DAVIS POLK & WARDWELL

                             450 LEXINGTON AVENUE
                             NEW YORK, N.Y.  10017
                                 212-450-4000
                               FAX: 212-450-4800


                           Writer's Direct Number:
                                 212-450-4525


                                                   February 10, 1997

Re:   Private Investment Company Proposed Rules
      File No. S7-30-96

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Stop 6-9
Washington, D.C. 20549

Dear Mr. Katz:

     We are writing in response to the Commission's request for
comments on the proposed rules which implement the private investment company
provisions of the National Securities Markets Improvement Act of 1996.  The
proposed rules, which are contained in Release No. IC-22405, define certain
terms related to the section 3(c)(7) exemption, and clarify transition issues
for section 3(c)(1) companies.  We commend the Commission on its timely and
constructive proposals.

      As we see it, new section 3(c)(7) was a determined effort by
Congress to "promote the capital formation process...[by] increasing the
domestic venues available to investors."(1)  The creation of 3(c)(7) funds
would "improve liquidity in [the] valuable market that many small business[es]
depend on for the capital they need to expand and create new jobs."(2)
Imposing no limitation on the number of purchasers in a 3(c)(7) fund, Congress
designed a straightforward quantitative test to ensure that each investor
meets "minimum standards of financial sophistication."(3)  Prior to the
enactment of the Act, the Commission itself urged the creation of 3(c)(7)
funds for persons who "possess a high degree of financial sophistication,"(4)
so as to adequately evaluate an investment in an unregulated fund.  We believe
that the proposed rules should facilitate the creation of section 3(c)(7)
companies consistent with Congressional concerns regarding investor
sophistication; they should be simple, straightforward and easy to administer.

     While we support the overall scope of the rules, our comments
address certain provisions which seem inconsistent with the approach we
believe was intended by Congress.  We worry that these provisions add
complexity and administrative burdens which will lead to an unwarranted,
government-mandated intrusion into the financial affairs of sophisticated
individual investors, seriously impeding the development of 3(c)(7) funds.

Summary of Major Comments

(1)Statement of Mr. Bliley, Conference Report on H.R. 3005 (September 28,
1996) at H12047.
(2)Id.
(3)Senate Report 104-293 (June 26, 1996) at 24.
(4)"Protecting Investors: A Half Century of Investment Company Regulation,"
Division of Investment Management, SEC (May 1992) at 113.
     I.  Good Faith Reliance.  We urge the Commission to remove the
     requirement of "reasonable inquiry" to ascertain an investor's
     qualified purchaser status.  We believe that this provision is
     unnecessary, intrusive and inconsistent with analogous provisions
     in other SEC rules.

     II.  Deductions from the Amount of Investments.  We urge the
     Commission to reconsider requiring numerous complicated deductions
     from the amount of investments.  These provisions create needless
     complexity and reduce the investment appeal of 3(c)(7) funds
     without furthering the protection of unsophisticated investors.

     III.  Securities Included as Investments.  We believe securities of
     controlled private issuers with shareholders' equity above an
     appropriate amount, securities of majority-owned public companies
     and certain other business holdings should count as investments.

     IV.  Companies with Limited Investments.  We believe that
     sophisticated operating companies should be permitted to count
     their own shareholders' equity as an investment.

I.  Good Faith Reliance

     We commend the Commission for its timely development of good faith
procedural rules.  However, we strongly urge the Commission to remove the
requirement of "reasonable inquiry."  We believe that an issuer should be
entitled to reasonably rely upon investor certifications if the issuer does
not have any basis for believing that the information is incorrect in any
material respect.  This approach is consistent with that followed in the
analogous provisions of Regulation D and rule 144A under the Securities Act of
1933, which require an issuer to "reasonably believe" an investor meets the
requisite qualifications.  Regarding rule 144A in particular, the Commission
has stated that an issuer does not have a duty of inquiry unless it has
"reason to question the veracity of the certification."(5)  We believe it is
appropriate to follow these precedents because they both seek to determine
whether prospective investors meet certain sophistication standards in order
to qualify for unregistered offerings.  Given these similarities, we see no
reason for the 3(c)(7) standard to be different from the 3(c)(1) standard
contained in Regulation D or rule 144A.

     In addition, Congress did not appear to contemplate a due diligence
obligation when it authorized the Commission to "develop reasonable care
defenses when an issuer relying on the qualified purchaser exception in good
faith sells securities to a purchaser that does not meet the qualified
purchaser definition."(6)  An affirmative duty to independently verify every
certification from an investor would impose an unwarranted burden upon 3(c)(7)
funds; it might well require a personal financial statement to be prepared by
each prospective investor or require letters of attestation from bankers,
brokers, accountants or financial advisers, which even then might not satisfy
a "due diligence" obligation.(7)  Because one of the goals of the Act is to
encourage the development of 3(c)(7) funds, we believe that the rule should
not frustrate their creation by imposing unreasonable certification procedures
on investors and unreasonable compliance burdens on 3(c)(7) funds, all in
order to protect certain investors from themselves.

     We further request that the Commission clarify that the remedy for
good faith admittance of an unqualified purchaser is the expulsion of that
investor from the fund, and not the disqualification of the fund, as long as
the fund had no reason to believe the investor's certifications were false.
The fund should not lose its status as a 3(c)(7) entity due to individual
(5)Release No. IC-17452 (April 23, 1990) at 10.
(6)House Report No. 104-622 at 53 (1996).
(7)The Commission's own report in the Initial Regulatory Flexibility Analysis
stated that the proposed rules "would not impose any new reporting,
recordkeeping or compliance requirements."  Release No. IC-22405 (December 18,
1996) at 49.  If the Commission decides not to accept an investor's signed
statement, we suggest that the rules include a non-exclusive list of reliable
documentation similar to those referred to.
investor misrepresentations.

     The Commission should also clarify that existing investors should
not have to requalify as qualified purchasers each time they reinvest earnings
(including gains) or add to their initial investment in the fund.  The
reinvestment of earnings is a mere continuation of the original investment, so
it should not require any requalification.  New commitments to make additional
investments will be based upon fund-specific knowledge and investment
experience which would not suddenly disappear even if an investor were to fall
below the threshold test.  Thus, requiring requalification would not protect
unsophisticated investors, but would impose undue compliance burdens.  If the
Commission believes requalification is necessary, we suggest that it permit
the underlying agreement to specify that an existing qualified purchaser
affirms its status each time it commits to make additional investments in the
fund, so that reconfirmation is implicit in the new investment itself.  In
addition, so as not to disadvantage existing investors in a converted 3(c)(7)
fund, these investors should be allowed to add to their investments in the
fund without any certification requirements.

     Finally, we suggest that the Commission permit funds to qualify
investors based solely upon a minimum investment amount of $5 million for
individuals or family companies and $25 million for other entities.  Under
this proposal, a fund would be able to automatically admit investors as
qualified purchasers without asking additional questions relating to their
status.(8)  This proposal would permit funds with sufficiently high minimum
purchase amounts to admit qualified purchasers without the need for any other
qualification procedure.

II.  Deductions from the Amount of Investments

     We observe that the proposed definition of "investments" is
extremely complicated, which creates numerous problems the Commission should
strive to avoid.  First, in our view, the complexity alone may deter
prospective investors from investing in a 3(c)(7) fund.  Many investors do not
wish to disclose detailed financial information due to either the private
nature of the information, or the added time and expense of documenting it.
Second, the intricate, highly technical and counterintuitive nature of the
rules makes them hard to understand for anyone other than a sophisticated
lawyer expert in U.S. securities and investment company laws.

     We would prefer government-mandated rules which would not require
as great an intrusion into an investor's financial affairs as we fear is
required by the complicated nature of the proposed rules.  We are particularly
concerned about the provisions which reduce the amount of investments by
virtually any leverage incurred and by certain payments received by an
investor in the previous twelve months.  As a practical matter, almost every
individual investor who fails the qualified purchaser test because of these
provisions will be able to invest in a similarly invested and unregulated
3(c)(1) fund as an accredited investor under the far less restrictive
provisions of Regulation D.  While we fully respect and recognize the $5
million threshold under the Act, we do not understand why the definitional
rules implementing section 3(c)(7) need be so complex and personally intrusive
to merely distinguish between investors that can invest in 3(c)(7) funds
rather than 3(c)(1) funds.  In order to further promote the fundamental
legislative intent of easing regulatory burdens on legitimate capital-raising
efforts and encourage the creation of 3(c)(7) funds, we believe the rules
should be as straightforward and easy to administer as possible.

     A.  Leverage

(8)The same rationale would apply to an issuer's actual knowledge of a
purchaser's investments through, for example, brokerage accounts and other
investments maintained at the issuer or an affiliate, that are equal to the
requisite amount of investments.  We would support a rule permitting an issuer
to rely solely upon this actual knowledge.

     The provision requiring deductions for any outstanding indebtedness
incurred to acquire investments is particularly problematic.  We believe that
this provision is inconsistent with the Act and its legislative history.
Given that Congress chose a definition of "investments" over "net worth"(9) as
a measure of an investor's sophistication, we believe that generally the gross
asset value of investments should count toward the qualified purchaser
threshold.  In many cases, leverage (especially the use of a margin account)
may actually be an indication of financial sophistication.  In addition,
investors who incur indebtedness to purchase investments will have had their
investment portfolios and their investment experience scrutinized by their
lending institutions.  This creditor review ensures the financial health and
sophistication of investors who borrow to purchase investments.

     In addition, implementing this provision will prove extremely
burdensome for issuers.  It may be practically impossible in many instances to
determine whether an investor incurred certain indebtedness to acquire
investments; the proposed rule may, as a practical matter, require that all
indebtedness be deducted in order to ensure compliance.  In any case, these
rules would require the extensive involvement of an individual's accountant or
financial advisor.

     Although the Commission's rationale for this deduction is that
Congress intended qualified purchasers to "own" their investments,(10)
investments are still considered to be owned by an investor even if their
acquisition was financed through borrowing.  Regardless of the
characterization of ownership, however, possession of these investments still
demonstrates financial sophistication.  Thus, consistent with Congressional
intent, they should be included in the definition.  We also note that the
assumptions underlying this rule appear to be that investors may ask for loans
imprudently and that lenders will make loans imprudently.  We disagree with
both of these assumptions.(11)

     If the fundamental concern of the Commission regarding indebtedness
relates to loans secured by real estate, we suggest that the provision be
limited to these types of loans by requiring the valuation of real estate that
serves as collateral for loans to be done on a net basis.

     B.  Certain Payments

     We are similarly concerned about the provisions requiring
complicated deductions for certain payments received during the preceding 12
months.  Although we recognize that receipt of some of these payments may not
reflect immediate investment experience, we urge the Commission to avoid these
deductions because this concern does not justify the inordinate complexity (and
resulting inefficiency) the provision creates.(12)  We note that no similar
provision exists for the determination of accredited investors under
Regulation D.  Also, the deductions do not necessarily further investor
protection because either individuals with $5 million to invest are likely to
have access to and will frequently utilize sophisticated investment advisors
and other professionals, or current suitability concepts will adequately
protect these investors.  Further, we believe that certain of these deductions
are particularly arbitrary.  For example, requiring a deduction for any amount
received pursuant to an agreement related to a legal separation or divorce
could have the effect of causing a person who was qualified while married to
be disqualified for a full year after the separation or divorce.

     In addition, we believe the deductions for family companies are
too broad.  The proposed rule requires family companies to deduct all amounts
deductible by their owners even if the proceeds are not being used by the
family company.  This provision could easily result in a family company
(9)Congress implicitly rejected the existing "net worth" standard for
determining accredited investors under Regulation D of the 1933 Act.
(10)Release No. IC-22405 at 25.
(11)Indeed, the proposed rule even goes so far as to require that the initial
proceeds of the loans should be deducted, and not outstanding indebtedness.
Certainly, any debt that has been repaid should not be deducted.
(12)The SEC has in the past acknowledged the value of a straightforward
approach.  For example, the SEC amended rule 144A to include U.S. government
securities because excluding them would create "inordinate complexity and
inefficiency in applying the Rule, and [did] not appear necessary to assure
that QIBs include only sizable institutions experienced in securities
investing."  Release No. 33-6942 (July 16, 1992) at 5.
failing the qualified purchaser test even though each of its owners is a
qualified purchaser.  Again, for both family companies and individuals, we
urge the Commission to eliminate these deduction requirements.

III.  Securities Included as Investments

     A.  Securities of Private Companies

     The proposed rule excludes from the definition of investments
securities of private issuers with which the investor has a control
relationship.  In response to the Commission's inquiry, we believe that all
interests, whether or not controlling, in large privately-held companies
should be included.(13)  Holders of controlling interests in large private
companies are equally, if not more, sophisticated than holders of
non-controlling interests.  A controlling investor's decision to keep a large
company private does not mean that the company's securities are less of an
investment than a public company's securities.  In addition, many private
funds, including hedge funds and venture capital funds, invest significantly
in privately-held companies so that investments by these kinds of funds are
familiar to holders of controlling interests in these companies.

     The inclusion of these interests is consistent with the Act's
legislative history.  Congress specifically rejected the House definition of
qualified purchaser, which excluded securities of certain controlled or
affiliated issuers.  It instead followed the less restrictive Senate proposal,
which expressed specific concern only with "controlling interest[s] in a
privately-owned family business."(14)  Generally, those family businesses
which may not necessarily demonstrate investment experience are small
companies.  In contrast, controlling investors in large privately-held
corporations are frequently quite sophisticated, and are less likely to hold
their interests solely due to a familial relationship.

     As the Commission notes, the definition of investments could
distinguish sophisticated investors through use of a shareholders' equity
threshold.  We suggest that a controlling interest in a private company with
shareholders' equity in excess of $25 million should be counted as an
investment.  Consistent with the Act's legislative history, this threshold
would protect less sophisticated investors in small, family-owned businesses
without excluding many investors who are highly sophisticated.

     B.  Securities of Listed Companies

     We urge the Commission to include in the definition of investments
securities of "listed companies" even if the investor or a person with which
the investor has a control relationship has a majority ownership position in
the company.  We believe that acquiring, holding, or maintaining a majority
interest in a public company requires a great deal of investment
sophistication.  These investors have relatively liquid holdings, and are
permitted to sell their securities under rule 144.  In fact, a common reason
majority investors take a company public is to gain the ability to liquidate
all or a portion of their position in a company.  Thus, these securities
should logically be considered as investments and count toward the qualified
purchaser threshold.

     The proposed exclusion of majority interests is particularly
inappropriate for individual investors.  We understand that the Commission may
be concerned about companies including securities of operating subsidiaries
that may not be held as investments.  However, this concern does not apply to
individuals; in fact, individual holders of majority interests in public
companies are likely to be quite experienced in evaluating investments.
(13)We note that the definition of "control" is itself complicated, and may
cause considerable difficulty for prospective investors in ascertaining their
status.
(14)Senate Report 104-293 (June 26, 1996) at 10, 25.

     In addition, the proposed definition of "listed company" is
complicated and may not be readily definable.(15)  We believe that the
definition should include all securities offered to the public because
ownership of these securities is likely to demonstrate the requisite level of
sophistication.  Our proposal would include securities of companies which are
no longer required to file under the 1934 Act.  Securities of these companies
would still indicate the same level of sophistication even if, for example,
the number of record holders has declined.  In addition, the criteria for
determining eligible foreign securities should only require that the
securities trade on an offshore securities market because ownership of these
securities is likely to indicate financial sophistication.  The definition of
offshore securities market should specifically include many of the emerging
markets in which private investment companies may invest but which are not
specifically included in the definition under Regulation S.

     C.  Other Business Holdings

     In response to the Commission's inquiry whether other types of
business holdings should be treated as investments, we strongly urge the
inclusion of general partnership, limited partnership, joint venture and other
similar interests, whether or not they are considered "securities" in other
contexts.  We believe that these interests should be included because they
indicate the same level of financial sophistication as traditional securities,
especially when held directly or indirectly by individuals.  The definition of
investments should not depend upon the structure of a particular entity for
tax purposes.  However, we would not include these interests to the extent
that these vehicles are used solely to hold a controlling interest in a
private business with shareholders' equity of less than $25 million.

     We also believe that a company's shareholders' equity should be
considered an investment for purposes of determining whether that company
itself is considered a qualified purchaser if the company has a net worth or
market value of at least $25 million.  For example, certain manufacturing
companies invest in venture capital funds to gain access to new technology or
new manufacturing methods.  These companies are among the most sophisticated
investors in these venture capital funds, especially funds that invest in
particular industries, e.g., computer technology and healthcare.
Representatives of these companies frequently serve on fund advisory boards to
help select and monitor investments made by a fund.  It would be a strange
result if these sophisticated operating companies would not be treated as
qualified purchasers just because they had less than $25 million in what the
Commission considered as "investments."

     We further suggest that the Commission permit companies to count
their pension plan assets as investments.  Many operating companies are
unlikely to have large investment portfolios.  However, they often provide
their employees with company-directed pension plans.  We suggest that if a
company has discretion to choose individual plan investments or the investment
options available to plan participants, the plan assets should count as
investments of the company.  This approach would permit companies to include
assets which accurately reflect the company's investment sophistication.

IV.  Specific Comments on the Proposed Rules

     A.  Real Estate Included as Investments

     We strongly support the inclusion of real estate held for
investment purposes, even if not held in the form of a security, because
investment real estate demonstrates as much expertise in financial matters as
(15)For example, the definition includes securities for which "transaction
reports" are required pursuant to an "effective transaction reporting plan,"
and securities listed on "any foreign securities exchange or non-exchange
market designated by the SEC."  Rule 11Aa3-1 of the 1934 Act and Regulation S
of the 1933 Act.

similar amounts of other types of assets.  We suggest that the Commission
consider including business-
related property worth in excess of $2 million because some closely-held
business owners hold business real estate as a separate investment.  In
addition, it may be difficult to determine whether certain sophisticated real
estate investors hold real estate for business purposes or as an investment.

     B.  Commodities Included as Investments

     We strongly support the inclusion of commodity interests and
physical commodities held for investment purposes because they demonstrate
financial sophistication and are consistent with the traditional understanding
of assets held as investments.  In response to the Commission's inquiry, we
urge the Commission to also include non-exchange traded financial instruments,
such as forward contracts and interest rate and currency swaps due to the
similarity of these instruments to commodity interests and investments in
general.

     C.  Cash and Cash Equivalents Included as Investments

     We strongly support the inclusion of cash and cash equivalents, but
believe that the proposed rule is unnecessarily intrusive in requiring the
determination that the cash be held for investment purposes.  As noted by the
Commission, investors may have a certain component of their portfolio in cash
at any given time, particularly if they are preparing to make an investment.
Although cash may not be as reflective of investment experience as other
assets, it is highly unlikely that investors with $5 million have cash as a
principal investment for any significant period of time.  Thus, cash should be
included as a component of a legitimate investment portfolio.  In response to
the Commission's inquiry, we believe that an acceptable and far less intrusive
method of determining whether cash is held for investment purposes is to
exclude cash held below a certain amount (e.g., $25,000).  However, because
this amount is so minor compared to the $5 million threshold, we believe it
would be simpler and even less intrusive to count all cash and cash
equivalents as investments.

     D.  Other Assets Included as Investments

     Certain retirement and estate planning vehicles demonstrate the
same investment sophistication as a direct investment in securities, and may
also represent a significant portion of an investor's portfolio.  Thus, we
support the inclusion of investment vehicles which are commonly included in
any calculation of an investor's net worth.  For example, the portion of any
trust that is revocable by the investor should be included.  A revocable trust
is a sophisticated estate planning vehicle, and its assets are available to
the settlor at will.  An investor should not be penalized for holding assets
through this type of trust for tax and estate planning purposes.  In addition,
the Commission should include amounts held in IRAs and Keogh, 401(k) and
similar plans if participants have the ability to select investment options or
specific investments.

     As a related matter, if the plan's fiduciary has sole discretion
over specific investment decisions, the plan should be able to use plan assets
to meet the qualified purchaser test.  This rule would follow current
Commission interpretations which permit certain plans to count as single
beneficial owners under section 3(c)(1) if a plan's fiduciary has discretion
over specific investment decisions.(16)

     Finally, in response to the Commission's inquiry as to the
inclusion of other assets, we believe that collectibles, such as art or coins,
(16)The Standish, Ayer & Wood, Inc. Stable Value Group Trust (avail. Dec. 28,
1995).

demonstrate financial sophistication if investors hold them for investment
purposes.  We would also support the inclusion of any property that produces
income from interest, dividends, annuities or royalties not derived in the
ordinary course of a trade or business.  However, if the inclusion of these
assets would make the rule more complicated and intrusive, we would not
include them in the definition.

     E.  Valuation of Investments

     We support the valuation of investments based on either market
value or cost.

     F.  Jointly-Held Investments

     We strongly support the Commission's clarification that
investments held jointly with a person's spouse may be fully included in the
value of either spouse's investment.  A joint investment reflects the
financial sophistication of both spouses.  In response to the Commission's
inquiry, we would support a rule which would allow spouses who hold $5 million
in investments in the aggregate, whether or not jointly-held, to be qualified
purchasers if they make a joint investment in a 3(c)(7) fund.

     G.  Investments Held by Certain Corporate Affiliates

     We urge the Commission to permit a parent company to aggregate
investments it owns with its wholly- and majority-owned subsidiaries,
regardless of whether it manages the investments of these subsidiaries.(17)
This suggestion would further the Commission's stated goal of permitting
holding companies to invest in 3(c)(7) funds.(18)  The Commission's proposed
rule would prevent many holding companies from investing in 3(c)(7) funds
because in a practical sense many parent companies may not have direct
investment discretion over their subsidiaries' investments.

     In response to the Commission's inquiry, we believe that the rule
should not require the subsidiary to be consolidated with the parent company
under Generally Accepted Accounting Principles.  Even if a parent company
possesses almost complete control over a subsidiary, the GAAP may not in
certain instances require their consolidation.

     H.  The Grandfather Provision -- Conversion to 3(c)(7) Status

     In response to the Commission's inquiry, we urge the Commission
not to expand the definition of "beneficial owner" under this section.
Broadening the definition could create tremendous practical problems for
converting funds.  First-tier holders rarely communicate with their own 
holders about investment decisions, so they are unlikely to have procedures
in place to effectively provide redemption rights.  In addition, some 
second-tier holders may wish to redeem their investments in the underlying 
issuer while others may wish to remain invested.  It would be logistically 
difficult to permit only certain second-tier holders to redeem their 
interests.  Because of these problems, first-tier holders may refuse to 
cooperate, thus impeding the ability of many 3(c)(1) companies to convert, 
and frustrating the goals of this provision.

     In addition, limiting the definition of beneficial owner is
consistent with the Act's legislative history.  We agree with the Commission
that Congress intended to grant notice and redemption rights only to the
institutional investor, and not the investor's security holders.  Debate in
the Senate suggested that notice under this section should only be given "to
the controlling entity of that institution, not directly to all of the
(17)Although rule 2a51-1(i) only lists investments of majority-owned
subsidiaries, the related commentary in the release includes both wholly- and
majority-owned subsidiaries.  We agree that it is appropriate to include
investments of wholly-owned subsidiaries.
(18)Release No. IC-22405 (Dec. 18, 1996) at 29.

investing institution's underlying investors or participants."(19)  In
addition, the Senate Committee report stated that issuers must provide
redemption rights to "fund owners 'of record'"(20) rather than to every
second-tier holder of the converting fund.  Thus, we believe the Commission
should not expand the definition of beneficial owner.

     Regarding the definition of net assets, we believe that they
should be determined according to a fund's existing withdrawal provisions, to
the extent that a fund's governing documents specify them.  These provisions
protect the expectations and ensure the proper treatment of both withdrawing
and remaining shareholders.  In addition, withdrawal provisions would not
necessarily undermine redemption rights.  For example, funds may impose
hold-back provisions for illiquid investments.  However, because illiquid
investments are generally not available to new investors, withdrawing
investors would not be disadvantaged by remaining in these investments.
Conversely, not complying with hold-back provisions may disadvantage the
fund's remaining investors.  Funds that do not have existing withdrawal
provisions would not have investors' expectations to protect, and could
determine net assets under rule 2a-4 of the 1940 Act.

     We urge the Commission to permit existing holders to increase the
amount of their investments post-conversion.  Freezing these investors in
their existing positions does not protect their interests.  Once an investor
consents to the conversion, it should be permitted to fully participate as any
other investor in the fund.

     I.  Consent to Qualified Purchaser Status

     We suggest that the Commission clarify that, in seeking consents
from beneficial owners in order for a fund to be treated as a qualified
purchaser, the fund can adopt a procedure in which a response is required from
a beneficial owner if the beneficial owner objects to the treatment of the
fund as a qualified purchaser, but no further action is required if the
beneficial owner consents to such treatment.

     J.  Conforming Rule

     The Commission proposes that any company formed "for the specific
purpose of acquiring the securities offered" may not be a qualified purchaser
unless each beneficial owner of the company's securities is a qualified
purchaser.  We suggest that the Commission clarify that this provision does
not include an entity-level test.  For example, an entity formed by all
qualified purchasers for the specific purpose of investing in a 3(c)(7) fund
should be a qualified purchaser even if it does not as a separate entity meet
the qualified purchaser test.  In other words, if an entity is formed for the
purpose of investing in a 3(c)(7) fund, the Commission should ignore the
entity itself, and instead look only to its holders in determining its status.
This clarification would address situations where qualified purchasers may
prefer to use special purpose companies to hold an investment, rather than to
invest individually.


     K.  Non-Exclusive Safe Harbor for Certain 3(c)(7) Funds

     We believe that the proposed non-exclusive safe harbor is far too
narrow because it requires a substantial flow of new money into the converted
fund at the time of conversion.  Basing the safe harbor upon the percentage of
new capital in a fund makes it particularly difficult for large funds to
convert because they must raise in absolute terms a large amount of money.
This provision would actually impede bona fide conversions given that large
experienced funds will be the most successful in attracting qualified
(19)Senate floor debate (October 1, 1996) at S12094.
(20)Senate Report 104-293 (June 26, 1996) at 23.

purchasers, and thus least likely to engage in sham conversions.  Therefore,
we approve of the Commission's suggestion that previously existing qualified
purchasers in the converted fund should count toward the threshold.  We also
urge the Commission not to increase the percentage threshold.

     L.  Investments by Fund Employees and Other Persons

     We believe that this provision should include securities owned by
companies, partnerships, trusts or other similar entities whose beneficial
owners consist exclusively of "knowledgeable employees."  The Commission
should also include employees' securities companies because these companies
originate through the Commission's own rigorous exemptive application process
and are often vehicles utilized by knowledgeable employees.  In addition, we
believe that the definition of "related persons" under this provision should
logically include all persons in the definition of an employee's "immediate
family" who may hold interests in an employees' securities company.(21)  It
would be a strange result if certain people were included within the immediate
family definition but were not deemed related persons for the knowledgeable
employee provision.

     In addition, we urge the Commission to remove the requirement of a
12-month waiting period before an employee may qualify for this provision.  
The Commission should permit funds to offer this investment option to 
prospective employees as a legitimate part of their overall compensation 
package.  An employee who participates in or obtains information regarding 
a fund's investment activities will have sufficient knowledge to make an 
informed investment decision.

     In order to avoid unnecessary disruption of the fund, we urge the
Commission to permit employees to remain in the fund based solely upon their
status at the time of their initial purchase.  This treatment would be
consistent with section 3(c)(7)(A) which tests qualified purchaser status only
at the time of acquisition.

     M.  Transfers of Securities

     We urge the Commission to remove the requirement that the
securities be acquired subject to an arrangement which prohibits transfers to
non-approved persons.  We believe that any transfer due to an involuntary
event should automatically qualify, regardless of how or whether transfers are
prohibited by the underlying agreement.  In practice, most agreements prohibit
transfers without the consent of the general partner or manager, whose consent
may be withheld for any reason.  Requiring a greater level of detail in each
agreement is unnecessary and would considerably increase a fund's compliance
burdens.

     N.  Blue Sky Preemption

     We urge the Commission to define the term qualified purchaser for
purposes of the federal preemption of state blue sky laws to include the
categories of qualified purchaser listed under section 2(a)(51)(A) of the 1940
Act for 3(c)(7) companies.(22)  This definition is consistent with Congress'
suggestion that the SEC "consider a definition of qualified purchaser not more
restrictive than that provided in Title II of this legislation under section
3(c) of the Investment Company Act."(23)  Although the 1996 Act itself
specifies no time limit for this rulemaking, we concur with Congress'
"inten[t] that the Commission move promptly"(24) in defining the scope of this
provision, and suggest that the blue sky definition be adopted at the same
time as the private investment company rules, at least for offerings of
(21)In addition to the list of related persons contemplated by the proposed
rules, family members eligible to participate in employees' securities
companies include investment vehicles established for the benefit of those
persons.  FMR Corp. and Fidelity Waterway Limited Partnership, Release No.
IC-22062 (July 10, 1996).
(22)Section 18(b)(3) under Title I of the 1996 Act preempts state blue sky
laws for sales to "qualified purchasers, as defined by the Commission by rule."
(23)House of Representatives Report 104-622 (June 17, 1996) at 31.
(24)Id.

securities of 3(c)(7) issuers.  Including the categories of qualified
purchaser listed under section 2(a)(51)(A) at this time would not preclude the
Commission from adding other classes of qualified purchasers to the blue sky
preemption provision at a later date.

     O.  Foreign Investment Companies

     We suggest that the Commission clarify how certain of the proposed
rules apply to foreign private investment companies.  We urge the Commission to
address these issues at the same time it adopts the private investment company
rules rather than through a series of subsequent no-action letters.

     (i) General.  We urge the Commission to clarify that foreign
private funds relying on section 7(d) need comply with the qualified purchaser
restrictions only in their offerings to U.S. persons.  This interpretation is
consistent with section 7(d) and with the Commission's treatment of foreign
funds under the Touche Remnant & Co. letter, which imports into section 7(d)
private investment concepts from section 3(c)(1).(25)  The Commission permits
unregistered foreign investment companies to count only the number of U.S.
holders toward the 3(c)(1) limit when offering securities in the United
States.  Because the purpose of the securities laws is to protect U.S.
persons, the laws should not restrict non-U.S. persons from investing in
foreign funds.

     We also urge the Commission to permit foreign private funds to
have up to 100 U.S. nonqualified investors, as well as an unlimited number of
U.S. qualified purchasers and non-U.S. investors.  We note that section 7(d)
does not contain any limitation on the number of U.S. holders as long as the
fund does not conduct a public offering in the United States.  In addition,
nonqualified U.S. purchasers would not be disadvantaged by investing in these
funds because the proposed funds would be structured similar to existing 7(d)
funds which comply with the Touche Remnant requirements.  Both of these types
of funds have potentially unlimited numbers of investors and large capital
accounts.  It should not matter to the 100 nonqualified U.S. investors whether
additional investors are U.S. qualified purchasers or non-U.S. persons.

     We believe the Commission should interpret the qualified purchaser
restrictions on sales to U.S. holders consistent with its interpretation under
the Investment Funds Institute of Canada letter.(26)  Under this letter, the
Commission stated that a foreign fund does not have to count toward the
3(c)(1) limit subsequent purchases of its securities by U.S. residents if the
fund did not directly or indirectly facilitate those purchases.  We believe
the same reasoning should apply to foreign funds who wish to sell securities
privately to U.S. qualified purchasers (i.e., if a non-U.S. person sells to a
U.S. person without the fund's involvement, then the subsequent holder need
not be a qualified purchaser).

     (ii) The Grandfather Provision -- Conversion to 3(c)(7) Status.  We
suggest that the Commission clarify that existing foreign private funds may use
3(c)(7) concepts without providing the same notice and redemption rights
required of existing 3(c)(1) funds.  We assume, however, that if the Commission
determines that notice and redemption rights should apply to these funds, it
would limit the rights to U.S. holders.

     (iii)  Consent to Qualified Purchaser Status.  We suggest that the
Commission clarify that existing foreign private funds may become qualified
purchasers without obtaining the consent of their beneficial owners.  The Act
does not include 7(d) funds in the provision which requires consent to
qualified purchaser status.  In addition, a foreign fund's U.S. holders would
not anticipate the application of these strict regulations to offshore funds.
(25)Touche Remnant & Co. (avail. August 27, 1984).  Consistent with this
approach, we assume that the transition rule for existing 3(c)(1) funds
relying on current look-through provisions also covers existing foreign
private investment companies.
(26)Investment Funds Institute of Canada (avail. March 4, 1996).
If the Commission decided to require 7(d) funds to obtain their holders'
consent, we believe this requirement should only apply to the fund's U.S.
holders.


     We appreciate the opportunity to comment on these proposed rules.
Please feel free to contact me at the above number, Sally Park at (212)
450-4098 or Yukako Kawata at (212) 450-4896, if we can be of further
assistance.



                                       Very truly yours,



                                      /s/ Pierre de Saint Phalle



cc:  Barry P. Barbash, Director, Division of Investment Management
     Kenneth J. Berman, Assistant Director, Division of Investment
        Management
     Robert E. Plaze, Assistant Director, Division of Investment
        Management