[Federal Register Volume 64, Number 234 (Tuesday, December 7, 1999)]
[Notices]
[Pages 68397-68400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31637]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24181; 812-11534]
Salomon Brothers Asset Management Inc., et al.; Notice of
Application
December 1, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
section 17(a) of the Act, and under section 17(d) of the Act and rule
17d-1 under the Act to permit certain joint transactions.
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APPLICANTS: Salomon Brothers Assets Management Inc. (``SBAM''), Salomon
Brothers High Income Fund II Inc. (``Fund''), Citicorp, and Citicorp
North America, Inc. (``CNAI'').
SUMMARY OF APPLICATION: Applicants request an order to permit the Fund
and any other registered closed-end management investment company for
which SBAM or any entity controlling, controlled by, or under common
control with SBAM serves as investment adviser (collectively with the
Fund, the ``Funds'') to enter into secured loan transactions with a
facility administered by CNAI.\1\
\1\ All registered investment companies that currently intend to
rely on the requested order are named as an applicant. Any Fund that
relies on the order in the future will comply with the terms and
conditions of the application.
[[Page 68398]]
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FILING DATES: The application was filed on March 11, 1999. Applicants
have agreed to file an amendment during the notice period, the
substance of which is reflected in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on December 27, 1999, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, by 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 may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, DC
20549-0609. SBAM and the Fund, Seven World Trade Center, New York, NY
10048; Citicorp and CNAI, 399 Park Avenue, New York, NY 10043.
FOR FURTHER INFORMATION CONTACT: Anu Dubey, Senior Counsel, at (202)
942-0687, or Nadya Roytblat, Assistant Director, 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
Commission's Public Reference Branch, 450 5th Street, NW, Washington,
DC 20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. The Fund is a Maryland corporation and a diversified closed-end
management investment company registered under the Act. SBAM,
registered as an investment adviser under the Investment Advisers Act
of 1940, serves as the investment adviser to the Fund. SBAM is an
indirect, wholly-owned subsidiary of Citigroup, Inc. (``Citigroup''), a
global financial services organization. Citigroup is a banking holding
company and is wholly-owned by Citigroup. CNAI is a wholly-owned
subsidiary of Citicorp. Among other activities, CNAI is an
administrator of asset-backed commercial paper programs.
2. The Fund's principal investment objective is to maximize current
income by investing primarily in a diversified portfolio of high yield
debt securities rated at the time of investment in medium or lower
rating categories. Applicants state that the Fund has a policy of using
leveraging techniques to seek higher returns for its shareholders. To
this end, the Fund seeks to borrow money at the most desirable rate
available, and use the proceeds of the borrowings to make investments
with the expectation of higher yield. The Fund anticipates that
interest payments on any borrowing of money or issuance of debt
securities will reflect lower, short-term rates and that its
investments, purchased with borrowed money, will have yields higher
than the cost of the Fund's borrowings. The Fund currently is using
collateralized bank financing for leverage.
3. Applicants request relief to permit the Funds to obtain loans
from a commercial paper conduit issuer (``Conduit'') for which CNAI
acts as administrative agent. A loan from the Conduit to a Fund will be
at an interest rate equal to the Conduit's cost of funds (i.e., the
weighted average commercial paper rate plus commercial paper dealer
commissions). The loan will be secured by Fund assets (``Pledged
Assets''), pledged for the benefit of the Conduit, CNAI and Citicorp,
that meet certain eligibility criteria based on a Fund's investment
objectives and policies. The loan facility will require that the value
of Pledged Assets exceed the outstanding principal amount of the loans
made under the loan facility, plus unpaid accrued interest, by at least
200 percent. The Pledged Assets will be available solely to secure
repayments of the loans made under the loan facility to a Fund.
4. Applicants state that the proposed loan facility would allow the
Funds to borrow money at an advantageous interest rate because the
Conduit's cost of funds is lower than that of other lenders, and this
advantage will be passed on to the borrowers from the Conduit,
including the Funds. No more than 10% of a Conduit's loans will be made
to the Funds. The other borrowers will be unaffiliated entities,
including unaffiliated closed-end funds. Applicants estimate that
approximately 5% of the Conduit's loans currently are made to
unaffiliated closed-end investment companies (``closed-end funds''). A
Fund will have the right to terminate its participation in the loan
facility at any time.
5. Applicants state that financial institutions (``Liquidity
Providers'') provide liquidity to a Conduit on a transaction-by-
transaction basis under agreements between the Liquidity Providers and
the Conduit. Applicants state that the liquidity support is additional
assurance that the Conduit's commercial paper will be paid at maturity
notwithstanding any credit factors or other issues that may affect a
borrower from the Conduit. In connection with the proposed loan
facility for the Funds, CNAI will serve as the Liquidity Provider to
the Conduit. Citicorp will guarantee CNAI's obligations under the loan
facility.
6. The Conduit at any time and for any reason may (i) sell an
outstanding loan to CNAI as Liquidity Provider, or (ii) require CNAI as
Liquidity Provider to provide financing to a Fund instead of the
Conduit. Applicants state that this arrangement is necessary in order
for the Conduit's commercial paper issuances to have high ratings.
Applicants state that at least 90% of a Conduit's commercial paper will
be rated A-1+/P-1. The rate at which CNAI as Liquidity Provider would
make a loan to a Fund would not be as favorable as that of the Conduit,
but would be comparable to the rates on secured lines of credit from
banks. Applicants state that, absent extenuating circumstances, it is
anticipated that a Conduit, rather than CNAI or another Liquidity
Provider, will be the lender to the Funds under the loan facility.
7. A Fund will pay certain fees to CNAI in connection with the loan
facility. These include (i) a fixed amount up-front for structuring the
loan facility, (ii) a fee for administering the loan facility, set as a
percentage of a Fund's outstanding loans from the Conduit, and (iii) a
fee for CNAI's commitment as Liquidity Provider, based on a percentage
of the unused portion of CNAI's commitment.
Applicants' Legal Analysis
1. Section 17(a)(2) of the Act prohibits an affiliated person of a
registered investment company, or an affiliated person of that person,
acting as principal, from purchasing a security or other property from
the company. Section 2(a)(3) of the Act defines an ``affiliated
person'' of another person to include any person directly or indirectly
controlling, controlled by, or under common control with, the other
person, and, in the case of an investment company, its investment
adviser. Under section 2(a)(9) of the Act, a person that owns
beneficially more than 25% of the voting securities of a company is
presumed to control the company.
2. Applicants state that, as the Funds' investment adviser, SBAM is
an affiliated person of the Funds. Applicants also state that Citicorp
and CNAI are affiliated persons of SBAM because they are under the
common
[[Page 68399]]
control of Citigroup. Applicants state that, as a result, Citicorp and
CNAI are affiliated persons of an affiliated person of the Funds.
Applicants state that the pledge of Pledged Assets by a Fund in
connection with the loan facility may constitute a purchase by an
affiliated person of an affiliated person of a Fund prohibited by
section 17(a)(2) of the Act.
3. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
any affiliated person of a registered investment company or any
affiliated person of that person, acting as principal, from effecting
any transaction in connection with any joint enterprise or joint
arrangement in which the investment company participates, unless an
application regarding the joint arrangement has been filed with the
Commission and granted by order. Applicants state that the loan
facility may constitute a joint arrangement between a Fund and CNAI.
4. Section 17(b) of the Act authorizes the Commission to exempt a
transaction from section 17(a) if the terms of the proposed transaction
are reasonable and fair and do not involve overreaching on the part of
any person concerned, and if the proposed transaction is consistent
with the policy of each registered investment company concerned and
with the general purposes of the Act. Section 6(c) of the Act provides
that the Commission may exempt any person, security, or transaction
from any provision of the Act if the exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act. Under rule 17d-1, in passing on applications for
orders under section 17(d), the Commission must consider whether the
investment company's participation in the joint enterprise or joint
arrangement is consistent with the provisions, policies, and purposes
of the Act and the extent to which such participation is on a basis
different from or less advantageous than that of other participants.
5. Applicants request an order under sections 6(c) and 17(b) of the
Act and under section 17(d) of the Act and rule 17d-1 under the Act to
permit the Funds to participate in the loan facility. Applicants state
that borrowing from the facility is designed to provide benefits to the
Funds. Applicants assert that there is no express or implied
understanding between SBAM and CNAI or Citicorp that SBAM will give
preference to the loan facility in selecting lenders for the Funds.
Applicants also state that the borrowings by a Fund will be on an arms-
length basis and on terms and conditions similar to those of any other
borrower from a Conduit. For these reasons, applicants believe that the
requested relief meets the standards of sections 6(c) and 17(b) of the
Act and rule 17d-1 under the Act.
6. Under the proposed conditions, a Fund's participation in the
facility will be overseen and monitored by a Fund's board of directors
(``Board''), including a majority of the directors who are not
interested persons of the Fund (``Disinterested Directors''). Among
other things, the Board, including a majority of the Disinterested
Directors, would be required to determine that the interest rate a Fund
would pay to a Conduit (i) would be lower than that available from
typical financing sources considered by the Fund, and (ii) would not
exceed the rate on comparable loans by the Conduit to unaffiliated
closed-end funds. Before a Fund may borrow from the Conduit, the Board
also would have to consider, and compare to market rates, the interest
rate that the Fund may be required to pay should the Conduit at a later
time transfer the loan to CNAI as the Liquidity Provider.
7. In addition, the proposed conditions would require that the fees
a Fund would pay to CNAI in connection with the loan facility be no
higher than similar fees paid by unaffiliated closed-end funds. The
Board, including a majority of the Disinterested Directors, also would
conduct quarterly reviews of a Fund's transactions with the loan
facility, including the terms of each transaction, and would be
required to make an annual re-evaluation of a Fund's continued
participation in the loan facility. Should CNAI become the lender, the
Board will have the option to terminate the Fund's participation in the
loan facility.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Loans by a Conduit to the Funds in the aggregate will not exceed
10% of the principal amount of the Conduit's outstanding loans and
other assets.
2. At least 90% of a Conduit's commercial paper will be rated in
the category A-1+ or P-1.
3. A loan by a Conduit to the Funds will be at an interest rate
equal to the Conduit's cost of funds (i.e., the weighted average
commercial paper rate plus commercial paper dealer commissions).
4. Before a Fund may participate in the loan facility, the Fund's
Board, including a majority of the Disinterested Directors, will
determine that:
(a) participation in the loan facility is consistent with the
Fund's investment objectives and policies, and is in the best interests
of the Funds and its shareholders; and
(b) the terms of the Fund's participation are reasonable and fair,
do not involve overreaching, and are no less advantageous than those of
other participants.
5. Before a Fund may participate in the loan facility, the Board,
including a majority of the Disinterested Directors, will adopt
procedures governing the Fund's participation in the loan facility
(``Procedures''). In addition to any other provisions the Board may
find necessary or appropriate to be included in the Procedures, the
Procedures will require that, before a Fund may enter into a loan
transaction with a Conduit, the Board, including a majority of the
Disinterested Directors, will determine that:
(a) the borrowing is in the best interests of the Fund and its
shareholders;
(b) the borrowing and pledge of assets are consistent with the
Fund's investment objectives and policies;
(c) the interest rate on the loan is expected to be lower than that
available from typical financing sources considered by the Fund as
consistent with its investment objectives and policies and in the best
interests of its shareholders;
(d) the interest rate does not exceed the rate on comparable loans
by the Conduit to closed-end funds unaffiliated with Citigroup in
similar transactions;
(e) the Fund asset eligibility criteria are consistent with the
Fund's investment objectives and policies and the Fund's investments
consistent with the eligibility criteria will be in the best interests
of the Fund and its shareholders;
(f) any fee that the Fund will be required to pay to CNAI for
structuring and administering the loan facility will be in the
aggregate no higher than the percentage amount of similar fees paid by
other closed-end funds with similar investment objectives and policies
that are unaffiliated with Citigroup in similar transactions (taking
into account the interest rate paid on the loans by these funds) with a
Conduit;
(g) any fee that the Fund will be required to pay CNAI as a
percentage of CNAI's unused loan commitment as Liquidity Provider will
be no higher than the percentage amounts paid by unaffiliated closed-
end funds with similar investment objectives and policies to a
Liquidity Provider for the six month period before a loan transaction
with a Conduit or to an
[[Page 68400]]
unaffiliated Liquidity Provider that participates in the loan facility;
and
(h) the interest rate that may be paid to CNAI as Liquidity
Provider is expected to be no higher than that available for secured
lines of credit from typical financial sources for similar transactions
considered by the Fund as consistent with its objectives and policies
and in the best interests of shareholders.
6. If a Conduit determines (i) to require CNAI as Liquidity
Provider to acquire from the Conduit outstanding loans made to a Fund,
or (ii) not to extend additional loans to a Fund but require CNAI as
the Liquidity Provider to do so, the Board, including a majority of the
Disinterested Directors, will be notified promptly. As soon as
practicable, the Board, including a majority of the Disinterested
Directors, must determine whether it is in the best interests of a Fund
and its shareholders to continue to participate in the loan facility or
to terminate its participation in the loan facility in accordance with
its terms and, if applicable, refinance the loans with proceeds from
alternative sources. In determining that it is in the best interests of
a Fund and its shareholders to participate in the loan facility, the
Board shall find that the interest rate paid to CNAI as Liquidity
Provider (i) is no higher than that available for secured lines of
credit from typical financial sources for similar transactions that are
considered by the Fund as consistent with it objectives and policies
and in the best interests of shareholders and (ii) does not exceed the
interest rate on comparable loans made by CNAI to closed-end funds
unaffiliated with Citigroup in similar transactions.
7. In making the determinations referred to in conditions 5(c),
5(h) and 6 above, the Board will consider interest rate quotes from at
least three loan facilities or other alternative financing sources
unaffiliated with Citigroup.
8. At each regular quarterly meeting, the Board, including a
majority of the Disinterested Directors, will (a) review a Fund's loan
transactions with the loan facility during the preceding quarter,
including the terms of each transaction; and (b) determine whether the
transactions were effected in compliance with the Procedures and the
terms and conditions of this order. At least annually, the Board,
including a majority of the Disinterested Directors, will (a) make the
determinations concerning a Fund's continued participation in the loan
facility required in condition 4 above; and (b) approve such changes to
the procedures as it deems necessary or appropriate.
9. The Funds will maintain and preserve permanently in an easily
accessible place a written copy of the Procedures and any modifications
to the Procedures. The Funds will maintain and preserve for a period of
not less than six years from the end of the fiscal year in which any
transaction with the loan facility occurred, the first two years in an
easily accessible place, (a) a written record of each transaction
setting forth a description of the terms of the transaction, including
the amount, the maturity, and the rate of interest on the loan, and (b)
all information upon which the determinations required by these
conditions were made.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-31637 Filed 12-6-99; 8:45 am]
BILLING CODE 8010-01-M
