[Federal Register Volume 79, Number 155 (Tuesday, August 12, 2014)]
[Notices]
[Pages 47160-47162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18983]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-31199; File No. 812-13970]
Citigroup Global Markets Inc., et al.; Notice of Application and
Temporary Order
August 6, 2014.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Temporary order and notice of application for a permanent order
under section 9(c) of the Investment Company Act of 1940 (``Act'').
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Summary of Application: Applicants have received a temporary order
exempting them from section 9(a) of the Act, with respect to an
injunction entered against Citigroup Global Markets Inc. (``CGMI'') on
August 5, 2014 by the United States District Court for the Southern
District of New York (``Injunction''), until the Commission takes final
action on an application for a permanent order. Applicants also have
applied for a permanent order.
Applicants: CGMI, CEFOF GP I Corp. (``CEFOF''), CELFOF GP Corp.
(``CELFOF''), Citibank, N.A. (``Citibank''), Citigroup Alternative
Investments LLC (``Citigroup Alternative''), Citigroup Capital Partners
I GP I Corp. (``CCP I''), Citigroup Capital Partners I GP II Corp.
(``CCP II''), Citigroup Private Equity (Offshore) LLC (``CPE
(Offshore)''), Citigroup First Investment Management Americas LLC
(``CFIMA,'' and along with CGMI, CEFOF, CELFOF, Citibank, Citigroup
Alternative, CCP I, CCP II, and CPE (Offshore), the ``Applicants'').\1\
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\1\ Applicants request that any relief granted pursuant to the
application also apply to any other company of which CGMI is or may
become an affiliated person within the meaning of section 2(a)(3) of
the Act (together with the Applicants, the ``Covered Persons'').
DATES: Filing Date: The application was filed on October 20, 2011 and
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amended on August 5, 2014.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request 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 September 2, 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; Applicants: CGMI, CEFOF, CELFOF,
CCP I, CCP II, CPE (Offshore), CFIMA, 388 Greenwich Street, New York,
NY 10013; Citibank, Citigroup Alternative, 399 Park Avenue, New York,
NY 10043.
FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Senior Counsel, at
(202) 551-6819, or Mary Kay Frech, Branch Chief, at (202) 551-6821
(Division of Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a temporary order and 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.
Applicants' Representations
1. Each of the Applicants is an indirect wholly-owned subsidiary of
Citigroup Inc. (``Citigroup''), a diversified financial services
company. CGMI is a full service investment banking firm that engages in
securities underwriting, sales and trading, investment banking,
financial advisory and investment research services. CGMI is registered
as a broker-dealer under the Securities Exchange Act of 1934 and as an
investment adviser under the Investment Advisers Act of 1940
(``Advisers Act''). It currently does not serve as principal
underwriter or investment adviser of any Funds, but it may seek to do
so in the future.\2\ CFIMA
[[Page 47161]]
is registered as an investment adviser under the Advisers Act and
serves as investment adviser for one or more Funds. CEFOF, CELFOF,
Citibank, Citigroup Alternative, CCP I, CCP II, and CPE (Offshore)
(``ESC Advisers'') serve as investment advisers to certain employees'
securities companies within the meaning of section 2(a)(13) of the Act,
which provide investment opportunities for certain eligible employees,
officers, directors and persons on retainer of Citigroup and its
affiliates (``ESCs'' and included in the term ``Funds'').\3\
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\2\ ``Funds'' refers to any registered investment company,
business development company, or ESC (as defined herein) for which a
Covered Person serves as an investment adviser, sub-adviser, general
partner or depositor, or any registered open-end investment company,
registered unit investment trust or registered face amount
certificate company for which a Covered Person serves as principal
underwriter.
\3\ Greenwich Street Employees Fund, L.P., et al., Investment
Company Act Release Nos. 25324 (Dec. 21, 2001) (notice) and 25367
(Jan. 16, 2002) (order) (``ESC Order'').
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2. On August 5, 2014, the United States District Court for the
Southern District of New York entered a judgment, which included the
Injunction, against CGMI (``Final Judgment'') in a matter brought by
the Commission.\4\ The conduct of CGMI, along with certain of its
affiliates, (together, ``Citi'') alleged in the complaint
(``Complaint'') involved Citi's role in the structuring and marketing
of a largely synthetic collateralized debt obligation (``CDO'') whose
investment portfolio consisted primarily of credit default swaps
referencing other CDO securities with collateral consisting primarily
of residential mortgage-backed securities. The Complaint alleged that
the marketing materials for the CDO were materially misleading because
they suggested that Citi was acting in the traditional role of an
arranging bank, when in fact Citi had allegedly exercised influence
over the selection of the assets and had retained a proprietary short
position of the assets it had helped select, which gave Citi allegedly
undisclosed economic interests adverse to those of the investors in the
CDO. The Final Judgment would restrain and enjoin CGMI from violating
sections 17(a)(2) and (3) of the Securities Act of 1933. Without
admitting or denying any of the allegations in the Complaint, except as
to personal and subject matter jurisdiction, CGMI consented to the
entry of the Final Judgment and other equitable relief, including
certain undertakings and the payment of a civil penalty.
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\4\ Securities and Exchange Commission v. Citigroup Global
Markets Inc., 11-CV-7387 (S.D.N.Y. Aug. 5, 2014).
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Applicants' Legal Analysis
1. Section 9(a)(2) of the Act, in relevant part, prohibits a person
who has been enjoined from engaging in or continuing any conduct or
practice in connection with the purchase or sale of a security, or in
connection with activities as an underwriter, broker or dealer, from
acting, among other things, as an investment adviser or depositor of
any registered investment company or a principal underwriter for any
registered open-end company, registered unit investment trust or
registered face-amount certificate company. Section 9(a)(3) of the Act
makes the prohibition in section 9(a)(2) applicable to a company, any
affiliated person of which has been disqualified under the provisions
of section 9(a)(2). Section 2(a)(3) of the Act defines ``affiliated
person'' to include, among others, any person directly or indirectly
controlling, controlled by, or under common control with, the other
person. Applicants state that CGMI is an affiliated person of each of
the other Applicants within the meaning of section 2(a)(3) of the Act.
Applicants state that the entry of the Injunction results in Applicants
being subject to the disqualification provisions of section 9(a) of the
Act.
2. Section 9(c) of the Act provides that the Commission shall grant
an application for exemption from the disqualification provisions of
section 9(a) if it is established that these provisions, as applied to
the applicants, are unduly or disproportionately severe or that the
applicants' conduct has been such as not to make it against the public
interest or the protection of investors to grant the exemption.
Applicants have filed an application pursuant to section 9(c) seeking a
temporary and permanent order exempting them and other Covered Persons
from the disqualification provisions of section 9(a) of the Act.
3. Applicants believe they meet the standard for exemption
specified in section 9(c). Applicants state that the prohibitions of
section 9(a) as applied to them would be unduly and disproportionately
severe and that the conduct of the Applicants has been such as not to
make it against the public interest or the protection of investors to
grant the exemption from section 9(a).
4. Applicants state that the alleged conduct giving rise to the
Injunction did not involve any of the Applicants acting in the capacity
of investment adviser, sub-adviser or depositor for any Fund (including
as general partner providing investment advisory services to ESCs) or
as principal underwriter for any registered open-end company,
registered unit investment trust or registered face-amount certificate
company. Applicants also state that, to the best of their knowledge,
none of the current directors, officers, or employees of the Applicants
that are involved in providing services as investment adviser or sub-
adviser of the Funds (including as general partner providing investment
advisory services to ESCs) or principal underwriter for any registered
open-end company (or any other persons in such roles during the time
period covered by the Complaint) participated in the conduct alleged in
the Complaint to have constituted the violations that provide a basis
for the Injunction. Applicants further represent that the personnel at
CGMI who participated in the conduct alleged in the Complaint to have
constituted the violations that provided a basis for the Injunction
have had no, and will not have any, involvement in providing advisory
or depositary services (including as general partner providing
investment advisory services to ESCs) to the Funds or principal
underwriting services to any registered open-end company, registered
unit investment trust, or registered face-amount certificate company on
the behalf of the Applicants or other Covered Persons. Applicants also
represent that because the personnel of the Applicants (other than
those at CGMI) did not participate in the conduct alleged in the
Complaint to have constituted the violations that provide a basis for
the Injunction, the shareholders of those Funds were not affected any
differently than if those Funds had received services from any other
non-affiliated investment adviser or principal underwriter. Applicants
state that the alleged conduct did not involve any Fund or the assets
of any Fund.
5. Applicants state that their inability to continue to provide
investment advisory and subadvisory services to the Funds (including as
general partner providing investment advisory services to ESCs) and
principal underwriting services to any registered open-end company
would result in potential hardship for some of the Funds and their
shareholders. Applicants state that they will, as soon as reasonably
practicable, distribute written materials, including an offer to meet
in person to discuss the materials, to the boards of directors of the
Funds (``Boards'') (excluding, for this purpose, the ESCs) for which
the Applicants serve as investment adviser, investment sub-adviser or
principal underwriter, including the directors who are not ``interested
persons,'' as defined in section 2(a)(19) of the Act, of such Funds,
and their independent legal counsel, if any, describing the
circumstances that led to the Injunction
[[Page 47162]]
and any impact on the Funds, and the application. Applicants state they
will provide the Boards with the information concerning the Injunction
and the application that is necessary for the Funds to fulfill their
disclosure and other obligations under the federal securities laws.
6. Applicants also state that, if they were barred from providing
services to the Funds, the effect on their businesses and employees
would be severe. Applicants state that they have committed substantial
resources to establishing an expertise in providing advisory and
distribution services to Funds. Applicants further state that
prohibiting them from providing such services would not only adversely
affect their businesses, but would also adversely affect numerous
employees who are involved in those activities. Applicants also state
that disqualifying the ESC Advisers from continuing to provide
investment advisory services to the ESCs is not in the public interest
or in the furtherance of the protection of investors. Because the ESCs
have been formed for certain key employees, officers and directors of
Citigroup and its affiliates, it would not be consistent with the
purposes of the ESC provisions of the Act or the terms and conditions
of the ESC Order to require another entity not affiliated with
Citigroup to manage the ESCs. In addition, participating employees of
Citigroup and its affiliates likely subscribed for interests in the
ESCs with the expectation that the ESCs would be managed by an
affiliate of Citigroup.
7. Certain of the Applicants previously have applied for and
received exemptions under section 9(c) as the result of conduct that
triggered section 9(a) of the Act, as described in greater detail in
the application.
Applicants' Condition
Applicants agree that any order granting the requested relief will
be subject to the following condition:
Any temporary exemption granted pursuant to the application
shall be without prejudice to, and shall not limit the Commission's
rights in any manner with respect to, any Commission investigation
of, or administrative proceedings involving or against, Covered
Persons, including, without limitation, the consideration by the
Commission of a permanent exemption from section 9(a) of the Act
requested pursuant to the application or the revocation or removal
of any temporary exemptions granted under the Act in connection with
the application.
Temporary Order
The Commission has considered the matter and finds that Applicants
have made the necessary showing to justify granting a temporary
exemption.
Accordingly,
It is hereby ordered, pursuant to section 9(c) of the Act, that
Applicants and any other Covered Persons are granted a temporary
exemption from the provisions of section 9(a), solely with respect to
the Injunction, subject to the condition in the application, from
August 5, 2014, until the Commission takes final action on their
application for a permanent order.
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18983 Filed 8-11-14; 8:45 am]
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