[Federal Register Volume 60, Number 45 (Wednesday, March 8, 1995)]
[Notices]
[Pages 12807-12811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5645]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20937; 813-136]


EIP Inc.; Notice of Application

March 2, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'').

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

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APPLICANT: EIP Inc.

RELEVANT ACT SECTIONS: Applicant seeks a conditional order under 
sections 6(b) and 6(e) granting an exemption from all the provisions of 
the Act, and the rules thereunder, except section 9, certain provisions 
of section 17 and the related rules thereunder, and sections 36 through 
53, and the rules thereunder.

SUMMARY OF APPLICATION: Applicant seeks to form limited partnerships 
(the ``Partnerships'') of which it will be the general partner and 
which will be employees' securities companies within the meaning of 
section 2(a)(13) of the Act, and to engage in certain affiliated and 
joint transactions with the Partnerships.

FILING DATES: The application was filed on September 1, 1994, and 
amended on November 1, 1994, January 13, 1995, and February 15, 1995.

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 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on March 27, 1995, 
and should be accompanied by proof of service on applicant, 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. 
Applicant, South Tower, World Financial Center, 225 Liberty Street, New 
York, New York 10080-6123.


.FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 942-0581, or C. David Messman, 
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.

Applicant's Representations

    1. Applicant is a Delaware corporation and an indirect wholly-owned 
subsidiary of Merrill Lynch & Co., Inc. (``ML&Co.''). ML&Co. is a 
diversified financial services holding company that through its 
subsidiaries provides investment, financing, insurance, and related 
services. Merrill Lynch, Pierce, Fenner & Smith Incorporated (``Merrill 
Lynch''), ML&Co.'s principal sudsidiary, is a registered broker-dealer. 
ML&Co. and its affiliated companies are herein referred to as the ``ML 
Group.''
    2. Applicant or another direct or indirect wholly-owned subsidiary 
of ML&Co. formed for such purpose will be the ``General Partner'' of 
each of the Partnerships.\1\ The General Partner proposes to establish 
Partnerships from time to time for the benefit of highly compensated 
key employees of the ML Group. The Partnerships will be part of a 
program designed to create capital buildings opportunities competitive 
with those at other investment banking firms for ML&Co.'s professionals 
and managers and to facilitate its recruitment of professionals and 
managers. Each Partnership will operate as a non-diversified closed-end 
management investment company and will meet the definition of an 
[[Page 12808]] ``employees' securities company'' in section 2(a)(13) of 
the Act.

    \1\The ``General Partner'' refers to applicant or another 
wholly-owned subsidiary of ML&Co. in its role as the general partner 
of a Partnership or the functional equivalent with respect to any 
Partnership organized as a business trust or limited liability 
company.
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    3. Interests in the Partnerships (the ``Interests'') will be 
offered only to ``Eligible Employees,'' who are current employees of 
the ML Group that meet the income standards for ``accredited 
investors'' of rule 501(a)(6) under Regulation D promulgated under the 
Securities Act of 1933 (the ``Securities Act''). Eligible Employees 
will be experienced professionals in the investment banking and 
securities business, or in related administrative, financial, 
accounting, legal, or operational activities, and will be sophisticated 
investors. Eligible Employees will be senior employees of the ML Group 
and will know or be known to, and have direct access to, other Eligible 
Employees.\2\ Eligible Employees will be advised that the Interests 
will be sold in a transaction exempt under section 4(2) of the 
Securities Act and thus offered without the protections afforded by 
registration thereunder, and that the Partnerships will be exempt from 
most provisions of the Act. An Eligible Employee becomes a limited 
partner of a Partnership (a ``Limited Partner'') by investing in the 
Partnership.

    \2\Pursuant to Merrill Lynch KECALP Growth Investments L.P. 
1983, Investment Company Act Release Nos. 12290 (Mar. 11, 1982) 
(notice) and 12363 (Apr. 8, 1982) (order), amended, Investment 
Company Act Release Nos. 20280 (May 5, 1994) (notice) and 20328 
(June 1, 1994) (order), an indirect wholly-owned subsidiary of 
ML&Co. may establish limited partnerships (the ``KECALP 
Partnerships'') that meet the definition of ``employees' securities 
companies'' under the Act and are exempt from most provisions of the 
Act. Interests in the KECALP Partnerships are offered exclusively to 
certain employees of ML&Co. and its subsidiaries and to non-employee 
directors of ML&Co. It is expected that the number of persons 
eligible to invest in a Partnership will be significantly smaller 
than the number eligible to invest in a KECALP Partnership. All 
Eligible Employees are expected to be eligible to invest in KECALP 
Partnerships organized in the future. To avoid any conflicts of 
interests between the KECALP Partnerships and the Partnerships, 
ML&Co. had adopted a policy that, with respect to investment 
opportunities in which both a KECALP Partnership and a Partnership 
may invest, such opportunities will first be made available to the 
KECALP Partnership. In addition, no person may be a member of both 
the boards of directors of the General Partner and of KECALP Inc., 
the general partner of the KECALP Partnerships.
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    4. The applicable partnership agreement may provide that a Limited 
Partner make a capital contribution in its entirety upon the formation 
of a Partnership or in installments. A Limited Partner who fails to pay 
an installment when due must pay interest on such installment, remain 
personally liable for the amount of the default and, to the extent 
permitted by law, will not be entitled to participate as a Limited 
Partner when making approvals or decisions.
    5. All of the Partnerships will have minimum capital contributions 
and restrictions with respect to transferability of Interests. 
Interests will be non-transferable except with the express consent of 
the General Partner and in any event will be transferable only to 
Eligible Employees and members of a Limited Partner's immediate family. 
Upon the death of a Limited Partner or such Limited Partner becoming 
incompetent, insolvent, incapacitated, or bankrupt, such Limited 
Partner's estate or legal representative may succeed to the Limited 
Partner's Interests as an assignee for the purpose of settling such 
Limited Partner's estate or administering such Limited Partner's 
property, but may not become a Limited Partner. Interests will not be 
redeemable, except that the estate of a deceased Limited Partner may 
elect to have the Limited Partner's Interests repurchased by the 
General Partner or the Partnership at a price equal to the value of the 
Interests determined at the next succeeding appraisal date.
    6. The purchase price of an Interest acquired upon the termination 
of a Limited Partner's employment (other than termination for cause) or 
upon the Limited Partner's bankruptcy or adjudication of incompetence 
will equal the amount that the Limited Partner would have received had 
the Partnership been liquidated on the valuation date as of the end of 
the immediately preceding fiscal year. If termination is for cause, the 
General Partner has the right, but not the obligation, to acquire the 
Interest of the Limited Partner at the lesser of the amount equal to 
(a) what the Limited Partner would have received had the Partnership 
been liquidated on the valuation date as of the end of the immediately 
preceding fiscal year, less any distributions made after such valuation 
date, or (b) the cost of the Limited Partner's investment on such 
valuation date, plus any undistributed ordinary income.
    7. The General Partner will be a registered investment adviser. The 
General Partner will manage, operate, and control the Partnerships and 
will have the authority to make all decisions regarding the 
acquisition, management, and disposition of the investments of the 
Partnerships (the ``Investments''). All Investments and dispositions 
thereof will be approved by the General Partner's board of directors 
(the ``Board''), which will consist of five members. When considering 
investments for the Partnerships, the Board will receive the advice of 
members of a committee of advisers. The Board may consider investments 
proposed by unrelated third parties and investments offered by Merrill 
Lynch in public offerings or private placements and investments 
presented to the Partnership by affiliates of the General Partner. All 
investments selected by the General Partner will be evaluated 
independently of each other and chosen only if a majority of the Board 
determines that they are suitable for and in the best interest of the 
Partnerships.
    8. Pending investment, Partnership funds will be invested in 
``Temporary Investments,'' which consists of: (a) U.S. Government 
obligations with maturities of not longer than one year and one day; 
(b) commercial paper with maturities not longer than six months and one 
day and having a rating assigned to it by Standard & Poor's Corporation 
or Moody's Investors Service, Inc. (or, if neither organization shall 
rate such commercial paper at such time, by any nationally recognized 
rating organization in the United States) equal to one of the two 
highest ratings assigned by such organization; (c) interest-bearing 
deposits in U.S. or Canadian banks with an unrestricted surplus of at 
least $250 million, maturing within one year; and (d) any money market 
fund distributed and managed by ML&Co. or any affiliated person thereof 
or successor thereof. Consistent with section 12(d)(1)(A)(i), no 
Partnership making a Temporary Investment will acquire more than 3% of 
the total outstanding voting securities of an investment company.
    9. The General Partner will make no cash contribution to the 
Partnerships other than a nominal contribution upon their formation. 
The General Partner will be allocated and receive 1% of the income, 
profit, loss, credit, expense, and deductions of the Partnership. 
Distributable cash generally will be allocated 1% to the General 
Partner and 99% to the Limited Partners. The General Partner is 
obligated to pay the operating expenses of the Partnerships and is 
entitled to receive from each Partnership annually up to 1\1/2\% of the 
Limited Partners' capital contribution to reimburse the General Partner 
for incurring such operating expenses. The General Partner's net worth 
will be adequate to meet the requirements of classifying the 
Partnerships as partnerships rather than as associations taxable as 
corporations for federal income tax purposes.
    10. It is expected that new Partnerships would be formed on a 
periodic basis but would not be formed until the capital of the prior 
Partnership [[Page 12809]] has been invested or committed for 
investment, other than reserves maintained for follow-on investments or 
operating expenses. The General Partner may under certain circumstances 
deem it appropriate to allocate an investment between two Partnerships.
    11. It is expected that a substantial percentage of Investments 
will be made available to a Partnership by the ML Group. Other 
affiliated persons of ML&Co. may also invest in the same Investments in 
which the Partnerships invest.
    12. The General Partner will not have the power to require that a 
Limited Partner withdraw from a Partnership, except that the applicable 
partnership agreement may provide that the General Partner has the 
right, but not the obligation, to acquire the Interest of a Limited 
Partner following his or her termination of employment or bankruptcy. 
The General Partner may be removed by the vote of at least two-thirds 
of the outstanding Interests of a Partnership. The General Partner may 
assign or transfer its Interest to another wholly-owned subsidiary of 
ML&Co.
    13. The General Partner has the right to dissolve the Partnership 
approximately six years after its formation. It is anticipated that the 
General Partner will dissolve the Partnership when a Partnership's 
equity investments have matured and disposition of other Investments 
can be effected.

Applicant's Legal Analysis

    1. Section 17(a) prohibits an affiliated person of a registered 
investment company from selling to or purchasing from such investment 
company any security or other property. Applicant requests an exemption 
from section 17(a) to the extent necessary to permit a member of the ML 
Group to engage in principal transactions with a Partnership. The 
exemption would let the Partnerships (a) purchase Investments from 
members of the ML Group on a principal basis; (b) purchase interests or 
property in a company or other investment vehicle affiliated with 
ML&Co. or in which a member of the ML Group already owns securities; 
(c) sell, put or tender, or grant options in securities or interests in 
a company or other investment vehicle back to such entity, where that 
entity is affiliated with the ML Group; and (d) participate as a 
selling security holder in a public offering underwritten by a member 
of the ML Group or in which a member of the ML Group acts as a member 
of the underwriting or selling group. In addition, a Partnership may 
purchase from, or sell to, an affiliated person of such Partnership a 
Temporary Investment or other short-term investment. Applicant asserts 
that the requested exemption is consistent with the policy of the 
Partnerships and the protection of investors. The Limited Partners will 
be fully informed of the possible extent of the Partnerships' dealings 
with affiliates and, as professionals employed in the securities 
business, will be able to understand and evaluate the attendant risks.
    2. Section 17(d) and rule 17d-1 prohibit an affiliated person of a 
registered investment company, acting as principal, from participating 
in or effecting any transaction in connection with any joint enterprise 
or joint arrangement in which the investment company participates. The 
section and rule might require the Partnerships to refrain from certain 
transactions in which any Limited Partner or a member of the ML Group 
is also a participant. Applicant requests an exemption from section 
17(d) and rule 17d--1 to the extent necessary to let the Partnerships 
engage in transactions with ``Co-investors,'' as defined in condition 3 
below, who may be affiliated persons of the Partnerships. Applicant 
believes that joint participation by the Partnerships in transactions 
with Co-Investors is consistent with the provisions, policies, and 
purpose of the Act. Each Limited Partner will receive a pro rata share 
of the income, profit, loss, credit, expense, and deduction of a 
Partnership based on the Limited Partner's investment in the 
Partnership, after the allocation to the General Partner of 1% of each 
such item. Any Investment made concurrently by a Partnership and a Co-
Investor will be made on the same terms, though not necessarily in the 
same amount.
    3. Section 17(f) requires that every registered investment 
management company deposit its securities and similar investments in 
the custody of certain specified entities. Rule 17f-1 requires that a 
member of a national securities exchange serving as custodian of the 
securities and investments of an investment company must, among other 
things, operate under a written contract approved by a majority of the 
investment company's board of directors. Applicant requests an 
exemption from section 17(f) and rule 17f-1 to let Merrill Lynch act as 
custodian without a written contract. Applicant asserts that, since 
there is such a close association between the Partnerships and Merrill 
Lynch, requiring a written contract would expose the Partnerships to 
unnecessary burden and expense where none is necessary. Furthermore, 
any funds or securities of the Partnership held by Merrill Lynch will 
have the protection of fidelity bonds. Applicant further requests an 
exemption from rule 17f-1(b)(4), which requires that the investment 
company's securities and investments be verified by actual examination 
by an independent public accountant at certain specified times. 
Applicant does not believe the expense of retaining such an independent 
accountant is warranted, in light of the community of interest of all 
parties involved and the existing requirement for an independent annual 
audit. The Partnerships otherwise will comply with rule 17f-1.
    4. Section 17(g) authorizes the SEC to require by rules thereunder 
that certain officers and employees of a registered management 
investment company be bonded against larceny and embezzlement. Rule 
17g-1 requires, among other things, that a majority of the company's 
board of directors approve at least annually the arrangements regarding 
the custody and safekeeping of the company's assets. Applicant requests 
an exemption from section 17(g) and rule 17g-1 to let the Partnerships 
comply with rule 17g-1 by having the General Partner's officers and 
directors take actions and make determinations set forth in the rule. 
In all other respects, the partnerships will comply with rule 17g-1.
    5. Rule 17j-1 requires that every access person of a registered 
investment company report to such company with respect to transactions 
in any security in which the access person has, or by reason of the 
transaction acquires, any direct or indirect beneficial ownership in 
the security. Applicant requests an exemption from the rule, except for 
the antifraud provisions set forth in rule 17j-1(a). Applicant asserts 
that the other provisions of the rule are burdensome and unnecessary as 
applied to the Partnerships and that the exemption is consistent with 
the policy of the Act. Applicant contends that the community of 
interests among the Limited Partners by virtue of their common 
association in ML&Co. is the best insurance against any abuse at which 
the rule is aimed.
    6. Section 6(c) permits the SEC to exempt any person, security, or 
transaction from any of the provisions of the Act, or of the rules 
thereunder, if and to the extent that the 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 Act. Applicant submits that the requested exemption 
satisfies these standards.
[[Page 12810]]

    7. The Partnerships will be conceived and organized by persons who 
will be investing in the Partnerships, either directly or indirectly, 
and will not be promoted by persons seeking to profit from fees or 
investment advice or from the distribution of securities. Applicant 
asserts that the requested exemptions are necessary or relevant to the 
operations of the Partnerships as an investment program uniquely 
adapted to the needs of the Eligible Employees.

Applicant's Conditions

    Applicant agrees that the requested order shall be subject to the 
following conditions:
    1. Each proposed transaction otherwise prohibited by section 17(a) 
or section 17(d) and rule 17d-1 (the ``Section 17 Transactions'') will 
be effected only if the General Partner determines that: (a) the terms 
of the transaction, including the consideration to be paid or received, 
are fair and reasonable to the partners and do not involve overreaching 
of the Partnership or its partners on the part of any person concerned; 
and (b) the transaction is consistent with the interests of the 
partners, the Partnership's organizational documents, and the 
Partnership's reports to its partners. In addition, the General Partner 
will record and preserve a description of such affiliated transactions, 
their findings, the information or materials upon which their findings 
are based and the basis therefor. All such records will be maintained 
for the life of the Partnerships and at least two years thereafter, and 
will be subject to examination by the SEC and its staff.\3\

    \3\Each Partnership will preserve the accounts, books and other 
documents required to be maintained in an easily accessible place 
for the first two years.
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    2. In connection with the Section 17 Transactions, the General 
Partner will adopt, and periodically review and update, procedures 
designed to ensure that reasonable inquiry is made, prior to the 
consummation of any such transaction, with respect to the possible 
involvement in the transaction of any affiliated person or promoter of 
or principal underwriter for the Partnerships, or any affiliated 
persons of such a person, promoter, or principal underwriter.
    3. As a condition to the relief requested from section 17(d) and 
rule 17d-1, the General partner will not invest the funds of any 
Partnership in any Investment in which a ``Co-Investor,'' as defined 
below, has or proposed to acquire the same class of securities of the 
same issuer, where the Investment involves a joint enterprise or other 
joint arrangement within the meaning of rule 17d-1 in which the 
Partnership and the Co-Investor are participants, unless any such Co-
Investor, prior to disposing of all or part of its investment, (a) 
gives the General Partner sufficient, but not less than one day's, 
notice of its intent to dispose of its investment, and (b) refrains 
from disposing of its investment unless the Partnership has the 
opportunity to dispose of the Partnership's investment prior to or 
concurrently with, and on the same terms as, and pro rata with the Co-
Investor. The term ``Co-Investor'' means ML&Co. and any person who is: 
(a) An ``affiliated person'' (as such term is defined in the Act) of 
the Partnership; (b) a subsidiary of ML&Co., or other company 
controlled by ML&Co. or its subsidiaries; (c) an officer or director of 
a subsidiary of ML&Co., or other company controlled by ML&Co. or its 
subsidiaries; (d) companies, partnerships, or other investment vehicles 
offered, sponsored, or managed by a member of the ML Group; (e) any 
entity with respect to which ML&Co. or its subsidiaries or controlled 
entities provides management, investment management, or similar 
services as manager, investment manager, or general partner or in a 
similar capacity, and for which it may receive compensation, including, 
without limitation, management fees, performance fees, carried 
interests entitling it to share disproportionately in income and 
capital gains or similar compensation; or (f) a company in which an 
officer or director of the General Partner acts as officer, director, 
or General Partner, or has a similar capacity to control the sale or 
other disposition of the company's securities. The restrictions 
contained in this condition, however, shall not be deemed to limit or 
prevent the disposition of an investment by a Co-Investor: (a) To its 
direct or indirect wholly-owned subsidiary, to any company (a 
``parent'') of which the Co-Investor is a direct or indirect wholly-
owned subsidiary, or to a direct or indirect wholly-owned subsidiary of 
its parent; (b) to immediate family members of the Co-Investor or a 
trust established for any Co-Investor or any such family member; (c) 
when the investment is comprised of securities that are listed on any 
exchange registered as a national securities exchange under section 6 
of the Securities Exchange Act of 1934, as amended (the ``Exchange 
Act''); or (d) when the investment is comprised of securities that are 
national market system securities pursuant to section 11A(a)(2) of the 
Exchange Act and rule 11Aa2-2(T) thereunder.
    4. Each Partnership and its General Partner will maintain and 
preserve, for the life of each such Partnership and at least two years 
thereafter, such accounts, books, and other documents as constitute the 
record forming the basis for the audited financial statements that are 
to be provided to the partners, and each annual report of such 
Partnership required by the terms of the applicable partnership 
agreement to be sent to the partners, and agree that all such records 
will be subject to examination by the SEC and its staff.\4\

    \4\Each Partnership will preserve the accounts, books, and other 
documents required to be maintained in an easily accessible place 
for the first two years.
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    5. The General Partner will send to each Limited Partner who had an 
interest in the Partnership at any time during the fiscal year then 
ended partnership financial statements audited by the Partnership's 
independent accountants. At the end of each fiscal year, the General 
Partner will make an appraisal or have an appraisal made of all of the 
assets of the Partnership as of such fiscal year end. The appraisal of 
the Partnership assets may be by independent third parties appointed by 
the General Partner and deemed qualified by the General Partner to 
render an opinion as to the value of Partnership assets, using such 
methods and considering such information relating to the investments, 
assets, and liabilities of the Partnership as such persons may deem 
appropriate, but in the case of an event subsequent to the end of the 
fiscal year materially affecting the value of any Partnership asset or 
investment, the General Partner may revise the appraisal as it, in its 
good faith and sole discretion, deems appropriate. In addition, within 
90 days after the end of each fiscal year of each of the Partnerships 
or as soon as practicable thereafter, the General Partner shall send a 
report to each person who was a Limited Partner at any time during the 
fiscal year then ended, setting forth such tax information as shall be 
necessary for the preparation by the Limited Partner of his or her 
federal and state income tax returns and a report of the investment 
activities of the Partnership during such a year.
    6. In any case where purchases or sales are made from or to an 
entity affiliated with a partnership by reason of a 5% or more 
investment in such entity by a director, officer, or employee of ML&Co. 
or any of its affiliates, any [[Page 12811]] such individual will not 
participate in the General Partner's determination of whether or not to 
effect such purchase or sale.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-5645 Filed 3-7-95; 8:45 am]
BILLING CODE 8010-01-M