[Federal Register Volume 59, Number 154 (Thursday, August 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19563]
[[Page Unknown]]
[Federal Register: August 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC--20444; International Series Release No. 696; 812-9056]
The Bank of New York; Notice of Application
August 5, 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: The Bank of New York.
Relevant Act Sections: Conditional order requested under section 6(c)
for an exemption from the provisions of section 26(a)(2)(D).
Summary of Application: Applicant seeks a conditional order that would
permit applicant to deposit foreign securities, held by unit investment
trusts for which it serves as trustee, with the securities clearance
and depository facilities operated by Morgan Guaranty Trust Company of
New York (``Morgan Guaranty'') in Brussels, Belgium in its capacity as
operator of the Euroclear System (``Euroclear''), or with Central de
Livraison de Valeurs Mobilieres, S.A. (``CEDEL''). Euroclear and CEDEL
are sometimes referred to as the ``Transnational Agencies.''
Filing Dates: The application was filed on June 15, 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 August 30, 1994,
and should be accompanied by proof of service on the 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 5th Street, N.W., Washington, D.C.
20549. Applicant, The Bank of New York, 101 Barclay Street, New York,
New York 10286.
FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563 or Barry D. Miller,
Senior Special Counsel, 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. Applicant is a trust company incorporated and doing business
under the laws of the State of New York. Applicant meets the
qualifications of section 26(a)(1) of the Act for a trustee or
custodian of a unit investment trust. Applicant currently serves as
trustee of various unit investment trusts sponsored or co-sponsored by,
among others, Van Kampen Merritt; Merrill Lynch, Pierce, Fenner & Smith
Incorporated; Nike Securities L.P.; Dean Witter Reynolds Inc.; Quest
For Value; Bear, Stearns & Co. Inc.; and Unison Investment Trusts Ltd.
and may in the future act as trustee of trusts sponsored by these and
other sponsors. Under each trust indenture, and as required by the Act,
applicant has responsibility for the custody of the securities held in
the trust.
2. Various sponsors of trusts for which applicant acts as trustee
have created, or have expressed an interest in creating, trusts whose
investment objectives contemplate investment in securities denominated
in foreign currencies and in foreign securities. Foreign securities,
especially securities issued in the European market, are issued
generally in bearer form. With the growth of the European securities
markets, the problems with bearer instruments entailed by the necessity
for presentment of certificates or coupons for payment of principal of
or interest on the securities have led to the increased importance of a
book-entry system to speed clearance of trades and collection of
principal and interest payments.
3. Euroclear and CEDEL are the largest clearance and custody
systems of internationally traded securities in the world. They were
organized principally to provide a simple, economic and automated means
of settling secondary market transactions in internationally traded
securities regardless of the geographical location of the parties to
the transaction. The branch of Morgan Guaranty in Brussels, Belgium
operates Euroclear, and is subject to regulation by the New York and
federal banking authorities and the Belgian Banking Commission. Belgian
law governs Morgan Guaranty's liability as custodian and operator of
Euroclear under the contract between Euroclear and each participating
entity. CEDEL was founded as a limited company under the laws of the
Grand Duchy of Luxembourg. CEDEL is headquartered in Luxembourg and has
representative offices in London, Tokyo, New York, and Hong Kong. CEDEL
operates under the supervision of the Institute Monetaire
Luxembourgeois, the Luxembourg Monetary Authority, which is also the
banking control authority.
4. Applicant believes that securities deposited in Euroclear or
CEDEL are at least as effectively protected as the same securities
would be if directly deposited with a foreign branch of a United States
bank, or shipped to the United States for custody, for several reasons,
including:
(a) the insurance coverage for Euroclear and CEDEL depositaries and
their outstanding loss records;
(b) the expertise and experience of the banks holding securities
for Euroclear or CEDEL;
(c) the efficiencies resulting from handling large quantities of
the same issue;
(d) the excellent track records of Euroclear and CEDEL;
(e) the close scrutiny of Euroclear and CEDEL services resulting
from the market's dependence upon (and hence concern for) these
services and the oversight of the depositaries; and
(f) the depositary agreements pursuant to which securities are held
by Euroclear and CEDEL depositaries, which impose high standards of
care on the depositaries.
5. Applicant believes that the exposure to certain custodial risks
is reduced when securities are held through Euroclear or CEDEL, rather
than directly by a United States bank branch, since securities held in
Euroclear or CEDEL do not have to be transported for deposit outside
these systems to effect sale. Furthermore, holding foreign securities
outside of Euroclear and CEDEL would give rise to substantially higher
costs and probably would involve other significant problems.
Applicant's Legal Analysis
1. Section 26(a)(1) provides that a unit investment trust must be
governed by a trust indenture that designates one or more trustees or
custodians, each of which is a bank, and section 26(a)(2)(D) requires
that the trust indenture provide that the trustee or custodian have
possession of all securities and other property in which the funds of
the trust are invested.
2. Euroclear and CEDEL do not qualify under the Act as custodians
for unit investment trust assets. The term ``bank'' is defined in
section 2(a)(5) as a banking institution organized under the laws of
the United States, a member bank of the Federal Reserve System, and any
other banking institution or trust company doing business under the
laws of any state or the United States that receives deposits or
exercises fiduciary powers. The SEC has stated that an overseas branch
of a domestic bank is the only facility located outside the United
States that qualifies as a custodian under section 26. See Exemption
for Custody of Investment Company Assets Outside the United States,
Investment Company Act Release No. 13724 (Jan. 17, 1984). The SEC also
has indicated that a foreign-incorporated subsidiary does not meet this
definition. See International Resources Funds, Inc., Investment Company
Act Release No. 2874 (May 4, 1959). Accordingly, neither Euroclear nor
CEDEL meets the definition of a bank under the Act, and, as a result,
neither qualifies as a custodian.
3. Section 6(c) provides in relevant part that the SEC, by order
upon application, may exempt any transactions 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 and provisions of the Act.
Applicant believes that the requested relief satisfies the section 6(c)
standard.
4. Rule 17f-5 permits a registered management investment company to
hold foreign securities in foreign security depositories or clearing
agencies such as Euroclear or CEDEL, subject to certain provisions.
Rule 17f-5 permits investment companies to place and maintain foreign
securities, as defined in the rule, with certain foreign custodians,
provided that a majority of the board of directors, (a) determines that
maintaining the company's assets in a particular country is consistent
with the best interests of the company and its shareholders, (b)
determines that maintaining the company's assets with a particular
foreign custodian is consistent with the best interests of the company
and its shareholders, and (c) approves, as consistent with the best
interests of the company and its shareholders, a written contract that
will govern the manner in which such custodian will maintain the
company's assets. The directors also must establish a system to monitor
these arrangements and annually review and approve the continuance of
these arrangements. Both Euroclear and CEDEL qualify as foreign
custodians under rule 17f-5. There, however, is no rule analogous to
rule 17f-5 applicable to the safekeeping of the assets of a unit
investment trust when those assets are held outside of the United
States.
5. Applicant proposes to provide to a trust custody services that
would permit the foreign securities of the trust to be held abroad in
the custody of Euroclear or CEDEL. These arrangements will be in total
agreement with those applicable to registered management investment
companies as contemplated by rule 17f-5, except that (a) certain duties
and responsibilities of the directors of such companies will be
performed by applicant as trustee, (b) applicant will provide
indemnification to the unit holders, and (c) only Euroclear and CEDEL
will qualify as foreign custodians for the trusts.
6. Applicant views the deposit of trust assets with Euroclear and
CEDEL to be consistent with the purposes of section 26. Euroclear and
CEDEL are the largest clearance and custody systems of internationally
traded securities. Their insurance coverage, governing terms and
conditions, and the high calibre of their depositories provide trust
and unit holders with a great degree of security.
Applicant's Conditions
Applicant agrees that the exemptive order requested herein will be
subject to the following conditions:
1. Applicant will comply with the provisions of Rule 17f-5 under
the Act as if each trust was a registered investment company and
applicant was its board of directors; except that Euroclear and CEDEL
shall be the only qualified ``eligible foreign custodians'' for the
trusts.
2. Applicant will indemnify and hold each of the trusts harmless
from and against any loss that shall occur as the result of the failure
of a Transnational Agency holding the foreign securities of a trust to
exercise reasonable care with respect to the safekeeping of such
foreign securities to the same extent that applicant would be required
to indemnify and hold a trust harmless if applicant were holding such
foreign securities in the jurisdiction of the United States whose laws
govern the relevant trust indenture; provided, however, that applicant
shall not be liable for loss except by reason of the gross negligence,
bad faith, or willful misconduct of applicant or a Transnational
Agency.
3. Applicant will assure that the sponsors of each of the trusts
agree that the potential exposure of loss to unit holders resulting
from the use of a Transnational Agency will be disclosed, if material,
in the prospectus relating to the relevant trust.
4. Applicant will maintain and keep current written records
regarding the basis for choice or continued use of a particular
Transnational Agency, and such records will be available for inspection
at applicant's offices at all reasonable times during its usual
business hours by unit holders and the SEC.
For the Commission, by the Division of Investment Management,
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-19563 Filed 8-10-94; 8:45 am]
BILLING CODE 8010-01-M
