[Federal Register Volume 65, Number 218 (Thursday, November 9, 2000)]
[Notices]
[Pages 67419-67421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28793]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IA-1905/803-150]


ML Oklahoma Venture Partners, Limited Partnership, et al.; Notice 
of Application

November 3, 2000.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Advisers Act of 1940 (``Advisers Act'').

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Applicants: ML Oklahoma Venture Partners, Limited Partnership (``ML 
Oklahoma'' or ``Partnership'') and MLOK Co., Limited Partnership 
(``Managing General Partner'').

Relevant Advisers Act Sections: Exemption requested under section 206A 
of the Advisers Act from section 205(a)(1) of the Advisers Act.

Summary of Application: Applicants request an order permitting the 
Partnership to make in-kind distributions of its portfolio securities 
and, in connection with these distributions, deem gains or losses on 
the distributed securities to be realized, for purposes of the Managing 
General Partner's performance compensation, upon distribution to ML 
Oklahoma's limited partners.

Filing Dates: The application was filed on May 11, 2000 and amended on 
October 27, 2000.

[[Page 67420]]


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 copies of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on November 28, 
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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th 
Street, NW., Washington, DC 20549. ML Oklahoma Venture Partners, 
Limited Partnership and MLOK Co., Limited Partnership, Two World 
Financial Center, 23rd Floor, New York, NY 10281-6123.

FOR FURTHER INFORMATION CONTACT: Karen Goldstein, Senior Counsel, or 
Jennifer Sawin, Assistant Director, at (202) 942-0716 (Division of 
Investment Management, Office of Investment Adviser Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. ML Oklahoma is a limited partnership organized under the laws of 
Delaware and is a business development company as defined in section 
202(a)(22) of the Advisers Act (``BDC''). ML Oklahoma's investment 
objective is to seek long-term capital appreciation by making venture 
capital investments in new and developing companies, primarily Oklahoma 
companies, which the Partnership's management believes offer 
significant long-term growth opportunities.
    2. ML Oklahoma's registration statement under the Securities Act of 
1933 on Form N-2 became effective on December 1, 1988. ML Oklahoma 
closed its public offering on August 14, 1989, at which time it sold 
10,248 units of limited partnership interest (``Units'') for total 
proceeds of $10.2 million. The Partnership is scheduled to terminate on 
December 31, 2000.
    3. ML Oklahoma has five general partners, consisting of four 
individuals (``Individual General Partners'') and the Managing General 
Partner. The Individual General Partners include three ML Oklahoma 
independent General Partners (defined in the application as individuals 
who are not ``interested persons'' of ML Oklahoma within the meaning of 
section 2(a)(19) of the Investment Company Act of 1940) and one general 
partner that is an affiliated person of the Managing General Partner. 
The Managing General Partner is a limited partnership controlled by its 
general partner, Merrill Lynch Venture Capital Inc. (``Management 
Company''). The Management Company performs, or arranges for the 
performance of, management and administrative services necessary for 
the operation of ML Oklahoma. The Management Company is an indirect 
subsidiary of Merrill Lynch & Co., Inc.
    4. The Managing General Partner is the managing general partner of 
ML Oklahoma and is solely responsible for ML Oklahoma's venture capital 
investments. The Managing General Partner and the Management Company 
are each registered with the Commission under the Advisers Act.
    5. Allocation of profits and losses of ML Oklahoma to its Partners 
are made in accordance with the terms of the Amended and Restated 
Agreement of Limited Partnership of the Partnership (``Partnership 
Agreement''). The Partnership Agreement generally provides that each 
year, with respect to venture capital investments, if the sum of all 
profits allocated to the Limited Partners equals the sum of all losses 
allocated the Limited Partners, and the Limited Partners have been 
allocated a ``priority return,'' \1\ the Managing General Partner is 
allocated 30% of profits. When the Managing General Partner has been 
allocated 20% of all profits, it is then (and thereafter) allocated 20% 
of profits (``Managing General Partner's Allocation''). The Partnership 
Agreement provides that ML Oklahoma's investment income and net 
realized capital gains or losses, in excess of the Managing General 
Partner's Allocation, shall be allocated among all the Partners 
(including the Managing General Partner) in proportion to their capital 
contributions. The Partnership Agreement also provides that all other 
profits and losses, including interest or other income on funds not 
invested in venture capital investments, will be allocated among all 
the Partners (including the Managing General Partner) in proportion to 
their capital contributions.
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    \1\ Under the Partnership Agreement, the ``Priority Return'' is 
an amount equal to a cumulative, non-compounded return of 10% per 
annum on the average daily amount of the gross capital contributions 
invested in liquidated investments from the date of the last closing 
of the sale of Units through the date each venture capital 
investment is liquidated. The Priority Return is calculated on a 
cumulative basis over the life of the Partnership through the 
relevant year.
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    6. The Partnership Agreement provides that the Individual General 
Partners may make in-kind distributions of any or all of ML Oklahoma's 
portfolio securities ``in such amounts and at such times as they may 
determine.'' The Partnership Agreement provides that, for the purpose 
of allocating profits and losses, unrealized gains or losses 
attributable to any securities distributed in-kind to Partners will be 
deemed realized upon distribution. Any in-kind distribution made by the 
Partnership will be valued based on its market price on the national 
securities exchange or the NASDAQ National Market System (``NASDAQ 
NMS'') at the close of trading on the date the securities are first 
distributed by the Partnership. Prior to making any in-kind 
distribution, at least a majority of the Independent General Partners 
will have approved the proposed in-kind distribution as being in the 
best interests of the Limited Partners. The Limited Partners will be 
notified prior to any in-kind distribution made by the Partnership.
    7. Although the Partnership Agreement expressly contemplates in-
kind distributions both during the life of ML Oklahoma and upon its 
termination, and permits the Managing General Partner to receive 
compensation based upon gains attributable to securities distributed in 
kind, ML Oklahoma has made no such distributions. In a prior 
application filed by the Managing General Partner, the Management 
Company and ML Oklahoma for certain exemptions under the Investment 
Company Act of 1940, those applicants undertook that ML Oklahoma would 
not make in-kind distributions until it obtained a no-action letter 
from the Commission staff confirming that unrealized gains or losses 
attributable to in-kind distributions are properly deemed realized upon 
such distribution, or obtained an exemption pursuant to section 206A of 
the Advisers Act permitting ML Oklahoma to deem such gains or losses to 
be realized upon in-kind distributions of securities. \2\
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    \2\ See ML Oklahoma Venture Partners, L.P., et al., Investment 
Company Act Release Nos. 16613 (Oct. 26, 1988) [53 FR 44272 (Nov. 2, 
1988)] (Notice of Application) and 16652 (Nov. 23, 1988), 42 SEC 
Docket 463 (Order).
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Applicant's Legal Analysis

    1. Section 205(a)(1) of the Advisers Act prohibits any investment 
adviser register under the Advisers Act from entering into a contract 
which provides

[[Page 67421]]

for compensation based upon ``a share of capital gains upon or capital 
appreciation of the funds or any portion of the funds of the client,'' 
commonly referred to as a ``performance fee.''
    2. Section 205(b)(3) provides, in pertinent part, that the 
performance fee proscriptions of section 205(a)(1) are not applicable 
to advisory contracts between an investment adviser and a BDC if, among 
other things, ``the compensation provided for in such contract does not 
exceed 20 per centum of the realized capital gains upon the funds of 
[the BDC] over a specified period or as of definite dates, computed net 
of all realized capital losses and unrealized capital depreciation.'' 
Thus, Applicants assert, section 205(b)(3) recognizes the 
appropriateness of a performance fee as compensation for investment 
advisers to BDCs in light of the special nature of BDCs.
    3. Section 205(b)(3) permits a performance fee with respect to 
realized gains only and does not contemplate the procedures set forth 
in the Partnership Agreement whereby unrealized gains or losses are 
``deemed'' realized under certain conditions for purposes of the 
compensation formula.
    4. Section 206A of the Advisers Act authorizes the Commission, by 
order upon application, to exempt any person or transaction from any 
provision of the Advisers Act ``if and to the extent that such 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of [the Advisers Act].''
    5. Applicants request exemptive relief from section 205(a)(1) to 
permit the Partnership to make in-kind distributions of shares of 
common stock that ML Oklahoma holds in one of its two remaining 
investments. Upon distribution, the Partnership would deem realized any 
unrealized gains or losses on the securities being distributed. 
Applicants submit that the performance fee received by the Managing 
General Partner from the in-kind distribution may be prohibited under 
section 205(a)(1) of the Advisers Act and it is not included within the 
exemption from that prohibition provided in section 205(b)(3).
    6. Applicants state that the exemption sought is consistent with 
the standards set out in Advisers Act section 206A. Congress has found 
it appropriate to permit a performance fee in the case of an investment 
adviser to a BDC. Applicants argue that to the extent section 205(b)(3) 
requires a performance fee to be based on realized capital gains, their 
proposal is consistent with the statutory purpose. Once the in-kind 
distribution is made, the Managing General Partner will no longer have 
any control over the investment in the subject securities; investors in 
ML Oklahoma will have the exclusive ability to liquidate such 
investments. Furthermore, Applicants state that, under the terms of 
their proposal, the proper valuation of the securities upon which the 
performance fee is based would be easily determinable. Applicants 
request exemptive relief only with respect to in-kind distributions of 
securities that Applicants represent are traded on the NASDAQ NMS and 
for which market quotations are readily available.\3\ Thus, applicants 
assert, the issues that would be raised if ML Oklahoma paid a 
performance fee based on the valuation of securities of private 
companies are not present.
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    \3\ In the Application, Applicants state that the relief they 
request extends to in-kind distributions of securities only if, at 
the time of the distribution, the securities continue to be traded 
on a national securities exchange or the NASDAQ NMS.
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    7. Applicants submit that it is in the best interests of the 
Partners, particularly the Limited Partners, and in the public interest 
for ML Oklahoma to have the authority to make in-kind distributions of 
the subject portfolio securities. First, Applicants represent that the 
distributed securities will be freely transferable, and the Partners 
will be able to determine whether to hold or sell them. Applicants 
assert that as a venture capital fund, ML Oklahoma has no experience or 
expertise with respect to publicly traded securities, and therefore the 
Partners do not lose the benefits of expert, professional management by 
receiving in-kind distributions. Second, Applicants assert that the 
distributions of portfolio securities will not constitute a taxable 
event with respect to the Partnership or the Partners, so that Partners 
will, in determining whether to hold or sell the securities, control 
the timing of realization of capital gains. Third, to the extent that 
ML Oklahoma holds a significant percentage of the subject company's 
shares, Applicants expect that the market could more easily absorb 
sales by those Partners desiring to sell over a more extended time 
period than if ML Oklahoma sold its position directly over a shorter 
period of time. Finally, Applicants assert that in-kind distributions 
on termination are an efficient way of winding up the Partnership's 
affairs and avoiding premature dispositions of portfolio investments.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-28793 Filed 11-8-00; 8:45 am]
BILLING CODE 8010-01-M