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REPONSE OF TI OFFCE OF CIl COUNSEL
 

DIVSION OF INTM MAAGEM 

By letter date September 24, 1997, you reuest our guidace as to whether The BSC 

Employee Fund, L.P. (the "Paership"), an employee' securities company as dermed in
 

Section 2(a)(13) of the Investment Company Act of 1940 (the 
 "Act"), may trt its unfnded 1 capita commtments as "investments" for purpses of Rule 2a51-1 under the Act. 


You state that the Parership was creted for the benefit of cert employees, offcers, 

and ditors ("Elgible Employees") of The Bea Steas Companes, Inc. ("BSC") and any
 

entities controlled dirtly or indirtly by BSC ("Bea Steas"). Interests in the Parnership 

have been offere and sold to Elgible Employee without registrtion pursuant to Section 4(2) of 

the Securities Act of 1933 ("Securities Act,,).2 The Parnership invests in private investment 

vehicles that typicay ar excluded from the dermition of "investment company" under Section 

3(c)(1) or Section 3 
 (c) (7) of the Act ("Acquisition Funds"). 

You represent that the Parnership has binding capita commitments from its liited
 

parners, payable on demand to the Parnership, in excess of $25 mion in cash. You state that, 

in lieu of cag the capita commitments of the Elgible Employees who are admitted to the
 

Parnership as liited parners on an up-front basis, the Parnership proposes to draw down the
 

capita of the liited parners over time, roughly in parel to capita cas issued by the
 

3 Acquisition Funds. 


The Parnershi and its genera parner recived an order4 under Section 6(b)5 of the Act 

exempting them from paricular provisions of the Act to permit them to engage in cert
 

Rue 2a1-1 defies the term "invesents" for pÙise of Secon 2(a)(51) of the Act, 

which in tu defies the term "quaed purhar." 

2 

Section 4(2) exempts trctons by an issuer not involvig any public offerig frm the
 

regition rements of the Securties Act. 

3	 You state that the Parnership expets to drw under a cret facilty provided by Bea 

Steas to fund a porton of the Parnership's investment progr. Pursuat to Rule 

2a51-1(e) under the Act, you reresent that amounts to be drwn under the creit facilty
 

have ben deducted for purpses of caculatig the tota amount of "investments" held or 

to be held by the Parership. 

4 

The BSC Employee Fund, L.P., Investment Compay Act Relea Nos. IC-22656 (ly 7,
 

1997) (notice) and IC-22695 (June 3, 1997) (order). 

5 Secon 6(b) of the Act provide tht the Commsion sha exempt employee i seurties 

companes frm the provisions of the Act to the extnt tht such exemption is consent 

with the protetion of invesors. 
afilted and joint trsactions. In their application, applicats discussed the prosed 

investments of the Parership and the maner in which the Parership would drw down the 

lited parners' capita.
 

Discussion 

In order to invest in securities issued by a company excluded from the dermition of 

"investment company" under Section 3(c)(7) of the Act ("Section 3 


(c) (7) Company"), an investor must be a "qualed purchaser. " Section 2(a)(51)(A)(iv) of the Act generay dermes "qualed 

purchaser" as any person who in the aggrgate owns and invests on a discretiona basis not less 

than $25 'milon in investments. Rule 2a51-1 (b) under the Act dermes "investments" for
 

purposes of Section 2(a)(51). Subpargrph (6) of that provision states that the term 

"investments" includes: 

In the case of a Prosptive Qualed Purchaser that is a Section 3 


(c) (7) Company, a company that would be an investment company but for the exclusion provided by Section 

3 (c) (1) of the Act. . ., or a commodty pol, any amounts payable to such Prsptive 

Qualed Purchaser pursuant to a firm agrement or simil bindig commtment pursuant 

to which a person has agree to acquir an interest in, or make capita contrbutions to, 

the Prosptive Quaed Purchaser upon the demand of the Prosptive QuaIed
 

Purchaser. 

You maita that the nature of the subscription agreements is such that the Parnership 

quales as a "qualed purchaser" for purposes of Section 2(a)(51)(A)(iv) of the Act if the 

Parnership includes in the amount of its "investments" the amounts payable to the Parershi by 

its liited parners pursuant to the subscription agreements. You question whether the
 

Parnership's unfnded capita commitments constitute investments beuse the Parnership is not 

a Section 3 
 (c) (7) Company, is not excluded from the Act under Section 3(c)(1), and is not a 

commodity pol. You note that the Commission stated in the release adoptig Rule 2a51-1 that 

"a Prsptive Qualed Purchaser that is a privately offere fund. . . may trt as investments 

unfnded capita commtments (i.e., firm agiments by investors to provide these Prsptive' 

Qualed Purchasers with cah upon reuest):,;6 Whe the adoptlg releae used the phrse 

"privately offere funds," Rule 2a51-1(b)(6) refers to Section 3(c)(7) Companes, companes 

excluded from the Act under Section 3(c)(1) 'of the Act, and commodty pols. You maita that 

the policy arculated in the adoptig releae applies equay to the Paershi, which offers its 

interets on a private basis to mangement personnel who expet to be able to defer the fundig of 

their capita commitments unti such tie as the Parnershi is able to invest the capita in the 

Parership's underlying investments. 

You rereent that if the Parership is unable to trt its unfnded capita commtments as 

investments under Rule 2a51-1, its abilty to implement its investment progra may be adversely 

afected, beuse the Parership may have to defer investig in Section 3 


(c) (7) Companes unti 

Prvately Ofere Invesent Compaes, Invesent Compay Act Relea No. 22597 

(Apr. 3, 1997) ("adoptig relea").
 

2 

6 
its investment portolio otherwise increses to $25 mion. Alternatively, you maita that 

forcing the Parership to drw its lite parers' cash capita immedtely to enable the
 

Parnership to meet the $25 mion investment thrshold could disadvantage the lited parners.
 

Analysis 

We agr that the policy arculated in the adoptig release that "privately offere fund(sl 

. . . may trt as investments unfnded capita commitments . . ." applies equay to privately 

offere employees' securities companes such as the Parership. These companes have accss to 

cash that wil be used for investment purpses, thugh the commitments that reflect investors' 

assessments of the investment expertse of the sponsor of the employee' securities company. 

Thus, an employees' securities company may trt its firm agreements or simar bindig
 

commitments pursuant to which investors have agr to acquir interests in, or make capita
 

contrbutions to, a qualed purchaser upon the demand of the qualed purchaser as 

"investments" for purposes of Rule 2a51-1 under the Act. Ths response is based on the facts and 

representations contaed in your letter. You should note that different facts and circumstaces
 

may require a diferent conclusion.
 

~a.~ 

Sar A. Buescher
 

Attorney 

3
 
LATHAM & WATKINS
 

PAUL R. WATKINS UBOQ.lli73) ATTORNEYS AT LAW NEW .JF'RSFY nFFIr-F 

DANA LATHAM cieQe.Ul741 

1001 PENNSYVANIA AVE.. N.W. ONE NEWARK CENTER NEWARK. NEW JERSEY 07101-3174 

CHICAGO OFFICE 

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WASHINGTN. D.C. 2004-2505 

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FAX (212) 751-4864 

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TELEPHONE + 652-2g05-6400 

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LOS ANGF'I FS OFFICE September 24 1997 

701 -S- STREET. SUITE 2100 

SAN DIEGO. CALIFORNIA g2101-81Q7 

TELEPHONE (6Ig) 236-1234 

FAX (6101 606-741Q 

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TELEPHONE + 613-3423-3070 

FAX +613-3423-3071 

VIA MESSENGER 

Offce of the Associate Director (Chief Counsel) Investment Company Act! 

Division of Investment Management Sections 2(a)(51)(A) and 

Securities and Exchange Commission 3(c)(7); Rule 2a51-1 

450 Fifth Street, N.W. 

Washington, D.C. 20549 

Attention: Karen L. McMilan, Esq. 

Dear Ms. McMilan: 

We are wrting to seek c1arficati~n from the Division ofInvestment Management 

of an interpretive issue that has arisen regarding the definition of the term "investments" for 

purposes of Rule 2a51-1 under the Investment Company Act, as amended (the "Act"). This issue 

has arisen in the course of our representation of 
 The BSC Employee Fund, L.P. (the 

"Parnership"), to which the Commission has granted an order (the "Order") pursuant to Section 

6(b) of the Act exempting the Parnership from certin provisions of 
 the Act. Resolution of 
 the 

issue is relevant to the question of 
 whether the Parnership (and similar future parerships) may 

be deemed a "Qualified Purchaser" for puroses of 
 Section 2(a)(51(A) of 
 the Act and, 

accordingly, whether the Parership may invest in vehicles that are excluded from the definition 

See The BSC Employee Fund, L.P., Investment Company Act Release Nos. 22656 (May 7, 1997) 

(notice) and 22695 (June 3, 1997) (order). Although we believe that the facts pertinent to the 

resolution of the issue raised by this letter are fully set forth herein, a more complete description of 

the Partnership and its proposed activities may be found in Investment Company Act Release No. 

22656. 
LATHAM & WATKINS 

Offce of the Associate Director (Chief 
 Counsel) 

September 24, 1997 

Page 2 

of "investment company" (and similar future parerships) by operation of Section 3(c)(7) of the 

Act. 

The Parership has been formed for the benefit of eligible employees, offcers 

and directors ("Eligible Employees") of 
 The Bear Stears Companes Inc. ("BSC") and entities 

controlled directly or indirectly by BSC (BSC and such entities being referred to collectively as 

"Bear Stears") and is intended to be a means of rewarding and retaining these individuals. Each 

Eligible Employee must at the time of his or her subscription for a limited parnership interest in 

the Parnership be a Managing Director or Senior Managing Director of Bear Stears or a Bear 

Stears director or senior officer and must also be an "accredited investor" meeting the income 

requirements set forth under Rule 501(a)(6) of 
 Regulation D under the Securities Act of 1933 as 

amended (the "Securities Act,,).2 By virtue of 
 their employment by Bear Stears, Eligible 

Employees are also sophisticated professionals engaged in various aspects of the investment 

baning and securities business. Interests in .the Parnership have been offered and sold on a 

private basis to Eligible Employees in reliance on the exemption from the registration 

requirements of 
 the Securities Act set forth in Section 4(2) thereof. The Partnership is investing 

its capital in a number of closed-end private investment funds which are typically excluded from 

the definition of "investment company" by operation of 
 Section 3(c)(1) of 
 the Act or, potentially, Section 3(c)(7) thereof 
 ("Acquisition Funds"). The Acquisition Funds in which the Parnership 

proposes to invest have been identified by Bear Stearns through the Partnership's general partner, 

which is a wholly owned subsidiary of BSC and whose Board of Directors is comprised 

exclusively of senior management personnel of Bear Stears. 

Pursuant to the subscription agreements in which Eligible Employees àgreed to 

subscribe for limited partnership interests in the Parnership, the Partnership received binding 

contractual commitments from its limited partners for approximately $30.0 milion in cash, to be 

contributed to the Parnership on demand of 
 the Parnership.) The Parnership is drawing on 

these capital commitments over time, roughly in parallel fashion to capital calls issued by the 

Acquisition Funds in which the Parership itself is investing. The nature of 
 the subscription agreements is such that the Partnership qualifies as a "Qualified Purchaser" for puroses of 

Section 2(a)(51)(A)(iv) of 
 the Act, if the Partnership includes in the amount of 
 its "investments" 

(calculated as provided in Rule 2a-5l-l(b)(6) under the Act) the amounts payable to the 

Parership by its limited parners pursuant to the subscription agreements. 

2 The sole exception to these offering and eligibility requirements relate to a very limited number of 

BSe employees (five or fewer) who have been intimately involved in the organization of 
 the 

Partnership and its investment program. 

The Partnership also expects to draw under a credit facility provided by Bear Steams to fund in part 

the Partnership's investment program. Pursuant to Rule 2a51-1(e), amounts to be drawn under the 

credit facilty have been deducted for purposes of calculating the total amount of 
 "investments" held
 

or to be held by the Partnership. 
LATHAM & WATKINS 

Offce of the Associate Director (Chief Counsel) 

September 24, 1997 

Page 3
 

We believe that the Parnership should be permitted to include the capital 

commitments of its limited parers in calculating the amount of its "investments" for puroses 

of Section 2(a)(51)(A)(iv) of the Act. Inthe Investment Company Act Release adopting Rule 

2a51-1 (Investment Company Act Release No. 22597) (the "Section 3(c)(7) Adopting Release"), 

the Commission stated that a "Prospective Qualified Purchaser that is a pnvately offered fud . . . 

may treat as investments unded capita commitments," given that "the fud has access to cash 

that wil be used for investment puroses, though commitments that reflect investors' 

assessment of 
 the fud sponsor's investment expertise." That policy is precisely applicable to 

the case of the Parership, in which interests have been offered on a private basis under Section
 

4(2) of the Securities Act to highly sophisticated management personnel of an investment 

banng firm and where the limited parners (i) are relying on Bear Stears to identify, and invest 

their capital in, a diversified portfolio of Acquisition Funds, and (ii) expect to be able to defer 

funding their capital commitments until such time as the Parnership is able to invest that capital 

in the Parnership's underlying investments. However, Rule 2a51-I(b)(6), in contrast to the 

Section 3(c)(7) Adopting Release, speaks only to whether commodity pools or entities excluded 

from the definition of "investment company" by operation of Section 3( c )(1) or Section 3( c )(7) 

of the Act may treat their capital commitments as investments. Rule 2a51- I (b )(6) does not 

specifically address whether privately offered employee securities companies such as the 

Partnership, which have received exemptive orders under Section 6(b), may also treat their 

capital commitments as investments. 

If the Parership is unable to treat the capital commitments of its limited parners 

as "investments" for purposes of 
 Section 2(a)(51)(A)(iv) of 
 the Act, its abilty to implement its 

investment program may be adversely affected. This is because investment by the Parnership in 

entities relying on the Section 3(c)(7) exclusion may have to be deferred until such time as the 

Partnership's investment portfolio otherwise increases to $25.0 millon in size. Such a result
 

may effectively preclude the Parnership from investing in a number of otherwse attactive 

Section 3(c)(7) fuds. On the other hand, forcing the Parnership to draw its limited parers' 

cash capital commitments immediately, whichwould enable compliance with the $25.0 milion 

in investments test, would appear to be wholly unnecessary and punitive to the limited parners. . 

As an interpretive matter, we believe, and ask the Staff to concur, that, for 

purposes of Rule 2a51-1(b)(6), capita commitments made in respect of 
 privately offered 

employee securities companies which have received orders under Section 6(b) (and, potentially, 

Section 6(e)) should be treated identically to capital 
 commitments made in respect of Section 

3(c)(I) companies, Section 3(c)(7) companies or commodity pools. Alternatively, to the extent 

the Staff is not prepared to make a blanet determination for purposes of 
 Rule 2a-51-1(b)(6) that 

a company that has received a Section 6(b) order may treat unfunded capital commitments as if it 

were a Section 3(c)(l) or Section 3(c)(7) company, we believe that the Parnership, in light of 
 the 

representations made herein about the sophistication of the limited parners and Bear Stears, and 

in light of the Parnerships investment program of investing in Section 3( c)(1) and Section 
, '. 

,LATHA & WATKINS
 

Offce of the Associate Director (Chief 
 Counsel) 

September 24, 1997 

Page 4 

3(c)(7) fuds, should be allowed to treat its unded capita commitments as investments 

pursuant to Rule 2-51-1(b)(6). 

If for any reason you do not concur in our conclusion, we respectflly request a 

conference with the Sta before any adverse wrtten response is given to this letter. Should you 

or any member of the Sta have any questions concerning the foregoing or need fuher 

information or clarfication, please call either me at (202) 637-2237 or John Har of 
 the New York offce of this firm at (212) 906-1290. Than you very much for your consideration of 
 this 

request. 

Very trly yours,
 

OsfJ~~ 

John D. Watson, Jr. 

of LATHAM & WATKINS 

cc: David Grim, Esq.
 

Mercer Bullard, Esq. 

DC_DOCS\80775.\