[Federal Register Volume 61, Number 84 (Tuesday, April 30, 1996)]
[Notices]
[Pages 19097-19100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10644]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21915; 812-9744]


Medallion Financial Corp., et al.; Notice of Application

April 24, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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applicants: Medallion Financial Corp. (``Medallion''), Tri-Magna 
Corporation (``Tri-Magna''), Medallion Funding Corp. (``MFC''), Alvin 
Murstein, and Andrew Murstein.

relevant act sections: Order requested under section 6(c) of the Act 
for an exemption from sections 12(d), 18(a), and 61(a) of the Act, 
under sections 17(d) and 57(a)(4) of the Act and rule 17d-1 thereunder 
permitting certain joint transactions, under section 17(b) of the Act 
for an exemption from section 17(a) of the Act, and under section 57(c) 
of the Act for an exemption from sections 57(a) (1), (2), and (3) of 
the Act.

summary of applicatioN: Applicants request an order to permit Medallion 
to acquire all the outstanding stock of Tri-Magna Corporation through a 
merger and to acquire certain other companies. In addition, the order 
would permit Medallion to engage in certain joint transactions with its 
subsidiaries and would permit modified asset coverage requirements for 
Medallion and its subsidiaries on a consolidated basis.

filing date: The application was filed on September 1, 1995 and amended 
on January 16, 1996. Applicants have agreed to file an additional 
amendment, the substance of which is incorporated herein, 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 May 20, 1996, 
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, SEC, 450 5th Street NW., Washington, DC 20549. 
Applicants, Suite 2000, 205 East 42d Street, New York, NY 10017.

FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563, or Robert A. 
Robertson, 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.

Applicants' Representations

    1. Medallion is a closed-end investment company. It was organized 
for the purpose of acquiring: Tri-Magna, another closed-end investment 
company; Edwards Capital Company, L.P. (``ECC''), a privately-held 
limited partnership licensed as a Small Business Investment Company (an 
``SBIC'') by the Small Business Administration (the ``SBA''); and 
Transportation Capital Corp. (``TCC''), a Specialized Small Business 
Investment Company (an ``SSBIC'') licensed by the SBA.\1\ Tri-Magna, 
ECC, and TCC are referred to as the ``Acquired Companies.'' Medallion 
plans to file an election under section 54 of the Act to be regulated 
as a business development company (a ``BDC'') and, contemporaneous with 
the acquisition of TCC and ECC, will register each company under the 
Act as a closed-end investment company. Upon completion of these 
transactions, Medallion will engage directly and/or through its 
principal subsidiaries (the ``Subsidiaries'') primarily in the business 
of making loans to small businesses and, to a lesser degree, in the 
business of taxicab rooftop advertising.
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    \1\ Concurrently with these acquisitions, Medallion will merge 
with Tri-Magna and operate Tri-Magna's two subsidiaries, MFC, an 
SSBIC, and Medallion Taxi Media, Inc. (``Media''), a corporation 
providing taxicab rooftop advertising, as its own subsidiaries. In 
1988, the SEC issued an order to MFC permitting it to create a 
holding company structure, with MFC as a wholly-owned subsidiary of 
such holding company, and permitting the holding company and its 
subsidiaries to engage in certain joint transactions and other 
activities otherwise prohibited under the Act. Medallion Financial 
Corporation, Investment Company Act Release Nos. 16253 (Feb. 4, 
1988) (notice) and 16296 (Mar. 1, 1988) (order).
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    2. Medallion proposes to acquire all the outstanding shares of Tri-
Magna through a merger of Tri-Magna into Medallion (the ``Merger'') for 
$20.00 per share in cash plus an additional dividend of $.50 per share 
plus the accumulated earnings, if any, of Media to be paid immediately 
prior to the Merger and to acquire the remaining Acquired Companies for 
cash or Medallion stock or some combination thereof. Acquisitions for 
cash will be financed from the proceeds of the initial public offering 
of Medallion stock (the ``IPO''). The acquisitions will be closed 
contemporaneously with the IPO.
    3. At a meeting held on October 18, 1995, the full board of 
directors of Tri-Magna voted unanimously to accept the recommendation 
of a committee of its independent directors (the ``Independent 
Committee'') to pursue the Merger, determining that the Merger is in 
the best interests of and is fair to the stockholders of Tri-Magna. The 
board of directors also unanimously recommended that the stockholders 
of Tri-Magna approve the Merger. On December 21, 1995, the Merger 
Agreement was executed and delivered by Tri-Magna and Medallion.
    4. The consummation of the Merger is subject to certain conditions, 
including (a) approval of the Merger Agreement by the holders of at 
least a majority of the outstanding shares of Tri-Magna stock, (b) 
approval by all governmental agencies and other third parties from whom 
such approval is required, including the SEC and the SBA, (c) receipt 
by Tri-Magna of an opinion from Gruntal & Co., Incorporated 
(``Gruntal''), an investment banking firm engaged by the Independent 
Committee, opining as to the fairness from a financial point of view of 
the terms of the Merger to the stockholders of Tri-Magna, (d) the 
successful negotiation and closing of the acquisitions of the other 
Acquired Companies, and (e) the closing of the IPO.
    5. Alvin Murstein and Andrew Murstein will serve as chief executive 
officer and as president, respectively, of Medallion following the 
Merger. Each of Alvin Murstein and Andrew Murstein currently holds 100 
shares of Medallion's common stock through a trust. In addition, Alvin 
Murstein will make a capital contribution of approximately $1,000,000 
to Medallion in exchange for shares of Medallion stock valued at the 
public offering price of Medallion shares sold in the IPO.
    6. Myron Cohen, Robert Fanger, and Michael Miller (the ``Affiliated 
Advisers'') will form and register an

[[Page 19098]]

investment adviser (the ``Sub-Adviser'') that will enter into a sub-
advisory contract (the ``Sub-Advisory Agreement'') with Medallion to 
provide investment advisory services. The Affiliated Advisers presently 
are officers and directors of Tri-Magna and collectively hold 14.9% of 
Tri-Magna's outstanding stock. Following the IPO, the Affiliated 
Advisers will resign their positions with Tri-Magna and will no longer 
own Tri-Magna stock. Pursuant to the Sub-Advisory Agreement, Medallion 
will pay the Sub-Adviser, in arrears, a monthly fee of $18,750 as 
compensation for the services to be rendered and the expenses to be 
paid by the Sub-Adviser.
    7. The Sub-Advisory Agreement will be approved by a majority of the 
non-interested directors of Medallion and a majority of Medallion's 
voting securities outstanding immediately prior to the closing of the 
IPO. The Sub-Advisory Agreement will be subject to section 15 of the 
Act and will be terminable without penalty to Medallion on 60 days' 
written notice by either party or by vote of a majority of Medallion's 
outstanding voting securities and will terminate if assigned.

Applicants' Legal Analysis

Section 6(c)

    1. Applicants request relief under section 6(c) of the Act from 
sections 12(d), 18(a), and 61(a). Section 6(c) permits the SEC to 
exempt any person or transaction from any provision of the 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 Act.

Sections 12(d) and 60

    1. Section 12(d)(1) limits the amount of securities a registered 
investment company may purchase of another registered investment 
company. Section 60 applies the provisions of section 12 to BDCs.
    2. Since Medallion will operate those of its Subsidiaries licensed 
as an SBIC or SSBIC (the ``SBA Subsidiaries'') as wholly-owned 
subsidiaries, the acquisition of the securities of the SBA 
Subsidiaries, any loans or advances made to such SBA Subsidiaries by 
Medallion, and any other transfer of assets from Medallion to the SBA 
Subsidiaries will be exempt from sections 12(d)(1) (A) and (C) by 
virtue of rule 60a-1, which exempts from those sections the acquisition 
by a BDC of the securities of an investment company licensed by the SBA 
that is operated as a wholly-owned subsidiary of the BDC. The making of 
loans or advances by the SBA Susidiaries to Medallion, however, may 
violate section 12(d) if such loans or advances were deemed to be 
purchases by the SBA Subsidiaries of Medallion's debt securities. 
Accordingly, applicants request under section 6(c) an exemption from 
section 12(d)(1) to permit the acquisition by the SBA Subsidiaries of 
any securities of Medallion representing indebtedness.

Sections 18(a) and 61(a)

    1. Section 18(a) prohibits a registered closed-end investment 
company from issuing any class of senior security unless such company 
complies with the asset coverage requirements set forth in that 
section. ``Asset coverage'' is defined in section 18(h) as the ration 
which the value of the total assets of an issuer, less all liabilities 
not represented by senior securities, bears to the aggregate amount of 
senior securities of such issuer. Under section 18(a)(1)(A), senior 
securities of closed-end investment companies representing indebtedness 
must had an asset coverage of 300% immediately after their issuance or 
sale and, under section 18(a)(2)(A), senior securities of such 
companies representing stock must have an asset coverage of 200%. 
Section 18(k) provides an exemption from the foregoing asset coverage 
requirements for investment companies licensed by the SBA. Section 
61(a) applies section18 to BDCs, with certain exceptions.
    2. Medallion will be a BDC and each of the SBA Subsidiaries will be 
closed-end investment companies registered under the Act and, 
accordingly, subject to the provisions of, and the exemptions available 
under, section 18 on an individual basis (as modified by section 61(a) 
with respect to Medallion). In addition, as a holding company for 
controlled, closed-end investment company subsidiaries, such as the SBA 
Subsidiaries, applicants believe that Medallion may be subject to the 
asset coverage requirements of section 61(a) on a consolidated basis 
because it may be deemed to be an indirect issuer of senior securities 
with respect to the SBA Subsidiaries' indebtedness. Accordingly, 
applicants request under section 6(c) an exemption from sections 18(a) 
and 61(a) to treat borrowings by any of the SBA Subsidiaries and the 
SBA's preferred stock interest in such SBA Subsidiaries as liabilities 
and indebtedness not represented by senior securities in applying the 
asset coverage requirements of section 18(a) to Medallion and the SBA 
Subsidiaries on a consolidated basis.

Sections 17(b) and 57(c)

    1. Section 17(b) of the Act permits the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that (a) the 
terms of the proposed transaction, including the consideration to be 
paid or received, are reasonable and fair and do not involve 
overreaching on the part of any person concerned; (b) the proposed 
transaction is consistent with the policy of each registered investment 
company concerned; and (c) the proposed transaction is consistent with 
the general purposes of the Act. Section 57(c) permits the SEC to 
exempt a proposed transaction from sections 57(a) (1), (2), and (3) 
using substantially the same standard imposed by section 17(b).

Sections 17(a) and 57(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between registered investment companies and any 
affiliated person of that company. Paragraphs (1), (2), and (3) of 
section 57(a) impose substantially the same prohibitions on 
transactions between BDCs and certain of their affiliates, including 
any director, officer, or employee of a BDC and any entity controlled 
by a director, officer, or employee of a BDC.
    2. Medallion will be an affiliated person of its Subsidiaries by 
reason of its ownership of all their voting stock, and the Subsidiaries 
will be affiliated persons of Medallion and of each other by reason of 
their common control by Medallion. Applicants believe that Media and 
another Subsidiary that Medallion may organize in the future 
(``Newco'') will be fully-owned subsidiaries, as defined in rule 17a-3, 
and, therefore, transactions between each of them and Medallion will be 
exempt from section 17(a) under rule 17a-3.\2\ In addition, applicants 
believe that additional investments in any of the Subsidiaries by 
Medallion in the form of stock purchases, capital contributions or 
loans do not violate section 17(a) since the seller (a Subsidiary) will 
be the issuer of any securities issued and will be controlled by the 
purchaser (Medallion). Applicants believe, however, that loans from the 
SBA Subsidiaries to Medallion will not be exempt from section 17(a), as 
such

[[Page 19099]]

Subsidiaries will not be fully-owned and the lender (the SBA 
Subsidiary) will be controlled by the borrower (Medallion). 
Accordingly, absent an exemptive order, such loans could be deemed to 
violate section 17(a).
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    \2\ Rule 17a-3 provides in pertinent part that transactions 
solely between a registered investment company and one or more of 
its ``fully owned subsidiaries'' are exempt from section 17(a) Rule 
17a-3 defines a ``fully owned subsidiary'' as a subsidiary that, 
among other things, is not indebted to any person other than its 
parent, the parent's other fully owned subsidiaries, and/or banks or 
insurance companies in any amount that is material in relation to 
the particular subsidiary.
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    3. Applicants also believe that from the perspective of the SBA 
Subsidiaries, purchases and sales of portfolio securities between 
Medallion and the SBA Subsidiaries also would be violations of section 
17(a) as such transactions would not involve securities issued by 
Medallion or the SBA Subsidiaries.\3\ Since Medallion, an ``upstream 
affiliated person,'' would be a participant to such transactions, the 
exemption provided by rule 17a-6 would not be available.
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    \3\ Applicants believe that such transactions would be exempt 
from the perspective of medallion under rules 57b-1 and 17a-6, since 
the SBA Subsidiaries will be ``downstream affiliated persons'' of 
Medallion. Applicants also believe that transactions between the SBA 
Subsidiaries and Media or Newco also would be exempt under rule 17a-
6.
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    4. Applicants believe that small business or other concerns 
(``Portfolio Companies'') to which loans may be made by Medallion or 
the SBA Subsidiaries, which may become affiliated persons of Medallion 
and/or the SBA Subsidiaries, may borrow from, or sell securities issued 
by such concerns to, Medallion and the SBA Subsidiaries. Such 
transactions may be prohibited by section 17(a), since (a) in the case 
of a sale of securities by a Portfolio Company, the sale may not be 
part of a general offering to as class of the issuer's stockholders, or 
(b) in the case of a loan, the Portfolio Company may not be controlled 
by Medallion or the SBA Subsidiaries. In addition, such transactions 
may violate section 57(a) since rule 57b-1 only exempts transactions 
with affiliates of downstream affiliates of a BDC that are affiliated 
within the meaning of section 2(a)(3) (C) or (D). Accordingly, 
transactions between Medallion and Portfolio Companies of which an SBA 
Subsidiary owns 5% of the outstanding voting securities would not be 
exempted by rule 57b-1.
    5. Applicants believe that the requested relief from sections 17(a) 
and 57(a) (1), (2), and (3) meets the standards for relief because the 
SBA Subsidiaries will be wholly-owned by Medallion and because no 
officers or directors of Medallion, the SBA Subsidiaries or any 
controlling persons or other ``upstream affiliated persons'' of 
Medallion will have any financial interest (other than as shareholders 
of Medallion) in (a) transactions with Portfolio Companies which may 
become affiliates of Medallion and/or the SBA Subsidiaries and (b) the 
purchase and sale of securities or other property or the borrowing of 
money or other property solely between Medallion and its SBA 
Subsidiaries, there can be no overreaching on the part of any person 
and no harm to the public interest will occur in such transactions.

Sections 17(d) and 57(a)(4) and Rule 17d-1

    1. Section 17(d) and rule 17d-1 make it unlawful for an affiliated 
person of a registered investment company or any affiliated person of 
such person, acting as principal, to participate in or effect any 
transaction in connection with any joint enterprise or arrangement in 
which any such registered company or a company controlled by it is a 
participant, unless an application respecting such transaction has been 
granted by the SEC. Section 57(a)(4) imposes substantially the same 
prohibitions on joint transactions involving BDCs and certain of their 
affiliates, including any director, officer or employee of a BDC and 
any entity controlled by a director, officer, or employee of a BDC. 
Section 57(i) provides that the rules and regulations under section 
17(d) shall apply to transactions subject to section 57(a)(4) in the 
absence of rules under that section. No rules with respect to joint 
transactions have been adopted under section 57(a)(4) and, therefore, 
the standards set forth under rule 17d-1 govern the order requested 
herein.
    2. In passing upon applications filed pursuant to rule 17d-1, the 
SEC is directed by rule 17d-1(b) to consider whether the participation 
of the registered investment company in a joint enterprise or 
arrangement is consistent with the provisions, policies and purposes of 
the Act and the extent to which such participation is on a basis 
different from or less advantageous than that of other participants.
    3. The proposed Merger and the transactions contemplated thereby in 
which Tri-Magna, MFC, Medallion, the Affiliated Advisers, Alvin 
Murstein, and Andrew Murestein will participate may be deemed to be a 
joint enterprise or transaction in which they have a joint 
participation in the profits. In addition, applicants believe that it 
may become necessary or desirable for Medallion and its Subsidiaries to 
participate together with third persons which have no other affiliation 
with Medallion or its Subsidiaries in joint transactions such as 
investments in the same or different securities of the same issuer, 
either simultaneously or sequentially. Section 17(d) and rule 17d-1 may 
prohibit such joint participation by Medallion and the SBA 
Subsidiaries. Accordingly, applicants request an order of the SEC under 
sections 17(d) and 57(a)(4) of the Act and rule 17d-1 thereunder 
permitting Medallion and the SBA Subsidiaries to participate in any 
joint enterprise or joint arrangement involving other participants only 
to the extent that any such transaction would not be prohibited if 
Medallion and the SBA Subsidiaries were not separate companies.
    4. Applicants believe that transactions with the Portfolio 
Companies would not result in overreaching on the part of any person. 
Applicants also believe that there can also be no overreaching on the 
part of any person and no harm to the public interest will occur in the 
purchase and sale of securities or other property or the borrowing of 
money or other property between Medallion and its SBA Subsidiaries, so 
long as Medallion and its Subsidiaries are the sole participants in 
such transactions because Medallion will own all the voting stock of 
the SBA Subsidiaries and, together, all three entities will in effect 
operate as a single economic unit. In addition, since the SBA 
Subsidiaries will have the same fundamental investment policies as 
those of Medallion, such transactions will be consistent with the 
fundamental policies of both. Finally, applicants believe that the 
relief requested herein is consistent with the purposes of the Act.

Applicants' Conditions

    As a condition to the granting of the exemptive relief sought, each 
of Medallion and the SBA Subsidiaries will comply with the following 
conditions:
    1. Medallion will at all times own and hold beneficially and of 
record all of the outstanding voting capital stock of the SBA 
Subsidiaries.
    2. The SBA Subsidiaries will have the same fundamental investment 
policies as those of Medallion, as set forth in Medallion's 
registration statement; the SBA Subsidiaries will not engage in any 
other action described in section 13(a) of the Act, unless such action 
shall have been authorized by Medallion after approval of such action 
by a vote of a majority (as defined in the Act) of the outstanding 
voting securities of Medallion.
    3. Medallion will not cause or permit the SBA Subsidiaries to enter 
into, renew or perform any investment advisory or underwriting contract 
or agreement, written or oral, as contemplated by section 15 of the 
Act, unless the terms of any such contract or agreement and any renewal 
thereof shall

[[Page 19100]]

have been approved in compliance with said section 15; and where any 
vote of the stockholders of the SBA Subsidiaries would be required by 
said section 15, unless the stockholders of Medallion also shall have 
approved the same by a vote of a majority (as defined in the Act) of 
the outstanding voting securities of Medallion; or where any action of 
the directors of the SBA Subsidiaries would be required by said section 
15, unless the board of directors of Medallion, including a majority of 
those directors who are not parties to any such contract or agreement 
or interested persons of any such party, also shall have approved the 
same.
    4. Medallion will not, and will not cause or permit any SBA 
Subsidiary to, issue any senior security or sell any senior security of 
which Medallion or any SBA Subsidiary is the issuer except as 
hereinafter set forth:
    (a) each of the SBA Subsidiaries may continue to have outstanding 
and may issue additional shares of its preferred stock to the SBA in 
accordance with applicable SBA regulations; and
    (b) Medallion and each SBA Subsidiary may issue and sell to banks, 
insurance companies, and other financial institutions its secured or 
unsecured promissory notes or other evidences of indebtedness in 
consideration of any loan, or any extension or renewal thereof made by 
private arrangement, and each SBA Subsidiary may issue debt securities 
held or guaranteed by the SBA, provided the following conditions are 
met:
    (i) such notes or evidences of indebtedness are not intended to be 
publicly distributed,
    (ii) such notes or evidences of indebtedness are not convertible 
into, exchangeable for, or accompanied by any options to acquire, any 
equity security, and
    (iii) immediately after the issuance or sale of any such notes or 
evidences of indebtedness, Medallion and its Subsidiaries on a 
consolidated basis, and Medallion, individually, shall have the asset 
coverage required by section 18(a) of the Act, (as modified by section 
61(a) for Medallion), except that, in determining whether Medallion and 
its Subsidiaries on a consolidated basis have the asset coverage 
required by section 18(a) of the Act (as modified by section 61(a)), 
any SBA preferred stock interest in the SBA Subsidiaries and any 
borrowings by the SBA Subsidiaries shall not be considered senior 
securities and, for purposes of the definition of ``asset coverage'' in 
section 18(h), shall be treated as indebtedness not represented by 
senior securities.
    5. No person shall serve as a director of any SBA Subsidiary who 
shall not have been elected as a director of Medallion at its most 
recent annual meeting, as contemplated by section 16(a) of the Act and 
subject to the provisions thereof relating to the filling of vacancies. 
Notwithstanding the foregoing, the board of directors of each SBA 
Subsidiary will be elected by Medallion as sole stockholder.
    6. Any small business or other concern to which loans may be made 
by Medallion or any of the SBA Subsidiaries, which may become an 
affiliated person of Medallion and/or the SBA Subsidiaries, may borrow 
from, or sell securities issued by it to, Medallion and the SBA 
Subsidiaries, provided that such transaction meets the requirements for 
an exemption pursuant to rule 17a-6 promulgated pursuant to the Act, 
except to the extent that it fails to meet the requirements of such 
rule solely because another member of the group of Medallion and its 
SBA Subsidiaries is also a party to the transaction or has, or within 6 
months prior to the transaction had, or pursuant to an arrangement will 
acquire, a direct or indirect financial interest in the small business 
or other concern. In addition, Medallion and the SBA Subsidiaries may 
effect purchases and sales of securities and other property or the 
borrowing of money or other property, provided that Medallion and its 
SBA Subsidiaries are the sole participants in such transactions.
    7. Medallion and its SBA Subsidiaries, as a group or individually, 
may participate in any join enterprise or joint arrangement involving 
other participants, provided that such transaction meets the 
requirements for an exemption pursuant to rule 17d-1 except to the 
extent it fails to meet the requirements of such rule solely because 
any of Medallion and its SBA Subsidiaries as a group are, or propose to 
be, participants in the joint enterprise or joint arrangement.
    8. Medallion will acquire securities of its SBA Subsidiaries 
representing indebtedness only if, in each case, the prior approval of 
the SBA has been obtained. Medallion and its SBA Subsidiaries will 
purchase and sell portfolio securities between themselves only if, in 
each case, the prior approval of the SBA has been obtained.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-10644 Filed 4-29-96; 8:45 am]
BILLING CODE 8010-01-M