[Federal Register Volume 59, Number 87 (Friday, May 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10891]


[[Page Unknown]]

[Federal Register: May 6, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20261; 812-8696]

 

Bando McGlocklin Capital Corporation et al.; Application

April 29, 1994.
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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APPLICANTS: Bando McGlocklin Capital Corporation (``Bando'') and Bando 
McGlocklin Small Business Investment Corporation (the ``SBIC 
Subsidiary'').

RELEVANT ACT SECTIONS: Exemption requested under sections 6(c) and 
17(b) of the Act from sections 8(b), 12(d), 17(a), 18(a), 18(c), 30(a), 
30(b), and 30(d) of the Act and rules 8b-16, 30a-1, 30b1-1, and 30d-1 
thereunder.

SUMMARY OF APPLICATION: Applicants request an order to permit Bando to 
form two new subsidiaries and engage in certain transactions with the 
new subsidiaries. The order also would permit modified asset coverage 
requirements for Bando and one of the subsidiaries and, in addition, 
permit certain reports to be filed on a consolidated basis. The 
requested order would amend two prior orders.

FILING DATE: The application was filed on November 19, 1993 and amended 
on February 11, 1994. Applicants have agreed to file an additional 
amendment, the substance of which is incorporated herein, during the 
notice period.

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 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on May 24, 1994, 
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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549. 
Applicants, 13555 Bishops Court, Brookfield, WI 53005.

FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at 
(202) 942-0576, 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.

Applicants' Representations

    1. Bando and the SBIC Subsidiary, Wisconsin corporations, are 
registered closed-end investment companies. In 1992 and 1993, the SEC 
issued orders to permit Bando and the SBIC Subsidiary to create a 
holding company structure with the SBIC Subsidiary being a wholly-owned 
subsidiary of Bando, and to permit Bando to issue a class of senior 
security (the ``Prior Order'').\1\ Bando was licensed to operate as a 
small business investment company under the Small Business Investment 
Act of 1958. On March 26, 1993, Bando transferred substantially all of 
its assets and its small business investment company license to the 
SBIC Subsidiary. Presently, the SBIC Subsidiary provides secured loans 
to small businesses.
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    \1\Investment Company Act Release Nos. 19030 (Oct. 15, 1992) 
(notice), 19092 (Nov. 10, 1992) (order) (initial order permitting 
Bando to establish and operate the SBIC Subsidiary as a wholly-owned 
subsidiary), 19584 (July 21, 1993) (notice), and 19636 (Aug. 17, 
1993) (order) (order amending initial order to permit Bando to issue 
one class of senior security which is a stock).
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    2. Bando proposes to form two additional subsidiary corporations. 
One of these will be a small business lender (``the SBL Subsidiary'') 
participating in a government guaranteed loan program and the other 
will be the ``Bankruptcy Remote Subsidiary.'' The SBL and Bankruptcy 
Remote Subsidiaries will be registered closed-end investment companies 
under the Act.
    3. Subject to the approval of the Small Business Administration 
(``SBA''), the SBL Subsidiary will operate as a qualified lender 
licensed under the government guaranteed loan program authorized by 
section 7(a) of the Small Business Act (the ``7(a) Program''). The 7(a) 
Program's objective is to provide funds to small business concerns, 
which otherwise may have limited access to credit. The SBA guarantees 
up to 70 to 85% of the principal amount of loans made by lenders under 
the 7(a) Program. The SBA has notified Bando that Bando's participation 
in the 7(a) Program must be effected in a corporation separate from the 
Bando and the SBIC Subsidiary.
    4. The Bankruptcy Remote Subsidiary will facilitate the 
``securitization'' of portfolio loans of Bando, the SBIC Subsidiary, 
and the SBL Subsidiary. Securitization of loans held by the SBL and 
SBIC Subsidiaries will be effected by the sale of the loans to Bando, 
followed by the sale of the loans to the Bankruptcy Remote Subsidiary. 
The Bankruptcy Remote Subsidiary then will sell the loans to a 
``company'' that is not taxed as a corporation under the Internal 
Revenue Code, in exchange for cash and securities issued by the 
company. The directors of the Bankruptcy Remote Subsidiary will not be 
identical to those of Bando, the SBIC Subsidiary, or the SLB 
Subsidiary. This will enable certain securities issued by a company and 
collateralized by the loans purchased from the Bankruptcy Remote 
Subsidiary to obtain an investment grade rating. A majority of the 
directors of the Bankruptcy Remote Subsidiary will be directors of 
Bando. All loans would be sold on a non-recourse basis and neither 
Bando nor any of its subsidiaries would guarantee payment of such 
loans.

Applicants' Legal Analysis

A. Section 12(d)

    1. Section 12(d)(1) of the Act limits the amount of securities a 
registered investment company may hold of other investment companies. 
Section 12(e) provides an exemption to the section 12(d)(1) limitations 
for acquisitions of securities of certain corporations, such as those 
that furnish capital to industry, provided that, among other things, 
the aggregate cost of the securities does not exceed 5% of the total 
assets of the acquiring company at the time of purchase. Subsequent to 
the Bando's initial acquisition of the outstanding common stock of the 
SBL Subsidiary, Bando's additional purchases of the SLB Subsidiary's 
common stock may exceed 5% of Bando's total assets and, therefore, the 
section 12(e) exemption will no longer be available.
    2. In addition, because Bando will hold more than 3% of the 
outstanding voting stock of the SBL Subsidiary, Bando's loans to the 
SBL Subsidiary could violate section 12(d)(1) if such loans were 
considered acquisitions of the SBL Subsidiary's debt securities. 
Bando's organization of the Bankruptcy Remote Subsidiary and subsequent 
purchases of the subsidiary's common stock also will violate section 
12(d)(1) absent an exemption, and section 12(e) will not be available 
because the Bankruptcy Remote Subsidiary will not engage in any of the 
businesses specified in section 12(e). Accordingly, Bando requests an 
exemption from section 12(d)(1) to permit Bando to (a) make further 
acquisitions of the common stock of the SBL Subsidiary, (b) acquire 
notes and other indebtedness of the SBL Subsidiary, and (c) acquire the 
common stock of the Bankruptcy Remote Subsidiary.

B. Section 17(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between registered investment companies and any 
affiliated person of that company. Bando, the SBL Subsidiary, and the 
Bankruptcy Remote Subsidiary will be affiliated persons. Since the SBL 
Subsidiary will be fully owned by Bando, Bando's initial acquisition of 
the outstanding common stock of the SBL Subsidiary will be exempt under 
rule 17a-3 from section 17(a).\2\ In addition, applicants assert that 
investments in the SBL Subsidiary in the form of stock purchases, 
capital contributions, or loans do not violate section 17(a) because 
the seller is the issuer and is controlled by Bando. Purchases and sale 
of portfolio securities between Bando and the SBL Subsidiary, however, 
appear to be violations of section 17(a).\3\ Accordingly, applicants 
request an exemption from section 17(a) to the extent necessary to 
permit purchases and sales of portfolio securities between Bando and 
the SBL Subsidiary.
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    \2\Rule 17a-3 provides in part that transactions solely between 
a registered investment company and one or more of its ``fully owned 
subsidiaries'' are exempt from section 17(a). Rule 17a-3 defines a 
``fully owned subsidiary'' as a subsidiary that, among other things, 
is not indebted to any person other than its parent, the parent's 
other fully owned subsidiaries, and/or banks or insurance companies 
in any amount that is material in relation to the particular 
subsidiary.
    \3\After the SBL Subsidiary begins operations, it will no longer 
be considered a ``fully owned subsidiary'' under rule 17a-3 to the 
extent that the SBL Subsidiary becomes indebted to parties other 
than Bando, the SBIC Subsidiary, the Bankruptcy Remote Subsidiary, 
banks, or insurance companies in any ``material amount.''
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    2. Applicants assert that the organization and operation of the 
Bankruptcy Remote Subsidiary does not raise any issues under section 
17(a) because it will be able to rely on the rule 17a-3 exemption.

C. Section 18

    1. Section 18(a) of the Act prohibits a registered closed-end 
investment company from issuing any class of senior security unless the 
company complies with the asset coverage requirements set forth in the 
section. ``Asset coverage'' is defined in section 18(h) to mean the 
ratio which the value of the total assets of an issuer, less all 
liabilities not represented by senior securities, bears to the 
aggregate amount of senior securities of such issuer. Under section 
18(a), senior securities of closed-end investment companies 
representing indebtedness must have an asset coverage of 300% 
immediately after their issuance and senior securities of such 
companies representing stock must have an asset coverage of 200%. 
Section 18(c) prohibits a registered closed-end investment company from 
issuing more than one class of senior securities representing 
indebtedness.
    2. Bando, the SBL Subsidiary, and the Bankruptcy Remote Subsidiary 
are subject to the asset coverage requirements of section 18(a) on an 
individual basis, and Bando on a consolidated basis because Bando may 
be an indirect issuer of senior securities with respect to the SBL and 
Bankruptcy Remote Subsidiaries' indebtedness. Accordingly, Bando would 
be required to treat as its own any liabilities of the SBL and 
Bankruptcy Remote Subsidiaries.
    3. Absent exemptive relief, the asset coverage limitations of 
section 18(a) would prevent the SBL Subsidiary from using borrowings 
from Bando to fund 7(a) Program loans. Similarly, without an exemption, 
section 18(c) would preclude the SBL Subsidiary from issuing more than 
one class of securities to finance such borrowings. In addition, if 
deemed to be an indirect issuer of the SBL Subsidiary's indebtedness, 
sections 18 (a) and (c) would impose the same limitations on Bando with 
respect to the SBL Subsidiary's borrowings on a consolidated basis. 
Accordingly, applicants request an exemption from 18(a) to the extent 
necessary to treat the SBL Subsidiary's borrowings from Bando as 
``liabilities and indebtedness not represented by senior securities'' 
within the meaning of section 18(h) in applying the asset coverage 
requirements of section 18(a). Applicants also request an exemption 
from section 18(c) to permit Bando and the SBL Subsidiary, on an 
individual basis, to have more than one class of senior security 
representing indebtedness, subject to condition 5 below. The 
organization and operation of the Bankruptcy Remote Subsidiary does not 
raise any issues under section 18 because it will not issue senior 
securities.

D. Sections 8 and 30

    In the absence of an exemption, each of Bando, the SBL Subsidiary, 
and the Bankruptcy Remote Subsidiary would be required to file annual 
amendments to its registration statement and transmit to its 
shareholders annual and/or semi-annual reports on form N-SAR pursuant 
to sections 8(b), 30(a), 30(b), and 30(d) and rules 8b-16, 30a-1, 30b1-
1, and 30d-1. Applicants request an exemption to permit: (a) Bando to 
file on behalf of itself, the SBL Subsidiary, and the Bankruptcy Remote 
Subsidiary amendments to its registration statement containing 
information with respect to Bando, the SBL Subsidiary, and the 
Bankruptcy Remote Subsidiary on a consolidated basis only; (b) Bando to 
file on behalf of itself and the SBL Subsidiary semi-annual reports on 
form N-SAR containing information with respect to Bando, the SBL 
Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated 
basis only; and (c) Bando to transmit to its shareholders semi-annually 
reports containing the financial information for Bando, the SBL 
Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated 
basis only.

E. Modification of Condition 6 of Prior Order

    1. Condition 6 of the Prior Order provides that if 10% or more of 
Bando's total assets on a consolidated basis are invested in assets 
other than securities issued by the SBIC Subsidiary, then, in addition 
to the consolidated financial statements of Bando and the SBIC 
Subsidiary, there shall be included in such reports separate financial 
statements of the SBIC Subsidiary. Absent exemptive relief, applicants 
assume that if 10% or more of Bando's total assets on a consolidated 
basis are invested in assets other than the SBIC, SBL, and Bankruptcy 
Remote Subsidiaries, separate financial statements would be required.
    2. In the future, Bando may make loans directly and may purchase 
loans from the SBIC or SBL Subsidiaries, and may therefore have more 
than 10% of its assets on a consolidated basis invested in assets other 
than the SBIC, SBL, and Bankruptcy Remote Subsidiaries. Accordingly, 
applicants request that condition 6 of the Prior Order be modified to 
require separate financial statements of the SBIC, SBL, and Bankruptcy 
Remote Subsidiaries if 10% or more of Bando's total assets on a 
consolidated basis are invested in assets other than securities issued 
by the SBIC, SBL, and Bankruptcy Remote Subsidiaries and securities 
similar to securities in which the subsidiaries invest.

F. Standards for Exemption Under Sections 6(c) and 17(b)

    1. Section 6(c) of the Act permits the SEC to exempt any person or 
transaction 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 
of the Act. The relationship of Bando's shareholders to the activities 
to be carried out by the SBL and Bankruptcy Remote Subsidiaries will be 
no different than if such activities were carried out by Bando because 
(a) the SBL and Bankruptcy Remote Subsidiaries will be wholly-owned 
subsidiaries of Bando; and (b) Bando has agreed that it will exercise 
its rights as the shareholder of the SBL and Bankruptcy Remote 
Subsidiaries on matters required by the Act to be approved by 
shareholders only as directed by Bando's shareholders. Accordingly, 
applicants believe that the requested exemptions meet the section 6(c) 
standards.
    2. Section 17(b) of the Act permits the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that (a) the 
terms of the proposed transaction, including the consideration to be 
paid or received, are reasonable and fair and do not involve 
overreaching on the part of any person concerned; (b) the proposed 
transaction is consistent with the policy of each registered investment 
company concerned; and (c) the proposed transaction is consistent with 
the general purposes of the Act. Applicants believe that the requested 
relief from section 17(a) meets these standards.

Applicants' Conditions

    Applicants state that as a condition to the granting of the 
exemptive relief requested, each of Bando, the SBIC Subsidiary, the SBL 
Subsidiary, and the Bankruptcy Remote Subsidiary will comply with the 
following conditions:
    1. Bando will at all times own and hold beneficially and of record 
all of the outstanding voting capital stock of the SBIC, SBL, and 
Bankruptcy Remote Subsidiaries.
    2. The SBIC and SBL Subsidiaries will have the same fundamental 
policies of Bando, as set forth in Bando's registration statement; the 
SBIC and SBL Subsidiaries will not engage in any of the activities 
described in section 13(a) of the Act, except in each case as 
authorized by the vote of a majority of the outstanding voting 
securities of Bando. The Bankruptcy Remote Subsidiary will not engage 
in any of the activities described in section 13(a) of the Act, except 
in each case as authorized by the vote of a majority of the outstanding 
voting securities of Bando.
    3. No person shall serve or act as investment adviser to the SBIC, 
SBL, or Bankruptcy Remote Subsidiaries under circumstances subject to 
section 15 of the Act, unless the directors and shareholders of Bando 
shall have taken the action with respect thereto also required to be 
taken by the directors and shareholders of the SBIC, SBL, or Bankruptcy 
Remote Subsidiaries, as the case may be.
    4. No person shall serve as a director of the SBIC, SBL, or 
Bankruptcy Remote Subsidiaries who shall not have been elected as a 
director of Bando at its most recent annual meeting, as contemplated by 
section 16(a) of the Act and subject to the provision thereof relating 
to the filling of vacancies, provided that the Bankruptcy Remote 
Subsidiary may have two directors who are not directors of Bando as 
long as a majority of its board of directors consists of directors who 
are also directors of Bando. Notwithstanding the foregoing, (a) the 
board of directors of the SBIC and SBL Subsidiaries will be elected by 
Bando as the sole shareholder of both corporations, and such board will 
be composed of the same persons that serve as directors of Bando and 
(b) the board of directors of the Bankruptcy Remote Subsidiary will be 
elected by Bando as the sole shareholder of the Bankruptcy Remote 
Subsidiary and such board will be composed of the same persons that 
serve as directors of Bando except to the extent noted above.
    5. Bando will not itself issue or sell any senior security 
representing indebtedness if immediately thereafter Bando will have 
outstanding more than one class of senior security representing 
indebtedness; and Bando will not issue or sell any senior security 
which is a stock if immediately thereafter Bando shall have outstanding 
more than one class of senior security which is a stock, as provided 
under section 18(c) of the Act. Bando shall not guarantee any 
borrowings of the SBIC or SBL Subsidiaries, nor shall Bando enter into 
any express or implied agreement that is the functional equivalent of 
such a guarantee, including any agreement that will ensure that the 
SBIC or SBL Subsidiaries has a tangible net worth of a specified 
amount. Bando will not cause or permit the SBIC or SBL Subsidiaries to 
issue or sell any senior security of which the SBIC or SBL Subsidiaries 
is the issuer except as hereafter set forth: the SBIC and SBL 
Subsidiaries may issue and sell to banks, insurance companies, and 
other financial institutions their secured or unsecured promissory 
notes or other evidences of indebtedness in consideration of any loan, 
or any extension or renewal thereof made by private arrangement, and 
the SBIC Subsidiary may issue debt securities held or guaranteed by 
SBA, provided the following conditions are met: (a) Such notes or 
evidences of indebtedness are not intended to be publicly distributed; 
and (b) such notes or evidences of indebtedness are not convertible 
into, exchangeable for or accompanied by any options to acquire, any 
equity security. Immediately after the issuance or sale of any class of 
senior security by Bando or the issuance or sale of any such notes or 
evidences by the SBIC or SBL Subsidiaries, Bando, the SBIC Subsidiary, 
and the SBL Subsidiary on a consolidated basis, and Bando and the SBL 
Subsidiary individually, shall have the asset coverage required by 
section 18(a), except that, in determining whether Bando, the SBIC 
Subsidiary, and the SBL Subsidiary, on a consolidated basis, and the 
SBL Subsidiary on an individual basis, have the asset coverage required 
by section 18(a), any borrowings by the SBIC Subsidiary or any 
borrowings by the SBIC Subsidiary or any borrowings by the SBL 
Subsidiary from Bando, for purposes of the definition of ``asset 
coverage'' in section 18(h), shall be treated as indebtedness not 
represented by senior securities. The Bankruptcy Remote Subsidiary will 
not issue senior securities.
    6. Bando will file with the SEC pursuant to rule 8b-16 amendments 
to its registration statement pursuant to section 8(b) of the Act on 
behalf of itself, the SBIC Subsidiary, the SBL Subsidiary, and the 
Bankruptcy Remote Subsidiary containing information with respect to, 
and financial statements of, Bando, the SBIC Subsidiary, the SBL 
Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated 
basis only, such amendments to be in lieu of and in satisfaction of the 
separate filing obligations of Bando, the SBIC Subsidiary, the SBL 
Subsidiary, and the Bankruptcy Remote Subsidiary pursuant to rule 8b-
16. Bando will file with the SEC pursuant to sections 30(a) and 30(b) 
of the Act and rules 30a-1 and 30b1-1 thereunder semi-annual reports on 
form N-SAR, or appropriate successor form, on behalf of itself, the 
SBIC Subsidiary, and the SBL Subsidiary containing information with 
respect to Bando, the SBIC Subsidiary, the SBL Subsidiary, and the 
Bankruptcy Remote Subsidiary on a consolidated basis only, such 
consolidated semi-annual reports to be lieu of and in satisfaction of 
the separate filing obligations of Bando, the SBIC Subsidiary, and the 
SBL Subsidiary pursuant to sections 30(a) and 30(b) and rules 30a-1 and 
30b1-1. Bando will in response to the appropriate item of form N-SAR or 
appropriate successor form indicate that the report is being filed on 
behalf of the SBIC, SBL, and Bankruptcy Remote Subsidiaries and include 
the ``811'' number of each of the SBIC, SBL, and Bankruptcy Remote 
Subsidiaries. Bando will transmit to its shareholders semi-annually 
pursuant to section 30(d) of the Act and rule 30d-1 thereunder reports 
containing the financial information and statements prescribed and 
required by such section and rule for Bando, the SBIC Subsidiary, the 
SBL Subsidiary, and the Bankruptcy Remote Subsidiary on a consolidated 
basis only, which reports shall be in lieu of and in satisfaction of 
the separate reporting obligations of Bando, the SBIC Subsidiary, the 
SBL Subsidiary, and the Bankruptcy Remote Subsidiary pursuant to 
section 30(d) and rule 30d-1, only so long as the amount of Bando's 
total assets on a consolidated basis invested in assets other than 
securities of the SBIC, SBL, and Bankruptcy Remote Subsidiaries, or 
securities similar to those in which such subsidiaries invest, does not 
exceed 10%. Notwithstanding anything in this condition, Bando shall not 
be relieved of any of its reporting obligations including, but not 
limited to, any consolidating statement setting forth the individual 
statements of the SBIC, SBL, or Bankruptcy Remote Subsidiaries required 
by rule 6-03(c) of regulation S-X. The selection of any independent 
public accountant who signs a consolidated financial statement filed by 
Bando, the SBIC Subsidiary, the SBL Subsidiary, and the Bankruptcy 
Remote Subsidiary with the SEC shall be ratified in accordance with 
section 32(a)(2) of the Act by a majority of the outstanding voting 
securities (as defined in section 2(a)(42) of the Act) of Bando.
    7. Bando will acquire securities of the SBIC Subsidiary 
representing indebtedness only if, in each case, the prior approval of 
SBA has been obtained. Bando and the SBIC Subsidiary will purchase and 
sell portfolio securities between themselves only if, in each case, the 
prior approval of SBA has been obtained.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-10891 Filed 5-9-94; 8:45 am]
BILLING CODE 8010-01-M