
with a specified formula. Such formula is expected to provide that the
amount of the Partnership's co-investment will bear the same proportion
to the aggregate investments of the related Partnership as the
aggregate capital commitments of the Investment Fund and the
Partnership as the aggregate capital commitments of the Investment Fund
and the Partnership. In addition, the Partnership generally will be
required to make any co-investments on terms no more favorable than
those applicable to the investments by the related Investment Fund.\4\
\4\It is anticipated that the economic terms applicable to the
Partnership's investments will be substantially the same as those
applicable to the corresponding investments by the related
Investment Fund; however, it is possible that the related Investment
Fund may invest in a different class of securities or that the
Investment Fund's investment may have more favorable non-economic
terms (e.q., the right to representation on the board of directors
of the portfolio company) in light of differences in legal
structure, or regulatory, tax, or other
considerations. [[Page 4214]]
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17. It is possible that a Partnership will not participate in
investment opportunities due to regulatory, tax, or other
considerations even though the related Investment Fund proceeds to make
investments in connection with such investment opportunities. The
circumstances, if any, in which a Partnership will or will not make an
investment alongside the related Investment Fund will be provided for
in the Partnership Agreement. Under no circumstances, however, will a
Partnership make an investment unless the related Investment Fund also
makes an investment in connection with the applicable investment
opportunity.
18. Similarly, each Partnership, except as permitted by condition 3
below, will be given the opportunity to sell or otherwise dispose of
its investments prior to or concurrently with, and on the same terms as
sales or other dispositions by the related Investment Fund.
19. A Partnership will not invest more than 15% of its assets in
securities issued by registered investment companies (with the
exception of temporary investments in money market funds), and a
Partnership will not acquire any security issued by a registered
investment company if immediately after such acquisition the
Partnership will own more than 3% of the outstanding voting stock of
the registered investment company.
20. The ``lock-step'' investment requirements described above could
enable the Limited Partners of each Partnership to derive the benefit
of various terms applicable to the related Investment Fund that were
designed for the protection of investors in such Investment Fund. It
also is possible that the terms of the related Investment Fund will
include provisions that would give the investors of the Investment Fund
rights that are specifically not made available to the Limited Partners
of the Partnership. For example, investors of the Investment Fund may
have the right (which will not be available to the Limited Partners) to
make additional co-investments outside such Investment Fund in certain
investment opportunities.
21. Subject to the terms of each Partnership and the related
Investment Fund, the Partnership will be permitted to enter into
transactions involving an entity within the Morgan Stanley Group
(including without limitation the related Investment Fund), a portfolio
company, and partner of or other investor in the related Investment
Fund that is not an entity within the Morgan Stanley Group (together
with the affiliates (as defined in rule 12b-2 under the Exchange Act)
of such partner or other investor, hereinafter referred to as a ``Non-
MS Investment Fund Partner''), or any partner or person or entity
related to any partner. Such transactions may include, without
limitation, the purchase or sale by the Partnership of an investment,
or an interest therein, from or to any entity within the Morgan Stanley
Group, acting as principal. With respect to any investment purchased by
a Partnership from an entity within the Morgan Stanley Group, acting as
principal, the Partnership will acquire the investment for no more than
the fair value at the time of purchase, plus carrying costs and certain
organizational expenses. The fair value at the time of such purchase
may be more or less than the price paid by the entity, depending on the
appreciation or depreciation in the particular investment.
22. No individual who serves on the Board or manages or is
otherwise employed to perform the day-to-day affairs of the Partnership
will be permitted to invest his or her own funds in connection with any
Partnership investment, except through the related Investment Fund or
the Partnership as a partner or other investor of the General Partner,
through the Partnership as a Limited Partner of the Partnership, or
through the exercise of stock options or warrants granted, on the same
terms and amounts, to all outside directors of the entities in which
such Partnership invests.
23. An entity within the Morgan Stanley Group (including the
General Partner) may provide investment banking, management, or other
services and receive fees or other compensation and expense
reimbursement in connection therewith from entities in which a
Partnership makes an investment or competitors of such entities. Such
fees or other compensation may include, without limitation, advisory
fees, organization or success fees, financing fees, management fees,
performance-based fees, fees for brokerage and clearing services, and
compensation in the form of carried interests entitling the entity to
share disproportionately in income or capital gains or similar
compensation. An entity within the Morgan Stanley Group also may engage
in market-making activities with respect to the securities of entities
in which a Partnership makes an investment or competitor of such
entities. Employees of an entity within the Morgan Stanley Group may
serve as officers or directors of such entities pursuant to rights held
by a Partnership or the related Investment Fund to designate such
officers or directors, and receive officers' and directors' fees and
expense reimbursement in connection with such services. The Morgan
Stanley Group reserves the right not to charge or to waive all or part
of any such fees or other compensation or expense reimbursement that a
Partnership otherwise might incur or bear indirectly. However, any such
fees or other compensation or expense reimbursement received by an
entity within the Morgan Stanley Group generally will not be shared
with any Partnership.
24. With regard to the transactions described above into which a
Partnership directly or indirectly enters, the Board must determine
prior to entering into such transaction that the terms thereof are fair
to the partners and the Partnership.
25. Interests in a Partnership will be non-transferable, except
with the prior written consent of the General Partner of the
Partnership, which consent may be withheld in its sole discretion. In
any event, interests will not be transferable to persons other than:
(a) Other Eligible Employees; (b) trusts or other investment vehicles
for the benefit of such Limited Partner and/or such Limited Partner's
immediate family; or (c) an entity within the Morgan Stanley Group.
26. Upon the death of a Limited Partner, or such Limited Partner
becoming incompetent, insolvent, incapacitated or bankrupt, such
Limited Partner's estate or legal representative will succeed to the
Limited Partner's interest as an assignee for the purpose of settling
such Limited Partner's estate or administering such Limited Partner's
property, and may not become a Limited Partner.
27. Interests in a Partnership may be redeemable by the Partnership
upon the Limited Partner's termination of employment from the Morgan
Stanley Group. Alternatively, Morgan Stanley Group may have the right
to purchase a Limited Partner's interest upon such termination of
employment. The terms upon which an interest may be so redeemed or
purchased, including the manner in which the redemption or purchase
price will be determined, will be fully disclosed to Eligible Employees
at the time they are offered the right to subscribe for the interest.
In any event, with respect to a redemption, the redemption price will
not be less than the lower of (a) the amount invested plus interest
calculated at a rate per [[Page 4215]] annum at least equal to the
discounted rate for 90-day Treasury bills for the period since the
investment and (b) the then fair value (as determined by the General
Partner) of the interest, less amounts, if any, forfeited by the
Limited Partner for failure to make required capital contributions.
28. The consequences to a Limited Partner who defaults on his or
her obligation to fund a required capital contribution to the
Partnership will be described in the applicable Partnership agreement.
Such default provisions shall be on terms no less favorable than those
applicable to third party investors in the related Investment Fund,
will be fully disclosed to Eligible Employees at the time they are
offered the right to participate in the Partnership, and the General
Partner will not elect to exercise any alternative involving the
forfeiture by the defaulting Limited Partner of a portion of his or her
capital account if the defaulting Limited Partner is suffering from, or
will suffer, severe hardship.
29. During the existence of each Partnership, books and accounts of
the Partnership will be kept, in which the General Partner of the
Partnership will enter, or cause to be entered, all business transacted
by the Partnership and all moneys and other consideration received,
advanced, paid out, or delivered on behalf of the Partnership, the
results of the Partnership's operations, and each partner's capital.
Such books will at all times be accessible to all partners of the
Partnership, subject to certain reasonable limitations to address
concerns with respect to, among other things, the confidentiality of
certain information. In addition, for each fiscal year of a
Partnership, the General Partner of the Partnership will cause an
examination of the financial statements of the Partnership to be made
by a nationally recognized firm of certified public accountants. A copy
of the accounts' report with respect to each fiscal year, which will
include the Partnership's financial statements, will be mailed or
otherwise furnished to each partner of the Partnership within a
specified period after the end of such fiscal year. Each Partnership
also will supply all information reasonably necessary to enable the
partners of the Partnership to prepare their Federal and state income
tax returns. The General Partner generally also will furnish
information regarding each Partnership to the Partners on a quarterly
basis. It is expected that the scope and nature of the information
furnished to the Limited Partners of any Partnership will be the same
as that furnished to the third party investors of the related
Investment Fund.
Applicants' Legal Analysis
1. Section 6(b) provides that the SEC shall exempt employees'
securities companies from the provisions of the Act to the extent that
such exemption is consistent with the protection of investors. Section
2(a)(13) defines an employees' security company, among other things, as
any investment company all of the outstanding securities of which are
beneficially owned by the employees or persons on retainer of a single
employer or affiliated employers or by former employees of such
employers; or by members of the immediate family of such employers,
persons on retainer, or former employees.
2. Section 6(e) provides that in connection with any order
exempting an investment company from any provision of section 7,
certain specified provisions of the Act shall be applicable to such
company, and to other persons in their transactions and relations with
such company, as though such company were registered under the Act, if
the SEC deems it necessary or appropriate in the public interest or for
the protection of investors.
3. Applicants request an exemption under sections 6(b) and 6(e) of
the Act from all provisions of the Act, and the rules and regulations
thereunder, except section 9, sections 17 and 30 (except as described
below), sections 36 through 53, and the rules and regulations
thereunder.
4. Section 17(a) provides, in relevant part, that it is unlawful
for any affiliated person of a registered investment company, or any
affiliated person of such person, acting as principal, knowingly to
sell any security or other property to such registered investment
company or to purchase from such registered investment company any
security or other property. Applicants request an exemption from
section 17(a) of the Act to the extent necessary to: (a) Permit an
entity within the Morgan Stanley Group, acting as principal, to engage
in any transaction directly or indirectly with any Partnership or any
company controlled by such Partnership; (b) permit any Partnership to
invest in or engage in any transaction with any entity, acting as
principal, (i) in which such Partnership, and company controlled by
such Partnership, or any member of the Morgan Stanley Group has
invested or will invest, or (ii) with which such Partnership, any
company controlled by such Partnership, or any entity within the Morgan
Stanley Group is or will become otherwise affiliated; and (c) permit a
Non-MS Investment Fund Partner, acting as principal, to engage in any
transaction directly or indirectly with the related Partnership or any
company controlled by such Partnership. The transactions to which any
Partnership is a party will be effected only after a determination by
the Board that the requirements of Condition 1 below have been
satisfied. In addition, these transactions will be effected only to the
extent not prohibited by the limited partnership agreements or other
organizational agreements of the related Investment Fund and the
Partnership in question.
5. The principal reason for the requested exemption is to ensure
that each Partnership will be able to invest in companies, properties,
or vehicles in which an entity within the Morgan Stanley Group
(including without limitation the related Investment Fund), or the
entity's employees, officers, directors, or advisory directors, or the
partners of or other investors in the related Investment Fund, may make
or have already made an investment. The relief also is requested to
permit each Partnership the flexibility to deal with its portfolio
investments in the manner the General Partner deems most advantageous
to all partners of or investors in such Partnership, or as required by
the related Investment Fund or the Partnership's other co-investors.
Furthermore, the requested exemption is sought to ensure that a Non-MS
Investment Fund Partner will not directly or indirectly become subject
to a burden, restriction, or other adverse effect by virtue of the
related Partnership's participation in an investment opportunity.
Without this exemption, a Non-MS Investment Fund Partner may be
restricted in its ability to engage in transactions with the related
Partnership's portfolio companies, which would not have been the case
had such Partnership not invested in such portfolio companies.
6. The partners of or investors in each Partnership will have been
fully informed of the possible extent of such Partnership's dealings
with the related Investment Fund or another entity within the Morgan
Stanley Group or with a Non-MS Investment Fund Partner and, as
professionals employed in the securities business, will be able to
understand and evaluate the attendant risks. Applicants assert that the
community of interest among the partners of or other investors in each
Partnership, on the one hand, and the related Investment Fund or
another entity within the Morgan Stanley Group or the Non-MS Investment
Fund [[Page 4216]] Partners, on the other hand, is the best insurance
against any risk of abuse.
7. Applicants state that a Partnership will not make loans to the
related Investment Fund or any other entity within the Morgan Stanley
Group, or to any employee, officer, director, or advisory director of
the Morgan Stanley Group, with the exception of short-term repurchase
agreements or other fully secured loans to an entity within the Morgan
Stanley Group. In addition, a Partnership will not sell or lease any
property to the related Investment Fund or any other entity within the
Morgan Stanley Group, except on terms at least as favorable as those
obtainable from unaffiliated third parties.
8. Section 17(d) makes it unlawful for any affiliated person of a
registered investment company, acting as principal, to effect any
transaction in which the company is a joint or joint and several
participant with the affiliated person in contravention of such rules
and regulations as the SEC may prescribe for the purpose of limiting or
preventing participation by such companies. Rule 17d-1 under section
17(d) prohibits most joint transactions unless approved by order of the
SEC. Applicants request an exemption from section 17(d) and rule 17d-1
thereunder to the extent necessary to permit affiliated persons of each
Partnership (including without limitation the General Partner, the
related Investment Fund, and other entities within the Morgan Stanley
Group) or affiliated persons of any of these persons (including without
limitation the Non-MS Investment Fund Partners) to participate in, or
effect any transaction in connection with, any joint enterprise or
other joint arrangement or profit-sharing plan in which such
Partnership or a company controlled by such Partnership is a
participant. The exemption requested would permit, among other things,
co-investments by each Partnership and individual partners or other
investors or employees, officers, directors, or advisory directors of
the Morgan Stanley Group making their own individual investment
decisions apart from the Morgan Stanley Group.
9. Compliance with section 17(d) would prevent each Partnership
from achieving its principal purpose. Because of the number and
sophistication of the potential partners of or investors in a
Partnership and persons affiliated with such partners or investors,
strict compliance with section 17(d) would cause a Partnership to
forego investment opportunities simply because a partner or investor or
other affiliated person of the Partnership (or any affiliate of such a
person) also had, or contemplated making, a similar investment. In
addition, attractive investment opportunities of the types considered
by a Partnership often require each participant in the transaction to
make available funds in an amount that may be substantially greater
than may be available to the Partnership alone. As a result, the only
way in which a Partnership may be able to participate in such
opportunities may be to co-invest with other persons, including its
affiliates. The flexibility to structure co-investments and joint
investments in the manner described above will not involve abuses of
the type section 17(d) and rule 17d-1 were designed to prevent. The
concern that permitting co-investments or joint investments by the
related Investment Fund or another entity within the Morgan Stanley
Group or by the Non-MS Investment Fund Partners on the one hand, and a
Partnership on the other, might lead to less advantageous treatment of
the Partnership, should be mitigated by the fact that: (a) The Morgan
Stanley Group, in addition to its substantial stake as a general
partner or manager in such Investment Fund and such Partnership, will
be acutely concerned with its relationship with the key personnel who
invest in the Partnership; and (b) senior officers and directors of the
Morgan Stanley Group will be investing in such Partnership.
10. Section 17(f) provides that the securities and similar
investments of a registered management investment company must be
placed in the custody of a bank, a member of a national securities
exchange, or the company itself in accordance with SEC rules.
Applicants request an exemption from section 17(f) and rule 17f-1 to
the extent necessary to permit an entity within the Morgan Stanley
Group to act as custodian without a written contract. Because there is
such a close association between each Partnership and the Morgan
Stanley Group, requiring a detailed written contract would expose the
Partnership to unnecessary burden and expense. Furthermore, any
securities of a Partnership held by the Morgan Stanley Group will have
the protection of fidelity bonds. An exemption is requested from the
terms of rule 17f-1(b)(4), as applicants do not believe the expense of
retaining an independent accountant to conduct periodic verifications
is warranted given the community of interest of all the parties
involved and the existing requirement for an independent annual audit.
11. Section 17(g) and rule 17g-1 generally require the bonding of
officers and employees of a registered investment company who have
access to securities or funds of the company. Applicants request an
exemption from section 17(g) and rule 17g-1 to the extent necessary to
permit each Partnership to comply with rule 17g-1 without the necessity
of having a majority of the members of the related Board who are not
``interested persons'' take such actions and make such approvals as are
set forth in rule 17g-1.
12. Section 17(j) and rule 17j-1 make it unlawful for certain
enumerated persons to engage in fraudulent, deceitful, or manipulative
practices in connection with the purchase or sale of a security held or
to be acquired by an investment company. Rule 17j-1 also requires every
registered investment company, its adviser, and its principal
underwriter to adopt a written code of ethics with provisions
reasonably designed to prevent fraudulent activities, and to institute
procedures to prevent violations of the code. Applicants request an
exemption from section 17(j) and rule 17j-1 (except rule 17j-1(a))
because the requirements contained therein are burdensome and
unnecessary in the context of the Partnerships. Requiring each
Partnership 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 interest among the partners of or
investors in such Partnership by virtue of their common association in
the Morgan Stanley Group; the substantial and largely overlapping
protections afforded by the conditions with which applicants have
agreed to comply; the concern of the Morgan Stanley Group that
personnel who participate in each Partnership actually receive the
benefits they expect to receive when investing in such Partnership; and
the fact that the investments of the Partnerships will be investments
that usually would not be offered to the investors, including those
investors who would be deemed access persons, as individual investors.
Accordingly, the requested exemption is consistent with the purposes of
the Act, because the dangers against which section 17(j) and rule 17j-1
are intended to guard are not present in the case of any Partnership.
13. Sections 30(a), 30(b) and 30(d), and the rules under those
sections, generally require that registered investment companies
prepare and file with the SEC and mail to their shareholders certain
periodic reports [[Page 4217]] and financial statements. The forms
prescribed by the SEC for periodic reports have little relevance to a
Partnership and would entail administrative and legal costs that
outweigh any benefit to partners of or investors in the Partnerships.
Exemptive relief is requested to the extent necessary to permit each
Partnership to report annually to its investors in the manner described
above in paragraph 29. An exemption also is requested from section
30(f) to the extent necessary to exempt the General Partner, the
managing general partner or manager, if any, of such General Partner,
members of the related Board, and any other persons who may be deemed
members of an advisory board of such Partnership from filing reports
under section 16 of the Exchange Act with respect to their ownership of
interests in the Partnership.
14. Applicants submit that the exemptions requested are consistent
with the protection of investors in view of the substantial community
of interest among all the parties and the fact that each Partnership is
an ``employees' securities company'' as defined in section 2(a)(13).
Each Partnership will be conceived and organized and managed by persons
who will be investing, directly or indirectly, or are eligible to
invest, in such Partnership, and will not be promoted by persons
outside the Morgan Stanley Group seeking to profit from fees or
investment advice or from the distribution of securities. Applicants
also submit that the terms of the proposed affiliated transactions will
be reasonable and fair and free from overreaching.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
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 a Partnership is a party (the
``Section 17 Transactions'') will be effected only if the Board,
through the General Partner of such Partnership, determines that: (a)
The terms of the transaction, including the consideration to be paid or
received, are fair and reasonable to the partners of or investors in
such Partnership and do not involve overreaching of the Partnership or
its partners or investors on the part of any person concerned; and (b)
the transaction is consistent with the interests of the partners of or
investors in such Partnership, such Partnership's organizational
documents and such Partnership's reports to its partners or investors.
In addition, the General Partner of each Partnership will record and
preserve a description of such affiliated transactions, the Board's
findings, the information or materials upon which the Board's findings
are based and the basis therefor. All such records will be maintained
for the life of such Partnership and at least two years thereafter, and
will be subject to examination by the SEC and its staff.\5\
\5\Each Partnership will preserve the accounts, books and other
documents required to be maintained in an easily accessible place
for the first two years.
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2. In connection with the Section 17 Transactions, the Board,
through the General partner, will adopt, and periodically review and
update, procedures designed to ensure that reasonable inquiry is made,
prior to the consummation of any such transaction, with respect to the
possible involvement in the transaction of any affiliated person or
promoter of or principal underwriter for such Partnership, or any
affiliated person of such a person, promoter, or principal underwriter.
3. The General Partner of each Partnership will not invest the
funds of such Partnership in any investment in which a ``Co-Investor,''
as defined below, has 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 such Partnership and the Co-Investor are participants, unless
any such Co-Investor, prior to disposing of all or part of its
investment, (a) gives the General Partner 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 such Partnership has
the opportunity to dispose of the Partnership's investment prior to or
concurrently with, and on the same terms as, and pro rata with the Co-
Investor. The term ``Co-Investor,'' with respect to any Partnership,
means any person who is: (a) An ``affiliated person'' (as such term is
defined in the Act) of such Partnership; (b) an entity within the
Morgan Stanley Group; (c) an officer or director of an entity within
the Morgan Stanley Group; or (d) a company in which the General Partner
of such Partnership acts as a general partner or has a similar capacity
to control the sale or other disposition of the company's securities
(including without limitation the related Investment Fund). The
restrictions contained in this condition, however, shall not be deemed
to limit or prevent the disposition of an investment by a Co-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 such Co-Investor 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 Exchange Act; or (d) when the investment is
comprised of securities that are national market system securities
under section 11A(a)(2) of the Exchange Act and rule 11Aa2-1
thereunder.
4. Each Partnership and the General Partner or manager of such
Partnership will maintain and preserve, for the life of the Partnership
and at least two 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 partners of or
investors in such Partnership, and each annual report of such
Partnership required to be sent to such partners or investors, and
agree that all such records will be subject to examination by the SEC
and its staff.\6\
\6\Each Partnership will preserve the accounts, books and other
documents required to be maintained in an easily accessible place
for the first two years.
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5. The General Partner of each Partnership will send to each
partner of or investor in such Partnership who had an interest in any
capital account of such Partnership at any time during the fiscal year
then ended Partnership financial statements audited by such
Partnership's independent accountants. At the end of each fiscal year,
the General Partner will make a valuation or have a valuation made of
all of the assets of the Partnership 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 Partnership. In addition, within 90
days after the end of each fiscal year of the Partnership or as soon as
practicable thereafter, the General Partner of such Partnership will
send a report to each person who was a partner or investor in such
Partnership at any time during the fiscal year then ended, setting
forth such tax information as shall be necessary for the preparation by
the partner or investor of his or its federal and state income tax
returns and a report of the investment activities of such Partnership
during such year.
6. In any case where purchases or sales are made by a Partnership
from or [[Page 4218]] to an entity affiliated with the Partnership by
reason of a 5% or more investment in such entity by a Morgan Stanley
Group advisory director, director, officer or employee, such individual
will not participate in the Partnership's determination of whether or
not to effect such purchase or sale.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-1497 Filed 1-19-95; 8:45 am]
BILLING CODE 8010-01-M
