[Federal Register Volume 59, Number 39 (Monday, February 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4422]


[Federal Register: February 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20084; 812-8594]


Bando McGlocklin Capital Corporation; Notice of Application

February 18, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (``Act'').

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APPLICANT: Bando McGlocklin Capital Corporation.

RELEVANT SECTIONS: Exemption requested under sections 6(c), 17(d), and 
23(c), and rule 17d-1 from the provisions of sections 17(d), 18(d), and 
23, and rule 17d-1.

SUMMARY OF APPLICATION: Applicant, a diversified closed-end registered 
investment company, seeks a conditional order permitting it to offer 
key employees of applicant and its subsidiaries deferred equity 
compensation in the form of stock options.

FILING DATES: The application was filed on September 28, 1993, and 
amended on January 14, 1994, and February 4, 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 March 15, 1994, 
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 such notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. 
Applicant, 13555 Bishops Court, Brookfield, Wisconsin 53005.

FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Attorney, at (202) 272-5287, or C. David 
Messman, Branch Chief, at (202) 272-3018 (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 from 
the SEC's Public Reference Branch.

Applicant's Representations

    1. Applicant is an internally managed, diversified closed-end 
registered investment company. As of December 31, 1993, applicant had 
outstanding 3,875,600 shares of common stock. Applicant's common stock 
is quoted on the NASDAQ National Market System.
    2. Before March 26, 1993, applicant was licensed to operate as a 
small business investment company (``SBIC'') under the Small Business 
Investment Act of 1958, as amended, and provided long-term, primarily 
variable rate, secured loans to finance the growth, expansion, and 
modernization of small businesses. Applicant was granted an exemption 
from various provisions of the Act and the rules thereunder to permit 
it to create a holding company structure.\1\ The purpose of the holding 
company structure was to allow applicant to expand its business beyond 
that of an SBIC. Although applicant is no longer an SBIC, it will 
continue to provide secured loans to finance the growth, expansion, and 
modernization of small business entities.
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    \1\Investment Company Act Release Nos. 19030 (Oct. 15, 1992) 
(notice) and 19092 (Nov. 10, 1992) (order).
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    3. On March 26, 1993, applicant transferred its SBIC license to 
Bando McGlocklin Small Business Investment Corporation (the 
``Subsidiary''), a Wisconsin corporation, under a plan of 
reorganization under section 351 of the Internal Revenue Code of 1986 
(the ``Code''). Under the plan, virtually all of applicant's assets 
were transferred to the Subsidiary; virtually all of applicant's 
liabilities were assumed by the Subsidiary; and all of the issued and 
outstanding shares of the Subsidiary's common stock were issued to 
applicant. Since March 26, 1993, substantially all of applicant's 
business has been conducted through the Subsidiary.
    4. As an internally-managed investment company, applicant employs 
its own personnel and advisory staff. Applicant currently maintains two 
incentive stock option plans in accordance with two orders issued to 
applicant when it was an SBIC.\2\
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    \2\Investment Company Act Release Nos. 17837 (Nov. 1, 1990) 
(notice) and 17978 (Nov. 27, 1990) (order) (the ``1990 Plan''); and 
15909 (Aug. 3, 1987) (notice) and 15958 (Sept. 2, 1987) (order) (the 
``1987 Plan'').
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    5. To induce key employees to remain in the employ of applicant and 
its subsidiaries and to increase the incentive and personal interest of 
such employees in the welfare of applicant and its subsidiaries, 
applicant's Board of Directors on August 25, 1993, approved the 1993 
Incentive Stock Option Plan (the ``Plan''). Applicant's shareholders 
subsequently approved the Plan.
    6. The Plan, which is substantially similar to the previous plans, 
provides for the grant of options to purchase a maximum of 100,000 
shares of applicant's common stock. Applicant has agreed not to issue 
more than 85,672 shares under the Plan, so that the total number of 
shares that may be issued under all of applicant's incentive stock 
option plans will not exceed 7.5% of applicant's currently issued and 
outstanding shares without a subsequent SEC order.
    7. Only key employees of applicant and its subsidiaries will be 
eligible to receive options. The Plan provides that if an option 
granted under the Plan expires or is terminated unexercised, the shares 
of common stock covered by that option will again be available for the 
grant of new options under the Plan. In addition, the Plan provides 
that not more than 29,985 shares may be issued to one participant 
through the exercise of options granted under the Plan.
    8. Applicant currently has five key employees (its three executive 
officers, its controller, and its general counsel), who serve in 
identical capacities with the Subsidiary. Applicant anticipates that 
options to purchase shares of common stock under the Plan will be 
granted to applicant's three executive officers when and if the 
requested order is received. The number and specific terms of the 
options to be granted to such persons have not yet been determined.
    9. Applicant's executive officers not only have the responsibility 
for making applicant's investments, but also for making all executive 
and operational decisions. As the executive officers of applicant, 
their performance directly affects applicant's performance and the 
value of applicant's common stock. To a lesser extent, the performance 
of applicant's controller and its general counsel, who participate in 
operational decisions, but do not make executive decisions, also 
directly affects the value of applicant's common stock. The performance 
of applicant's other employees does not directly affect applicant's 
performance. It therefore would be inconsistent with the purposes of 
the Plan to grant such employees stock options, since no matter how 
competently they performed their duties, their performance probably 
would not affect the value of applicant's common stock.
    10. The Plan will be administered by the Compensation Committee of 
applicant's Board of Directors. The Compensation Committee consists of 
five directors of applicant, a majority of whose members are not 
``interested persons'' of applicant, as defined in section 2(a)(19). 
Members of the Compensation Committee may not receive options under the 
Plan.
    11. All of the options to be granted pursuant to the Plan will be 
incentive stock options within the meaning of section 422 (formerly 
section 422A) of the Code. As incentive stock options, the following 
restrictions apply:
    (a) The Plan must state the aggregate number of shares that may be 
issued pursuant to the exercise of options and the class of employees 
eligible to receive options; the Plan also must be approved by 
applicant's shareholders.
    (b) All options must be granted within ten years of the date the 
Plan was adopted.
    (c) Options may not be exercised more than ten years after the date 
on which they are granted.
    (d) The exercise price of the options may not be less than the fair 
market value of the underlying stock on the date of grant. In 
accordance with this provision, options will be granted at the last 
quoted sale price of the underlying stock on the date of grant or, if 
there is no sale on such date, the options will be granted at the mean 
between the closing bid and asked quotations.
    (e) Options may not be transferable by an optionee (otherwise than 
by will or the laws of descent and distribution), and may be exercised 
during the lifetime of the optionee only by the optionee.
    (f) Options may not be granted to persons owning more than 10% of 
the voting power of the outstanding shares of applicant's common stock 
at the time the options are granted.
    (g) The aggregate fair market value (determined at the time the 
option is granted) of the stock with respect to which options are 
exercisable for the first time by an individual in any calendar year 
may not exceed $100,000.
    (h) Stock acquired upon exercise of options may not be sold for two 
years from the grant date or one year from the exercise date, whichever 
is later.
    (i) Options may be exercised by the optionee only if the optionee 
was an employee or officer of applicant during the entire period 
commencing with the grant date and ending three months prior to the 
exercise date, unless termination of employment is caused by death or 
disability, in which case the option may be exercised within one year 
following termination of employment.
    12. The Plan does not provide for the grant of stock appreciation 
rights. The Plan does permit the exercise price of an option to be paid 
in cash or by tendering previously acquired shares of stock, valued at 
the fair market value as determined by the Compensation Committee. In 
placing a fair market value on previously acquired shares of 
applicant's common stock, applicant will use the same standards as are 
used in determining the fair market value at the time of the grant of 
the option.
    13. The Compensation Committee may determine in its sole discretion 
that an adjustment in the number or kind of shares reserved for 
issuance under the Plan but not yet covered by options or of the stock 
then subject to options is necessary, or that an adjustment in the 
option price in each stock option agreement is necessary because of a 
change in the number or kind of outstanding shares of stock of 
applicant (or of any stock or other securities into which such shares 
of stock shall have been changed or for which it shall have been 
exchanged), whether through reorganization, recapitalization, stock 
split, combination of shares, merger or consolidation, or any other 
change in the number or kind of outstanding shares of stock.
    14. Applicant also has a profit sharing plan qualified under 
section 401(a) of the Code, which is intended to provide a source of 
retirement income for employees. In accordance with the requirements of 
the Employee Retirement Income Security Act of 1974, as amended, 
applicant's profit sharing plan does not discriminate in favor of 
shareholders, officers, and highly compensated employees as to 
coverage, benefits, contributions, or otherwise. Applicant to date has 
not contributed the maximum permissible amount in any year. The Plan is 
not a substitute for a profit-sharing plan qualified under section 
401(a), as it is intended to provide incentive compensation and does 
not establish a source of income for an employee's retirement years.

Applicant's Legal Conclusions

    1. Section 18(d) prohibits any registered management investment 
company from issuing warrants or rights to subscribe to or purchase its 
securities except those issued ratably to a class of security holders 
with an exercise period of up to 120 days, or in exchange for warrants 
in connection with a reorganization. The issuance of stock options by 
applicant to its employees would not satisfy these statutory 
exceptions.
    2. The issuance of stock options to applicant's employees also 
would be prohibited under section 23. Section 23(a) generally prevents 
a registered closed-end investment company from issuing any of its 
securities for services or for property other than cash or securities. 
Because the issuance of stock options by applicant may constitute the 
issuance of securities for services, absent exemptive relief, it would 
be prohibited by section 23(a). Section 23(b) prohibits the sale by a 
closed-end investment company of any stock of which it is the issuer at 
a price below current net asset value, except with the consent of a 
majority of its common stockholders at the time of issuance or under 
certain other enumerated circumstances. If the net asset value of 
applicant's common stock were to increase following the grant of an 
option, the option exercise price may be less than the net asset value 
of a share of applicant's common stock on the date of exercise. 
Furthermore, section 23(c) generally prohibits the purchase by a 
registered closed-end investment company of any securities of which it 
is the issuer. Thus, to the extent that payment for stock options with 
previously acquired shares of applicant's common stock is considered to 
be a purchase by applicant of its own securities, section 23(c) would 
prohibit the transaction.
    3. Section 17(d) and rule 17d-1(a) thereunder also prohibit an 
affiliated person of a registered investment company from participating 
in, or offering a transaction in connection with, any joint enterprise 
or other joint arrangement or profit-sharing plan in which the 
registered company is a participant unless an order permitting the 
transaction has been granted by the SEC. Paragraph (c) of rule 17d-1 
includes stock option plans in the definition of joint enterprise, 
joint arrangement or profit-sharing plan prohibited by section 17(d). 
These provisions therefore may prohibit any stock option plan absent an 
order from the SEC.
    4. Although applicant is engaged primarily in the business of 
making loans to small businesses, it is no longer an SBIC and therefore 
is unable to rely on an existing SEC order permitting SBICs to issue 
stock options to their employees\3\ or on rule 17d-1(d)(4). 
Additionally, both the order and the rule specifically provide that the 
options granted must be ``qualified stock options'' under former 
section 422 of the Code and must conform to the requirements of 13 CFR 
805(b) adopted by the Small Business Administration. ``Qualified stock 
options'' were eliminated in 1976. Thus, although the incentive stock 
options provided for in the Plan have many of the same characteristics 
as qualified stock options under former section 422, they have some 
minor differences, which are fully described in the application. 
Applicant is also unable to rely upon a similar order granted to the 
Association of Publicly Traded Investment Funds\4\ because the order 
does not extend to registered closed-end investment companies that are 
engaged primarily in the business of making loans to small businesses.
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    \3\National Association of Small Business Investment Companies, 
Investment Company Act Release No. 6523 (May 14, 1971).
    \4\Investment Company Act Release Nos. 14541 (May 28, 1985) 
(notice) and 14594 (June 21, 1985) (order) (permitting the issuance 
of incentive stock options by member closed-end investment companies 
with portfolios of marketable securities).
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    5. Section 6(c) provides that the SEC may grant an exemption from 
the provisions of the Act if such exemption is necessary or appropriate 
in the public interest and consistent with the protection of investors 
and the purposes intended by the policy and provisions of the Act. Rule 
17d-1(b) requires the SEC, in passing upon an application regarding a 
joint enterprise, joint arrangement or profit-sharing plan, to consider 
whether the participation of the investment company in the transaction 
is consistent with the policies and purposes of the Act and the extent 
to which such participation is on a basis different from or less 
advantageous than that of other participants. Section 23(c)(3) requires 
the SEC to insure that repurchases by closed-end funds of their own 
securities are on a basis which does not unfairly discriminate against 
any holders of the class of securities to be purchased.
    6. Applicant submits that the limitations on the requested order 
will provide protection to investors against dilution of their pro rata 
interests that are similar to those the SEC previously has found 
consistent with the purposes and policies of the Act and even greater 
than those Congress imposed on stock options to be issued by business 
development companies. The Plan has been approved by applicant's 
shareholders, and any options granted under the Plan must be approved 
by a majority of applicant's directors who are not interested persons 
of applicant and who cannot participate in the Plan. In addition, the 
total percentage of shares that could be issued under the Plan, the 
1987 Plan, and the 1990 Plan will be limited to 7.5% of the outstanding 
shares of applicant's common stock.
    7. Applicant states that the abuses and adverse effects of 
investment company stock options would have no applicability to stock 
options granted under the Plan. The limited stock options that could be 
granted under the Plan would offer no opportunity for any change in 
control of applicant or quick sale at a profit. Additionally, the 
options themselves would not be transferable. Moreover, the existence 
and nature of the stock options granted by applicant would be fully 
disclosed in accordance with the standards or guidelines adopted by the 
Financial Accounting Standards Board for operating companies and the 
requirements of the SEC, and will be neither so extensive nor so 
complex as to make the financial statements of applicant or management 
remuneration more difficult to understand.
    8. Applicant's investments (other than investments in idle funds) 
are in small businesses, the securities of which will not be publicly 
traded. In addition, all of applicant's investments in small businesses 
consist of non-convertible secured loans. Under these circumstances, 
applicant believes that it is difficult to conceive a scenario in which 
applicant's portfolio investments could create a short-term artificial 
increase in the price of applicant's stock.
    9. Applicant submits that, in the event this application is 
granted, any adverse impact on investor interests protected by the Act 
will be minimal, and further, will be more than outweighed by the 
benefits to investors that will result from permitting applicant to 
compete for top quality personnel on a more equal footing with its 
competitors. Applicant competes primarily with banks and other entities 
that are not investment companies registered under the Act. These 
organizations are able to offer stock options to employees and have an 
advantage over applicant in attracting and retaining highly qualified 
personnel. In order for applicant to compete on a more equal basis with 
such organizations, it has to have personnel as competent as such 
organizations, and in order to attract and retain such personnel, 
applicant must be able to offer comparable compensation packages.
    10. For the foregoing reasons, applicant believes that the 
applicant satisfies the standards for relief set forth in sections 
6(c), 17(d), and 23(c) of the Act and rule 17d-1 thereunder.

Applicant's Conditions

    Applicant agrees that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. Applicant's directors, including a majority of the directors who 
are not interested persons of applicant, will review periodically the 
potential impact that the grant or exercise of stock options could have 
on applicant's earnings and net asset value per share, such review to 
take place prior to any decisions to grant stock options, but in no 
event less frequently than annually. Adequate procedures and records 
will be maintained to permit such review by applicant's directors, and 
the directors will have the authority to take appropriate steps if 
necessary to ensure that neither the grant nor the exercise of stock 
options would have an effect contrary to the interests of investors in 
these areas. The directors' authority will include, in addition to the 
authority to prevent or limit the grant of additional stock options, 
the authority to limit the number of stock options exercised in a given 
period of time if the directors conclude that the effect on applicant's 
expenses or earnings would be contrary to the interests of investors or 
that net asset value per share might be excessively diluted.
    2. No more than 85,672 shares will be issued pursuant to the Plan, 
absent a subsequent exemptive order from the SEC with respect to the 
remaining 14,328 shares authorized under the Plan.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4422 Filed 2-25-94; 8:45 am]
BILLING CODE 8010-01-M