[Federal Register Volume 64, Number 17 (Wednesday, January 27, 1999)]
[Notices]
[Pages 4165-4168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1803]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23659; 812-11436]
CityFed Financial Corp.; Notice of Application
January 20, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under sections 6(c) and 6(e)
of the Investment Company Act of 1940 (``Act'') for exemption from all
provisions of the Act, except sections 9, 17(a) (modified as discussed
in the application), 17(d) (modified as discussed in the application),
17(e), 17(f), 36 through 45, and 47 through 51 of the Act and the rules
thereunder.
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SUMMARY OF APPLICATION: The requested order would exempt the applicant,
City Fed Financial Corp. (``CityFed''), from certain provisions of the
Act until the earlier of one year from the date the requested order is
issued or such time as CityFed would no longer be required to register
as an investment company under the Act. The order would extend an
exemption granted until February 12, 1999.\1\
\1\ CityFed Financial Corp., Investment Company Act Release Nos.
22473 (January 17, 1997) (notice) and 22506 (February 12, 1997)
(order).
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FILING DATE: The application was filed on December 17, 1998. Applicant
has agreed to file an amendment during the
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notice period, the substance of which is reflected in the notice.
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 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,
1999, 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, N.W., Washington, D.C.
20549. CityFed, 35 Old South Road, P.O. Box 3126, Nantucket, MA 02584.
FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Staff Attorney, at
(202) 942-0634 or Edward P. Macdonald, 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. CityFed 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 CityFed'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
(``OTS'') placed City Federal into receivership and appointed the
Resolution Trust Corporation (``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, CityFed 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, 1998, CityFed
held cash and securities of approximately $9.4 million.
3. While CityFed's Board of Directors has considered from time to
time whether to engage in operating business, the board has determined
not to engage in an operating business at the present time because of
the claims filed against CityFed, 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 CityFed and certain current or former directors and,
in some cases, officers of CityFed and City Federal. The Notice of
Charges requests that an order be entered by the Director of the OTS
requiring CityFed 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 (``Net Worth Maintenance Claim'') 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 CityFed and
certain current or former directors and, in some cases, officers of
CityFed 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 CityFed and denying both CityFed'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, CityFed 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. On August 20, 1997,
the OTS Director issued a decision and order granting CityFed's motion
for interlocutory review. The Director concluded that the ALJ had erred
in recommending summary disposition on the OTS Net Worth Maintenance
Claim against CityFed and held that there were disputed issues of fact
on that claim that precluded summary judgment, and he remanded the case
to the ALJ for further proceedings consistent with his decision. The
ALJ has lifted the stay of the proceedings, and CityFed and OTS have
begun to engage in discovery on the Net Worth Maintenance Claim.
5. Also on June 2, 1994, the OTS issued a Temporary Order to Cease
and Desist (``Temporary Order'') against CityFed. The Temporary Order
required CityFed to post $9.0 million as security for the payment of
the amount sought by the OTS in its Notice of Charges. CityFed
unsuccessfully petitioned the district court for an injunction against
the Temporary Order. CityFed 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 CityFed and the Respondents for a temporary restraining
order and an injunction against the Temporary Order. On October 26,
1994, CityFed and the OTS entered into an Escrow Agreement (``Escrow
Agreement'') with CoreStates Bank, N.A. (``CoreStates'') pursuant to
which CityFed transferred substantially all of its assets to CoreStates
for deposit into an escrow account to be maintained by CoreStates.
CityFed'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 CityFed in the amount of $15,000 for
operating expenses, (b) the disbursement of funds on account of
purchases of securities by CityFed, 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
status or function of the escrow account
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unless authorized by CityFed and the OTS in writing.
6. On December 7, 1992, the RTC filed suit against CityFed and two
former officers of City Federal seeking damages of $12 million dollars
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 CityFed agreed to dismiss without
prejudice the RTC's claim against CityFed 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,
CityFed may be obligated to indemnify these former officers and
directors and advance their legal expenses. On the advice of counsel to
a special committee of CityFed's Board of Directors, comprised of
directors who have not been named in the First or Second RTC Action,
CityFed advanced reasonable defense costs to such former directors and
officers in such Actions. CityFed 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, CityFed, 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.'' CityFed's goodwill suit is presently pending in that court.
The United States Court of Federal Claims has established a procedure
for deciding supervisory goodwill claims that may affect CityFed's
right to assert a claim for the loss of supervisory goodwill on the
books of City Federal.
9. Currently, CityFed's stock is traded sporadically in the over-
the-counter market. CityFed has one employee who is president, chief
executive officer, and treasurer. CityFed's secretary does not received
any compensation for her service.
Applicant's Legal Analysis
1. Section 3(a)(1) defines an investment company as any issuer 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. CityFed acknowledges that it may be deemed to fall within one of
the Act's definitions of an investment company. Accordingly, CityFed
requests an exemption under sections 6(c) and 6(e) from all provisions
of the Act, subject to certain exceptions described below. CityFed
requests an exemption until the earlier of one year 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. CityFed believes that it meets these criteria.
5. CityFed believes that its failure to become primarily engaged in
a non-investment business by February 12, 1999 is due to factors beyond
its control. CityFed asserts that the amount required to resolve its
currently outstanding claims cannot be reasonably estimated and could
exceed its assets. If CityFed is unable to resolve these claims
successfully, it states that it may seek protection from the bankruptcy
courts or liquidate. CityFed 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,
CityFed states that its circumstances are unlikely to change over the
requested one 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, CityFed 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, CityFed states that
it 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), CityFed 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. CityFed 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 CityFed was an operating
company and to the extent there are existing rights under the plan,
CityFed seeks an exemption to the extent necessary from section 17(d).
Applicant's Conditions
CityFed agrees that the requested exemption will be subject to the
following conditions:
1. CityFed 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 CityFed's Board of Directors, subject to two exceptions:
a. CityFed 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
sections 3(c) of the Act other than sections 3(c)(1) and 3(c)(7)) in
connection with the possible acquisition of an operating business as
evidenced by a resolution approved by CityFed's Board of Directors; and
b. CityFed 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)(10) promulgated under the Act.
2. CityFed's Form 10-KSB, Form 10-QSB and annual reports to
shareholders will state that an exemptive order has been granted
pursuant to sections 6(c) and 6(e) of the Act and that CityFed and
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other persons, in their transactions and relations with CityFed, 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 CityFed were
a registered investment company, except as permitted by the requested
order.
Notwithstanding sections 17(a) and 17(d) of the Act, an affiliated
person (as defined in section 2(a)(3) of the Act) of CityFed may engage
in a transaction that otherwise would be prohibited by these sections
with CityFed:
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
CityFed, and (ii) the participation of CityFed in the proposed
transaction will not be on a basis less advantageous to CityFed than
that of other participants; and
b. in connections with each such transaction, CityFed shall inform
the bankruptcy court of (i) 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. 99-1803 Filed 1-26-99; 8:45 am]
BILLING CODE 8010-01-M
