[Federal Register Volume 59, Number 87 (Friday, May 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10891]
[[Page Unknown]]
[Federal Register: May 6, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20261; 812-8696]
Bando McGlocklin Capital Corporation et al.; Application
April 29, 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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APPLICANTS: Bando McGlocklin Capital Corporation (``Bando'') and Bando
McGlocklin Small Business Investment Corporation (the ``SBIC
Subsidiary'').
RELEVANT ACT SECTIONS: Exemption requested under sections 6(c) and
17(b) of the Act from sections 8(b), 12(d), 17(a), 18(a), 18(c), 30(a),
30(b), and 30(d) of the Act and rules 8b-16, 30a-1, 30b1-1, and 30d-1
thereunder.
SUMMARY OF APPLICATION: Applicants request an order to permit Bando to
form two new subsidiaries and engage in certain transactions with the
new subsidiaries. The order also would permit modified asset coverage
requirements for Bando and one of the subsidiaries and, in addition,
permit certain reports to be filed on a consolidated basis. The
requested order would amend two prior orders.
FILING DATE: The application was filed on November 19, 1993 and amended
on February 11, 1994. Applicants have 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
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on May 24, 1994,
and should be accompanied by proof of service on applicants, 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549.
Applicants, 13555 Bishops Court, Brookfield, WI 53005.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at
(202) 942-0576, or Robert A. Robertson, 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.
Applicants' Representations
1. Bando and the SBIC Subsidiary, Wisconsin corporations, are
registered closed-end investment companies. In 1992 and 1993, the SEC
issued orders to permit Bando and the SBIC Subsidiary to create a
holding company structure with the SBIC Subsidiary being a wholly-owned
subsidiary of Bando, and to permit Bando to issue a class of senior
security (the ``Prior Order'').\1\ Bando was licensed to operate as a
small business investment company under the Small Business Investment
Act of 1958. On March 26, 1993, Bando transferred substantially all of
its assets and its small business investment company license to the
SBIC Subsidiary. Presently, the SBIC Subsidiary provides secured loans
to small businesses.
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\1\Investment Company Act Release Nos. 19030 (Oct. 15, 1992)
(notice), 19092 (Nov. 10, 1992) (order) (initial order permitting
Bando to establish and operate the SBIC Subsidiary as a wholly-owned
subsidiary), 19584 (July 21, 1993) (notice), and 19636 (Aug. 17,
1993) (order) (order amending initial order to permit Bando to issue
one class of senior security which is a stock).
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2. Bando proposes to form two additional subsidiary corporations.
One of these will be a small business lender (``the SBL Subsidiary'')
participating in a government guaranteed loan program and the other
will be the ``Bankruptcy Remote Subsidiary.'' The SBL and Bankruptcy
Remote Subsidiaries will be registered closed-end investment companies
under the Act.
3. Subject to the approval of the Small Business Administration
(``SBA''), the SBL Subsidiary will operate as a qualified lender
licensed under the government guaranteed loan program authorized by
section 7(a) of the Small Business Act (the ``7(a) Program''). The 7(a)
Program's objective is to provide funds to small business concerns,
which otherwise may have limited access to credit. The SBA guarantees
up to 70 to 85% of the principal amount of loans made by lenders under
the 7(a) Program. The SBA has notified Bando that Bando's participation
in the 7(a) Program must be effected in a corporation separate from the
Bando and the SBIC Subsidiary.
4. The Bankruptcy Remote Subsidiary will facilitate the
``securitization'' of portfolio loans of Bando, the SBIC Subsidiary,
and the SBL Subsidiary. Securitization of loans held by the SBL and
SBIC Subsidiaries will be effected by the sale of the loans to Bando,
followed by the sale of the loans to the Bankruptcy Remote Subsidiary.
The Bankruptcy Remote Subsidiary then will sell the loans to a
``company'' that is not taxed as a corporation under the Internal
Revenue Code, in exchange for cash and securities issued by the
company. The directors of the Bankruptcy Remote Subsidiary will not be
identical to those of Bando, the SBIC Subsidiary, or the SLB
Subsidiary. This will enable certain securities issued by a company and
collateralized by the loans purchased from the Bankruptcy Remote
Subsidiary to obtain an investment grade rating. A majority of the
directors of the Bankruptcy Remote Subsidiary will be directors of
Bando. All loans would be sold on a non-recourse basis and neither
Bando nor any of its subsidiaries would guarantee payment of such
loans.
Applicants' Legal Analysis
A. Section 12(d)
1. Section 12(d)(1) of the Act limits the amount of securities a
registered investment company may hold of other investment companies.
Section 12(e) provides an exemption to the section 12(d)(1) limitations
for acquisitions of securities of certain corporations, such as those
that furnish capital to industry, provided that, among other things,
the aggregate cost of the securities does not exceed 5% of the total
assets of the acquiring company at the time of purchase. Subsequent to
the Bando's initial acquisition of the outstanding common stock of the
SBL Subsidiary, Bando's additional purchases of the SLB Subsidiary's
common stock may exceed 5% of Bando's total assets and, therefore, the
section 12(e) exemption will no longer be available.
2. In addition, because Bando will hold more than 3% of the
outstanding voting stock of the SBL Subsidiary, Bando's loans to the
SBL Subsidiary could violate section 12(d)(1) if such loans were
considered acquisitions of the SBL Subsidiary's debt securities.
Bando's organization of the Bankruptcy Remote Subsidiary and subsequent
purchases of the subsidiary's common stock also will violate section
12(d)(1) absent an exemption, and section 12(e) will not be available
because the Bankruptcy Remote Subsidiary will not engage in any of the
businesses specified in section 12(e). Accordingly, Bando requests an
exemption from section 12(d)(1) to permit Bando to (a) make further
acquisitions of the common stock of the SBL Subsidiary, (b) acquire
notes and other indebtedness of the SBL Subsidiary, and (c) acquire the
common stock of the Bankruptcy Remote Subsidiary.
B. Section 17(a)
1. Section 17(a) of the Act generally prohibits sales or purchases
of securities between registered investment companies and any
affiliated person of that company. Bando, the SBL Subsidiary, and the
Bankruptcy Remote Subsidiary will be affiliated persons. Since the SBL
Subsidiary will be fully owned by Bando, Bando's initial acquisition of
the outstanding common stock of the SBL Subsidiary will be exempt under
rule 17a-3 from section 17(a).\2\ In addition, applicants assert that
investments in the SBL Subsidiary in the form of stock purchases,
capital contributions, or loans do not violate section 17(a) because
the seller is the issuer and is controlled by Bando. Purchases and sale
of portfolio securities between Bando and the SBL Subsidiary, however,
appear to be violations of section 17(a).\3\ Accordingly, applicants
request an exemption from section 17(a) to the extent necessary to
permit purchases and sales of portfolio securities between Bando and
the SBL Subsidiary.
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\2\Rule 17a-3 provides in part that transactions solely between
a registered investment company and one or more of its ``fully owned
subsidiaries'' are exempt from section 17(a). Rule 17a-3 defines a
``fully owned subsidiary'' as a subsidiary that, among other things,
is not indebted to any person other than its parent, the parent's
other fully owned subsidiaries, and/or banks or insurance companies
in any amount that is material in relation to the particular
subsidiary.
\3\After the SBL Subsidiary begins operations, it will no longer
be considered a ``fully owned subsidiary'' under rule 17a-3 to the
extent that the SBL Subsidiary becomes indebted to parties other
than Bando, the SBIC Subsidiary, the Bankruptcy Remote Subsidiary,
banks, or insurance companies in any ``material amount.''
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2. Applicants assert that the organization and operation of the
Bankruptcy Remote Subsidiary does not raise any issues under section
17(a) because it will be able to rely on the rule 17a-3 exemption.
C. Section 18
1. Section 18(a) of the Act prohibits a registered closed-end
investment company from issuing any class of senior security unless the
company complies with the asset coverage requirements set forth in the
section. ``Asset coverage'' is defined in section 18(h) to mean the
ratio which the value of the total assets of an issuer, less all
liabilities not represented by senior securities, bears to the
aggregate amount of senior securities of such issuer. Under section
18(a), senior securities of closed-end investment companies
representing indebtedness must have an asset coverage of 300%
immediately after their issuance and senior securities of such
companies representing stock must have an asset coverage of 200%.
Section 18(c) prohibits a registered closed-end investment company from
issuing more than one class of senior securities representing
indebtedness.
2. Bando, the SBL Subsidiary, and the Bankruptcy Remote Subsidiary
are subject to the asset coverage requirements of section 18(a) on an
individual basis, and Bando on a consolidated basis because Bando may
be an indirect issuer of senior securities with respect to the SBL and
Bankruptcy Remote Subsidiaries' indebtedness. Accordingly, Bando would
be required to treat as its own any liabilities of the SBL and
Bankruptcy Remote Subsidiaries.
3. Absent exemptive relief, the asset coverage limitations of
section 18(a) would prevent the SBL Subsidiary from using borrowings
from Bando to fund 7(a) Program loans. Similarly, without an exemption,
section 18(c) would preclude the SBL Subsidiary from issuing more than
one class of securities to finance such borrowings. In addition, if
deemed to be an indirect issuer of the SBL Subsidiary's indebtedness,
sections 18 (a) and (c) would impose the same limitations on Bando with
respect to the SBL Subsidiary's borrowings on a consolidated basis.
Accordingly, applicants request an exemption from 18(a) to the extent
necessary to treat the SBL Subsidiary's borrowings from Bando as
``liabilities and indebtedness not represented by senior securities''
within the meaning of section 18(h) in applying the asset coverage
requirements of section 18(a). Applicants also request an exemption
from section 18(c) to permit Bando and the SBL Subsidiary, on an
individual basis, to have more than one class of senior security
representing indebtedness, subject to condition 5 below. The
organization and operation of the Bankruptcy Remote Subsidiary does not
raise any issues under section 18 because it will not issue senior
securities.
D. Sections 8 and 30
In the absence of an exemption, each of Bando, the SBL Subsidiary,
and the Bankruptcy Remote Subsidiary would be required to file annual
amendments to its registration statement and transmit to its
shareholders annual and/or semi-annual reports on form N-SAR pursuant
to sections 8(b), 30(a), 30(b), and 30(d) and rules 8b-16, 30a-1, 30b1-
1, and 30d-1. Applicants request an exemption to permit: (a) Bando to
file on behalf of itself, the SBL Subsidiary, and the Bankruptcy Remote
Subsidiary amendments to its registration statement containing
information with respect to Bando, the SBL Subsidiary, and the
Bankruptcy Remote Subsidiary on a consolidated basis only; (b) Bando to
file on behalf of itself and the SBL Subsidiary semi-annual reports on
form N-SAR containing information with respect to Bando, the SBL
Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated
basis only; and (c) Bando to transmit to its shareholders semi-annually
reports containing the financial information for Bando, the SBL
Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated
basis only.
E. Modification of Condition 6 of Prior Order
1. Condition 6 of the Prior Order provides that if 10% or more of
Bando's total assets on a consolidated basis are invested in assets
other than securities issued by the SBIC Subsidiary, then, in addition
to the consolidated financial statements of Bando and the SBIC
Subsidiary, there shall be included in such reports separate financial
statements of the SBIC Subsidiary. Absent exemptive relief, applicants
assume that if 10% or more of Bando's total assets on a consolidated
basis are invested in assets other than the SBIC, SBL, and Bankruptcy
Remote Subsidiaries, separate financial statements would be required.
2. In the future, Bando may make loans directly and may purchase
loans from the SBIC or SBL Subsidiaries, and may therefore have more
than 10% of its assets on a consolidated basis invested in assets other
than the SBIC, SBL, and Bankruptcy Remote Subsidiaries. Accordingly,
applicants request that condition 6 of the Prior Order be modified to
require separate financial statements of the SBIC, SBL, and Bankruptcy
Remote Subsidiaries if 10% or more of Bando's total assets on a
consolidated basis are invested in assets other than securities issued
by the SBIC, SBL, and Bankruptcy Remote Subsidiaries and securities
similar to securities in which the subsidiaries invest.
F. Standards for Exemption Under Sections 6(c) and 17(b)
1. Section 6(c) of the Act permits the SEC to exempt any person or
transaction from any provision of the Act, if such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
of the Act. The relationship of Bando's shareholders to the activities
to be carried out by the SBL and Bankruptcy Remote Subsidiaries will be
no different than if such activities were carried out by Bando because
(a) the SBL and Bankruptcy Remote Subsidiaries will be wholly-owned
subsidiaries of Bando; and (b) Bando has agreed that it will exercise
its rights as the shareholder of the SBL and Bankruptcy Remote
Subsidiaries on matters required by the Act to be approved by
shareholders only as directed by Bando's shareholders. Accordingly,
applicants believe that the requested exemptions meet the section 6(c)
standards.
2. Section 17(b) of the Act permits the SEC to exempt a proposed
transaction from section 17(a) if evidence establishes that (a) the
terms of the proposed transaction, including the consideration to be
paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned; (b) the proposed
transaction is consistent with the policy of each registered investment
company concerned; and (c) the proposed transaction is consistent with
the general purposes of the Act. Applicants believe that the requested
relief from section 17(a) meets these standards.
Applicants' Conditions
Applicants state that as a condition to the granting of the
exemptive relief requested, each of Bando, the SBIC Subsidiary, the SBL
Subsidiary, and the Bankruptcy Remote Subsidiary will comply with the
following conditions:
1. Bando will at all times own and hold beneficially and of record
all of the outstanding voting capital stock of the SBIC, SBL, and
Bankruptcy Remote Subsidiaries.
2. The SBIC and SBL Subsidiaries will have the same fundamental
policies of Bando, as set forth in Bando's registration statement; the
SBIC and SBL Subsidiaries will not engage in any of the activities
described in section 13(a) of the Act, except in each case as
authorized by the vote of a majority of the outstanding voting
securities of Bando. The Bankruptcy Remote Subsidiary will not engage
in any of the activities described in section 13(a) of the Act, except
in each case as authorized by the vote of a majority of the outstanding
voting securities of Bando.
3. No person shall serve or act as investment adviser to the SBIC,
SBL, or Bankruptcy Remote Subsidiaries under circumstances subject to
section 15 of the Act, unless the directors and shareholders of Bando
shall have taken the action with respect thereto also required to be
taken by the directors and shareholders of the SBIC, SBL, or Bankruptcy
Remote Subsidiaries, as the case may be.
4. No person shall serve as a director of the SBIC, SBL, or
Bankruptcy Remote Subsidiaries who shall not have been elected as a
director of Bando at its most recent annual meeting, as contemplated by
section 16(a) of the Act and subject to the provision thereof relating
to the filling of vacancies, provided that the Bankruptcy Remote
Subsidiary may have two directors who are not directors of Bando as
long as a majority of its board of directors consists of directors who
are also directors of Bando. Notwithstanding the foregoing, (a) the
board of directors of the SBIC and SBL Subsidiaries will be elected by
Bando as the sole shareholder of both corporations, and such board will
be composed of the same persons that serve as directors of Bando and
(b) the board of directors of the Bankruptcy Remote Subsidiary will be
elected by Bando as the sole shareholder of the Bankruptcy Remote
Subsidiary and such board will be composed of the same persons that
serve as directors of Bando except to the extent noted above.
5. Bando will not itself issue or sell any senior security
representing indebtedness if immediately thereafter Bando will have
outstanding more than one class of senior security representing
indebtedness; and Bando will not issue or sell any senior security
which is a stock if immediately thereafter Bando shall have outstanding
more than one class of senior security which is a stock, as provided
under section 18(c) of the Act. Bando shall not guarantee any
borrowings of the SBIC or SBL Subsidiaries, nor shall Bando enter into
any express or implied agreement that is the functional equivalent of
such a guarantee, including any agreement that will ensure that the
SBIC or SBL Subsidiaries has a tangible net worth of a specified
amount. Bando will not cause or permit the SBIC or SBL Subsidiaries to
issue or sell any senior security of which the SBIC or SBL Subsidiaries
is the issuer except as hereafter set forth: the SBIC and SBL
Subsidiaries may issue and sell to banks, insurance companies, and
other financial institutions their secured or unsecured promissory
notes or other evidences of indebtedness in consideration of any loan,
or any extension or renewal thereof made by private arrangement, and
the SBIC Subsidiary may issue debt securities held or guaranteed by
SBA, provided the following conditions are met: (a) Such notes or
evidences of indebtedness are not intended to be publicly distributed;
and (b) such notes or evidences of indebtedness are not convertible
into, exchangeable for or accompanied by any options to acquire, any
equity security. Immediately after the issuance or sale of any class of
senior security by Bando or the issuance or sale of any such notes or
evidences by the SBIC or SBL Subsidiaries, Bando, the SBIC Subsidiary,
and the SBL Subsidiary on a consolidated basis, and Bando and the SBL
Subsidiary individually, shall have the asset coverage required by
section 18(a), except that, in determining whether Bando, the SBIC
Subsidiary, and the SBL Subsidiary, on a consolidated basis, and the
SBL Subsidiary on an individual basis, have the asset coverage required
by section 18(a), any borrowings by the SBIC Subsidiary or any
borrowings by the SBIC Subsidiary or any borrowings by the SBL
Subsidiary from Bando, for purposes of the definition of ``asset
coverage'' in section 18(h), shall be treated as indebtedness not
represented by senior securities. The Bankruptcy Remote Subsidiary will
not issue senior securities.
6. Bando will file with the SEC pursuant to rule 8b-16 amendments
to its registration statement pursuant to section 8(b) of the Act on
behalf of itself, the SBIC Subsidiary, the SBL Subsidiary, and the
Bankruptcy Remote Subsidiary containing information with respect to,
and financial statements of, Bando, the SBIC Subsidiary, the SBL
Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated
basis only, such amendments to be in lieu of and in satisfaction of the
separate filing obligations of Bando, the SBIC Subsidiary, the SBL
Subsidiary, and the Bankruptcy Remote Subsidiary pursuant to rule 8b-
16. Bando will file with the SEC pursuant to sections 30(a) and 30(b)
of the Act and rules 30a-1 and 30b1-1 thereunder semi-annual reports on
form N-SAR, or appropriate successor form, on behalf of itself, the
SBIC Subsidiary, and the SBL Subsidiary containing information with
respect to Bando, the SBIC Subsidiary, the SBL Subsidiary, and the
Bankruptcy Remote Subsidiary on a consolidated basis only, such
consolidated semi-annual reports to be lieu of and in satisfaction of
the separate filing obligations of Bando, the SBIC Subsidiary, and the
SBL Subsidiary pursuant to sections 30(a) and 30(b) and rules 30a-1 and
30b1-1. Bando will in response to the appropriate item of form N-SAR or
appropriate successor form indicate that the report is being filed on
behalf of the SBIC, SBL, and Bankruptcy Remote Subsidiaries and include
the ``811'' number of each of the SBIC, SBL, and Bankruptcy Remote
Subsidiaries. Bando will transmit to its shareholders semi-annually
pursuant to section 30(d) of the Act and rule 30d-1 thereunder reports
containing the financial information and statements prescribed and
required by such section and rule for Bando, the SBIC Subsidiary, the
SBL Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated
basis only, which reports shall be in lieu of and in satisfaction of
the separate reporting obligations of Bando, the SBIC Subsidiary, the
SBL Subsidiary, and the Bankruptcy Remote Subsidiary pursuant to
section 30(d) and rule 30d-1, only so long as the amount of Bando's
total assets on a consolidated basis invested in assets other than
securities of the SBIC, SBL, and Bankruptcy Remote Subsidiaries, or
securities similar to those in which such subsidiaries invest, does not
exceed 10%. Notwithstanding anything in this condition, Bando shall not
be relieved of any of its reporting obligations including, but not
limited to, any consolidating statement setting forth the individual
statements of the SBIC, SBL, or Bankruptcy Remote Subsidiaries required
by rule 6-03(c) of regulation S-X. The selection of any independent
public accountant who signs a consolidated financial statement filed by
Bando, the SBIC Subsidiary, the SBL Subsidiary, and the Bankruptcy
Remote Subsidiary with the SEC shall be ratified in accordance with
section 32(a)(2) of the Act by a majority of the outstanding voting
securities (as defined in section 2(a)(42) of the Act) of Bando.
7. Bando will acquire securities of the SBIC Subsidiary
representing indebtedness only if, in each case, the prior approval of
SBA has been obtained. Bando and the SBIC Subsidiary will purchase and
sell portfolio securities between themselves only if, in each case, the
prior approval of SBA has been obtained.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-10891 Filed 5-9-94; 8:45 am]
BILLING CODE 8010-01-M
