[Federal Register Volume 59, Number 39 (Monday, February 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4422]
[Federal Register: February 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20084; 812-8594]
Bando McGlocklin Capital Corporation; Notice of Application
February 18, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``Act'').
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APPLICANT: Bando McGlocklin Capital Corporation.
RELEVANT SECTIONS: Exemption requested under sections 6(c), 17(d), and
23(c), and rule 17d-1 from the provisions of sections 17(d), 18(d), and
23, and rule 17d-1.
SUMMARY OF APPLICATION: Applicant, a diversified closed-end registered
investment company, seeks a conditional order permitting it to offer
key employees of applicant and its subsidiaries deferred equity
compensation in the form of stock options.
FILING DATES: The application was filed on September 28, 1993, and
amended on January 14, 1994, and February 4, 1994.
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 15, 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 such notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549.
Applicant, 13555 Bishops Court, Brookfield, Wisconsin 53005.
FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Attorney, at (202) 272-5287, or C. David
Messman, 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 from
the SEC's Public Reference Branch.
Applicant's Representations
1. Applicant is an internally managed, diversified closed-end
registered investment company. As of December 31, 1993, applicant had
outstanding 3,875,600 shares of common stock. Applicant's common stock
is quoted on the NASDAQ National Market System.
2. Before March 26, 1993, applicant was licensed to operate as a
small business investment company (``SBIC'') under the Small Business
Investment Act of 1958, as amended, and provided long-term, primarily
variable rate, secured loans to finance the growth, expansion, and
modernization of small businesses. Applicant was granted an exemption
from various provisions of the Act and the rules thereunder to permit
it to create a holding company structure.\1\ The purpose of the holding
company structure was to allow applicant to expand its business beyond
that of an SBIC. Although applicant is no longer an SBIC, it will
continue to provide secured loans to finance the growth, expansion, and
modernization of small business entities.
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\1\Investment Company Act Release Nos. 19030 (Oct. 15, 1992)
(notice) and 19092 (Nov. 10, 1992) (order).
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3. On March 26, 1993, applicant transferred its SBIC license to
Bando McGlocklin Small Business Investment Corporation (the
``Subsidiary''), a Wisconsin corporation, under a plan of
reorganization under section 351 of the Internal Revenue Code of 1986
(the ``Code''). Under the plan, virtually all of applicant's assets
were transferred to the Subsidiary; virtually all of applicant's
liabilities were assumed by the Subsidiary; and all of the issued and
outstanding shares of the Subsidiary's common stock were issued to
applicant. Since March 26, 1993, substantially all of applicant's
business has been conducted through the Subsidiary.
4. As an internally-managed investment company, applicant employs
its own personnel and advisory staff. Applicant currently maintains two
incentive stock option plans in accordance with two orders issued to
applicant when it was an SBIC.\2\
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\2\Investment Company Act Release Nos. 17837 (Nov. 1, 1990)
(notice) and 17978 (Nov. 27, 1990) (order) (the ``1990 Plan''); and
15909 (Aug. 3, 1987) (notice) and 15958 (Sept. 2, 1987) (order) (the
``1987 Plan'').
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5. To induce key employees to remain in the employ of applicant and
its subsidiaries and to increase the incentive and personal interest of
such employees in the welfare of applicant and its subsidiaries,
applicant's Board of Directors on August 25, 1993, approved the 1993
Incentive Stock Option Plan (the ``Plan''). Applicant's shareholders
subsequently approved the Plan.
6. The Plan, which is substantially similar to the previous plans,
provides for the grant of options to purchase a maximum of 100,000
shares of applicant's common stock. Applicant has agreed not to issue
more than 85,672 shares under the Plan, so that the total number of
shares that may be issued under all of applicant's incentive stock
option plans will not exceed 7.5% of applicant's currently issued and
outstanding shares without a subsequent SEC order.
7. Only key employees of applicant and its subsidiaries will be
eligible to receive options. The Plan provides that if an option
granted under the Plan expires or is terminated unexercised, the shares
of common stock covered by that option will again be available for the
grant of new options under the Plan. In addition, the Plan provides
that not more than 29,985 shares may be issued to one participant
through the exercise of options granted under the Plan.
8. Applicant currently has five key employees (its three executive
officers, its controller, and its general counsel), who serve in
identical capacities with the Subsidiary. Applicant anticipates that
options to purchase shares of common stock under the Plan will be
granted to applicant's three executive officers when and if the
requested order is received. The number and specific terms of the
options to be granted to such persons have not yet been determined.
9. Applicant's executive officers not only have the responsibility
for making applicant's investments, but also for making all executive
and operational decisions. As the executive officers of applicant,
their performance directly affects applicant's performance and the
value of applicant's common stock. To a lesser extent, the performance
of applicant's controller and its general counsel, who participate in
operational decisions, but do not make executive decisions, also
directly affects the value of applicant's common stock. The performance
of applicant's other employees does not directly affect applicant's
performance. It therefore would be inconsistent with the purposes of
the Plan to grant such employees stock options, since no matter how
competently they performed their duties, their performance probably
would not affect the value of applicant's common stock.
10. The Plan will be administered by the Compensation Committee of
applicant's Board of Directors. The Compensation Committee consists of
five directors of applicant, a majority of whose members are not
``interested persons'' of applicant, as defined in section 2(a)(19).
Members of the Compensation Committee may not receive options under the
Plan.
11. All of the options to be granted pursuant to the Plan will be
incentive stock options within the meaning of section 422 (formerly
section 422A) of the Code. As incentive stock options, the following
restrictions apply:
(a) The Plan must state the aggregate number of shares that may be
issued pursuant to the exercise of options and the class of employees
eligible to receive options; the Plan also must be approved by
applicant's shareholders.
(b) All options must be granted within ten years of the date the
Plan was adopted.
(c) Options may not be exercised more than ten years after the date
on which they are granted.
(d) The exercise price of the options may not be less than the fair
market value of the underlying stock on the date of grant. In
accordance with this provision, options will be granted at the last
quoted sale price of the underlying stock on the date of grant or, if
there is no sale on such date, the options will be granted at the mean
between the closing bid and asked quotations.
(e) Options may not be transferable by an optionee (otherwise than
by will or the laws of descent and distribution), and may be exercised
during the lifetime of the optionee only by the optionee.
(f) Options may not be granted to persons owning more than 10% of
the voting power of the outstanding shares of applicant's common stock
at the time the options are granted.
(g) The aggregate fair market value (determined at the time the
option is granted) of the stock with respect to which options are
exercisable for the first time by an individual in any calendar year
may not exceed $100,000.
(h) Stock acquired upon exercise of options may not be sold for two
years from the grant date or one year from the exercise date, whichever
is later.
(i) Options may be exercised by the optionee only if the optionee
was an employee or officer of applicant during the entire period
commencing with the grant date and ending three months prior to the
exercise date, unless termination of employment is caused by death or
disability, in which case the option may be exercised within one year
following termination of employment.
12. The Plan does not provide for the grant of stock appreciation
rights. The Plan does permit the exercise price of an option to be paid
in cash or by tendering previously acquired shares of stock, valued at
the fair market value as determined by the Compensation Committee. In
placing a fair market value on previously acquired shares of
applicant's common stock, applicant will use the same standards as are
used in determining the fair market value at the time of the grant of
the option.
13. The Compensation Committee may determine in its sole discretion
that an adjustment in the number or kind of shares reserved for
issuance under the Plan but not yet covered by options or of the stock
then subject to options is necessary, or that an adjustment in the
option price in each stock option agreement is necessary because of a
change in the number or kind of outstanding shares of stock of
applicant (or of any stock or other securities into which such shares
of stock shall have been changed or for which it shall have been
exchanged), whether through reorganization, recapitalization, stock
split, combination of shares, merger or consolidation, or any other
change in the number or kind of outstanding shares of stock.
14. Applicant also has a profit sharing plan qualified under
section 401(a) of the Code, which is intended to provide a source of
retirement income for employees. In accordance with the requirements of
the Employee Retirement Income Security Act of 1974, as amended,
applicant's profit sharing plan does not discriminate in favor of
shareholders, officers, and highly compensated employees as to
coverage, benefits, contributions, or otherwise. Applicant to date has
not contributed the maximum permissible amount in any year. The Plan is
not a substitute for a profit-sharing plan qualified under section
401(a), as it is intended to provide incentive compensation and does
not establish a source of income for an employee's retirement years.
Applicant's Legal Conclusions
1. Section 18(d) prohibits any registered management investment
company from issuing warrants or rights to subscribe to or purchase its
securities except those issued ratably to a class of security holders
with an exercise period of up to 120 days, or in exchange for warrants
in connection with a reorganization. The issuance of stock options by
applicant to its employees would not satisfy these statutory
exceptions.
2. The issuance of stock options to applicant's employees also
would be prohibited under section 23. Section 23(a) generally prevents
a registered closed-end investment company from issuing any of its
securities for services or for property other than cash or securities.
Because the issuance of stock options by applicant may constitute the
issuance of securities for services, absent exemptive relief, it would
be prohibited by section 23(a). Section 23(b) prohibits the sale by a
closed-end investment company of any stock of which it is the issuer at
a price below current net asset value, except with the consent of a
majority of its common stockholders at the time of issuance or under
certain other enumerated circumstances. If the net asset value of
applicant's common stock were to increase following the grant of an
option, the option exercise price may be less than the net asset value
of a share of applicant's common stock on the date of exercise.
Furthermore, section 23(c) generally prohibits the purchase by a
registered closed-end investment company of any securities of which it
is the issuer. Thus, to the extent that payment for stock options with
previously acquired shares of applicant's common stock is considered to
be a purchase by applicant of its own securities, section 23(c) would
prohibit the transaction.
3. Section 17(d) and rule 17d-1(a) thereunder also prohibit an
affiliated person of a registered investment company from participating
in, or offering a transaction in connection with, any joint enterprise
or other joint arrangement or profit-sharing plan in which the
registered company is a participant unless an order permitting the
transaction has been granted by the SEC. Paragraph (c) of rule 17d-1
includes stock option plans in the definition of joint enterprise,
joint arrangement or profit-sharing plan prohibited by section 17(d).
These provisions therefore may prohibit any stock option plan absent an
order from the SEC.
4. Although applicant is engaged primarily in the business of
making loans to small businesses, it is no longer an SBIC and therefore
is unable to rely on an existing SEC order permitting SBICs to issue
stock options to their employees\3\ or on rule 17d-1(d)(4).
Additionally, both the order and the rule specifically provide that the
options granted must be ``qualified stock options'' under former
section 422 of the Code and must conform to the requirements of 13 CFR
805(b) adopted by the Small Business Administration. ``Qualified stock
options'' were eliminated in 1976. Thus, although the incentive stock
options provided for in the Plan have many of the same characteristics
as qualified stock options under former section 422, they have some
minor differences, which are fully described in the application.
Applicant is also unable to rely upon a similar order granted to the
Association of Publicly Traded Investment Funds\4\ because the order
does not extend to registered closed-end investment companies that are
engaged primarily in the business of making loans to small businesses.
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\3\National Association of Small Business Investment Companies,
Investment Company Act Release No. 6523 (May 14, 1971).
\4\Investment Company Act Release Nos. 14541 (May 28, 1985)
(notice) and 14594 (June 21, 1985) (order) (permitting the issuance
of incentive stock options by member closed-end investment companies
with portfolios of marketable securities).
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5. Section 6(c) provides that the SEC may grant an exemption from
the provisions of the Act if such exemption is necessary or appropriate
in the public interest and consistent with the protection of investors
and the purposes intended by the policy and provisions of the Act. Rule
17d-1(b) requires the SEC, in passing upon an application regarding a
joint enterprise, joint arrangement or profit-sharing plan, to consider
whether the participation of the investment company in the transaction
is consistent with the 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. Section 23(c)(3) requires
the SEC to insure that repurchases by closed-end funds of their own
securities are on a basis which does not unfairly discriminate against
any holders of the class of securities to be purchased.
6. Applicant submits that the limitations on the requested order
will provide protection to investors against dilution of their pro rata
interests that are similar to those the SEC previously has found
consistent with the purposes and policies of the Act and even greater
than those Congress imposed on stock options to be issued by business
development companies. The Plan has been approved by applicant's
shareholders, and any options granted under the Plan must be approved
by a majority of applicant's directors who are not interested persons
of applicant and who cannot participate in the Plan. In addition, the
total percentage of shares that could be issued under the Plan, the
1987 Plan, and the 1990 Plan will be limited to 7.5% of the outstanding
shares of applicant's common stock.
7. Applicant states that the abuses and adverse effects of
investment company stock options would have no applicability to stock
options granted under the Plan. The limited stock options that could be
granted under the Plan would offer no opportunity for any change in
control of applicant or quick sale at a profit. Additionally, the
options themselves would not be transferable. Moreover, the existence
and nature of the stock options granted by applicant would be fully
disclosed in accordance with the standards or guidelines adopted by the
Financial Accounting Standards Board for operating companies and the
requirements of the SEC, and will be neither so extensive nor so
complex as to make the financial statements of applicant or management
remuneration more difficult to understand.
8. Applicant's investments (other than investments in idle funds)
are in small businesses, the securities of which will not be publicly
traded. In addition, all of applicant's investments in small businesses
consist of non-convertible secured loans. Under these circumstances,
applicant believes that it is difficult to conceive a scenario in which
applicant's portfolio investments could create a short-term artificial
increase in the price of applicant's stock.
9. Applicant submits that, in the event this application is
granted, any adverse impact on investor interests protected by the Act
will be minimal, and further, will be more than outweighed by the
benefits to investors that will result from permitting applicant to
compete for top quality personnel on a more equal footing with its
competitors. Applicant competes primarily with banks and other entities
that are not investment companies registered under the Act. These
organizations are able to offer stock options to employees and have an
advantage over applicant in attracting and retaining highly qualified
personnel. In order for applicant to compete on a more equal basis with
such organizations, it has to have personnel as competent as such
organizations, and in order to attract and retain such personnel,
applicant must be able to offer comparable compensation packages.
10. For the foregoing reasons, applicant believes that the
applicant satisfies the standards for relief set forth in sections
6(c), 17(d), and 23(c) of the Act and rule 17d-1 thereunder.
Applicant's Conditions
Applicant agrees that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. Applicant's directors, including a majority of the directors who
are not interested persons of applicant, will review periodically the
potential impact that the grant or exercise of stock options could have
on applicant's earnings and net asset value per share, such review to
take place prior to any decisions to grant stock options, but in no
event less frequently than annually. Adequate procedures and records
will be maintained to permit such review by applicant's directors, and
the directors will have the authority to take appropriate steps if
necessary to ensure that neither the grant nor the exercise of stock
options would have an effect contrary to the interests of investors in
these areas. The directors' authority will include, in addition to the
authority to prevent or limit the grant of additional stock options,
the authority to limit the number of stock options exercised in a given
period of time if the directors conclude that the effect on applicant's
expenses or earnings would be contrary to the interests of investors or
that net asset value per share might be excessively diluted.
2. No more than 85,672 shares will be issued pursuant to the Plan,
absent a subsequent exemptive order from the SEC with respect to the
remaining 14,328 shares authorized under the Plan.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4422 Filed 2-25-94; 8:45 am]
BILLING CODE 8010-01-M
