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BEON 3CC)(ì) -.
 

RULE ~1-1_.-~.1-~..J51-3. i:-i.. sG-5 3c.-­ AP 2 4 197 f::. 

~ .~P;. PULIC .. ,
 p llC~ AVAfT.ABl '1- ;;lJ-97

OurRef. No. 97-177-CC
 

REPONSE OF TH OFFCE OF CH COUNSEL Davis Polk & Warwell DMSION OF INTM MAAGEM File No. 132-3 

Your letter date Apri 23, 1997 reuests our. 
 assurace tht we would not
 

remmend enforcment action to the. Commsion if cert clients of your fi intendig to 

rely on the exclusion frm regulation under the Investment Company Act of 1940 (the "Act") 

provided by Section 3 
 (c) (7) of the Act issue securities to quaed purchasrs prior to the effective date of roles implementig Section 3 
 (c) (7), in the maner describe in your letter; 

The Nationa Securities Markets Improvement Act of 1996 provides tht Section 

3(c)(7) wil beme effective on the ealier of Apri 9, 1997, or the date on which the .
 

Conision completes rolemakg derIDg the term I'investments" under Section 2(a)(51) of 

the Act. On Apri 9, 1997, the Federa Register publihed a relea in which the-


Commssion adopte such roles (the "Rules"). i The Rules wil be effective on June 9, 

1997, 60 days afer publication in the Federa Register ("Efective Date"). The 6O-dy 

waitig period was establihed pursuat to the Smal Business Regulatory Enorcment 

Faiess Act of 1996 ("SBRBA"),2 which is designed in par to give Congrss the 

opportnity to review roles adopted by federa agencies. 
 3 Issuers intending to rely on

Section 3 
 (c) (7) may not have anticipated the application of SBRBA's 60-day waitig period to the Rules. 

You rereent that although Section 3 
 (c) (7) bee effective on Apri 9, 1997, the unanticipated delay of the effectiveness of the Rules wil impose hadship on a number of 

tys of issuers that intend to rely on Section 3(c)(7). You state that the 6O-day delay could


materiy afect the abilty of these issuers to meet their expete fundig reuirments and 

investment deadles. Speifcay, you rerent tht one of your clients currntly relying 

on the exclusion from regulation under the Act provided by Section 3(c)(1) of the Act-intends 

to convert to a Section 3(c)(7) fund. You state tht the Rules would 
 provide guidace.as to which of ths issuer's holders ar beneficia owners tht must reive notice and reemption 

rights before conversion. You also rerent tht other clients of your fi would seek to
 

rely on the Rules to determe wheter assets held by prosptive investors qua as 

"investments," includig the provisions spifing the trtment of contrllg interests and.
 

i Prvate Investment Companes, Investment Company Act Releae No. IC-22597 (Apr.
 

3, 1997) (adoptig Rules 2a51-1, 2a51-2, 2a51-3, 3c-l, 3c-5 and 3c-6). 

2 Pub. L.No. 104-121, §251, 110 Stat. 857 (1996) (coded at 5 D.S.C. §§ 801-808).
 

3 In addition to reuirg a 60-caenda day waitig period prior to the effective date of 

major roles, SBRBA also provides for a 60-legislative day period durig which a joint 

resolution of disapproval under the procures set forth in SBRBA may occur. 
2
 

investor indebtedness. 

You maita that it is approprite for an. issuer to rely on the Rules prior to the 

Efective Date, provided that the issuer: (i) wil issue its seurities only to persons who meet 

the derintion of quaed purchaser under the Act and the reuirments of the Rules at the 

~e of their acquisition of such seurities; (ü) in the event tht the Rules do not tae effect 

(or contiue) pursuant to a joint reolution of dipproval under the proures set forth in

SBRBA (a "Disapproval"), wil fully comply with any new rules that the Commission may 

adopt in rense to the Disapproval and tae al action necsa to comply with such new 

roles as if they had ben in effect since Apri 
 9, 1997; and (il) wil fully comply with al other applicable laws and roles, includig the Rules in their entity. To the extent that
 

issuers tae action to comply. with any such new rules as if they had ben in effect since 

Apri 9, 1997, you maita that the fact that issuers relied upon the Rules prior to the 

Efective Date wil not result in har to investors. 

We would not remmend enforcement action to the Commision if any issuer 

intendig to rely on Section 3 
 (c) (7) of the Act issues securities to quaed purchasers in accrdace with the Rules prior to the Efective Date,4 provided that in the event of a 

Disapproval, the issuer wil tae al action necssa to comply with any new roles that the
 

Commission may adopt in respnse to the Disapproval as if they had ben in effect since 

Apri 9, 1997. Ths response is lited to actions taen by issuers prior to the ealier of the 

Efective Date, or of any pre-Effective Date Disapproval. Ths respnse expresses the 

Division's position on enforcement action only, and does not purprt to express any legal
 

conclusions on the questions presented. 

~/i-~­

;;~g¡;;heidt 

Associate Dirtor and 

Chief Counsel 

4 Your letter only discusses issues arsing under Rule 2a51-1 (derIDg investments and 

addrssing -cert other matters) and Rule _2a51-2 (derIDg cert terms for purpses of the
 

gradfather and consent provisions). Our respnse is not so lited, but rather applies to al of 

the Rules.
 
DAVIS POLK & WARDWELL
 

1300 I STREET. N.W. 450 LEXINGTON AVENUE
 17-22. AKASAKA 2-CHOME


WASHINGTON. D.C. 20005 MINATO-KU. TOKYO 107 

NEW YORK, N.Y. 10017
 

212-450-4000 

4, PLACE DE LA CONCORDE MESSETURM FAX: 2 I 2-450-4800 7S008 PARIS 60308 FRANKFURT AM MAIN
 

WRITER'S DIRECT NUMBER:
 I FREDERICK'S PLACE 3A CHATER ROAD 

LONDON EC2R BAB HONG KONG 

212-425 

April 23, 1997 

Re: Effective Date of Section 3(c)(7) 

Mr. Douglas J. Scheidt, Esq. Investment Company Act 

Chief Counsel Section 3 ( c )(7) 

Division of Investment Management 

Securities and Exchange Commssion 

450 Fifth Street, N.W. 

Washington, D.C. 20549 

Dear Mr. Scheidt: 

We represent a number of clients which are in the process of formng 

the 

Investment Company Act of 1940. We request your confrmation that the Staff 

wil not recommend enforcement action under the 1940 Act if, as of the April 9, 

1997 effective date of section 3 ( c )(7), these funds issue securities to persons who 

meet the Qualified Purchaser requirements set forth in rules adopted by the 

Commssion on April 3 and subsequently published in the Federal Register. 

private investment companes that intend to rely upon new section 3(c)(7) of 


The National Securities Markets Improvement Act of 1996 created section. 

3(c)(7), which excludes from regUlation under the 1940 Act privately offered 

investment companes whose securities are held exclusively by Qualified 

Purchasers. The new act requires the Commssion to adopt rules that implement 

section 3(c)(7), and provides that section 3(c)(7) is effective the earlier of April 9 

or the date on which the Commssion completes its rulemakng. Although the 

Commssion adopted these rules on April 3, it anounced that they would not be 

effective' until 60 days afer their publication due to a separate statutory 

requirement requiring delayed effectiveness of regulations. Small Business 

Regulatory Enforcement Fairness Act of 1996 ("SBREF A"), Pub. L. No. 104-12 l . 

§251. As a result of this apparently unforeseen complication, there will be an 

almost two-month period during which the law is effective but the rules 

implementing its provisions are promulgated but not yet effective. We also 

understand that there is a60 legislative day period afer effectiveness during which 
Mr. Douglas J. Scheidt, Esq. 2 April 23, 1997

Securities and Exchange Commission 

Congress could disapprove the rules. During both of 
 these periods, Congress 

could disapprove the rules under the procedures set forth in SBREF A. 1
 

The delayed effectiveness of these rules imposes undue and unnecessary 

hardship on 3(c)(7) funds which have timed their formation in anticipation of an 

April 9 effective date. A delay could materially hinder the ability of these funds to 

meet their expected funding requirements and investment deadlines. As described 

below, although section 3(c)(7) is effective on April 9, the Commssion's rules 

provide practical guidelines for compliance with section 3(c)(7). Thus, it would be 

extremely useful for these funds to be able to rely upon the Commssion's rules 

before the date of their effectiveness. 

We represent one of the largest privately offered funds in the country 

which has been working over the past two months to convert from section 3(c)(1) 

to section 3(c)(7) upon adoption of the Commssion's rules. The rules relating to 

the Grandfather provision would guide the fund in determning which of its holders 

are beneficial owners that must receive notice and redemption rights before 

converSion. 

We also represent a client which is formng a new 3 ( c )(7) fund and has 

been marketing the fund for several months. Potential investors have signed 

subscription agreements committing to invest irI the fund, which commitments 

expire at the end of May (this gave the sponsor six weeks after effectiveness of 

section ~(c)(7) to close the fund). If the fund were now to wait until effectiveness 

of the rules in June, all of its commitments from investors would expire. It would 

be 'diffcult for the fund to close without reliance on the rules because it intends to 

require that investors in the fund certify as to their Qualified Purchaser status, and 

would like to rely upon the Commssion's rules to ascertain which assets held by 

prospective investors will count as investments for these purposes. For example, 

the rules reveal whether secunties of certain controlled issuers would be deemed 

investments, or whether to deduct leverage from the amount of assets held. The 

rules also guide the fund in its reliance on the reasonable belief standard in 

admitting prospective investors. It may also be the case that a potential investor 

may be a privately offered fund formed before April 30, 1996, in which case the 

consent provisions relating to the investor's treatment as a Qualified Purchaser 

would apply. We in fact have a number of other clients that are in various stages 

of capital raising for 3 (c )(7) funds, and the rules would prove helpful to these 

funds for the same aforementioned reasons. In many cases, these funds anticipated 

lWe understand tht issuers do not need no-action relief during the 60 legislative day period 

afer effectiveness beuse they may then rely upon the provisions of SBREF A.
 
Mr. Douglas 1. Scheidt, Esq. 3 April 23, 1997 

Securities and Exchange Commission 

the rules becoming effective in April in planning and executing the marketing of 

the funds.
 

We believe that it is appropriate to allow an issuer to rely on the 

Commssion's rules after April 9 but before the rules are effective, as long as (i) its 

securities wil be sold only to persons who meet the definition of Qualified 

Purchaser under the 1940 Act and the requirements of the rules at the time of their 

acquisition of such securities; (ii) in the event that the rules do not take effect or do 

not continue pursuant to a joint resolution of disapproval under the procedures set 

forth in SBREF A, the issuer will fully comply with the rules the Commission may 

adopt in response to the disapproval and take all corrective actions necessary to 

comply with such new rules as if they had been in effect as of April 9, 1997; and 

(iii) the issuer will fully comply with all other applicable laws and rules, including 

the rules adopted by the Commssion in Release No. IC-22597 in their entirety. 

The ability of 
 issuers to rely upon the Commssion's rules before their 

effectiveness would not afect Congress' ability to disapprove the rules during the 

waiting period, and would not harm investors; If Congress did disapprove the 

rules, as stated. above, the issuers would ensure that their investors received the 

protection afforded by the new rules the Commssion may adopt. 

In summary, these clients intend to fully comply with section 3(c)(7) and its 

related rules as of the date of the effectiveness of section 3(c)(7). We respectfully 

request ~onfrmation that the Staf would not recommend enforcement action . 

under the 1940 Act if these issuers sell securities to Qualified Purchasers in the 

manner described above as of April 9, 1997. The Staf provided similar relief to 

companies relying on new section 3(c)(2) before its statutory effective date. See 

Clear, Gottlieb, Steen & Hamlton (Nov. 25, 1996). 

Please feel free to contact me at (212) 450-4525 or Nora Jordan at (212) 

450-4684 if you have any questions regarding this request. 

Respectfully submitted,


e' ·


Pierre de Saint Phalle