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News October 17, 2005 Issue

SEC’s Division of Investment Management Issues Rare 3(b)(2) Exemptive Order

The SECís Division of Investment Management last week issued a relatively rare 3(b)(2) exemptive order under the Investment Company Act. The October 12 order (here's the notice) assured Applied Materials that despite its investment-heavy balance sheet, the company is "primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities."

Of course, Applied Materials knew that already. Its real business, as described in its most recent 10-K, is developing, manufacturing, marketing, and servicing integrated circuit fabrication equipment for the semiconductor industry. However, the company was concerned that it could be deemed to be an investment company based on the ratio of its investments to total assets, and the ratio of its interest income to net income.

So it filed an exemptive application. The process took three years and two months, and Applied Materials had to file no fewer than four revised applications (in March 2004 and February, May and September 2005 (Source: Global Securities Information, Inc.,, 800.669.1154)).

Ultimately, however, the company obtained the requested relief.

They were lucky. "There are hundreds of companies in the same boat, but they donít have orders," noted Wilmer Hale partner Matthew Chambers.

Whyís that? Morrison & Foerster partner Marco Adelfio pointed out that IMís exemptive applications office historically has been reluctant to go beyond the standards established in the 1947 Tonopah Mining case for determining an issuerís primary business under 3(b)(2). The staff, he said, has "consistently taken a fairly literal reading of the standards." Moreover, the staff has "tended to distinguish" the R&D exemption, taking the view that "you either are or you arenít" an R&D company. However, he noted, Applied Materials was able to demonstrate that it was engaged in significant research and development, even though they did not rise to the level of an R&D company eligible for the exemption. "They met some of the conditions, some of the time," he said. "That seemed to influence the staff." He also noted that Applied Materials was able to demonstrate a history of using its capital for strategic initiatives.