[Federal Register Volume 62, Number 16 (Friday, January 24, 1997)]
[Notices]
[Pages 3721-3724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1737]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22473; 812-10470]
Cityfed Financial Corp.; Notice of Application
January 17, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANT: Cityfed Financial Corp.
RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 6(e) of
the Act.
SUMMARY OF APPLICATION: Applicant requests an order that would exempt
it from all provisions of the Act, except sections 9, 17(a) (modified
as discussed herein), 17(d) (modified as discussed herein), 17(e),
17(f), 36 through 45, and 47 through 51 of the Act and the rules
thereunder, until the earlier of two years from the date of the
requested order or such time as applicant would no longer be required
to register as an investment company under the Act. The requested
exemption would extend an exemption granted until February 21, 1997.
FILING DATE: The application was filed on December 18, 1996.
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
[[Page 3722]]
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 February 11, 1997, 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.
Applicant, 4 Young's Way, P.O. Box 3126, Nantucket, MA 02584.
FOR FURTHER INFORMATION CONTACT:
Harry Eisenstein, Staff Attorney, at (202) 942-0552, 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 at the
SEC's Public Reference Branch.
Applicant's Representations
1. Applicant was a savings and loan holding company that conducted
its savings and loan operations through its wholly-owned subsidiary,
City Federal Savings Bank (``City Federal''). During the five year
period ending December 31, 1988, City Federal was the source of
substantially all of applicant's revenues and income. As a result of
substantial losses in its mortgage banking and real estate operations,
City Federal was unable to meet its regulatory capital requirements.
Accordingly, on December 7, 1989, the Office of Thrift Supervision (the
``OTS'') placed City Federal into receivership and appointed the
Resolution Trust Corporation (the ``RTC'') as City Federal's receiver.
City Federal's deposits and substantially all of its assets and
liabilities were acquired by a newly created federal mutual savings
bank, City Savings Bank, F.S.B. (``City Savings''). The OTS appointed
the RTC as receiver of City Savings.
2. Once City Federal was placed into receivership, applicant no
longer conducted savings and loan operations through any subsidiary and
substantially all of its assets consisted of cash that has been
invested in money market instruments with a maturity of one year or
less and money market mutual funds. As of September 30, 1996, applicant
held cash and securities of approximately $8.8 million. Because of its
asset composition, applicant may be deemed to be an investment company
under the Act. Rule 3a-2 under the Act provides a one-year safe harbor
to issuers that meet the definition of an investment company but intend
to engage in a business other than investing in securities. Because of
various claims against applicant and certain of its officers and
directors, applicant could not acquire an operating company within the
one year safe harbor. In 1996, applicant was granted an exemption from
all provisions of the Act until the earlier of February 21, 1997 or
such time as it would no longer be required to register as an
investment company.\1\
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\1\ Cityfed Financial Corp., Investment Company Act Release Nos.
21710 (January 26, 1996) (notice) and 21761 (February 21, 1996)
(order).
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3. While applicant's board of directors has considered from time to
time whether to engage in an operating business, the board has
determined not to engage in an operating business at the present time
because of the claims filed against applicant, whose liability
thereunder cannot be reasonably estimated and may exceed its assets.
4. On June 2, 1994, the OTS issued a Notice of Charges and Hearing
for Cease and Desist Order to Direct Restitution and Other Appropriate
Relief and Notice of Assessment of Civil Money Penalties (``Notice of
Charges'') against applicant and certain current or former directors
and, in some cases, officers of applicant and City Federal. The Notice
of Charges requests that an order be entered by the Director of the OTS
requiring applicant to make restitution, reimburse, indemnify or
guarantee the OTS against loss in an amount not less than $118.4
million, which the OTS alleges represents the regulatory capital
deficiency reported by City Federal in the fall of 1989. On November
30, 1995, the OTS issued an Amended Notice of Charges and Hearing for
Cease and Desist Order to Direct Restitution and Other Appropriate
Relief and Notice of Assessment of Civil Money Penalties (``Amended
Notice of Charges'') that is identical to the Notice of Charges, except
that the Amended Notice of Charges includes a reference to a federal
statutory provision not referred to in the Notice of Charges that the
OTS asserts provides an additional basis for the issuance of a Cease
and Desist Order against applicant and certain current or former
directors and, in some cases, officers of applicant and of City Federal
(``Respondents''). On February 1, 1996, an administrative law judge
(``ALJ'') issued a prehearing order (``Prehearing Order'') granting the
OTS's motion for partial summary disposition with respect to applicant
and denying both applicant's motion for partial summary disposition of
the OTS's assessment of civil money penalties and its cross-motion for
summary adjudication. On June 12, 1996, applicant moved for
interlocutory review by the acting director of the OTS of the
conclusions in the Prehearing Order and, if necessary, will seek
appellate review of any adverse decision. If the conclusions in the
Prehearing Order are not ultimately reversed, applicant may be required
to turn over to the OTS all or substantially all of its assets.
5. Also on June 2, 1994, the OTS issued a Temporary Order to Cease
and Desist (``Temporary Order'') against applicant. The Temporary Order
required applicant to post $9.0 million as security for the payment of
the amount sought by the OTS in its Notice of Charges. Applicant
unsuccessfully petitioned the district court for an injunction against
the Temporary Order. Applicant and the Respondents filed notices of
appeal from the D.C. Court's Order to the United States Court of
Appeals for the District of Columbia Circuit (``D.C. Circuit''), and
the Respondents filed a motion in the D.C. Circuit for an expedited
appeal and an order enjoining the enforcement of the Temporary Order
during the pendency of the appeal. The D.C. Circuit denied the
Respondents' motion for injunction on October 21, 1994. On July 11,
1995, the D.C. Circuit affirmed the denial by the D.C. Court of the
motions by applicant and the Respondents for a temporary restraining
order and an injunction against the Temporary Order. On October 26,
1994, applicant and the OTS entered into an Escrow Agreement (``Escrow
Agreement'') with CoreStates Bank, N.A. (``CoreStates'') pursuant to
which applicant transferred substantially all of its assets to
CoreStates for deposit into an escrow account to be maintained by
CoreStates. Applicant's assets in the escrow account continue to be
invested in money market instruments with a maturity of one year or
less and money market mutual funds. Withdrawals or disbursements from
the escrow account are not permitted without the written authorization
of the OTS, other than for (a) monthly transfers to applicant in the
amount of $15,000 for operating expenses, (b) the disbursement of funds
on account of purchases of securities by applicant, and (c) the payment
of the escrow fee and expenses to CoreStates. The Escrow Agreement also
provides that CoreStates will restrict the escrow account in such a
manner as to implement the terms of the Escrow Agreement and to prevent
a change in
[[Page 3723]]
status or function of the escrow account unless authorized by applicant
and the OTS in writing.
6. On December 7, 1992, the RTC filed suit against applicant and
two former officers of City Federal seeking damages of $12 million for
failure to maintain the net worth of City Federal (``First RTC
Action''). In light of the filing by the OTS of the Notice of Charges
on June 2, 1994, the RTC and applicant agreed to dismiss without
prejudice the RTC's claim against applicant in the First RTC Action.
7. In addition, the RTC filed suit against several former directors
and officers of City Federal alleging gross negligence and breach of
fiduciary duty with respect to certain loans (``Second RTC Action'').
The RTC seeks in excess of $200 million in damages. Under its bylaws,
applicant may be obligated to indemnify these former officers and
directors and advance their legal expenses. Applicant generally has
agreed to advance expenses in connection with these requests. Because
of the Temporary Order and the Escrow Agreement, however, applicant is
not continuing to advance expenses in connection with these requests.
Applicant is unable to determine with any accuracy the extent of its
liability with respect to these indemnification claims, although the
amount may be material.
8. On August 7, 1995, applicant, acting in its own right and as
shareholder of City Federal, filed a civil action in the United States
Court of Federal Claims seeking damages for loss of ``supervisory
goodwill.'' Applicant's goodwill suit is presently pending in that
court.
9. Currently, applicant's stock is traded sporadically in the over-
the-counter market. Applicant has one employee who is president, chief
executive officer, and treasurer. Applicant's secretary does not
receive any compensation for her service.
Applicant's Legal Analysis
1. Section 3(a)(1) defines an investment company as any issuer of a
security who ``is or holds itself out as being engaged primarily * * *
in the business of investing, reinvesting or trading in securities.''
Section 3(a)(3) further defines an investment company as an issuer who
is engaged in the business of investing in securities that have a value
in excess of 40% of the issuer's total assets (excluding government
securities and cash).
2. Section 6(c) of the Act provides that the Commission may exempt
any person from any provision of the Act ``if and to the extent that
such exemption is necessary or appropriate in the public interest.''
Section 6(e) provides that in connection with any SEC order exempting
an investment company from any provision of section 7, certain
specified provisions of the Act shall be applicable to such company,
and to other persons in their transactions and relations with such
company, as though such company were registered under the Act, if the
SEC deems it necessary or appropriate in the public interest or for the
protection of investors.
3. Applicant acknowledges that it may be deemed to fall within one
of the Act's definitions of an investment company. Accordingly,
applicant requests an exemption under sections 6(c) and 6(e) from all
provisions of the Act, subject to certain exceptions described below.
Applicant requests an exemption until the earlier of two years from the
date of the requested order or such time as it would no longer be
required to register as an investment company under the Act.
4. In determining whether to grant an exemption for a transient
investment company, the SEC considers such factors as whether the
failure of the company to become primarily engaged in a non-investment
business or excepted business or liquidate within one year was due to
factors beyond its control; whether the company's officers and
employees during that period tried, in good faith, to effect the
company's investment of its assets in a non-investment business or
excepted business or to cause the liquidation of the company; and
whether the company invested in securities solely to preserve the value
of its assets. Applicant believes that it meets these criteria.
5. Applicant believes that its failure to become primarily engaged
in a non-investment business by February 21, 1997 is due to factors
beyond its control. Applicant asserts that the amount required to
resolve its currently outstanding claims cannot be reasonably estimated
and could exceed its assets. If applicant is unable to resolve these
claims successfully, it states that it may seek protection from the
bankruptcy courts or liquidate. Applicant also asserts that it probably
will not be in a position to determine what course of action to pursue
until most, if not all, of its contingent liabilities are resolved.
Additionally, applicant states that its circumstances are unlikely to
change over the requested two-year period in light of the number of
claims currently pending against it and because of the existence of the
Escrow Agreement. Since the filing of its initial application for
exemptive relief under sections 6(c) and 6(e) on October 19, 1990,
applicant has invested in money market instruments and money market
mutual funds solely to preserve the value of its assets.
6. During the term of the proposed exemption, applicant will comply
with sections 9, 17(a) and (d) (subject to the exception below and the
modifications described in condition 3, below), 17(e), 17(f), 36
through 45, and 47 through 51 of the Act and the rules thereunder. With
respect to section 17(d), applicant represents that it established a
stock option plan when it was an operating company. Although the plan
has been terminated, certain former employees of City Federal have
existing rights under the plan. Applicant believes that the plan may be
deemed a joint enterprise or other joint arrangement or profit-sharing
plan within the meaning of section 17(d) and rule 17d-1 thereunder.
Because the plan was adopted when applicant was an operating company
and to the extent there are existing rights under the plan, applicant
seeks an exemption to the extent necessary from section 17(d).
Applicant's Conditions
Applicant agrees that the requested exemption will be subject to
the following conditions, each of which will apply to applicant from
the date of the requested order until it no longer meets the definition
of an investment company or during the period of time that it is exempt
from registration under the Act:
1. Applicant will not purchase or otherwise acquire any additional
securities other than securities that are rated investment grade or
higher by a nationally recognized statistical rating organization, or,
if unrated, deemed to be of comparable quality under guidelines
approved by applicant's board of directors, subject to two exceptions:
a. Applicant may make an equity investment in issuers that are not
investment companies as defined in section 3(a) of the Act (including
issuers that are not investment companies because they are covered by a
specific exclusion from the definition of investment company under
section 3(c) of the Act other than section 3(c)(1)) in connection with
the possible acquisition of an operating business as evidenced by a
resolution approved by applicant's board of directors; and
b. Applicant may invest in one or more money market mutual funds
that limit their investments to ``Eligible Securities'' within the
meaning of rule 2a-7(a)(5) promulgated under the Act.
2. Applicant's Form 10-KSB, Form 10-QSB and annual reports to
[[Page 3724]]
shareholders will state that an exemptive order has been granted
pursuant to sections 6(c) and 6(e) of the Act and that applicant and
other persons, in their transactions and relations with applicant, are
subject to sections 9, 17(a), 17(d), 17(e), 17(f), 36 through 45, and
47 through 51 of the Act, and the rules thereunder, as if applicant
were a registered investment company, except insofar as permitted by
the order requested hereby.
3. Notwithstanding sections 17(a) and 17(d) of the Act, an
affiliated person (as defined in section 2(a)(3) of the Act) of
applicant may engage in a transaction that otherwise would be
prohibited by these sections with applicant:
(a) if such proposed transaction is first approved by a bankruptcy
court on the basis that (i) the terms thereof, including the
consideration to be paid or received, are reasonable and fair to
applicant, and (ii) the participation of applicant in the proposed
transaction will not be on a basis less advantageous to applicant than
that of other participants; and
(b) in connection with each such transaction, applicant shall
inform the bankruptcy court of (i) of the identity of all of its
affiliated persons who are parties to, or have a direct or indirect
financial interest in, the transaction;
(ii) the nature of the affiliation; and (iii) the financial
interests of such persons in the transaction.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1737 Filed 1-23-97; 8:45 am]
BILLING CODE 8010-01-M
