[Federal Register Volume 60, Number 26 (Wednesday, February 8, 1995)]
[Notices]
[Pages 7615-7617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3111]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20877; 812-9378]
Cityfed Financial Corp.; Notice of Application
February 2, 1995.
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: Cityfed Financial Corp. (``Cityfed'').
RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 6(e) of
the Act.
SUMMARY OF APPLICATION: Applicant requests an order that would exempt
it from all provisions of the Act, except sections 9, 17(a) (modified
as discussed herein), 17(d) (modified as discussed herein), 17(e),
17(f), 36 through 45, and 47 through 51 of the Act and the rules
thereunder until the earlier of one year from the date of the requested
order or such time as Cityfed would no longer be required to register
as an investment company under the Act. The requested exemption would
extend an exemption originally granted until March 15, 1995.
FILING DATE: The application was filed on December 20, 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 February 27,
1995, 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 notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicant, 4 Young's Way, P.O. Box 3126, Nantucket, MA 02584.
FOR FURTHER INFORMATION CONTACT: James M. Curtis, Senior Counsel, at
(202) 942-0563, 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.
Applicant's Representations
1. Cityfed was a savings and loan holding company that conducted
its savings and loan operations through its wholly-owned subsidiary,
City Federal Savings Bank (``City Federal''). City Federal was the
source of substantially all of Cityfed's revenues and income. As a
result of substantial losses in its mortgage banking and real estate
operations, City Federal was unable to meet its regulatory capital
requirements. Accordingly, on December 7, 1989, the Office of Thrift
Supervision (the ``OTS'') placed City Federal into receivership and
appointed the Resolution Trust Corporation (the ``RTC'') as City
Federal's receiver. City Federal's deposits and substantially all of
its assets and liabilities were acquired by a newly created federal
mutual savings bank, City Savings Bank, F.S.B., whose deposits, assets,
and liabilities in turn were acquired by City Savings, F.S.B. (``City
Savings''). The OTS appointed the RTC as receiver of City Savings.
2. Once City Federal was placed into receivership, Cityfed no
longer conducted savings and loan operations through any subsidiary and
substantially all of its assets consisted of cash that has been
invested in money market instruments with a maturity of one year or
less and money market mutual funds. As of September 30, 1994, Cityfed
held cash and securities of approximately $9.03 million. Because of
Cityfed's asset composition, it may be an investment company under the
Act. Rule 3a-2 under the Act provides a one-year safe harbor to issuers
that meet the definition of an investment company but intend to engage
in a business other than investing in securities. Because of various
claims against Cityfed and certain Cityfed officers and directors,
Cityfed could not acquire an operating company within the one year safe
harbor. The expiration of the safe harbor period necessitated the
filing of an application for exemption from all provisions of the Act,
with certain exceptions. In 1994, Cityfed was granted conditional
relief from all provisions of the Act until March 15, 1995.\1\
\1\Cityfed Financial Corp., Investment Company Act Release Nos.
20074 (Feb. 15, 1994) (notice) and 20135 (Mar. 15, 1994) (order).
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3. While Cityfed's board of directors has considered from time to
time whether to engage in an operating business, the board has
determined not to engage in an operating business at the present time
because of the claims filed against Cityfed, whose liability thereunder
cannot be reasonably estimated and may exceed its assets.
4. On June 2, 1994, the OTS issued a Notice of Charges and Hearing
for Cease and Desist Order to Direct Restitution and Other Appropriate
Relief and Notice of Assessment of Civil Money Penalties (``Notice of
Charges'') against Cityfed and certain current or former directors and,
in some cases, officers of Cityfed and City Federal. The Notice of
Charges requests that an order be entered by the Director of the OTS
requiring Cityfed to make restitution, reimburse, indemnify or
guarantee the OTS against loss in an amount not less than $118.4
million, which the OTS alleges represents the regulatory capital
deficiency reported by City Federal in the fall of 1989. The Notice of
Charges provides that a hearing will be held before an administrative
law judge on the question of whether a final cease and desist order
should be issued against Cityfed. As of the date of the filing of the
application, no date has been set for such hearing.
5. Also on June 2, 1994, the OTS issued a Temporary Order to Cease
and Desist (``Temporary Order'') against Cityfed. The Temporary Order
required Cityfed to post $9.0 million as security for the payment of
the amount sought by the OTS in its Notice of Charges. Cityfed
unsuccessfully petitioned the district court for an injunction against
the Temporary Order. Cityfed has appealed to the Court of Appeals. On
October 26, 1994, Cityfed and the OTS entered into an Escrow Agreement
(``Escrow Agreement'') with CoreStates Bank, N.A. (``CoreStates'')
pursuant to which Cityfed transferred substantially all of its assets
to CoreStates for deposits into an escrow account to be maintained by
CoreStates. Cityfed's assets in the escrow account continue to be
invested in money market instruments with a maturity of one year or
less and money market mutual funds. Withdrawals or disbursements from
the escrow account are not permitted without the written authorization
of the OTS, other than for (a) monthly transfer to Cityfed in the
amount of $15,000 for operating expenses, (b) the disbursement of funds
[[Page 7616]] on account of purchases of securities by Cityfed, and (c)
the payment of the escrow fee and expenses to CoreStates. The Escrow
Agreement also provides that CoreStates will restrict the escrow
account in such a manner as to implement the terms of the Escrow
Agreement and to prevent a change in status or function of the escrow
account unless authorized by Cityfed and the OTS in writing.
6. On December 7, 1992, the RTC filed suit against Cityfed and two
former officers of City Federal seeking damages of $12 million dollars
for failure to maintain the net worth of City Federal (the ``First RTC
Action''). In connection with this action, the RTC sought a court order
to place Cityfed's assets under the control of the court. On January 5,
1993, the RTC and Cityfed entered into an agreement (the ``Agreement'')
whereby the RTC would refrain from seeking the above order and Cityfed
could continue to make payments for ordinary and reasonable business
expenses and certain legal fees. In light of the filing by the OTS of
the Notice of Charges on June 2, 1994, the RTC and Cityfed agreed to
dismiss without prejudice the RTC's claim against Cityfed in the First
RTC Action.
7. In addition, the RTC filed suit against several former directors
and officers of City Federal alleging gross negligence and breach of
fiduciary duty with respect to certain loans (the ``Second RTC
Action''). The RTC seeks in excess of $200 million in damages. Under
Cityfed's bylaws, Cityfed may be obligated to indemnify these former
officers and directors and advance their legal expenses. Cityfed
generally has agreed to advance expenses in connection with these
requests. Because of the Temporary Order and the Escrow Agreement,
however, Cityfed is not continuing to advance expenses in connection
with these requests. Cityfed is unable to determine with any accuracy
the extent of its liability with respect to these indemnification
claims, although the amount may be material.
8. Currently, Cityfed's stock is traded sporadically in the over-
the-counter market. Cityfed has one employee who is president, chief
executive officer, and treasurer. Cityfed's secretary does not receive
any compensation for her service. If Cityfed is unable to resolve the
above claims successfully, Cityfed may seek protection from the
bankruptcy courts or liquidate. Cityfed asserts that it probably will
not be in a position to determine what course of action to pursue until
most, if not all, of its contingent liabilities are resolved.
9. During the term of the proposed exemption, Cityfed 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 the
following modifications. With respect to section 17(d), Cityfed
represents that it established a stock option plan when it was an
operating company. Although the plan has been terminated, certain
former employees of Cityfed have existing rights under the plan.
Cityfed believes that the plan may be deemed a joint enterprise or
other joint arrangement or profit-sharing plan within the meaning of
section 17(d) and rule 17d-1 thereunder. Because the plan was adopted
when Cityfed was an operating company and to the extent there are
existing right under the plan, Cityfed seeks an exemption to the extent
necessary from section 17(d). In addition, Cityfed may become subject
to the jurisdiction of a bankruptcy court. With respect to transactions
approved by the bankruptcy court, applicant requests an exemption from
sections 17(a) and 17(d) as further described in condition 3 below.
Applicant's Legal Analysis
1. Section 3(a)(1) defines an investment company as any issuer of a
security who ``is or holds itself out as being engaged primarily * * *
in the business of investing, reinvesting or trading in securities.''
Section 3(a)(3) further defines as 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). Cityfed acknowledges that it may be deemed to
fall within one of the Act's definitions of an investment company.
Accordingly, applicant requests an exemption under sections 6(c) and
6(e) from all provisions of the Act, subject to certain exceptions.
2. In determining whether to grant an exemption for a transient
investment company, the SEC considers such factors as whether the
failure of the company to become primarily engaged in a non-investment
business or excepted business or liquidate within one year was due to
factors beyond its control; 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
whether the company invested in securities solely to preserve the value
of its assets. Cityfed believes that it meets these criteria.
3. Cityfed believes that its failure to become primarily engaged in
a non-investment business by March 15, 1995 is due to factors beyond
its control. Because of outstanding and potential claims against
Cityfed and certain of its officers and directors, Cityfed cannot
acquire an operating company. Cityfed has diligently pursued its claims
against others and has taken steps to determine the extent of its
contingent liabilities. Since the filing of its initial application for
exemptive relief under sections 6(c) and 6(e) on October 19, 1990,
Cityfed has invested in money market instruments and money market
mutual funds solely to preserve the value of its assets.
4. Cityfed requests an order that would exempt it from all
provisions of the Act, subject to certain exemptions, until the earlier
of one year from the date of any order issued on this application or
such time as Cityfed would no longer be required to register as an
investment company under the Act.
Applicant's Conditions
Cityfed agrees that the requested exemption will be subject to the
following conditions, each of which will apply to Cityfed from the date
of the order until it no longer meets the definition of an investment
company or during the period of time it is exempt from registration
under the Act:
1. Cityfed will not purchase or otherwise acquire any additional
securities other than securities that are rated investment grade or
higher by a nationally recognized statistical rating organization or,
if unrated, deemed to be of comparable quality under guidelines
approved by Cityfed's board of directors, subject to two exceptions:
a. Cityfed may make an equity investments in issuers that are not
investment companies as defined in section 3(a) of the Act (including
issuers that are not investment companies because they are covered by a
specific exclusion from the definition of investment company under
section 3(c) of the Act other than section 3(c)(1)) in connection with
the possible acquisition of an operating business as evidenced by a
resolution approved by Cityfed's board of directors; and
b. Cityfed may invest in one or more money market mutual funds that
limit their investments to ``Eligible Securities'' within the meaning
of rule 2a-7(a)(5) promulgated under the Act.
2. Cityfed's Form 10-KSB, Form 10-QSB and annual reports to
shareholders will state that an exemptive order has been granted
pursuant to sections 6(c) and 6(e) of the Act and that Cityfed and
other persons, in their transactions and relations with Cityfed, are
subject to sections 9, 17(a), 17(d), 17(e), 17(f), 36
[[Page 7617]] through 45, and 47 through 51 of the Act, and the rules
thereunder, as if Cityfed were a registered investment company, except
insofar as permitted by the order requested hereby.
3. Notwithstanding sections 17(a) and 17(d) of the Act, an
affiliated person (as defined in section 2(a)(3) of the Act) of Cityfed
may engage in a transaction that otherwise would be prohibited by these
sections with Cityfed:
(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
Cityfed, and (ii) the participation of Cityfed in the proposed
transaction will not be on a basis less advantageous to Cityfed than
that of other participants; and
(b) In connection with each such transaction, Cityfed 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 SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3111 Filed 2-7-95; 8:45 am]
BILLING CODE 8010-01-M