[Federal Register Volume 63, Number 44 (Friday, March 6, 1998)]
[Notices]
[Pages 11320-11324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-5819]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 23053; 813-160]
RGIP, LLC and Ropes & Gray; Notice of Application
March 2, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under sections 6(b) and 6(e)
of the Investment Company Act of 1940 (``Act'') granting an exemption
from all provisions of the Act, except section 9, section 17 (except
for certain provisions of sections 17(a), (d), (f), (g), and (j)),
section 30 (except for certain provisions of sections 30(a), (b), (e),
and (h)), and sections 36 through 53, and the rules and regulations
thereunder.
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SUMMARY OF APPLICATION: Applicants RGIP, LLC and Ropes & Gray request
an exemption from various provisions of the Act for an employees'
securities company within the meaning of section 2(a)(13) of the Act.
FILING DATES: The application was filed on September 18, 1996, and
amended on May 8, 1997, July 30, 1997, November 12, 1997 and February
9, 1998. Applicants have agreed to file an additional 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
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, 1998,
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.
Applicants, One International Place, Boston, Massachusetts 02110.
FOR FURTHER INFORMATION CONTACT:
Annmarie J. Zell, Staff Attorney at (202) 942-0532, or Mary Kay Frech,
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 from
the SEC's Public Reference Branch at 450 Fifth Street, NW., Washington,
DC 20549, or by telephone at (202) 942-8090.
Applicants' Representations
1. RGIP, LLC is a newly-formed Delaware limited liability company.
Ropes & Gray is a law firm organized as a Massachusetts general
partnership (the ``Company''). Applicants also request relief for all
entities identical in all material respects (other than investment
objective and strategy) to RGIP, LLC that maybe offered in the future
by the Company to the same class of investors (``Subsequent Funds,''
together with RGIP, LLC, the ``Funds''). Applicants anticipate that
each Subsequent Fund, if any, also will be structured as a limited
liability company, although other forms of organization are possible.
2. Interests in the Funds will be offered solely to eligible
investors (``Eligible Investors''), who will consist of: (a) Certain
employees of the Company (``Eligible Employees''), (b) trusts of which
the trustees, grantors, and/or beneficiaries are Eligible Employees, or
of which the beneficiaries are immediate family members of Eligible
Employees, (c) partnerships, corporations, or other entities, all of
the voting power of which is controlled by Eligible Employees, and (d)
the Company. Interests in each Fund will be offered in reliance upon
the exemption from registration under the Securities Act of 1933
(``Securities Act'') contained in section 4(2) or pursuant to
Regulation D under the Securities Act.
3. Eligible Employees include only persons who are current or
former: (a) partners of or lawyers employed by the Company, (b)
principals or other professionals employed by the Company or by an
entity which is directly or indirectly controlling, controlled by, or
under common control with the Company (``Affiliated Company''), which
provides certain consulting or other services to clients of the Company
or of such Affiliated Company, (c) key administrative employees of the
Company, or (d) a small number of other employees of the Company who
will be involved in managing the day-to-day affairs of the Funds. Each
Eligible Investor, or the related Eligible Employee, must either be an
accredited investor meeting the income requirements set forth in rule
501(a)(6) of Regulation D, or meet the sophistication requirements set
forth in rule 506(b)(2)(ii) of Regulation D, have had a minimum of five
years of legal or business experience and compensation of at least
$150,000 in the prior year, and have a reasonable expectation of
compensation of at least $150,000 in each of the two immediately
succeeding years. An Eligible Investor that is not an Eligible Employee
and for which an Eligible Employee does not make the decision to invest
in a Fund will be permitted to invest in a Fund only if the person who
makes the investment decision meets the sophistication requirements set
forth in rule 506(b)(2)(ii) of Regulation D.
4. Applicants believe that substantially all of the present and
former partners and a small number of employees of the Company
currently qualify as Eligible Employees. The Eligible Employees have
sufficient knowledge, educational training, sophistication and
experience in legal and business matters to be capable of evaluating
the risks of an investment in a Fund. No fee of any kind will be
charged in connection with the sale of units of the Funds.
5. The Fund has been established as a means of rewarding Eligible
Employees and attracting highly qualified personnel to the Company. The
Fund is intended to enable Eligible Investors to diversify their
investments and participate in investment opportunities that might not
otherwise be available to them or that might be beyond their individual
means.\1\ Some
[[Page 11321]]
of these investment opportunities may involve parties to which the
Company was, is, or will be acting as legal counsel. No Fund will be
charged legal fees by the Company, although the Company may require a
Fund to reimburse it for certain disbursements and expenses that it
incurs on behalf of the Fund.
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\1\ The Fund will not acquire any security issued by a
registered investment company if immediately after such acquisition
the Fund would own more than 3% of the outstanding voting stock of
the registered investment company.
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6. The Fund will operate as a non-diversified, closed-end
management investment company within the meaning of the Act. The Fund's
managing members (``Managing Members'') will be Eligible Investors who
are partners of the Company. The Managing Members will screen
investment opportunities that come to their attention through the
Company. Eligible Investors will elect whether or not to participate in
the investment opportunities. No fee will be charged to the Fund by the
Managing Members, nor will any compensation be paid by the Fund or its
Members to the Managing Members for their services. Eligible Investors
will know and have direct access to those individuals who will serve as
Managing Members. Any person serving as an investment adviser to the
Funds will register under the Investment Advisers Act of 1940 (the
``Advisers Act'') if required to do so by the Advisers Act.
7. Capital contributions made to the Fund by Eligible Investors who
elect to participate in a particular investment (``Members'') will be
allocated pro rata to the capital subaccounts relating to the
investment. No Eligible Investor will be required to invest in any
particular investment, but Members who elect not to participate in a
particular investment will have no interest in, or capital subaccount
with respect to, the investment.
8. Members will not be entitled to redeem their interest in the
Fund. A Member will be permitted to transfer his interest in the Fund
only with the express consent of a majority of the Managing Members and
only to an Eligible Investor. Upon a Member's death, the Member's
estate will be substituted as a Member. The Managing Members may
require a Member, including an Eligible Employee whose employment with
the Company is terminated or an Eligible Investor whose related
Eligible Employee's employment with the Company is terminated, to
withdraw from the Fund if the Managing Members determine that
withdrawal is in the best interest of the Fund. If a Member is required
to withdraw, the Company may require the Eligible Investor to sell his
interest in investments requiring future capital contributions to
another Eligible Investor designated by the Company who agrees to pay
the capital contributions and to assume the withdrawing Eligible
Investor's other obligations with respect to the investments. The
purchase price for the sale would be equal to the Member's capital
account for the investment as of the date the Member is requested to
withdraw, determined as if the capital account were credited or charged
with the income, realized and unrealized gains, expenses, and realized
and unrealized losses attributable to the investment as determined by
the Managing Members. In making such determinations, the Managing
Members will value privately held securities held by the Fund in
accordance with valuations provided by the issuer of the investment.
The withdrawing Eligible Investor would retain its interest in
investments that have been fully funded.
9. The value of the Members' capital accounts and sub-accounts will
be determined at such times as the Managing Members deem appropriate or
necessary. The Managing Members will only cause the assets held by the
Fund to be valued when such valuation is necessary or appropriate for
the administration of the Fund; valuations of a Member's interest at
other times will be the responsibility of the individual Member. The
Managing Members will maintain records of all financial statements
received from the issuers of the Fund's investments, and will make such
records available for inspection by Members.
10. Certain investment opportunities may permit a Fund to co-invest
with a partnership or other entity in which the same Fund or a
different Fund has invested (a ``Co-investor Partnership''). If a Fund
co-invests with a Co-investor Partnership, the Fund generally will be
required to make the co-investment on terms no more favorable to it
than those applicable to the investment by the Co-investor Partnership.
It is anticipated that the economic terms applicable to any co-
investment generally will be substantially the same as those applicable
to the corresponding investment by the Co-investor Partnership.
However, it is possible that the Co-investor Partnership may invest in
a different class of securities or that the Co-investor Partnership's
investment may have more favorable non-economic terms (e.g., the right
to representation on the board of directors of the portfolio company)
in light of differences in legal structure, or regulatory, tax, or
other considerations. A Fund making a co-invesment will be given the
opportunity to sell or otherwise dispose of the investment prior to or
concurrently with, and on the same terms as, sales or other
dispositions of the corresponding investments by the Co-investor
Partnership.
11. The Funds may be given an opportunity to co-invest with
entities which the Company provides, or has provided services, and from
which it may have received fees, but which are not affiliated persons
of the Funds or the Company or affiliated persons of these affiliated
persons. Applicants believe that these entities should not be treated
as co-investors for the purposes of condition 4. When these entities
permit others to co-invest with them, the transactions are commonly
structured so that all investors have an opportunity to dispose of
their investment at the same time. Nevertheless, if condition 4 were to
apply to the Funds' investments in these situations, applicants believe
that the Company's clients would be indirectly burdened. It is
important to the Company that the clients' interests take priority over
the Funds' interests and that the clients' activities not be burdened
by the Funds' activities. Applicants assert that the Fund's
relationship to a client of the Company that is not an affiliated
period of either the Company or the Fund differs fundamentally from a
Fund's relationship to the Company or its affiliated persons. The focus
of, and the rationale for, the protections contained in the requested
relief are to protest the Funds from overreaching by the Company and
its affiliated persons. These same concerns are not present with
respect to the Funds vis-a-vis clients of the Company who are not
affiliated with the Fund or the Company.
12. The net income, net gain, and net loss of each Fund will be
determined in accordance with the organizational documents for that
Fund. Net income or net loss of each Fund will be determined and
credited at least annually to the respective capital accounts and sub-
accounts of the Members in proportion to their respective contributed
capital in each investment. The Managing Members will have discretion
with respect to each Fund in distributing cash and proceeds from the
Fund's investments to its Members. Each Fund will send its Members an
annual report regarding its operations. This report will contain
unaudited financial statements because the Fund's assets will consist
only of investments selected by individual
[[Page 11322]]
Members.\2\ The Fund will maintain a file containing any financial
statements and other information received from the issuers of the
investments held by such Fund, and will make the file available for
inspection by its Members.
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\2\ Applicants do not believe that audited financial statements
of the Fund's aggregate assets would provide useful information to
its Members because each Member will have an interest only in the
capital sub-accounts that relate to particular investments in which
such Member has allocated capital contributions, and will not have
an economic interest in the holdings of the Fund on a consolidated
basis.
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Applicants' Legal Analysis
1. Section 6(b) of the Act provides that the SEC shall exempt
employees' securities companies from the provisions of the Act to the
extent that such exemption is consistent with the protection of
investors. Section 6(b) provides that the Commission shall consider, in
determining which provisions of the Act from which the company should
be exempt, the company's form of organization and capital structure,
the persons owning and controlling its securities, the price of the
company's securities and the amount of any sales load, how the
company's funds are invested, and the relationship between the company
and the issuers of the securities in which it invests. Section 2(a)(13)
of the Act defines an employees' securities company, in relevant part,
as any investment company all of the outstanding securities of which
are beneficially owned by current or former employees or persons on
retainer of a single employer; by members of the immediate family of
such employees, persons or retainer, or former employees; or by such
employer together with any one or more of the foregoing categories of
persons.
2. Section 7 of the Act generally prohibits investment companies
that are not registered under section 8 from selling or redeeming their
securities. Section 6(e) of the Act provides that in connection with
any order exempting an investment company from any provision of section
7, certain specified provisions of the Act shall be applicable to the
company, and to other persons in their transactions and relations with
the company, as though the company were registered under the Act, if
the SEC deems it necessary or appropriate in the public interest or for
the protection of investors. Applicants request an order under sections
6(b) and 6(e) of the Act for an exemption from all provisions of the
Act, and the rules and regulations under the Act, except section 9,
certain provisions of sections 17 and 30, and sections 36 through 53,
and the rules and regulations thereunder.
3. Applicants submit that the order requested is appropriate in the
public interest and consistent with the protection of investors.
Applicants believe that the Eligible Employees have sufficient
knowledge, educational training, sophistication, and experience in
legal and business matters to be capable of evaluating the risks of an
investment in a Fund. Applicants also assert that Eligible Investors
will know and have direct access to those individuals who will serve as
Managing Members.
4. Section 17(a) of the Act provides, in relevant part, that it is
unlawful for an affiliated person of a registered investment company,
or any affiliated person of such person, acting as principal, knowingly
to sell any security or other property to such registered investment
company or to purchase from such registered investment company any
security or other property. Applicants request an exemption from
section 17(a) to the extent necessary to permit a Fund: (a) To purchase
from the Company or any of its affiliated persons, securities or
interests in properties previously acquired for the account of the
Company or any of its affiliated persons; (b) to sell to the Company or
any of its affiliated persons, securities or interests in properties
previously acquired by the Funds; (c) to invest in companies,
partnerships, or other investment vehicles offered, sponsored, or
managed by the Company or any of its affiliated persons; (d) to invest
in securities of issuers for which the Company or any of its affiliated
persons has performed services and from which it may have received
fees; (e) to purchase interests in any company or other investment
vehicle (i) in which the Company or its partners or employees own 5% or
more of the voting securities, or (ii) that is otherwise an affiliated
person of the Fund or the Company; and (f) to participate as a selling
security-holder in a public offering in which the Company or any of its
affiliated persons acts as or represents a member of the selling group.
5. Applicants state that the Members of the Funds will be informed
in the Funds' communications relating to particular investment
opportunities of the possible extent of the Funds' dealings with the
Company or any affiliated person of the Company. Applicants believe
that Eligible Investors, as financially sophisticated professionals,
will be able to evaluate the risks associated with those dealings.
Applicants assert that a community of interest will exist among the
Members and the Company because the Funds are designed to reward and
provide incentives to partners and key employees.
6. Section 17(d) makes it unlawful for any affiliated person of a
registered investment company, acting as principal, to effect any
transaction in which such company, or a company controlled by such
company, is a joint or joint and several participant with the
affiliated person in contravention of SEC rules. Rule 17d-1 provides
that the SEC may approve a transaction subject to section 17(d) after
considering whether the participation of such registered company 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.
7. Applicants request an exemption from section 17(d) and rule 17d-
1 to the extent necessary to permit a Fund to engage in transactions in
which affiliated persons of the Fund also may be participants. Joint
transactions in which a Fund may participate could include the
following: (a) An investment by one or more Funds in a security in
which the Company or its affiliated person, another Fund, or a
transferee of those persons is or may become a participant, or with
request to which the Company or an affiliated person is entitled to
receive fees (including, but not limited to, legal fees, consulting
fees, or other economic benefits or interests); (b) an investment by
one or more Funds in an investment vehicle sponsored, offered, or
managed by the Company or its affiliated person; and (c) an investment
by one or more Funds in a security in which an affiliate is or may
become a participant.
8. Applicants submit that strict compliance with section 17(d)
would cause the Funds to forgo investment opportunities simply because
a Member, the Company, or another affiliated person of the Fund had
made or planned to make a similar investment. In addition, because
attractive investment opportunities of the types considered by the
Funds often require that each participant make available funds in an
amount that may be substantially greater than that available to the
Fund alone, applicants believe that there may be certain opportunities
of which a Fund may be unable to take advantage except as a co-
participant with other persons, including affiliates. Applicants also
assert that the flexibility to structure co- and joint investments in
the manner described above will not involve abuses of the type section
17(d)
[[Page 11323]]
and rule 17d-1 were designed to prevent.
9. Section 17(f) of the Act provides that the securities and
similar investments of a registered management investment company must
be placed in the custody of a bank, a member of a national securities
exchange, or the company itself in accordance with SEC rules. Rule 17f-
2 specifies the requirements for an investment company to maintain
custody of its investments. Applicants request an exemption from
section 17(f) and rule 17f-2 to permit the following exceptions from
the requirements of rule 17f-2: (a) A Fund's investments may be kept in
the locked files of the Company or of a partner of the Company; (b) for
purposes of paragraph (d) of the rule, (i) employees of the Company
will be deemed employees of the Funds, (ii) officers and Managing
Members of a Fund will be deemed to be officers of such Fund, and (iii)
the Managing Members of a Fund will be deemed to be the board of
directors of such Fund; and (c) in place of the verification procedure
under paragraph (f) of the rule, verification will be effected
quarterly by two employees of the Company. Applicants expect that many
of the Funds' investments will be evidenced only by partnership
agreements or similar documents, rather than by negotiable certificates
that could be misappropriated. Applicants assert that these instruments
are most suitably kept in the Company's files, where they can be
referred to as necessary.
10. Section 17(g) of the Act and rule 17g-1 generally require the
bonding of officers and employees of a registered investment company
who have access to securities or funds of the company. Applicants
request an exemption from section 17(g) and rule 17g-1 to the extent
necessary to permit each Fund to comply with rule 17g-1 without the
necessity of having a majority of the Managing Members who are not
``interested persons,'' as that term is defined in section 2(a)(19) of
the Act, take such actions and make such approvals as are set forth in
rule 17g-1. Applicants state that, because all Managing Members will be
affiliated persons, a Fund could not comply with rule 17g-1 without the
requested relief.
11. Section 17(j) and rule 17j-1 require every registered
investment company, its adviser, and its principal underwriter to adopt
a written code of ethics with provisions reasonably designed to prevent
fraudulent activities, and to institute procedures to prevent
violations of the code. Section 17(j) and paragraph (a) of rule 17j-1
also make it unlawful for certain persons to engage in fraudulent,
deceitful, or manipulative practices in connection with the purchase or
sale of a security held or to be acquired by an investment company.
Applicants request an exemption from section 17(j) and rule 17j-1 (with
the exception of the antifraud provisions of paragraph (a)), because
the requirements are burdensome and unnecessary as applied to the
Funds. Applicants believe that requiring the Funds to adopt a written
code of ethics and requiring access persons to report each of their
securities transactions would be time-consuming and expensive and would
serve little purpose in light of, among other things, the community of
interests among the Members of the Funds by virtue of their common
association with the Company.
12. Sections 30(a), 30(b), and 30(e) of the Act, and the rules
under those sections, generally require that registered investment
companies prepare and file with the SEC and mail to their shareholders
certain periodic reports and financial statements. Applicants assert
that the forms prescribed by the SEC for periodic reports have little
relevance to the Fund and would entail administrative and legal costs
that outweigh any benefit to the Members. Applicants also request an
exemption from section 30(h) to the extend necessary to exempt the
Managing Members and any other persons who may be deemed to be members
of an advisory board of a Fund from filing Forms 3, 4, and 5 under
section 16 of the Securities Exchange Act of 1934 (the ``Exchange
Act'') with respect to their ownership of interests in the Fund.
Because there is no trading market for interests in a Fund and the
transferability of these interests is severely restricted, applicants
submit that the filing of Forms 3, 4, and 5 would not serve the
purposes underlying section 16, would be unnecessary for the protection
of investors, and would be burdensome to those who would be required to
file them.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Each proposed transaction otherwise prohibited by section 17(a)
or section 17(d) and rule 17d-1 (``Section 17 Transactions'') will be
effected only if the Managing Members determine that: (a) The terms of
Section 17 Transaction including the consideration to be paid or
received, are fair and reasonable to the Members of the participating
Fund and do not involve overreaching of the Fund or its Members on the
part of any person concerned, and (b) the Section 17 Transaction is
consistent with the interests of the members of the participating Fund,
the Fund's organizational documents, and the Fund's reports to its
Members. In addition, the Managing Members will record and preserve a
description of Section 17 Transactions, their findings, the information
or materials upon which their findings are based, and the basis
therefore. All such records will be maintained for the life of a Fund
and at least two years thereafter, and will be subject to examination
by the SEC and its staff. All such records will be maintained in an
easily accessible place for at least the first two years.
2. In any case where purchases or sales are made from or to an
entity affiliated with a Fund by reason of a 5% or more investment in
such entity by a Managing Member, such Managing Member will not
participate in the Managing Members' determination of whether or not to
make such investment available to the Members of a Fund.
3. The Managing Members will adopt, and periodically review and
update, procedures deigned to ensure that reasonable inquiry is made,
prior to the consummation of any Section 17 Transaction, with respect
to the possible involvement in the transaction of any affiliated person
or promoter of or principal underwriter for the Funds, or any
affiliated person of such a person, promoter, or principal underwriter.
4. The Managing Members will not make available to the Members of a
Fund any investment in which a co-investor (``Co-Investor'') has or
proposes 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 Fund and the
Co-Investor are participants, unless any such Co-Investor, prior to
disposing of all or part of its investment: (a) Gives the Members of
the participating Fund holding such investment 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 Members of the
participating Fund holding the investment have the opportunity to
dispose of their investment prior to or concurrently with, on the same
terms as, and on a pro rata basis with, the Co-Investor. A Co-Investor
is any person who is: (a) An ``affiliated person'' (as such term is
defined in the Act) of the Fund; (b) the Company and any entities
controlled by the Company; (c) a current or former partner of the
Company; (d) an investment vehicle offered, sponsored, or managed by
the Company or an
[[Page 11324]]
affiliated person of the Company; or (e) a company in which a Managing
Member acts as an officer, director, or general partner, or has a
similar capacity to control the sale or 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 such family member;
(c) when the investment is comprised of securities that are listed, or
contemplated to be listed, on a national securities exchange registered
under section 6 of the Exchange Act; or (d) when the investment is
comprised of securities that are, or that are contemplated to be,
national market system securities pursuant to section 11A(a)(2) of the
Exchange Act and rule 11Aa2-1 under the Exchange Act.
5. The Managing Members of each Fund will send to each Member who
had an interest in that Fund at any time during the fiscal year then
ended, Fund financial statements. These financial statements may be
unaudited. In addition, within 90 days after the end of each fiscal
year of each of the Funds, or as soon as practicable thereafter, the
Managing Members will send a report to each person who was a Member at
any time during the fiscal year then ended, setting forth tax
information as shall be necessary for the preparation by the Member of
his federal and state income tax returns and a report of the investment
activities of the Fund during such year.
6. Each Fund and its Managing Members will maintain and preserve,
for the life of such Fund and at least two years thereafter, such
accounts, books, and other documents as constitute the record forming
the basis for the financial statements and annual reports of such Fund
to be provided to its Members, and agree that all such records will be
subject to examination by the SEC and its staff. These records will be
maintained in an easily accessible place for at least the first two
years.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-5819 Filed 3-5-98; 8:45 am]
BILLING CODE 8010-01-M