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[Federal Register Volume 63, Number 18 (Wednesday, January 28, 1998)]
[Notices]
[Pages 4331-4333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2016]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23005; 812-10514]

Merrill Lynch & Co., Inc., et al.; Notice of Application

January 21, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') for an exemption from all provisions 
of the Act.

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SUMMARY OF THE APPLICATION: Applicants request an order to permit 
Merrill Lynch Preferred Funding I, L.P. (the ``First Partnership'') and 
Merrill Lynch Preferred Capital Trust I (the ``First Trust'') to sell 
securities and use the proceeds to finance the business activities of 
its parent company, Merrill Lynch & Co., Inc. (``ML & Co.''), and 
companies controlled by ML & Co.

APPLICANTS: ML & Co., the First Trust, and the First Partnership.

FILING DATES: The application was filed on January 28, 1997. Applicants 
have agreed to file an amendment, the substance of which is 
incorporated in this notice, during the notice period.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on February 11, 
1998, and should be accompanied by proof of service on applicants, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, World Financial Center, North Tower, 250 Vesey 
Street, New York, NY 10281-1318.

FOR FURTHER INFORMATION CONTACT: Kathleen L. Knisely, Staff Attorney, 
at (202) 942-0517, or Christine Y. Greenlees, 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, N.W., Washington, D.C. 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. ML & Co. is a company incorporated under Delaware law. It is a 
holding company that, through its subsidiaries, provides investment, 
financing, insurance, and related services on a global basis. Its 
principal subsidiary, Merrill Lynch, Pierce, Fenner & Smith 
Incorporated, is a leading broker-dealer, investment banking firm, and 
underwriter. Other subsidiaries provide a variety of financial services 
on a global basis, including broker-dealer services, swap activities, 
futures activities, banking, investment banking, consumer and mortgage 
lending, real estate activities, and asset management. Applicants state 
that ML & Co. is primarily engaged in the business of a holding 
company, and does not hold more than 40% of its assets in ``investment 
securities,'' as defined in section 3(a)(2) of the Act.
    2. ML & Co. has formed a two-tier structure, consisting of the 
First Trust and the First Partnership, to provide financing to itself 
and entities controlled by ML & Co. (``Controlled Companies''). To 
provide additional financing, ML & Co. proposes to form one or more 
two-tier structures

[[Page 4332]]

substantially similar to the First Trust and First Partnership \1\ as 
well as one or more finance subsidiaries that differ in structure 
(each, an ``Other Finance Subsidiary'').
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    \1\ The First Trust and each future organized trust is referred 
to herein as the ``Trust'' and the First Partnership and each future 
organized partnership is referred to herein as the ``Partnership.''
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    3. Each Trust will be a statutory business trust organized under 
the laws of Delaware or another jurisdiction. Each Partnership will be 
a limited partnership organized under the laws of Delaware or another 
jurisdiction. The general partner interests in the Partnership (the 
``General Partner Interests'') will be owned by ML & Co. and/or one or 
more Controlled Companies, which will be the sole general partners of 
the Partnership (the ``General Partners'').
    4. Each Trust will issue common securities (``Trust Common 
Securities'') and preferred securities (``Trust Preferred 
Securities''). The Trust Common Securities will represent undivided 
beneficial interests in the assets of the Trust and will be owned by ML 
& Co. and/or one or more of its Controlled Companies. The Trust 
Preferred Securities will represent preferred undivided beneficial 
interests in the assets of the Trust and will entitle the holders to 
receive cumulative cash distributions accumulating from the date of 
original issuance and payable quarterly in arrears at a specified rate, 
as well as a specified amount on liquidation of the Trust, if, as, and 
when the Trust has funds available for payment. The distribution rate 
and payment dates on the Trust Preferred Securities will correspond to 
the distribution rate and payment dates for the Partnership Preferred 
Securities (as defined below) which, as described below, generally will 
be the only assets of the Trust.
    5. Each Partnership will sell the General Partner Interests and 
limited partnership interests (the ``Partnership Preferred 
Securities''). The Partnership Preferred Securities will provide 
essentially for the same distributions and liquidation payments as the 
Trust Preferred Securities. The funds for distributions on the 
Partnership Preferred Securities will come primarily from payments made 
to the Partnership by ML & Co. and/or its Controlled Companies.
    6. Each Trust will use all of the proceeds of its offering of Trust 
Preferred Securities to purchase the Partnership Preferred Securities. 
The Trust will not invest or make loans to any other company. Each 
Partnership will make investments in or loans to ML & Co. and/or its 
Controlled Companies of at least 85% of any cash or cash equivalent 
raised or to be raised from the sale of the Partnership Preferred 
Securities, within six months of the receipt of such cash or cash 
equivalents. Applicants anticipate that substantially all of the 
proceeds from the sale of the Partnership Preferred Securities (and 
indirectly, from the sale of the Trust Preferred Securities), together 
with the capital contribution from the General Partners, will be used 
by the Partnership to purchase debentures or equity securities of ML & 
Co. and/or one or more of its Controlled Companies.
    7. Amounts that are not loaned to ML & Co. and/or its Controlled 
Companies will consist of: (i) interest and dividends receivable from 
such investments and loans, cash on hand and demand deposits, time 
deposits and certificates of deposit, in no case having a maturity of 
greater than nine months; (ii) United States government securities; 
(iii) repurchase agreements having a maturity of no greater than nine 
months with respect to United States government securities; and (iv) 
other debt securities (e.g., commercial paper) which arise out of 
current transactions, and which have maturities at the time of issuance 
not exceeding nine months.
    8. The payment of distributions by the Trust or the Partnership and 
the payments on liquidation of the Trust or the Partnership will be 
guaranteed on a subordinated basis by ML & Co. (the ``Guarantee'').\2\ 
If ML & Co. fails to make a guarantee payment, a holder of either Trust 
Preferred Securities or Partnership Preferred Securities may institute 
directly a proceeding against ML & Co. for enforcement of the payment 
without first proceeding against any other entity.
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    \2\ See, e.g., Cleary, Gottlieb, Steen & Hamilton (pub. avail. 
Dec. 23, 1985).
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Applicants' Legal Analysis

    1. Applicants request an order pursuant to section 6(c) of the Act 
granting an exemption from all provisions of the Act for the Trust, the 
Partnership, and the Other Finance Subsidiaries.\3\ Applicants state 
that rule 3a-5 under the Act provides an exemption from the definition 
of investment company for certain companies organized primarily to 
finance the business operations of their parent companies or companies 
controlled by their parent companies.
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    \3\ Applicants are not seeking relief for the two-tier 
structure. See KDSM Inc. and Sinclair Capital (pub. avail. March 17, 
1997).
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    2. Rule 3a-5(b)(3)(i) in relevant part defines a ``company 
controlled by the parent company'' to be a corporation, partnership, or 
joint venture that is not considered an investment company under 
section 3(a) or that is excepted or exempted by order from the 
definition of investment company by section 3(b) or by the rules and 
regulations under section 3(a). Certain of the Controlled Companies do 
not fit within the definition of ``companies controlled by the parent 
company'' because they derive their non-investment company status from 
section 3(c)(2), 3(c)(3), 3(c)(4), 3(c)(5), or 3(c)(6) of the Act. None 
of the Controlled Companies which will receive loans from the 
Partnership or the Other Finance Subsidiary will be relying on section 
3(c)(1), 3(c)(5)(C), or 3(c)(7) of the Act.
    3. Applicants state that none of the Controlled Companies engage 
primarily in investment company activities. In addition, if ML & Co. or 
the Controlled Companies were themselves to issue the securities that 
are to be issued by the Trust or the Partnership and use the proceeds 
for their own purposes, they would not be subject to regulation under 
the Act. While ML & Co. has chosen to use the Trust, the Partnership, 
and the Other Finance Subsidiaries as financing vehicles, the Guarantee 
ensures that holders of Trust Preferred Securities will have direct 
recourse against ML & Co.
    4. Section 6(c) of the Act permits the SEC to exempt any person or 
class of persons from any provision of the Act or from any rule under 
the Act, if such exemption is necessary or appropriate in the public 
interest, consistent with the protection of investors, and consistent 
with the purposes fairly intended by the policy and provisions of the 
Act. Applicants submit that the relief requested satisfies the section 
6(c) standard.

Applicants' Condition

    Applicants agree that the order granting the requested relief will 
be subject to the following condition:
    Applicants will comply with all of the provisions of rule 3a-5 
under the Act, except that the Controlled Companies will not meet the 
portion of the definition of ``company controlled by a parent company'' 
in rule 3a-5(b)(3)(i) solely because they are excluded from the 
definition of investment company under section 3(c)(2), 3(c)(3), 
3(c)(4), 3(c)(5), or 3(c)(6) of the Act, provided that any such entity 
excluded from the definition of investment company under section 
3(c)(5) of the Act will fall within section 3(c)(5)(A) or section 
3(c)(5)(B) solely by reason of its holdings of accounts receivable of 
either their own customers or of the customers of other ML & Co. 
subsidiaries, or by reason of

[[Page 4333]]

loans made by it to such subsidiaries or customers, provided, further, 
that any such entity excluded from the definition of investment company 
under section 3(c)(6) of the Act will not be engaged primarily, 
directly, or through majority-owned subsidiaries in one or more of the 
businesses described in section 3(c)(5) of the Act (except as permitted 
in this condition).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2016 Filed 1-27-98; 8:45 am]
BILLING CODE 8010-01-M
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