[Federal Register Volume 63, Number 213 (Wednesday, November 4, 1998)]
[Notices]
[Pages 59607-59610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29470]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23510; 812-11146]
Merrill Lynch Private Equity Trust I, et al.; Notice of
Application
October 29, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') requesting an exemption from section
17(e) of the Act and under rule 17d-1 under the Act to permit certain
joint transactions in accordance with section 17(d) and rule 17d-1
under the Act.
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Summary of Application: Applicants request an order to permit certain
registered closed-end investment companies to co-invest with other
investment vehicles managed by the same investment adviser, and the
investment adviser to receive certain compensation in connection with
these transactions.
Applicants: ML Private Equity Inc. (together with any investment
adviser controlling, controlled by, or under common control with ML
Private Equity Inc., the ``Advisers'') and Merrill Lynch Private Equity
Trust I (the ``Fund'' and together with any future registered closed-
end investment company advised by the Advisers, the ``Funds'').
Filing Date: The application was filed on May 15, 1998, and amended on
September 2, 1998. Applicants have agreed to file an amendment, the
substance of which is incorporated in this notice, during the notice
period.
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 November 23,
1998, 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, N.W., Washington, D.C.
20549. Applicants: South Tower, World Financial Center, New York, New
York 10080.
For Further Information Contact: Elaine M. Boggs, Senior Counsel, at
(202) 942-0572, or Nadya B. Roytblat, Assistant Director, at (202) 942-
0564 (Office of Investment Company Regulation, Division of Investment
Management).
Supplementary Information: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington,
D.C. 20549 (tel. 202-942-8090).
Applicant's Representations
1. The fund will be a Delaware business trust and a privately
offered closed-end investment company registered under the Act. ML
Private Equity Inc. will register as an investment adviser under the
[[Page 59608]]
Investment Advisers Act of 1940 and will serve as the Fund's investment
adviser. The Adviser also may serve as investment adviser to private
accounts on a discretionary basis and as manager and/or investment
adviser to other investment vehicles excepted from the definition of
investment company by section 3(c)(1) or 3(c)(7) of the Act (``Private
Funds'').\1\
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\1\ Private Funds may include certain employees' securities
companies formed for the benefit of employees of Merrill Lynch &
Co., Inc. If the Adviser acts as the general partner of a Private
Fund, it may make a capital contribution in connection with the
organization of the Private Fund and maintain an interest in the
Private Fund.
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2. ML Private Equity Inc. is a wholly-owned subsidiary of Merrill
Lynch & Co., Inc. (``ML & Co.''). Merrill Lynch, Pierce, Fenner & Smith
Incorporated (``Merrill Lynch''), also a wholly-owned subsidiary of ML
& Co., will act as placement agent for the Fund's shares.
3. The Fund will have at least four trustees who are natural
persons (``Individual Trustees'') and, in addition, the Adviser may
serve as a trustee. Under the Fund's declaration of trust, the
Individual Trustees will perform the duties imposed by the Act or the
rules under the Act on directors of registered investment companies
organized in corporate form and the Adviser as trustee will not be
entitled to vote on any matters related to these duties.
4. The Fund will invest in institutional investment funds excepted
from the definition of investment company by section 3(c)(1) or 3(c)(7)
of the Act (``Underlying Funds''). The Underlying Funds may include
real estate partnerships, venture capital funds, leveraged buyout
funds, and hedge funds. The Underlying Funds will be managed by
individuals or entities that are not affiliated with the Adviser.
5. Merrill Lynch will act as placement agent and financial adviser
to the Underlying Funds and their sponsors. Merrill Lynch will receive
compensation for its services from the sponsors (but not from the
Underlying Funds). In general, fees for the combined financial advice
and placement agency services range up to 2 percent of the proceeds of
the offering for a new Underlying Fund, together with reimbursement of
out-of-pocket transaction expenses.
6. The Fund proposes to make investments in the Underlying Funds
concurrently with one or more other Funds, the Private Funds, and ``ML
Entities'' (``Co-Investments'').\2\ The Fund will not invest in an
Underlying Fund unless at least 70 percent of the capital committed to
the Underlying Fund is committed by investors that are not Funds,
Private Funds, or ML Entities.
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\2\ ``ML Entities'' refers to the Advisers, ML & Co., any other
entity controlling, controlled by, or under common control with ML &
Co. and other entities (other than the Funds or the Private Funds)
with respect to which ML & Co., or any entity controlling,
controlled by, or under common control with ML & Co., is authorized
to cause the entity to provide the opportunity for a Fund to
participate in the sale of an investment as contemplated by
condition 6 below.
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Applicants' Legal Analysis
A. Co-Investments
1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
any affiliated person of or principal underwriter for a registered
investment company or any affiliated person of such person or principal
underwriter (``second-tier affiliate''), acting as principal, from
effecting any transaction in connection with any joint enterprise or
other joint arrangement or profit sharing plan, in which the investment
company participates unless the Commission by order approves the
transaction. Under section 2(a)(3) of the Act, an affiliated person of
another person includes any person directly or indirectly controlling,
controlled by, or under common control with the other person and the
investment adviser to an investment company. Applicants request an
order pursuant to section 17(d) and rule 17d-1 to permit the Co-
Investments.
2. In determining whether to approve a transaction under rule 17d-
1, the SEC considers whether the proposed transaction is consistent
with the provisions, policies, and purposes of the Act, and the extent
to which the participation of the investment companies is on a basis
different from or less advantageous than that of the other
participation. For the reasons stated below, applicants believe that
the Co-Investments meet these standards.
3. Applicants state that the proposed Co-Investments will not be
less advantageous to any Fund than they are to any other Fund, Private
Fund, or ML Entity since each Fund will be offered the opportunity to
participate in the Co-Investments with each other participating Fund,
Private Fund, or ML Entity on an identical basis. In addition,
applicants state that oversight by the Individual Trustees as provided
for in the conditions below will protect the Fund from overreaching by
any affiliated person in a Co-Investment.
B. Payment of Compensation to Advisers
1. Section 17(e) of the Act places limitations on the types and
amounts of compensation that an affiliated person or second-tier
affiliate of a registered investment company, acting as agent, may
receive with respect to purchases and sales of securities by the
investment company. Section 6(c) permits the SEC to exempt any person
or transaction from any provision of the Act, if the exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies of the Act.
2. Applicants request an exemption under section 6(c) from section
17(e) to the extent that the section is applicable to compensation
received by Merrill Lynch or an affiliate attributable to the purchase
of the Underlying Funds by the Funds. The exemption would only be
available to purchases of an Underlying Fund by a Fund in which neither
Merrill Lynch nor any affiliate receives any commissions, fees, or
other compensation from a Fund or an Underlying Fund in connection with
the purchase.
3. Applicants state that the limitations in section 17(e) were
designed to prevent affiliates of registered investment companies from
receiving excessive compensation attributable to portfolio transactions
conducted by the investment companies. Applicants state that fees
received by Merrill Lynch from a sponsor of an Underlying Fund will be
identical with respect to each investor in an Underlying Fund for which
Merrill Lynch acts as placement agent, regardless of the identity of
the purchaser or whether it is affiliated with Merrill Lynch.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. A majority of the Individual Trustees of each Fund will not be
``interested persons,'' as defined in section 2(a)(19) of the Act, of
the Fund.
2. A fund will not invest in an Underlying Fund unless at least 70
percent of the capital committed to the Underlying Fund is committed by
investors that are not Funds, Private Funds, or ML Entities.
3. The Individual Trustees of each Fund participating in a Co-
Investment in an Underlying Fund, including a majority of the non-
interested Individual Trustees, will approve Co-Investments in advance.
To facilitate the Individual Trustees' determinations, the
[[Page 59609]]
Adviser will provide the Individual Trustees of a Fund with periodic
information listing all investments suitable for investment by the Fund
which have been entered into by another Fund or, to the knowledge of
the Adviser, a Private Fund or an ML Entity.
4. (a) Before making a Co-Investment, the Adviser will make a
preliminary determination as to whether each particular Co-Investment
opportunity meets the Fund's investment objective, policies, and
restrictions. The Adviser will maintain written records of the factors
considered in any preliminary determination.
(b) Following the making of the determination referred to in (a),
information concerning the proposed Co-Investment will be distributed
to the Individual Trustees. This information will be presented in
written form and will include the name of each Fund, each Private Fund,
and each ML Entity that, to the knowledge of the Adviser, may
participate and the maximum amount offered to each entity.
(c) Information regarding the Adviser's preliminary determinations
referred to in (a) will be reviewed by the Individual Trustees,
including a majority of the non-interested Individual Trustees. The
Individual Trustees, including a majority of the non-interested
Individual Trustees, will make an independent decision as to whether to
participate and the extent of participation in a Co-Investment in an
Underlying Fund based on the factors as are deemed appropriate under
the circumstances. If a majority of the non-interested Individual
Trustees of the Fund determines that the amount proposed to be invested
by the Fund is not sufficient to obtain an investment position that
they consider appropriate under the circumstances, the Fund will not
participate in the Co-Investment. Similarly, the Fund will not
participate in a Co-Investment if a majority of the non-interested
Individual Trustees of the Fund determines that the amount proposed to
be invested is an amount in excess of that which is determined to be
appropriate under the circumstances, although the non-interested
Individual Trustees may make a determination that the Fund take other
than their allotted portion of an investment. A Fund will only make a
Co-Investment if a majority of the non-interested Individual Trustees
of the Fund prior to making the Co-Investment in an Underlying Fund
conclude, after consideration of all information deemed relevant
(including the extent to which such participation is on a basis
different from or less advantageous than that of other participants and
the extent to which an ML Entity has or will provide investment banking
or other services to the Underlying Fund), that the investments by any
other Fund, Private Fund, and/or ML Entity, as applicable, would not
disadvantage the Fund in the making of the investment, in maintaining
its investment position or in disposing of the investment, and that
participation by the Fund would not be on a basis different from or
less advantageous than that of the other Fund, Private Fund, and/or any
ML Entity, as applicable. The non-interested Individual Trustees will
maintain at the Fund's office written records of the factors considered
in any decision regarding the proposed Co-Investment.
(d) The non-interested Individual Trustees will, for purposes of
reviewing each recommendation of the Adviser, request additional
information from the Adviser as they deem necessary for the exercise of
their reasonable business judgment, and they will also employ such
experts, including lawyers and accountants, as they deem appropriate
for the reasonable exercise of this oversight function.
5. Co-Investments in equity interests in an Underlying Fund by a
Fund with any other Fund, any Private Fund, and/or any ML Entity, as
applicable, will consist of the same class of securities, including the
same registration rights (if any), and other related rights, and will
be purchased at the same unit consideration, and the approval of these
transactions, including the determination of the terms of the
transactions by the Fund's non-interested Individual Trustees, will be
made in the same time period.
6. A Fund will not participate in a Co-Investment in an Underlying
Fund with another Fund, a Private Fund, or an ML Entity unless each
other party agrees to permit the Fund to participate, in the manner set
forth in this condition, in the disposition of (a) an interest in each
Underlying Fund or (b) securities received through an in-kind
distribution by the Underlying Fund. If a Fund, a Private Fund, or an
ML Entity proposes to dispose of a security described in the preceding
sentence, notice of the proposed sale will be given to the non-
interested Individual Trustees of the relevant Fund(s) at the earliest
practical time. A Fund will participate in the disposition of the
security on a lock-step basis with any other Fund, Private Fund, or an
ML Entity, unless the non-interested Individual Trustees of a Fund
determine that the Fund should not participate in the sale or not
participate on a lock-step basis. A Fund need not participate on a
lock-step basis in the disposition of securities sold by any other
Fund, a Private Fund, or an ML Entity if the non-interested Individual
Trustees of the Fund find that the retention or sale, as the case may
be, of the securities is fair to the Fund and that the Fund's
participation or choice not to participate in the sale on a lock-step
basis is not the result of overreaching by any other Fund, any Private
Fund, and/or an ML Entity, as applicable. If this finding is not made,
then the relevant Fund must participate in the sale on the basis of a
lock-step disposition. If at any time the result of a proposed
disposition of any portfolio security held by a Fund would alter the
proportionate holdings of each class of securities held by the other
Funds, Private Funds, and/or an ML Entity, as applicable, holding the
Co-Investment, then the non-interested Individual Trustees of the Fund
or Funds involved must determine that this result is fair to the
relevant Fund(s) and is not the result of overreaching by any other
Fund, Private Fund, and/or ML Entity, as applicable. The non-interested
Individual Trustees will record in the records of the Fund the basis
for their decisions as to whether to participate in the sale.
7. A decision by the Individual Trustees of a Fund (a) not to
participate in a Co-Investment or (b) not to sell, exchange, or
otherwise dispose of a Co-Investment in the same manner and the same
time as another Fund, Private Fund, or ML Entity will include a finding
that the decision is fair and reasonable to the Fund and not the result
of overreaching of the Fund or its share holders by the other Fund,
Private Fund and/or ML Entity, as applicable. The non-interested
Individual Trustees of each Fund will be provided quarterly for review
all information concerning Co-Investments made by the Funds, the
Private Funds, and/or ML Entities, as applicable, including Co-
Investments in which the Fund declined to participate, so they may
determine whether all Co-Investments made during the preceding quarter,
including those Co-Investments they declined, complied with the
conditions set forth above. In addition, the non-interested Individual
Trustees of each Fund will consider at least annually the continuing
appropriateness of the standards established for Co-Investments by the
Fund, including whether the use of these standards continues to be in
the best interest of the Fund and its share holders and does not
involve overreaching of the Fund or its share holders on the part of
any party concerned.
8. No non-interested Individual Trustee of a Fund will be an
affiliated person of a Private Fund or Underlying
[[Page 59610]]
Fund or have had, at any time since the beginning of the last two
completed fiscal years of any Private Fund or Underlying Fund, a
material business or professional relationship with any Private Fund or
Underlying Fund.
9. A Fund, each Private Fund, and/or ML Entity, as applicable, will
bear its own expenses associated with the disposition of portfolio
securities. The expenses, if any, of distributing and registering
securities under the Securities Act of 1933 sold by the Fund, one or
more Private Funds, and/or the ML Entity, as applicable, at the same
time will be shared by the Fund, the selling Private Fund(s), and or
each ML Entity, as applicable, in proportion to the relative amounts
they are selling.
10. Merrill Lynch and its affiliates will receive no commissions,
fees, or other compensation from a Fund or an Underlying Fund in
connection with a purchase by the Fund of an interest in the Underlying
Fund.\3\
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\3\ This condition does not limit arrangements in which an
Underlying Fund initially pays a placement fee to Merrill Lynch but
is reimbursed or credited with such amount so that the sponsor of
the Underlying Fund effectively bears the cost of the placement fee.
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11. The Fund will maintain all records required of it by the Act,
and all records referred to or required under these conditions will be
available for inspection by the Commission. The Fund will also maintain
the records required by section 57(f)(3) of the Act as if the Fund was
a business development company and the Co-Investments were approved by
the non-interested Individual Trustees under section 57(f).
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29470 Filed 11-3-98; 8:45 am]
BILLING CODE 8010-01-M
