[Federal Register Volume 59, Number 35 (Tuesday, February 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3874]
[[Page Unknown]]
[Federal Register: February 22, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20074; 812-7613]
Cityfed Financial Corp.; Notice of Application
February 15, 1994.
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. (``Cityfed'').
RELEVANT ACT SECTIONS: Exemption 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. Applicant would be exempt until the earlier of one year
from the date of the requested order or such time as applicant would no
longer be required to register as an investment company.
FILING DATE: The application was filed on October 19, 1990 and amended
on September 23, 1993 and January 18, 1994. Applicant has agreed to
file an additional amendment, the substance of which is incorporated
herein, during the notice period.
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 March 14, 1994,
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:
Felice R. Foundos, Staff Attorney, at (202) 272-2190, or Robert A.
Robertson, Branch Chief, at (202) 272-3018 (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''). 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 (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., whose deposits, assets,
and liabilities in turn were acquired by City Savings, 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. On September 30, 1993, Cityfed held
cash and securities of approximately $9.7 million. Because of Cityfed's
asset composition, it may 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 Cityfed and certain Cityfed officers and directors, Cityfed
could not acquire an operating company within the one year safe harbor.
The expiration of the safe harbor period necessitated the filing of an
application for exemption from all provisions of the Act, with certain
exceptions.
3. While Cityfed'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 Cityfed, whose liability thereunder
cannot be reasonably estimated and may exceed its assets.
4. 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 (the ``First RTC
Action''). In connection with this action, the RTC sought a court order
to place Cityfed's assets under the control of the court. On January 5,
1993, the RTC and Cityfed entered into an agreement (the ``Agreement'')
whereby the RTC would refrain from seeking the above order and Cityfed
could continue to make payments for ordinary and reasonable business
expenses and certain legal fees. Cityfed, however, must give a monthly
accounting of its expenditures to the RTC, and the RTC may apply to the
court for an appropriate order to prohibit an expenditure. In addition,
Cityfed must give the RTC written notice before paying extraordinary
expenses of more than $5,000 and before making certain payments for
defense costs, attorneys' fees and other legal disbursements.
5. On September 30, 1993, the OTS staff advised Cityfed that it
intended to recommend that the OTS initiate an administrative
enforcement proceeding against Cityfed. Applicant represents that in
such a proceeding, the OTS will likely assert claims similar to the RTC
in the First RTC Action and may attempt to freeze Cityfed's assets.
Because such a proceeding may render moot the issues in the First RTC
Action, the court entered an order on October 15, 1993 to stay that
action for 60 days. The court subsequently ordered the stay extended to
January 28, 1994. The orders do not affect the Agreement, except to
provide that the Agreement will terminate upon the effective date of
any order issued by the OTS, or of any consent order or agreement
between the OTS and Cityfed, that addresses the subject matter of the
Agreement. As of the date of filing the last amendment to this
application, the OTS has not initiated any administrative enforcement
proceeding against Cityfed.
6. 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 (the ``Second RTC
Action''). The RTC seeks in excess of $200 million in damages. Under
Cityfed's bylaws, Cityfed may be obligated to indemnify these former
officers and directors and advance their legal expenses. Currently,
Cityfed is advancing reasonable defense costs to the former directors
and officers named in the First and Second RTC Actions. Furthermore,
Cityfed is currently aware of several other legal actions involving
former officers, directors, or employees of Cityfed who have requested
that Cityfed advance expenses and indemnify them. Cityfed generally has
agreed to advance expenses in connection with these requests. 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.
7. 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 receive
any compensation for her service. If Cityfed is unable to resolve the
above claims successfully, Cityfed may seek protection from the
bankruptcy courts or liquidate. Cityfed 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.
8. During the term of the proposed exemption, Cityfed will comply
with sections 9, 17(a), 17(d), 17(e), 17(f), 36 through 45, and 47
through 51 of the Act and the rules thereunder, subject to the
following modifications. 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 asserts 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). In addition, Cityfed may become subject
to the jurisdiction of a bankruptcy court. With respect to transactions
approved by the bankruptcy court, applicants request an exemption from
sections 17(a) and 17(d) as further described in condition 3 below.
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). Cityfed 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.
2. In determining whether to grant an exemption for a transient
investment company, the Commission 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 asserts that it meets these criteria.
3. Cityfed's failure to become primarily engaged in a non-
investment business by the end of the one year safe harbor of rule 3a-2
is due to factors beyond its control. Because of outstanding and
potential claims against Cityfed and certain of its officers and
directors, Cityfed cannot acquire an operating company. Cityfed has
diligently pursued its claims against others and has taken steps to
determine the extent of its contingent liabilities. Since the filing of
this application on October 19, 1990, Cityfed has invested in money
market instruments and money market mutual funds solely to preserve the
value of its assets.
4. Cityfed requests an order that would exempt it from all
provisions of the Act, subject to certain exemptions, until the earlier
of one year from the date of any order issued on this application or
such time as Cityfed would no longer be required to register as an
investment company under the Act.
Applicant's Conditions
Cityfed agrees that the requested exemption will be subject to the
following conditions, each of which will apply to Cityfed from the date
of the order until it no longer meets the definition of an investment
company or during the period of time it is exempt from registration
under the Act:
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
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 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)(5) 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
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 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 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 connection 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. 94-3874 Filed 2-18-94; 8:45 am]
BILLING CODE 8010-01-M
