§  1.993   Insulation criteria for interests in limited partnerships, limited
liability partnerships, and limited liability companies.

   (a) A limited partner of a limited partnership and a partner of a
   limited liability partnership shall be treated as uninsulated within
   the meaning of §  1.992(b)(2)(ii)(A) unless the partner is prohibited
   by the limited partnership agreement, limited liability partnership
   agreement, or other operative agreement from, and in fact is not
   engaged in, active involvement in the management or operation of the
   partnership and only the usual and customary investor protections are
   contained in the partnership agreement or other operative agreement.
   These criteria apply to any relevant limited partnership or limited
   liability partnership, whether it is the licensee, a controlling
   U.S.-organized parent, or any partnership situated above them in the
   vertical chain of ownership.

   (b) A member of a limited liability company shall be treated as
   uninsulated for purposes of §  1.992(b)(2)(iii)(A) unless the member is
   prohibited by the limited liability company agreement from, and in fact
   is not engaged in, active involvement in the management or operation of
   the company and only the usual and customary investor protections are
   contained in the agreement. These criteria apply to any relevant
   limited liability company, whether it is the licensee, a controlling
   U.S.-organized parent, or any limited liability company situated above
   them in the vertical chain of ownership.

   (c) The usual and customary investor protections referred to in
   paragraphs (a) and (b) of this section shall consist of:

   (1) The power to prevent the sale or pledge of all or substantially all
   of the assets of the limited partnership, limited liability
   partnership, or limited liability company or a voluntary filing for
   bankruptcy or liquidation;

   (2) The power to prevent the limited partnership, limited liability
   partnership, or limited liability company from entering into contracts
   with majority investors or their affiliates;

   (3) The power to prevent the limited partnership, limited liability
   partnership, or limited liability company from guaranteeing the
   obligations of majority investors or their affiliates;

   (4) The power to purchase an additional interest in the limited
   partnership, limited liability partnership, or limited liability
   company to prevent the dilution of the partner's or member's pro rata
   interest in the event that the limited partnership, limited liability
   partnership, or limited liability company issues additional instruments
   conveying interests in the partnership or company;

   (5) The power to prevent the change of existing legal rights or
   preferences of the partners, members, or managers as provided in the
   limited partnership agreement, limited liability partnership agreement,
   or limited liability company agreement, or other operative agreement;

   (6) The power to vote on the removal of a general partner, managing
   partner, managing member, or other manager in situations where such
   individual or entity is subject to bankruptcy, insolvency,
   reorganization, or other proceedings relating to the relief of debtors;
   adjudicated insane or incompetent by a court of competent jurisdiction
   (in the case of a natural person); convicted of a felony; or otherwise
   removed for cause, as determined by an independent party;

   (7) The power to prevent the amendment of the limited partnership
   agreement, limited liability partnership agreement, or limited
   liability company agreement, or other organizational documents of the
   partnership or limited liability company with respect to the matters
   described in paragraphs (c)(1) through (6) of this section.

   (d) The Commission reserves the right to consider, on a case-by-case
   basis, whether voting or consent rights over matters other than those
   listed in paragraph (c) of this section shall be considered usual and
   customary investor protections in a particular case.

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