[Federal Register Volume 61, Number 22 (Thursday, February 1, 1996)]
[Notices]
[Pages 3750-3752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2054]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21710; 812-9932]
Cityfed Financial Corp.; Notice of Application
January 26, 1996.
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 granted until February 28, 1996.
FILING DATE: The application was filed on December 21, 1995.
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 20,
1996, 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. (``City Savings''). The
OTS appointed the RTC as receiver of City Savings.
2. Once City Savings 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, 1995, Cityfed
held cash and securities of approximately $8.9 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 1995, Cityfed was granted an exemption from
all provisions of the Act until February 28, 1996.\1\
\1\ Cityfed Financial Corp., Investment Company Act Release Nos.
20877 (Feb 2, 1995) (notice) and 20929 (Feb. 28, 1995) (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. On November 30,
1995, the OTS issued an Amended 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 (``Amended Notice of
Charges'') that is identical to the Notice of Charges except that the
Amended Notice of Charges includes a reference to a federal statutory
provision not referred to in the Notice of Charges that the OTS asserts
provides an additional basis for the issuance of a Cease and
[[Page 3751]]
Desist Order against Cityfed and certain current or former directors
and, in some cases, officers of Cityfed and of Cityfed's former
subsidiary (``Respondents'').
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 and the Respondents filed notices of
appeal from the D.C. Court's Order to the United States Court of
Appeals for the District of Columbia Circuit (``D.C. Circuit''), and
the Respondents filed a motion in the D.C. Circuit for an expedited
appeal and an order enjoining the enforcement of the Temporary Order
during the pendency of the appeal. The D.C. Circuit denied the
Respondents' motion for injunction on October 21, 1994. On July 11,
1995, the D.C. Circuit affirmed the denial by the D.C. Court of the
motions by Cityfed and the Respondents for a temporary restraining
order and an injunction against the Temporary Order. 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 deposit 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 transfers to Cityfed in the amount of $15,000 for
operating expenses, (b) the disbursement of funds 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 (``First RTC
Action''). 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 (``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. On August 7, 1995, Cityfed, acting in its own right and as
shareholder of City Federal, filed a civil action in the United States
Court of Federal Claims seeking damages for loss of ``supervisory
goodwill.'' Cityfed's goodwill suit is presently stayed (as are all
Court Federal Claims supervisory goodwill cases) pending possible
Supreme Court review of the recent decision of the United States Court
of Appeals for the Federal Circuit in another supervisory goodwill
case, Winstar Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995).
9. 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.
10. 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 City Federal 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 rights 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 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). 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 February 28, 1996 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.
[[Page 3752]]
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 investment 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 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 han
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 alliliation; and
(iii) the financial interests of such persons in the transaction.
For the SEC, by the Division of Investment Management, under
delegate authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2054 Filed 1-31-96; 8:45 am]
BILLING CODE 8010-01-M