[Federal Register Volume 79, Number 102 (Wednesday, May 28, 2014)]
[Notices]
[Pages 30656-30659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12231]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 31054; 812-14280]
Beverly Hills Bancorp Inc.; Notice of Application
May 21, 2014.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order under sections 6(c) and 6(e)
of the Investment Company Act of 1940 (``Act'') for an exemption from
all provisions of the Act, except sections 9, 17(a), 17(d), 17(e),
17(f), 36 through 45, and 47 through 51 of the Act and the rules
thereunder, modified as discussed in the application.
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Summary of Application: The requested order would exempt the
applicant, Beverly Hills Bancorp Inc. (``BHBC''), from certain
provisions of the Act until the earlier of one year from the date of
the requested order or such time as BHBC would no longer be required to
register as an investment company under the Act. The requested
exemption would extend an exemption granted until May 24, 2014.\1\
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\1\ Beverly Hills Bancorp Inc., Investment Company Act Release
Nos. 30497 (April 30, 2013) (notice) and 30541 (May 24, 2013)
(order) (``Prior Order'').
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Filing Dates: The application was filed on February 18, 2014 and
amended on April 29, 2014.
Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request
[[Page 30657]]
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 June 13,
2014 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 who wish to
be notified of a hearing may request notification by writing to the
Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090. Applicant, Post Office Box 8280,
Calabasas, CA 91372.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at
(202) 551-6876, or Mary Kay Frech, Branch Chief, at (202) 551-6821
(Division of Investment Management, Exemptive Applications Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicant's Representations
1. BHBC is a bank holding company that conducted its banking and
lending operations through its wholly-owned subsidiary First Bank of
Beverly Hills, a California banking corporation (the ``Bank''). From
its incorporation in 1996 until April 24, 2009, the Bank was the source
of substantially all of BHBC's revenues and income. The Bank sustained
substantial losses in its real estate loan and mortgage-backed
securities portfolios, and as of December 31, 2008, it no longer met
applicable regulatory capital requirements. As a result, on February
13, 2009, the Federal Deposit Insurance Corporation (``FDIC'') and the
California Department of Financial Institutions (the ``CDFI'') issued
an order requiring the Bank to increase its regulatory capital within
60 days. Because the Bank was unable to increase its regulatory capital
within the specified time period, on April 24, 2009, the CDFI closed
the Bank and the FDIC was appointed as the Bank's receiver.
2. BHBC has one class of common stock outstanding, which it
voluntarily delisted from the NASDAQ Global Select Market on February
12, 2009. On February 19, 2009, BHBC deregistered its common stock
under Section 12(g) of the Securities Exchange Act of 1934, as amended
(the ``Exchange Act''), and on March 13, 2009, its reporting
obligations under Section 15(d) of the Exchange Act were suspended. As
such, BHBC is no longer subject to the reporting requirements of the
Exchange Act and its common stock is solely traded on the over the
counter markets under the ``Other OTC'' category. As of January 27,
2014, BHBC had 78 holders of record.
3. As of December 31, 2013, on a consolidated basis, for financial
reporting purposes BHBC has assets of $8.5 million, liabilities of
$40.9 million, and a stockholders' equity of negative $32.4 million. On
a non-consolidated basis, BHBC's assets total approximately $7.1
million. BHBC currently has invested the assets in Permitted Securities
(as defined below) since the Prior Order.
4. BHBC has several direct or indirect wholly owned subsidiaries,
none of which has any ongoing business or operations. As of January 27,
2014, the following assets were held by BHBC subsidiaries: (i) Wilshire
Acquisitions Corporation (``Wilshire Asquisitions'') has assets with a
book value of $174,052 consisting of accrued interest and prepaid
expenses related to a subsidiary trust; (ii) WFC Inc. has assets with a
book value of $220,487 consisting of approximately 13 small consumer
and residential mortgage loans, cash, and prepaid expenses; and (iii)
BH Commercial Capital I, Inc. has assets with a book value of
$1,084,799 consisting of two secured commercial real estate loans
(collectively, the ``Subsidiary Assets''). In addition, BHBC also
either directly or indirectly owns the common securities of three
subsidiary trusts that were formed in connection with offerings of
trust preferred securities in which the trust subsidiaries issued their
common securities to BHBC or Wilshire Acquisitions and their preferred
securities to third party investors. The subsidiary trusts then loaned
all the proceeds of the sale of trust preferred securities to BHBC or
Wilshire Acquisitions in exchange for junior subordinated debentures
(the ``Subordinated Debentures''). The subsidiary trusts have no assets
other than the Subordinated Debentures.
5. BHBC's liabilities consist principally of $25.8 million of the
Subordinated Debentures issued to its two direct trust subsidiaries and
$10.3 million of Subordinated Debentures issued to its indirect trust
subsidiary, plus accrued interest of approximately $4.9 million and
accrued expenses of $1.0 million. In the aggregate, interest in an
approximate amount of $900,000 accrues on a yearly basis pursuant to
these three series of Subordinated Debentures. BHBC states that there
is no public market for the Subordinated Debentures or the trust
preferred securities. Under the terms of the Subordinated Debentures,
BHBC may defer interest payments for up to 20 consecutive quarters.\2\
On January 29, 2009, BHBC elected to exercise this right and had been
able to defer payments on the debentures unitl March 6, 2014. BHBC was
not in default under the Subordinated Debentures through the deferral
periods, however, BHBC is now in default under the debentures.
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\2\ During the period when interest payments are being deferred,
interest continues to accrue, compounding quarterly, at an annual
rate equal to the interest in effect for such period and must be
paid at the end of the deferral period.
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6. In March 2014, BHBC was contacted by the holders of some of the
debentures, and entered into negotiations with those holders regarding
payment of the debentures. On April 10, 2014, a former director of BHBC
filed an action against BHBC seeking a temporary restraining order
preventing BHBC from making payments on the debentures in light of
BHBC's indemnification obligations to its directors. The temporary
restraining order was granted. Subsequently, on April 15, 2014, BHBC
filed a voluntary petition for relief under chapter 11 of the United
States Bankruptcy Code. BHBC continues to operate its business as a
debtor in possession pursuant to sections 1107(a) and 1108 of the
Bankruptcy Code.
7. BHBC may be subject to contingent liabilities of uncertain
amounts related to claims associated with its former operations, as
well as regulatory and stockholder claims in connection with the
failure of the Bank. In addition, current and former directors and
officers of the Bank are subject to two pending actions (the
``Actions'') in connection with the failure of the Bank. These are: (a)
An administrative action brought by the FDIC in 2011 against two former
officers (one of whom has settled) seeking certain administrative
sanctions and penalties; and (b) a lawsuit brought by the FDIC in
April, 2012 against the Bank's former directors (including all four
current members of the board of directors of BHBC) and several former
officers of the Bank for negligence, gross negligence, and breach of
fiduciary duty in connection with their activities with the Bank. The
latter action seeks $100.6 million in damages related to losses
allegedly incurred by the Bank on certain loans.
[[Page 30658]]
8. BHBC states that it is subject to indemnification and expense
obligations in connection with various actions brought against its
current and former directors, officers, employees or agents. As a
result, BHBC is indemnifying these directors and officers in connection
with the Actions. The potential amount of the indemnification claim is
unknown.
9. Since the Bank was placed into receivership, BHBC has had no
active business or operations. Within several months of the
receivership, BHBC terminated all employees, and since that time has
paid two consultants on an hourly basis primarily for administrative
and accounting services. BHBC does not maintain an office and is
managed by its four member board of directors, which has considered
various alternatives, including liquidation and acquisition of an
operating business, while preserving its assets. BHBC states that
because of its financial condition and contingent liabilities, pursuing
these courses of action has not been feasible.
Applicant's Legal Analysis
1. Section 3(a)(1)(A) of the Act defines an investment company as
any issuer who ``is or holds itself out as being engaged primarily . .
. in the business of investing, reinvesting or trading in securities.''
Section 3(a)(1)(C) of the Act 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).
2. Section 6(c) of the Act provides that the Commission may exempt
any person 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. Section 6(e) provides that, in connection
with any order exempting an investment company from any provision of
section 7, certain provisions of the Act, as specified by the
Commission, shall apply to the company and other persons dealing with
the company, as if such company were a registered investment company.
3. BHBC acknowledges that it may be deemed to fall within one of
the Act's definitions of an investment company. Accordingly, BHBC
requests an order of the Commission pursuant to sections 6(c) and 6(e)
of the Act exempting it from all provisions of the Act, subject to
certain exceptions described below. BHBC requests an exemption until
the earlier of one year from the date of the requested order or such
time as it would no longer be required to register as an investment
company under the Act. During the term of the proposed exemption, BHBC
states that it 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 certain modifications described in the application.
4. BHBC requests exemptive relief to the extent necessary to permit
it to hold certain types of instruments that may be considered
``securities'', as defined in section 2(a)(36) under the Act, such as
short-term U.S. government securities, certificates of deposit and
deposit accounts with banks that are insured by the FDIC, shares of
registered money market funds, and any instruments that are eligible
for investment by money market funds consistent with rule 2a-7 under
the Act (collectively, ``Permitted Securities'') without being required
to register as an investment company under the Act. BHBC requests this
relief in order to permit it to preserve the value of its assets for
the benefit of its security holders, and submits that this relief is
necessary and appropriate for the public interest.
5. In determining whether to grant relief for a company in an
extended transition period, the following factors are considered: (a)
Whether the failure of the company to become primarily engaged in a
non-investment business or excepted business or to liquidate within one
year was due to factors beyond its control; (b) 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 (c) whether the company invested in securities solely to
preserve the value of its assets. BHBC believes that it meets these
criteria.
6. BHBC believes its failure to become primarily engaged in a non-
investment business or to liquidate within a year following the
receivership of the Bank is due to factors beyond its control. The
board of directors of BHBC has regularly considered the feasibility of
liquidating or engaging in an operating non-investment business and
concluded that it is currently not feasible to commence or acquire a
non-investment business or liquidate as a result of BHBC's negative net
worth and the uncertainties associated with actual and potential
litigation and regulatory claims. BHBC states that the contingent
liabilities make it impossible to liquidate BHBC and distribute its
assets to creditors and make it imprudent to utilize any substantial
part of its assets in an operating business. BHBC states that these
circumstances are unlikely to change over the requested one-year period
in light of the nature of the actual and contingent liabilities. BHBC
states that it has invested its liquid assets solely to preserve the
value of its assets and has invested solely in Permitted Securities
since the Prior Order. BHBC does not believe its current ownership of
certain loans acquired prior to its receivership is inconsistent with
its purpose of preserving the value of its assets for the benefit of
its security holders. BHBC thus believes that the public interest will
be best served by permitting it to continue to invest in Permitted
Securities while its liabilities are resolved.
Applicant's Conditions
Applicant agrees that the requested order will be subject to the
following conditions:
1. BHBC will not purchase or otherwise acquire any securities other
than Permitted Securities, except that BHBC may acquire equity
securities of an issuer that is not an ``investment company'' as
defined in section 3(a) of the Act or is relying on an exclusion from
the definition of ``investment company'' under section 3(c) of the Act
other than section 3(c)(1) or 3(c)(7), in connection with the
acquisition of an operating business as evidenced by a resolution
approved by BHBC's board of directors. BHBC may continue to hold the
Subsidiary Assets.
2. BHBC will not hold itself out as being engaged in the business
of investing, reinvesting, owning, holding, or trading in securities.
3. BHBC will not make any primary or secondary public offerings of
its securities, and it will notify its stockholders that an exemptive
order has been granted pursuant to sections 6(c) and 6(e) of the Act
and that BHBC and other persons, in their transactions and relations
with BHBC, 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 BHBC were a registered investment company, except as permitted by
the order requested hereby.
4. Notwithstanding sections 17(a) and 17(d) of the Act, an
affiliated person (as defined in section 2(a)(3) of the Act) of BHBC
may engage in a transaction that otherwise would be prohibited by these
sections with BHBC:
(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 BHBC,
and (ii)
[[Page 30659]]
the participation of BHBC in the proposed transaction will not be on a
basis less advantageous to BHBC than that of other participants; and
(b) in connection with each such transaction, BHBC 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 Commission, by the Division of Investment Management,
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12231 Filed 5-27-14; 8:45 am]
BILLING CODE 8011-01-P