Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices 25401

1 17 CFR 240.0–12.

2 15 U.S.C. 78mm(a)(1).

3The NASD filed its application on March 3,

2000. Subsequently, Nasdaq completed its

acquisition of the assets of the software

development company.

Form T–4 is used to apply for an

exemption from certain provisions of

the Trust Indenture Act. The

information required by Form T–4 is

mandatory. All information is provided

to the public upon request. Form T–4

takes 5 burden hours to prepare and is

filed by 3 respondents for a total of 15

burden hours.

Rule 14f–1 requires issuers to disclose

a change in a majority of issuer

directors. The information filed under

Rule 14f–1 must be filed with the

Commission. All information submitted

is provided to the public upon request.

It takes 18 burden hours to prepare the

necessary information and is filed by 44

respondents for a total of 792 burden

hours.

Rule 12d1–3 requires a certification

that a security has been approved by an

exchange for listing and registration

pursuant to Section 12(d) of the

Securities Exchange Act to be filed with

the Commission. The information

required under Rule 12d1–3 must be

filed with the Commission. All

information filed with the Commission

is available to the public upon request.

It takes one-half hour to prepare the

necessary information and is filed by

688 respondents for a total of 344

burden hours.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless it displays a currently valid

control number.

Written comments regarding the

above information should be directed to

the following persons: (i) Desk Officer

for the Securities and Exchange

Commission, Office of Information and

Regulatory Affairs, Office of

Management and Budget, Room 10102,

New Executive Office Building,

Washington, D.C. 20503; and (ii)

Michael E. Bartell, Associate Executive

Director, Office of Information

Technology, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Comments

must be submitted to OMB within 30

days of this notice.

Dated: April 18, 2000.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10727 Filed 4–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42713; Form Type 34–36

MR; File No. 79–9]

Notice of Application and Order

Temporarily Granting Application for a

Conditional Exemption by the National

Association of Securities Dealers, Inc.

Relating to the Acquisition and

Operation of a Software Development

Company by the Nasdaq Stock Market,

Inc

April 24, 2000

Pursuant to Rule 0–12 1 under the

Securities Exchange Act of 1934

(‘‘Exchange Act’’), notice is hereby given

that on March 3, 2000, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) and the Nasdaq Stock Market,

Inc. (‘‘Nasdaq’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) an application for a

conditional exemption under Section

36(a)(1) of the Exchange Act 2 relating to

Nasdaq’s acquisition and operation of a

software development company. In

addition, the NASD requested that, if

the Commission determined to solicit

comment on the application for a

permanent exemption, the Commission

grant a temporary conditional

exemption for a period of one year.

The Commission is publishing this

notice to solicit comments from

interested persons on the NASD’s

application for a permanent exemption.

For the reasons discussed below, the

Commission also is issuing an order at

this time approving the NASD’s request

for a temporary conditional exemption

for a period of one year from the date

of this release. The Commission will

make a final determination concerning

the request for a permanent exemption

after reviewing the comments submitted

in response to this notice and prior to

the expiration of the temporary

exemption.

The text of the NASD’s application is

set forth in section 1 below,3 followed

by the Commission’s solicitation of

comments on the NASD’s request for a

permanent exemption in section II and

the Commission’s order granting the

NASD’s request for a temporary

exemption in section III.

I. NASD’s Application for Exemption

On behalf of the NASD and Nasdaq,

pursuant to Section 36 of the Securities

Exchange Act of 1934 and Rule 0–12

thereunder, we are writing to apply for

an exemption from Section 19(b) of the

Exchange Act, to (1) permit Nasdaq to

acquire and operate a software

development company, Financial

Systemware, Inc. (‘‘FSI’’), to market

certain financial services software,

‘‘OTC Tools’’ and related software

(‘‘Software’’), and to expand the

products and services offered by FSI to

include service bureau and back-office

functions for NASD broker-dealers,

without filing proposed rule changes

pursuant to Rule 19b–4 under the

Exchange Act of before making or

implementing any modifications to the

Software, or with respect to each new

software product or service offered by

FSI (provided those new software

products and services are offered in a

manner that is not inconsistent with the

presentation contained in this letter),

and (2) permit FSI to determine prices

for such software products and services

based on competitive market factors

without filing proposed rule changes

pursuant to Rule 19b–4 under the

Exchange Act.

A. Background

The NASD is a national securities

association registered under Section

15A of the Exchange Act. As a national

securities association, the NASD is a

self-regulatory organization (‘‘SRO’’) as

defined by Section 3(a)(26) of the

Exchange Act. Though its subsidiaries,

NASD Regulation, Inc., the American

Stock Exchange, Inc. and Nasdaq, the

NASD develops rules and regulations,

conducts regulatory review of its

members’ business activities, and

designs and operates marketplace

facilities and services.

The NASD also has three other

subsidiaries: (1) Nasdaq International,

Ltd., which provides services to

domestic and foreign companies, (2)

Securities Dealers Insurance Co., Inc.,

which provides reinsurance services in

connection with a fidelity bond program

for NASD members, and (3) Securities

Dealers Risk Purchasing Group, which

provides professional liability insurance

to NASD members.

The NASD sets the overall strategic

direction and policy agenda of the

whole organization, oversees the

effectiveness of its subsidiaries and

ensures that the organization’s statutory

and self-regulatory obligations are

fulfilled.

Subject to receiving the exemptive

relief requested herein, Nasdaq plans to

acquire the assets of FSI, whose primary

line of business is the development and

distribution of a financial services

software product called ‘‘OTC Tools.’’

OTC Tools is designed for and marketed

25402 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices

4For example, FSI may perform for its customers,

service bureau and back-office functions, including

ACT trade reporting, trade comparison, and

position and account management functions (e.g.,

profit and loss calculations).

5Section 3(a)(26) of the Exchange Act defines the

term ‘‘self-regulatory organization’’ to mean ‘‘any

national securities exchange, registered securities

association, registered clearing agency, and, for

purposes of Section 19(b) and other limited

purposes, the Municipal Securities Rulemaking

Board (‘‘MSRB’’).’’

6Under Section 19(b)(3)(A) of the Exchange Act

and rule 19b–4(e) thereunder, a proposed rule

change may take effect upon filing without the

notice and approval procedures required by Section

19(b)(2) if the proposed rule change comes within

prescribed statutory categories, including rule

changes that (1) constitute a stated policy, practice,

or interpretation with respect to the meaning,

administration, or enforcement of an existing rule

of the SRO, (2) establish or change a due, fee, or

other charge imposed by the SRO, (3) are concerned

solely with the administration of the SRO, or (4) are

matters which the Commission may, consistent

with the public interest and the purposes of this

subsection, specify by rule.

7The term ‘‘facilities of the self-regulatory

organization’’ is not defined in the Exchange Act.

The term ‘‘facility’’ is defined in Section 3(a)(2) of

the Exchange Act, but only with respect to an

exchange (as defined in Section 3(a)(1), to ‘‘include

* * * its premises, tangible or intangible property

whether on the premises or not, any right to use

such premises or property or any service thereof for

the purpose of effecting or reporting a transaction

on an exchange (including, among other things, any

system of communication to or from the exchange,

by ticker or otherwise, maintained by or with the

consent of the exchange), and any right of the

exchange to the use of any property or service.’’

to NASD broker-dealers that use Nasdaq

Workstation II terminals. OTC Tools is

a Microsoft Windows-based software

product that enhances and simplifies a

user’s interactions with, and use of, the

Nasdaq Workstation II terminal, but

does not change or alter the current

features of Nasdaq, SelectNet or SOES (i.e.,

the facilities of the NASD).

Currently, the Software which is

being commercially marketed to NASD

broker-dealers, offers a variety of

features to assist them in efficiently

managing their quotes, monitoring and

executing incoming orders, continually

checking for closed, locked or crossed

markets, and monitoring the depth of

the market. There is a high level of

effective competition in providing these

types of software products and services

to market participants. For example,

Automatic Securities Clearance, through

its BRASS service, provides ordermanagement services and software to a

large number of NASD member firms

that are in many respects similar to the

Software. Other firms, such as Eagle

Trading, ADP, TCAM and Royal Blue,

offer order handling packages that

compete with those offered by FSL.

Similarly, many NASD member firms

have developed internal order

management and order-routing software

that provides independent functions

comparable to those provided by the

Software.

Given the NASD’s complex

infrastructure and the dramatic

acceleration of technological changes

that are impacting the securities

markets, the NASD and Nasdaq believe

that they must have the capability to

respond quickly to the technological

needs of NASD members. The NASD

and Nasdaq believe that the acquisition

of FSI will greatly improve Nasdaq’s

ability to provide such rapid solutions

to its members’ technological needs.

Nasdaq also plans to expand the

products and services offered by FSI to

include service bureau and back-office

functions 4 for NASD broker-dealers.

B. Basis for Relief Sought and

Anticipated Benefits to Investors

Section 19(b)(1) of the Exchange Act

requires an SRO,5 including the NASD

(as a registered securities association

under Section 15A of the Exchange Act),

to file with the Commission its

proposed rule changes accompanied by

a concise general statement of the basis

and purpose of the proposed rule

change. Once a proposed rule change

has been filed, the Commission is

required to publish notice of it and

provide an opportunity for public

comment. The proposed rule change

may not take effect unless approved by

the Commission by order, or unless the

rule change is within the class of rule

changes that are effective upon filing

pursuant to Section 19(b)(3)(a).6

Section 19(b)(1) of the Exchange Act

defines the term ‘‘proposed rule

change’’ to mean ‘‘any proposed rule or

rule change in, addition to, or deletion

from the rules of [a] self-regulatory

organization.’’ Pursuant to Section

3(a)(27) and 3(a)(28) of the Exchange

Act, the term ‘‘rules of a self-regulatory

organization’’ means (1) the

constitution, articles of incorporation,

bylaws and rules, or instruments

corresponding to the foregoing, of an

SRO, and (2) such stated policies,

practices and interpretations of an SRO

(other than the MSRB) as the

Commission, by rule, may determine to

be necessary or appropriate in the

public interest or for the protection of

investors to be deemed to be rules. The

Commission has exercised this

rulemaking authority by adopting Rule

19b–4(b) under the Exchange Act,

which defines the term ‘‘stated policy,

practice, or interpretation.’’

Rule 19b–4(b) defines the term ‘‘stated

policy, practice, or interpretation to

mean generally ‘‘any material aspect of

the operation of the facilities of the selfregulatory organization 7 or any

statement made available to the

membership, participants, or specified

persons thereof that establishes or

changes any standard, limit, or

guideline with respect to rights and

obligations of specified persons or the

meaning, administration, or

enforcement of an existing rule.’’

(Emphasis added.)

To the extent that the software or

related services (or portions thereof)

offered by FSI to Nasdaq member firms

would be a ‘‘facility’’ of an SRO, Section

19(b) of the Exchange Act, and rule 19b–

4, would, absent an exemption, require

the NASD to file proposed rule changes

with the Commission in certain

instances where FSI seeks to modify the

Software or the fees it charges for

providing it. Technology applications

for broker-dealers and market makers

develop and change very rapidly, and

FSI needs to be able to move quickly to

modify existing products and develop

new software products. If FSI were

required to follow the procedures for

rule filings and approvals each time the

Software is modified or enhanced, the

delays and administrative difficulties

associated with the rule filing process

would put FSI at a significant

competitive disadvantage relative to

other software developers that are not

affiliated with an SRO. Moreover, the

NASD and Nasdaq would not be able to

provide NASD broker-dealers with the

type of timely and effective software

development that users desire and have

indicated they need. Thus, in this

competitive software market, the delays

and administrative difficulties

associated with the rule filing process

would, in the NASD’s view, put FSI at

such a competitive disadvantage so as to

render the acquisition of FSI or the

rights to the software impracticable.

As noted above, because of the

NASD’s complex infrastructure and the

dramatic acceleration of technological

changes that are impacting the securities

markets, the NASD believes that it must

have the capability to respond quickly

to the technological needs of its

members. The NASD believes that the

acquisition of FSI by Nasdaq will greatly

improve Nasdaq’s ability to provide

such rapid solutions to its members’

technological needs. If, however, the

NASD and Nasdaq cannot as a practical

matter compete in the software market,

the result would be the inhibition of the

development of more efficient and

effective market operations and

economically efficient execution of

securities transactions—each a stated

Congressional goal under Section 11A of

the Exchange Act, which directs the

Commission to facilitate the

development of a national market

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices 25403

8The NASD, of course, reserves the right to

provide capital to FSI adequate for it to compete

effectively in the market place and to develop and

market new products and services.

system. Furthermore, as more efficient

means are developed for NASD brokerdealers to manage and monitor their

quotations, order flow, executions and

positions, the cost savings derived from

these efficiencies can be passed on to

investors through reduced spreads and

transactions costs, as well as through

increased liquidity in the over-thecounter market. Absent full and

effective competition in the software

market, the incentive to develop new

and beneficial software for market

maker use is reduced, thereby reducing

the opportunity to pass along the

benefits to investors.

C. Discussion

The Commission has general

exemptive authority pursuant to Section

36 of the Exchange Act, and Rule 0–12

thereunder, in pertinent part, to exempt

any person from any Exchange Act

provision or rule, to the extent that such

exemption is necessary or appropriate,

in the public interest, and is consistent

with the protection of investors. In order

for the NASD and Nasdaq to compete

effectively in providing software and

service bureau functions to NASD

broker-dealers, the NASD respectfully

requests that the Commission exercise

its general exemptive authority and

exempt the NASD from the

requirements of Sections 19(b) to (1)

permit it to operate FIS and offer

software to market makers (and other

NASD member firms) without filing

proposed rule changes with respect to

making or implementing any

modifications to the Software, or with

respect to each new software product or

service offered by FSI to (provided those

new software products and services are

offered in a manner that is not

inconsistent with the representations

contained in this letter), and (2) permit

FSI determine prices for such software

products and services based on

competitive market factors without

filing proposed rule changes. In

particular, the NASD requests an

exemption form Section 19(b) of the

Exchange Act with respect to any rule

filings that would otherwise be required

under that Section and the rules and

regulations thereunder.

Given the rapid advances in

technology, the increasing reliance of

the financial industry on automation

and the degree of competition in the

supply of technological solutions, we

believe that in certain circumstances,

including those presented in this

request, a policy distinction can be

made between essential or core SRO

services and ancillary non-essential or

optional services such as those offered

by FSI to permit the latter category of

services to be offered by an SRO on a

fully competitive basis without

compliance with the notice and

comment process while at the same time

ensuring that those services are offered

in a way that is consistent with the goals

and requirements of the Exchange Act.

As noted above, OTC Tools offers a

variety of features to assist NASD

broker-dealers in efficiently managing

their quotes, monitoring and executing

incoming orders, continually checking

of closed, locked or crossed markets,

and monitoring the depth of the market.

These functions to be performed by OTC

Tools are not central to the core

functionality of Nasdaq’s marketplace.

Rather the functions involved are

supplemental to, and independent of,

the primary functions of Nasdaq.

Moreover, the NASD and Nasdaq

believe that the exemption requested is

consistent with the purposes of the

Exchange Act, particularly the

protection of investors, the maintenance

of fair and orderly markets, and the

fostering of competition. This segment

of the financial software market is

highly competitive. As discussed above,

there are a number of other firms that

offer competing products to OTC Tools.

The NASD and Nasdaq purpose that

Nasdaq will operate FSI as a stand-alone

business, capitalized separately and not

subsidized by NASD members or other

revenues of the NASD or Nasdaq.8

In addition, the NASD and Nasdaq

would take appropriate steps to ensure

that FSI would not have any

information advantage regarding

planned developments and changes to

Nasdaq that would not also be available

to other competing vendors. Finally, the

core functions of Nasdaq would not be

altered as a result of the acquisition, and

the NASD and Nasdaq will take all

reasonable steps necessary to ensure

that market makers and order-entry

firms will continue to have the ability

to trade effectively through Nasdaq’s

essential facilities without using the

Software.

D. Conditions

As described in Exchange Act Rule 0–

12, in connection with a request for

exemption from any provision of the

Exchange Act, the applicant is required

to state any conditions or limitations it

believes would be appropriate for the

protection of investors. As a general

matter, the NASD and Nasdaq believe

the request submitted herein is

appropriate because it deals with

nonessential services of the NASD and

provides the benefit of optional

technological innovation designed to

improve the productivity of NASD

member firms. The following limitations

on the exemptive relief requested are, in

the view of NASD and Nasdaq, not

objectionable to further this objective

and to ensure that the operation of FSI

is generally consistent with the

requirements of the Exchange Act

applicable to SROs.

Continued Presence of Competition—

As indicated above, at the time of this

application, there is a high level of

effective competition in providing

software to market makers. Automatic

Securities Clearance, through its BRASS

service, for example, provides ordermanagement services and software that

are in many respects similar to the

Software to a large number of NASD

member firms. Other firms, such as

Eagle Trading, ADP, TCAM and Royal

Blue, offer order handling packages that

compete with those offered by FSI.

Similarly, many NASD member firms

have developed internal order

management and order management and

order-routing software that provides

independent functions comparable to

those provided by the Software.

Moreover, the software industry in

general, and the financial software

industry in particular, have low barriers

to entry, so that, as the markets evolve

and technology is increasingly brought

to bear on securities trading, new

entrants can, in our view, emerge,

NASD and Nasdaq understand that the

Commission may reconsider at a later

date its decision to grant the exemptive

relief requested herein in the event that

effective competition for these software

products and services no longer exists.

Independent Functionally of Nasdaq

and Other NASD-Sponsored Services—

NASD and Nasdaq believe that

providing the Software to NASD

member firms does not, and will not,

affect the basic functionality of the

Nasdaq system. In acquiring FSI and

providing the software to NASD

member firms, the core functions of

Nasdaq (currently provided through the

Nasdaq Workstation II terminal system)

will not be changed. Nasdaq and other

NASD-sponsored systems (such as the

Automated Confirmation Transaction

Service) operate and will continue to

operate independently of the Software.

Use of the Software is not, and will not

in the future, be necessary to access

Nasdaq or any other NASD marketrelated facility, and NASD members that

do not use the Software will be able to

enter and change quotes, route orders,

effect transactions and perform all

market functions in Nasdaq. The NASD

25404 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices

9API provides an electronic interface between a

subscriber’s computer system and the Nasdaq

Workstation II system, Through the use of the API,

a subscriber may build its own workstation

presentation software to integrate the Nasdaq

Workstation II service into the subscriber’s existing

presentation facilities. The API allows a subscriber

to emulate the Nasdaq Workstation II presentation

software with equivalent functionality, capacity

utilization and through-put capability, in addition

to providing enhanced capability to develop

customized internal presentations for use in

support of a subscriber’s activities. API also allows

a subscriber to operate a quote-update facility to

assist solely in complying with the Commission’s

Order Handling Rules. Generally, a subscriber

establishes an API ‘‘linkage,’’ such as Nasdaq

Workstation II substitute or quote update facility,

which in turn connects to a service delivery

platform via an API server.

10The Commission’s approval of the NASD’s

request for a temporary conditional exemption

should not be interpreted as suggesting that the

Commission is predisposed to approving the

NASD’s application for a permanent exemption

subject to the same conditions.

and Nasdaq believe that requiring full

Nasdaq core functionality without use

of the Software is an appropriate

condition to the grant of the exemptive

relief requested.

Full Public Access to Nasdaq through

the Application Programming Interface

(‘‘API’’) 9 will Continue—As the

Commission is aware, the Nasdaq

system is an open architecture system

and Nasdaq has provided an API that

enables firms to have access to the

Nasdaq system through their own

software or computer system. The

NASD and Nasdaq are fully committed

to maintaining the API to provide for

fair and equitable access to the system

and to encourage the development of

software by NASD member firms and

competing software vendors. Thus, we

believe that conditioning the exemptive

relief on continued free and open access

to Nasdaq through the API is

appropriate in light of the commitment

of the NASD and Nasdaq to maximum

competition in offering services to

NASD members.

Fair Access to Information on Nasdaq

Developments—As a fourth condition

consistent with the statutory objective

and our stated objective of maintaining

a competitive software market, the

NASD and Nasdaq, as noted above,

agree not to provide FSI an information

advantage concerning Nasdaq core

facilities, particularly changes and

improvements to the system, that is not

available to the industry generally or to

vendors of financial software for market

makers and order entry firms, and will

prevent FSI from having any advance

knowledge of proposed changes or

modifications to core Nasdaq facilities.

This is appropriate to avoid giving FSI

any informational advantage in the

development and enhancement of

software products for the Nasdaq

market.

In this regard, FSI will not share

employees with the NASD, Nasdaq or

any other NASD affiliate, and will be

housed in office space from that of the

NASD or Nasdaq. In addition, FSI will

be notified of any change or

improvements to the Nasdaq system in

the same manner that other competing

vendors are notified of such changes or

improvements. For example, in addition

to mailings and Web site disclosure of

changes to Nasdaq or to Nasdaq

technical specifications, Nasdaq

currently meets at least quarterly with

all vendors to discuss proposed

modifications to the System and

changes that are in the pipeline (subject

to Commission approval, where

needed). FSI will be treated, for

purposes of these mailings, disclosures

and meetings, the same as any third

party vendor and will not receive any

information regarding planned or actual

changes to Nasdaq in advance of other

vendors. Conversely, FSI will not

disclose any system or design

specifications, or any other information

to any employees with the NASD,

Nasdaq or any other NASD affiliate that

would give FSI and unfair advantage

over its competitors.

E. Conclusion

For the reason set forth above, the

NASD hereby requests that the

Commission grant an exemption from

Sections 19(b), and the rules and

regulations thereunder, to (1) permit the

Nasdaq to operate FSI and offer software

to market makers (and other NASD

member firms) without filing proposed

rule changes with respect to making or

implementing any modifications to the

Software, or with respect to each new

software product or service offered by

FSI (provided those new software

products services are offered in a

manner that is not inconsistent with the

representations contained in this letter),

and (2) permit FSI to determine prices

for such software products and services

based on competitive market factors

without filing proposed rule changes. If

the Commission believes that notice of

this request and an opportunity for

public comment is necessary, the NASD

requests that the Commission grant the

relief requested, on a temporary basis,

for a period of one year, and that

thereafter, following the conclusion of

any such notice and comment period,

the Commission grant the requested

relief on a permanent basis.

II. Solicitation of Comments

Section 36(b) of the Exchange Act

provides that the Commission shall, by

rule or regulation, determine the

procedures under which an exemptive

order shall be granted. Exchange Act

Rule 0–12(g) provides that the

Commission, in its sole discretion, may

choose to publish in the Federal

Register a notice of an application for an

exemption under Section 36 and to

allow any person to submit information

that relates to the action requested in

the application. The Commission has

determined that, prior to taking final

action on the NASD’s application for a

permanent exemption, it would be

helpful to offer the public an

opportunity to submit information

concerning the permanent exemption

and the conditions on which the

exemption is based. Accordingly,

interested persons are invited to submit

written data, views, and arguments

concerning the NASD’s application for

an exemption. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street NW., Washington DC 20549–

0609. All submissions should refer to

Form Type 34–36 MR; File No. 79–9

and should be submitted by July 31,

2000. Comment letters received will be

available for public inspection and

copying in the Commission’s Public

Reference Room.

III. Order Granting Temporary

Conditional Exemption

The Commission has determined to

grant the NASD’s request for a

temporary conditional exemption for a

period of one year from the date of this

release. The Commission finds that the

temporary conditional exemption from

the provisions of Section 19(b) is

necessary or appropriate in the public

interest and is consistent with the

protection of investors. In particular, the

exemption could help promote

efficiency and competition in the

market to provide enhanced software

services to broker-dealers who interact

with the NASD’s facilities, while

upholding the regulatory objectives of

the Exchange Act. After the end of the

public comment period set forth in

section II above and prior to expiration

of the temporary exemption, the

Commission will make a final

determination concerning the NASD’s

application for a permanent

exemption.10

As discussed further below, the

NASD, as a registered self-regulatory

organization, operates a number of

facilities used by broker-dealers that

effect transactions in securities in the

over-the-counter market, particularly

securities that are qualified for inclusion

in Nasdaq. These facilities, which

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices 25405

11The companies that currently offer the

enhanced software products for broker-dealers are

not owned by an SRO. When considered alone,

their activities do not fall within the definition of

a facility of an SRO, and they therefore are not

subject to the proposed rule change requirements of

Section 19(b).

12The Commission recently approved a proposed

rule change by the NASD to establish a revised

order delivery and execution system—the Nasdaq

National Market Execution System. Securities

Exchange Act Release No. 42344 (Jan. 18, 2000), 65

FR 3987. After implementation of the system,

SelectNet will be re-established as a non-liability

system for purposes for order delivery and

negotiation only.

include the automated quotations

network that is the heart of Nasdaq,

order delivery and execution systems,

and a transaction reporting system, are

made available to broker-dealer

subscribers primarily through the

Nasdaq Workstation II (‘‘NWII’’) service.

The NASD has adopted an open

architecture system that provides an API

between the NWII system and a

subscriber’s computer system. The API

allows broker-dealers to employ

specialized software that supplements

the NWII service and enhances their

interaction with the NASD’s facilities,

thereby facilitating their trading and

other proprietary activities. Currently, a

number of companies independent of

the NASD offer this type of software

product for sale to broker-dealers.

Nasdaq has acquired one of these

companies—FSI.

Certain of the functions offered

through FSI’s products, when

considered together with the other

services offered by the NASD and its

affiliates,11 could cause such products

to be considered part of the NASD’s

facilities. Consequently, changes to the

products or the fees charged for the

products could trigger the proposed rule

change requirements of Section 19(b),

which includes filings with the

Commission, public notice and

comment on those filings, and

Commission review and approval of the

proposed rule change. These

requirements could significantly

hamper the ability of FSI to compete

effectively in a rapidly changing

technology market to provide

specialized software to broker-dealers.

The requested temporary conditional

exemption would allow FSI to modify

its products, offer new products, and set

fees for its products without going

through the proposed rule change

procedures of Section 19(b).

In granting the Commission broad

exemptive authority in Section 36,

Congress intended to incorporate

flexibility into the Exchange Act

regulatory scheme to reflect a rapidly

changing marketplace. Congress

particularly intended for the

Commission to use this flexibility to

promote efficiency and competition.

The Commission believes that the

NASD’s requested temporary

conditional exemption will help achieve

these goals, while upholding the

regulatory objectives of the Exchange

Act. In particular, the exemption could

facilitate vigorous competition in the

market to provide enhanced software

services to broker-dealers by allowing

FSI to compete on a more equal footing

with companies that are not subject to

the regulatory requirements applicable

to an SRO. The exemption is subject to

four principal conditions to help assure

that FSI will not obtain an unfair

competitive advantage because of its

ownership by Nasdaq.

The Commission believes that

granting a temporary conditional

exemption is warranted because (1) the

products of FSI will not be required for

broker-dealers to access the NASD’s

fundamentally important or core

services, including quotation collection

and dissemination, order routing and

execution, and transaction reporting,

and (2) the opportunity for fair

competition will be preserved in the

market to provide enhanced software

services to broker-dealers who use the

NASD’s facilities. Under these

circumstances, the Commission believes

that competitive forces, rather than the

regulatory protections provided by the

proposed rule change process, can be

relied on to uphold the objectives of the

Exchange Act in an efficient manner

during the one-year period of the

temporary exemption. Fair and vigorous

competition, by creating incentives for

companies to provide superior software

products at fair prices, can serve the

interests of broker-dealers, and

ultimately those of their investor

customers.

A. The NASD’s Facilities and Its Open

Architecture System

The NASD currently operates a

number of facilities for broker-dealers

that effect transactions in securities

traded in the OTC markets. These

facilities include (1) an automated

quotations system, (2) the SelectNet

order delivery system,12 (3) the Small

Order Execution System (‘‘SOES’’), and

(4) the Automated Confirmation

Transaction Service (‘‘ACT’’).

At its heart, Nasdaq is a

telecommunications network for the

centralized collection and

dissemination of quotations from market

makers and electronic communications

networks (‘‘ECNs’’). This service allows

broker-dealers to enter, retrieve,

monitor, and adjust quotations

throughout the trading day. The NASD’s

SelectNet facility offers broker-dealers

the ability to automate the negotiation

and execution of trades and eliminates

the need for verbal contact between

trading desks. It allows Nasdaq

subscribers to direct orders for the

purchase and sale of Nasdaq stocks to

specified market makers or ECNs, or to

broadcast orders for Nasdaq stocks to all

market makers and ECNs. SelectNet also

identifies incoming and outgoing orders

and allows traders to see subsequent

messages and negotiation results. The

NASD’s SOES facility automatically

executes small agency orders routed to

market makers, reports completed trades

for public dissemination, and sends

information with respect to those trades

to clearing corporations for comparison

and settlement. Finally, the NASD’s

ACT facility is an automated service

that speeds the post-execution steps of

price and volume reporting and the

comparison and clearing of securities

transactions.

Access to the NASD’s facilities is

made available primarily through the

NASD’s NWII service. In addition, the

NASD has adopted an open architecture

system that provides full public access

to its facilities through API. The API

provides an electronic interface between

a subscriber’s computer system and the

NWII system. Through the use of the

API, a subscriber may employ its own

workstation presentation software to

integrate the NWII services into its

presentation capabilities. The API

thereby allows a subscriber to develop

customized internal presentations for

use in support of the subscriber’s

activities. In sum, fundamentally

important or core NASD services are

provided through the NWII system,

while subscribers also are able to

develop or purchase customized

software that enhances the NWII

services and responds to their

individual needs.

Many broker-dealers have taken

advantage of the API and employ

software to enhance the NASD services

provided through the NWII system.

Some broker-dealers have developed

such software internally. In addition, a

number of companies independent of

the NASD have developed this type of

software and offered it for sale to brokerdealers. For example, the promotional

materials of one company states that its

product ‘‘provides fully integrated and

enhanced Nasdaq Workstation II

features,‘‘ including automated

management of quotations, automated

ACT reporting, and automated SelectNet

order entry and order acceptance. Other

competing companies make similar

25406 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices

13For example, the current version of OTC Tools

enables a user (1) to maintain a pre-configured

maximum market spread in specific securities when

making adjustments in a quotation at one side of the

market; (2) to capture and execute incoming

SelectNet orders in several different fashions by

combining multiple keystroke or mouse functions;

(3) to send, with a single point-and-click feature,

multiple SelectNet preferenced orders to preset

market makers or ECNs; and (4) to monitor

SelectNet broadcast orders for electronic execution

based on the user’s pre-configured order selection

file.

14 17 CFR 240.19b–b

15The Commission has found that Nasdaq falls

within the definition of ‘‘exchange’’ under Section

3(a)(1) of the Act. Securities Exchange Act Release

No. 40760 (Dec. 8, 1998), 63 FR 70844 (‘‘ATS

Release’’), at nn. 58–61 and accompanying text.

16H.R. Rep. No. 104–622, 104th Cong., 2nd Sess.

38 (1996).

17S. Rep. No. 104–293, 104th Cong., 2nd Sess. 15

(1996).

18S. Rep. No. 94–75, 94th Cong., 1st Sess. 8

(1975).

19ATS Release, note 15 above, section I.

assertions concerning the ability of their

products to enhances the interaction of

broker-dealers with the NASD’s

facilities, as well as to facilitate a wide

array of other broker-dealer proprietary

activities.

The Nasdaq has acquired one of these

companies—FSI. FSI is a software

development company that offers a

product called OTC Tools. OTC Tools

includes a variety of features to assist

NASD members in conducting their

proprietary activities, including

efficiently managing their quotes,

monitoring and executing incoming

orders, continually checking for closed,

locked, or crossed markets, and

monitoring the depth of the market.13

To enable FSI to modify its products,

offer new products, and set fees for its

products as freely and quickly as its

competitors that are not owned by an

SRO, the NASD has requested a

temporary conditional exemption from

the proposed rule change provisions of

Section 19(b).

B. Proposed Rule Change Provisions of

Section 19(b)

Section 10(b) requires that every SRO

file with the Commission copies of any

proposed rule or any proposed change

in, addition to, or deletion from the

rules of such SRO, accompanied by a

concise general statement of the basis

and purpose of such proposed rule

change. The Commission is required to

publish notice of the filing of a

proposed rule change and to give

interested persons an opportunity to

submit written data, views, and

arguments. Section 19(b) provides that

the Commission shall approve an SRO’s

proposed rule change if it is consistent

with the requirements of the Act and the

rules and regulations thereunder

applicable to the SRO.

The term ‘‘rules of a self-regulatory

organization’’ is defined in Section

3(a)(28) of the Exchange Act to include

the rules of an association of brokerdealers that is a registered securities

association, and the term ‘‘rules of an

association’’ is defined in Section

3(a)(27) to include such of the stated

policies, practices, and interpretations

of the association as the Commission

determines by rule to be necessary or

appropriate in the public interest or for

the protection of investors. In Exchange

Act Rule 19b–4,14 the Commission has

defined ‘‘stated policy, practice, or

interpretation’’ to include any material

aspect of the operation of the facilities

of a self-regulatory organization. The

term ‘‘facility’’ when used with respect

to an exchange15 is defined very broadly

in Section 3(a)(2) to include, among

other things, any tangible or intangible

property of the exchange and any right

to the use of such property or any

service thereof for the purpose of

effecting or reporting a transaction on an

exchange (including any system of

communication to or from the

exchange).

Certain aspects of the software

products that enhance a broker-dealer’s

interaction with the NASD’s facilities

could, when considered together with

the other services offered by the NASD

and its affiliates, fall within the

Exchange Act definition of a facility and

therefore require the filing of a proposed

rule change for material changes in the

software and the fees charged for the

software. The NASD has requested a

temporary conditional exemption from

this requirement under Section 36 of the

Exchange Act.

C. Commission’s Exemptive Authority

Under Section 36

Section 36(a)(1) of the Exchange Act

grants the Commission broad authority

to exempt any person from any

provision of the Act to the extent that

such exemption is necessary or

appropriate in the public interest and is

consistent with the protection of

investors. In enacting Section 36,

Congress indicated that it expected that

‘‘the Commission will use this authority

to promote efficiency, competition and

capital formation.’’ 16 It particularly

intended to give the Commission

sufficient flexibility to respond to

changing market and competitive

conditions.

The Committee recognizes that the rapidly

changing marketplace dictates that effective

regulation requires a certain amount of

flexibility. Accordingly, the bill grants the

SEC general exemptive authority under both

the Securities Act and the Securities

Exchange Act. This exemptive authority will

allow the Commission the flexibility to

explore and adopt new approaches to

registration and disclosure. It will also enable

the Commission to address issues relating to

the securities markets more generally. For

example, the SEC could deal with the

regulatory concerns raised by the recent

proliferation of electronic trading systems,

which do not fit neatly into the existing

regulatory framework.17

At the same time that it added Section

36 to the Exchange Act, Congress

enacted Section 3(f), which charges the

Commission, when it is engaged in

rulemaking itself or reviewing an SRO

rule and is required to consider whether

an action is necessary or appropriate in

the public interest, also to consider

whether the action will promote

efficiency, competition, and capital

formation.

Section 36 and Section 3(f) reaffirm a

fundamental and long-established

principle of the Exchange Act—investor

interests are best served by a regulatory

structure that facilitates fair and

vigorous competition among market

participants. Congress emphasized this

principle, for example, when it

amended the Exchange Act in 1975:

In 1936, this Committee pointed out that a

major responsibility of the SEC in the

administration of the securities laws is to

‘create a fair field of competition.’ This

responsibility continues today. * * * The

objective would be to enhance competition

and to allow economic forces, interacting

within a fair regulatory field, to arrive at

appropriate variations in practices and

services. It would obviously be contrary to

this purpose to compel elimination of

differences between types of markets or types

of firms that might be competitionenhancing. 18

In recent years, the Commission has

exercised its Section 36 exemptive

authority by seeking to enhance

competition as a means to meet the

objectives of the Exchange Act. For

example, it exempted alternative trading

systems from many of the requirements

that otherwise would apply to an

‘‘exchange,’’ including registration and

the filing of proposed rule changes,

when such requirements were not

necessary or appropriate to further the

Exchange Act’s objectives. In adopting

this exemption, the Commission stated

that it ‘‘believes that its regulation of

markets should both accommodate

traditional market structures and

provide sufficient flexibility to ensure

that new markets promote fairness,

efficiency, and transparency.’’ 19

In addition, the Commission has used

its exemptive authority to revise the

proposed rule change requirements of

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices 25407

20Securities Exchange Act Release No. 40761

(Dec. 8, 1998), 63 FR 70952.

21ATS Release, note 15 above, section VI.A.

22The Commission reserves the right to modify,

by order, the terms and scope of the exemption

from the proposed rule change requirements if it

determines such modification is appropriate for the

protection of investors or in the public interest.

23This approach is consistent with the

Commission’s decision in an administrative

proceeding that included a denial of access claim

under Section 19(d) of the Exchange Act. In the

Matter of the Application of Morgan Stanley & Co.,

Admin. Proc. File No. 3–9289 (Dec. 17, 1997) (‘‘In

those cases in which we have found a denial of

access, an SRO had denied or limited the

applicant’s ability to utilize one of the

fundamentally important services offered by the

SRO. The services at issue were not merely

important to the applicant but were central to the

function of the SRO.’’).

Section 19(b) to meet the changing

needs of the SROs in a competitive

international marketplace. For example,

the Commission amended Rule 19b–4 in

1998 to streamline the requirements for

introduction of new derivative

securities products.20 At the same time,

the Commission adopted rule 19b–5 to

help reduce impediments to competitive

innovation by SROs by exempting them

from the requirement to file proposed

rule changes for pilot trading systems

for a two-year period. In adopting this

exemption, the Commission noted that

‘‘excessive regulation of traditional

exchanges, alternating trading systems,

or other markets hinders these

exchanges’ ability to compete and

survive in the global arena’’ and found

that the exemption from Section 19(b)

for pilot trading programs ‘‘responds to

the SROs’ need for a more balanced

competitive playing field.’’ 21

D. Temporary Conditional Exemptions

for FSI

The NASD has requested a temporary

conditional exemption that would allow

FSI to modify its products, offer new

products, and set fees for its products

without filing proposed rule changes

under Section 19(b). The exemption

would be subject to four principal

conditions: (1) the continued presence

or effective competition in the market to

provide software products that enhance

a broker-dealer’s interaction with the

NASD’s facilities; (2) the independent

functionality of the NASD’s facilities;

(3) continued full public access to the

NASD’s facilities through the API; and

(4) fair access to information concerning

the NASD’s facilities and systems.

The Commission believes that the

requested temporary conditional

exemption could help promote

efficiency and competition, while

upholding the regulatory objectives of

the Exchange Act. Nasdaq’s ownership

of a software company whose products

facilitate a broker-dealer’s interaction

with the NASD’s facilities could

promote efficiency and competition in

at least two ways. First, Nasdaq’s

detailed knowledge of the needs of

NASD members could lead FSI to

develop products with features that

more closely respond to those needs and

that increase the efficiency of brokerdealer operations. Second, Nasdaq

ownership could help assure that

software is developed and made

available that will meet the needs of the

wide variety of broker-dealers that are

NASD members, both large and small.

Thus, the existence of a Nasdaq-owned

company offering enhanced software

products could act as a spur to

competition and thereby help generate

better software products for brokerdealers.

Given the pace of change in software

technology and market conditions, the

Commission believes at this point that

the procedural requirements of Section

19(b) could significantly hamper the

ability of FSI to compete effectively

with companies that are not subject to

the same regulatory requirements. A

software company needs to act rapidly

and nimbly in developing and pricing

its products. If FSI were required to

comply with the proposed rule change

requirements, it necessarily would be

subject to greater expense, delay, and

uncertainty in offering products and

setting prices than its competitors.

Although the requirements of Section

19(b) serve vital regulatory functions,

particularly with respect to the

fundamentally important or core

services of an SRO, the Commission

does not believe at this point that they

are necessary to further the public

interest in the context of the limited

services to be provided by FSI.

In reviewing a proposed rule change

under Section 19(b) the Commission

focuses on the particular section of the

Exchange Act that sets forth substantive

requirements for the SRO’s rules. For a

national securities association such as

the NASD, Section 15A of the Exchange

Act requires, among other things, that

its rules (1) provide for the equitable

allocation of reasonable dues, fees, and

other charges among members using any

facility or system which the association

operates or controls (subparagraph

(b)(5)); (2) be designed to promote just

and equitable principles of trade, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest, and not be designed to

permit unfair discrimination between

customers, issuers, or broker-dealers

(subparagraph (b)(7)); and (3) not

impose any burden on competition not

necessary or appropriate in furtherance

of the purposes of the Exchange Act

(subparagraph (b)(9)).

The four principal conditions of the

requested temporary exemption will

help assure that these regulatory

objectives are upheld during the oneyear period of the exemption without

requiring Commission review and

approval of FSI’s products and fees.22

First, the products of FSI will not be

necessary for broker-dealers to access

the NASD’s fundamentally important or

core services, including quotation

collection and dissemination, order

routing and execution, and trade

reporting.23 The NASD and Nasdaq

have agreed to maintain an independent

functionality for the NASD’s marketrelated facilities—that is, FSI’s products

nor enhance software products of any

kind will be necessary for a brokerdealer to obtain access to the NASD’s

fundamentally important or core

services. The basic software products

necessary to obtain such access

(currently provided through the NWII

service) will be provided separately

from FSI.

In addition, for broker-dealers who

wish to employ software products that

enhance their interaction with the

NASD’s facilities, the exemption is

conditioned on the continued existence

of effective competition in the market to

provide such type of products. This

condition will assure that broker-dealers

have a variety of viable software

products from which to choose. To

maintain an opportunity for fair

competition, the NASD and Nasdaq

have agreed to continue to provide open

architecture systems that enable full

public access to the NASD’s facilities

through the API. The NASD and Nasdaq

also have agreed not to provide an

unfair information advantage to FSI. FSI

will not be given information that is not

available to the industry generally or to

other companies competing to provide

enhanced software products to brokerdealers. In particular, the NASD and

Nasdaq will prevent FSI from having

any advance private knowledge of

proposed changes or modifications to

the NASD’s facilities. To help meet this

condition, FSI will not share employees

with the NASD or any NASD affiliate

and will be housed in office space

separate from that of the NASD and

Nasdaq.

Given these conditions, the

Commission does not believe that the

regulatory protections offered by

Commission review and approval of

25408 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Notices

24 15 U.S.C. 78mm(a)(1).

1 Investment Company Act Release Nos. 22324

(Nov. 6, 1996) (notice) and 22370 (Dec. 4, 1996)

(order).

proposed rule changes are necessary or

appropriate to further the Exchange

Act’s regulatory objectives during the

one-year period of the temporary

exemption. Access to the NASD’s

fundamentally important and core

services will be independently

maintained by the NASD and fully

subject to the Exchange Act’s regulatory

scheme, including the proposed rule

change requirements of Section 19(b).

Fair competition will be maintained in

the market to provide enhanced

software products to broker-dealers.

Under these circumstances, the

Commission believes at this point that

competitive forces can be relied upon to

produce software products at fair prices

that meet the needs of broker-dealers. In

sum, the Commission believes that FSI

will neither be unnecessarily hampered

in its competition to provide software

services to broker-dealers nor given an

unfair competitive advantage because of

its ownership by Nasdaq.

For the reasons discussed above, the

Commission finds that the temporary

conditional exemption requested by the

NASD is necessary or appropriate in the

public interest and is consistent with

the protection of investors.

It Is Therefore Ordered, pursuant to

Section 36(a)(1) of the Act,24 that the

NASD’s application for a temporary

conditional exemption (Form Type 34–

36 MR; File No. 79–9) is granted for a

period of one year until April 24, 2001.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10725 Filed 4–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. IC–24402, 812–11650]

The Pacific Corporate Group Private

Equity Fund, et al., Notice of

Application

April 24, 2000.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of application for an

order under section 17(d) of the

Investment Company Act of 1940

(‘‘Act’’) and rule 17d–1 under the Act to

permit certain joint transactions.

SUMMARY OF APPLICATION: The Pacific

Corporate Group Private Equity Fund,

formerly known as The Alternative

Investment Fund (the ‘‘Fund’’), and

Pacific Corporate Group, Inc., formerly

known as Pacific Corporate Advisors,

Inc. (the ‘‘Adviser’’), seek to amend a

prior order (‘‘Prior Order’’) that permits

the Fund to co-invest with other

investment vehicles managed by the

Adviser or its affiliates and/or, under

certain circumstances, with the Adviser

or its affiliates. The amended order

(‘‘Amended Order’’) would revise

certain conditions of the Prior Order.

Applicants: The Fund and the Adviser.

FILING DATES: The application was filed

on June 9, 1999, and amended on

February 7, 2000. Applicants agree to

file an amendment during the notice

period, the substance of which is

reflected in this notice.

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

May 19, 2000, 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 who wish to be notified of a

hearing may request notification by

writing to the SEC’s Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, NW., Washington, DC 20549–

0609. Applicants, c/o Brown & Wood

LLP, One World Trade Center, New

York, New York 10048.

FOR FURTHER INFORMATION CONTACT:

Paula L. Kashtan, Senior Counsel, at

(202) 942–0615, or Mary Kay Frech,

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, 450 Fifth

Street, NW., Washington, DC 20549–

0102 (telephone (202) 942–8090).

Applicants’ Representations

1. The Fund is a closed-end

management investment company

registered under the Act. The Adviser

serves as investment adviser to the Fund

and is registered under the Investment

Advisers Act of 1940. The Fund invests

in private equity investments either

directly or indirectly through

underlying partnerships managed by an

adviser not affiliated with the Adviser.

2. On December 4, 1996, the SEC

issued the Prior Order to applicants

under section 6(c) of the Act exempting

applicants from section 12(d)(1)(A) of

the Act and pursuant to section 17(d) of

the Act and rule 17d–1 under the Act.1

The Prior Order permits the Fund and

Subsequent Funds, as defined in the

Prior Order (together with the Fund, the

‘‘Funds’’), to: (i) invest in unaffiliated

private investment companies exempt

from the definition of an investment

company by section 3(c)(1) of the Act;

and (ii) co-invest with Private Funds, as

defined in the Prior Order, managed by

the Adviser or its affiliates and/or,

under certain circumstances, with the

Adviser or its affiliates (‘‘CoInvestments’’).

3. Applicants state that, as a result of

amendments to section 3(c)(1) of the Act

that became effective in 1997, relief

from the provisions of section

12(d)(1)(A) of the Act granted in the

Prior Order is no longer required.

Accordingly, applicants request that

conditions 2 through 7 of the Prior

Order be deleted. Applicants represent

and understand that, except as

requested in the application, the

representation set forth in and the terms

and provisions of the Prior Order

remain unchanged.

Applicants’ Conditions

Applicants agree that the Amended

Order granting the requested relief shall

be subject to the following conditions:

1. A majority of the trustees of each

Fund (‘‘Trustees’’) will not be

‘‘interested persons,’’ as defined in

section 2(a)(19) of the Act, of the Fund

(‘‘Non-Interested Trustees’’).

2. No Co-Investments (except for

follow-on investments made pursuant to

condition 9 below) will be made

pursuant to the requested order with

respect to portfolio companies in which

the Adviser, any Fund or Private Fund,

or any of their affiliates has previously

acquired an interest.

3. The Trustees of each Fund

participating in a Co-Investment,

including a majority of the NonInterested Trustees, will approve CoInvestments in advance. To facilitate the

Trustees’ determinations, the Adviser

will provide the Trustees of a Fund with

periodic information listing all

investments made by the other Funds,

the Private Funds, and/or the Adviser or

its affiliate, as applicable, that would be

suitable for investment by a Fund.

4. (a) Before making a Co-Investment,

the Adviser will make a preliminary