February 10, 1997
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Private Investment Companies (File No. S7-30-96)
Dear Mr. Katz:
Eaton Vance Management, a registered investment adviser, appreciates the opportunity to express its views on the Commission's proposal, set forth in Release No. IC-22405, to adopt rules under the Investment Company Act to implement provisions of the National Securities Markets Improvement Act of 1996 (the "Act").
Definition of Investments
The legislative history of the Act indicates that the Commission should include all assets held for bona-fide investment purposes except personal residences and controlling interests in a privately owned family business, with the goal of identifying financially sophisticated investors who can appreciate the risks of investment pools which lack the protections afforded by the Investment Company Act.
While we generally agree with the broad scope of the Commission's proposed rules, we have the following comments on the proposed definition of investments.
Automatic Reinvestment of Periodic Distributions
- A. Physical Commodities: We see no reason, and have found nothing in the legislative history of the Act, to exclude bona-fide investments in any physical commodities, provided the qualified purchaser invests for his own account, either individually or in some fiduciary capacity, and not as a part of a regular business (such as a producer, distributor or processor) or as a dealer in such commodities. In our view, the fact that a particular commodity (e.g., a precious gem) may not be one with respect to which a Commodity Interest is traded on a regulated domestic or foreign commodities market or exchange should not disqualify that commodity for purposes of meeting the $5,000,000 or $25,000,000 minimum required by the Act.
- B. Controlling Interest in a Large Private Company: An investor with a controlling interest in a private company with shareholders equity exceeding $50,000,000 is very likely to be a sophisticated investor not needing the protections of the Investment Company Act. We recommend the Commission adopt the $50,000,000 shareholders equity test suggested in Footnote 36 of Release No. IC-22405.
- C. Cash and Cash Equivalents: Many financially sophisticated investors hold substantial cash equivalents (including certificates of deposit) for extended periods of time while waiting for an opportunistic private investment (such as a private investment pool, venture capital fund or real estate investment). To eliminate non-investment cash or cash equivalents, we recommend an arbitrary exclusion of a stated amount, namely $25,000, which would be presumed to be held for noninvestment purposes. All other cash and cash equivalents held for personal, business or other noninvestment purposes should also be excluded in new Rule 2a-51(b).
Made By a Section 3(c)(7) Fund
The Commission should not require that an investor in a Section 3(c)(7) fund who automatically reinvests periodic distributions be a qualified purchaser at the time of each such reinvestment, provided that such person was, at the time of his election to reinvest distributions, a bona-fide qualified purchaser. If the fund has determined that the authorization for reinvestment was obtained when the investor was in fact a qualified purchaser, and the investor can discontinue the reinvestment by notice to the fund at any time, the reinvestment should be treated as ministerial and not an act (such as an additional contribution of cash or other property by the investor to increase his interest in the fund) which would require another investigation and determination of the investor's status at the time of each reinvestment.
The Commission has never treated a dividend or distribution paid in cash or, at the investor's election, in shares, as a sale of shares or an investment entitled to protection under the securities laws. See Securities Act Release 929 (1936). By the same token, if a Section 3(c)(7) fund provides a mechanism or procedure which enables an investor to elect, at the time when such person is clearly a bona-fide qualified purchaser, to take distributions in additional shares or interests in the fund in lieu of cash or other property which may otherwise be distributed to non-electing investors, such election should not require re-examination of the investor's status at the time of each such distribution. The fact that the investor was a qualified purchaser at the time of his election should protect the issuer from being disqualified as a Section 3(c)(7) fund.
To clarify the distinction between a subsequent investment and a reinvestment election voluntarily established by a bona-fide qualified purchaser, we would suggest that the Commission provide in the final rule that an automatic reinvestment of a dividend or other distribution pursuant to a prior election made when the investor was a qualified purchaser is not deemed to be an "acquisition" of securities within the meaning of Section 3(c)(7)(A) of the Investment Company Act and will not disqualify the status of the issuer as a Section 3(c)(7) fund.
If you have any questions regarding the suggestions in this comment letter, please contact Alan Dynner or Thomas Otis at 617-482-8260.
Very truly yours,
EATON VANCE MANAGEMENT
CC: Barry P. Barbash, Director, Division of Investment Management
Robert E. Plaze, Associate Director, Division of Investment Management
Kenneth J. Berman, Assistant Director, Division of Investment Management
Nadya B. Roytblat, Assistant Chief, Division of Investment Management
David P. Mathews, Senior Counsel, Division of Investment Management
Also sent by E-Mail to email@example.com