oversight

Securities and Exchange Commission: Privately Offered Investment Companies

Published by the Government Accountability Office on 1997-04-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Office of the General Counsel


      B-276678



      April 24, 1997

      The Honorable Alfonse M. D'Amato
      Chairman
      The Honorable Paul S. Sarbanes
      Ranking Minority Member
      Committee on Banking, Housing, and Urban Affairs
      United States Senate

      The Honorable Thomas J. Bliley, Jr.
      Chairman
      The Honorable John D. Dingell
      Ranking Minority Member
      Committee on Commerce
      House of Representatives

      Subject:   Securities and Exchange Commission: Privately Offered Investment
                 Companies

      Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on
      major rules promulgated by the Securities and Exchange Commission (SEC),
      entitled "Privately Offered Investment Companies" (RIN: 3235-AH09). We received
      the rules on April 3, 1997. They were published in the Federal Register as final
      rules on April 9, 1997. 62 Fed. Reg. 17512.

      The SEC is adopting the rules to implement the provisions of the National Securities
      Markets Improvement Act of 1996 (Act) as they apply to privately offered
      investment companies. The rules provide definitions necessary to effectuate the
      applicable provisions of the Act as well as providing certain interpretative
      provisions resulting from the changes made by the Act.

      Enclosed is our assessment of the SEC's compliance with the procedural steps
      required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rules.
      Our review indicates that the SEC complied with the applicable requirements.




                                                                            GAO/OGC-97-37
If you have any questions about this report, please contact Alan Zuckerman,
Assistant General Counsel, at (202) 512-4586. The official responsible for GAO
evaluation work relating to the Securities and Exchange Commission is
Jean Stromberg, Director, Financial Institutions and Markets Issues. Ms. Stromberg
can be reached at (202) 512-8678.




Robert P. Murphy
General Counsel

Enclosure

cc: The Honorable Jonathan G. Katz
    Secretary
    Securities and Exchange Commission




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                                                                         ENCLOSURE

       ANALYSIS UNDER 5 U.S.C. § 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE
                                ISSUED BY
              THE SECURITIES AND EXCHANGE COMMISSION
                                ENTITLED
             "PRIVATELY OFFERED INVESTMENT COMPANIES"
                            (RIN: 3235-AH09)

(i) Cost-benefit analysis

The SEC's cost-benefit analysis consists of statements to the effect that the rules
benefit privately offered funds and their investors in a number of ways by defining
certain terms necessary to effectuate the new exclusion from regulation under the
Act. The analysis states that the SEC does not believe the rules will impose any
additional costs on privately offered funds but that these rules reduce unnecessary
burdens without jeopardizing investor protection. The analysis also states that the
Commission believes that the rules will promote efficiency, competition, and capital
formation.

(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. §§ 603-605,
607 and 609

Section 603: Initial Regulatory Flexibility Analysis

The SEC published a summary of the Initial Regulatory Flexibility Analysis (IRFA)
in its Notice of Proposed Rulemaking, 61 Fed. Reg. 68100, December 26, 1996. The
analysis includes information that describes the reasons for the proposed rules,
their objectives, and the legal basis for them. The IRFA summary noted several
alternatives considered by the Commission in connection with the proposed rules
that might minimize the effect on small entities, but concluded that it would be
inconsistent with the requirements of the Act to exempt small entities or to specify
different requirements for small entities. The Commission states that it has
determined that it is not feasible to further clarify, consolidate, or simplify the
proposed rules for small entities.

Section 604: Final Regulatory Flexibility Analysis

The preamble to the final rules contain a summary of the Final Regulatory
Flexibility Analysis (a copy of the full text of the analysis was furnished to our
office). The analysis complies with the requirements of §604 and, in addition, states
that there were no comments received with respect to the IRFA.




                                                                     GAO/OGC-97-37
Among other things, the analysis states that the rules effectuate the Act's provisions
that make possible the creation of small entities that are § 3(c)(7) funds.1 These
funds, privately offered investment companies that sell their securities solely
to "qualified purchasers" owning or investing on a discretionary basis certain
investments, are excluded from regulation under the Act. The rules also
minimize certain compliance burdens imposed by the Investment Company Act on
Section 3(c)(1) Funds2 that are small entities,3 including as the analysis notes,
Section 3(c)(1) Funds that wish to become Section 3(c)(7) Funds or invest in
Section 3(c)(7) Funds as qualified purchasers. Section 3(c)(1) Funds range from
small investment clubs to pools of sophisticated investors such as hedge funds and
venture capital funds. The Commission estimates that there are 300 U.S. "venture
capital pools" that are Section 3(c)(1) Funds that can be considered small entities
and between 600 and 2,250 Section 3(c)(1) Hedge Funds that may be small entities.

In response to comments, the SEC adopted a number of changes from the proposed
rules to minimize burdens on all privately offered funds, including those that are
small entities by definition, particularly with respect to provisions that make the
determination of a person's status as a qualified purchaser easier for Section 3(c)(7)
Funds.

The analysis also addresses several alternatives considered by the Commission in
connection with the proposed rules that might minimize the effect on small entities,
but concluded that it would be inconsistent with the requirements of the Act to
exempt small entities or to specify different requirements for small entities.

(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform
Act of 1995, 2 U.S.C. §§ 1532-1535

As an independent regulatory agency, the SEC is not subject to title II of the
Unfunded Mandates Reform Act of 1995.




1
 A new § 3(c)(7) was added to the Investment Company Act by the National
Securities Markets Improvement Act of 1996, Pub. L. No. 104-290 (1966).
2
Section 3(c)(1) Funds are privately offered investment companies that have no
more than 100 investors.
3
 Defined by the SEC as any privately offered fund with net assets of $50 million or
less at the end of its most recent fiscal year.

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(iv) Other relevant information or requirements under acts and executive orders

Administrative Procedure Act, 5 U.S.C. §§ 551 et seq.

The rules were promulgated using the notice and comment procedures of 5 U.S.C.
§ 553. A notice of proposed rulemaking was published on December 26, 1996,
61 Fed. Reg. 68100, and comments were requested.

Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520

The rules do not impose any new reporting, recordkeeping, or other compliance
requirements that are subject to the Paperwork Reduction Act.

Statutory authorization for the rule

The rules were adopted under 15 U.S.C. 80a-2(a)(51(B),-6(c) and -37(a), 15 U.S.C.
80a-2 note and -3 note, 15 U.S.C. 80a-3(c)(1),-3(c)7, -6(c) and -37(a).

Executive Order No. 12866

The rule, promulgated by an independent regulatory agency, is not subject to the
review requirements of Executive Order No. 12866.




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