* See Memorandum to SEC Rules Committee No. 134-96 (Dec. 20, 1996).
January 22, 1997
TO: SEC RULES COMMITTEE No. 9-97
RE: INSTITUTE’S DRAFT COMMENT LETTER ON PROPOSED PRIVATE
INVESTMENT COMPANY RULES
______________________________________________________________________________
As we previously informed you, the Securities and Exchange Commission issued for
public comment several new rules under the Investment Company Act of 1940 that relate to the
new exception for private investment companies that consist solely of certain financially
sophisticated persons or so-called "qualified purchasers."* A draft of the Institutes comment
letter on the proposal is attached and summarized below. (Please note that the draft references
several appendices which are not attached. We will send these out with the final letter and
otherwise make them available upon request.)
The letter points out that the Commission should act cautiously in implementing the
new exemption because of the potential dangers to the investing public and to the markets
from the sale of unregulated pooled investment vehicles. The letter also strongly encourages
the Commission to address two matters that are not discussed in detail in the proposing release
-- the meaning of the prohibition on public offerings and the meaning of the limitation on
investments in Section 3(c)(7) pools to qualified purchasers including, in particular, that
defined contribution plans only would be permitted to invest in the qualified purchaser pools if
all plan participants were themselves qualified purchasers.
The letter supports a narrower definition of "investments" than that proposed by the
Commission. Specifically, the letter supports including securities and commodity interests held
for investment purposes and supports excluding most real estate, all physical commodities, and
most cash and cash equivalents. (The letter supports including as investments interests in real
estate that are held in the form of a security and cash and cash equivalents that represent
proceeds from a recent sale of investments.) The letter also supports the proposed exclusion of
indebtedness incurred to acquire investments and the proposed deduction of payments
received by any person during the preceding twelve months under an insurance policy, as a
gift, or because of a divorce. In addition, the letter supports requiring a purchaser to provide
documentation regarding his or her ownership of investments and requiring that an issuers
reliance on such information be reasonable. Finally, the letter opposes the proposed safe harbor
from integration for sponsors of any Section 3(c)(1) fund who converts it to a 3(c)(7) fund and
then forms a new Section 3(c)(1) fund.
The letter must be filed with the Commission by February 10th. Therefore, please
provide me with your comments on the draft letter by noon on January 30, 1997 by phone at
202/326-5821, fax at 202/326-5827 or e-mail at donohue@ici.com.
Dorothy M. Donohue
Assistant Counsel
Attachment (in .pdf format)