[Federal Register Volume 59, Number 154 (Thursday, August 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19563]


[[Page Unknown]]

[Federal Register: August 11, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC--20444; International Series Release No. 696; 812-9056]

 

The Bank of New York; Notice of Application

August 5, 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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Applicant: The Bank of New York.

Relevant Act Sections: Conditional order requested under section 6(c) 
for an exemption from the provisions of section 26(a)(2)(D).

Summary of Application: Applicant seeks a conditional order that would 
permit applicant to deposit foreign securities, held by unit investment 
trusts for which it serves as trustee, with the securities clearance 
and depository facilities operated by Morgan Guaranty Trust Company of 
New York (``Morgan Guaranty'') in Brussels, Belgium in its capacity as 
operator of the Euroclear System (``Euroclear''), or with Central de 
Livraison de Valeurs Mobilieres, S.A. (``CEDEL''). Euroclear and CEDEL 
are sometimes referred to as the ``Transnational Agencies.''

Filing Dates: The application was filed on June 15, 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 August 30, 1994, 
and should be accompanied by proof of service on the 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 5th Street, N.W., Washington, D.C. 
20549. Applicant, The Bank of New York, 101 Barclay Street, New York, 
New York 10286.

FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563 or Barry D. Miller, 
Senior Special Counsel, 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. Applicant is a trust company incorporated and doing business 
under the laws of the State of New York. Applicant meets the 
qualifications of section 26(a)(1) of the Act for a trustee or 
custodian of a unit investment trust. Applicant currently serves as 
trustee of various unit investment trusts sponsored or co-sponsored by, 
among others, Van Kampen Merritt; Merrill Lynch, Pierce, Fenner & Smith 
Incorporated; Nike Securities L.P.; Dean Witter Reynolds Inc.; Quest 
For Value; Bear, Stearns & Co. Inc.; and Unison Investment Trusts Ltd. 
and may in the future act as trustee of trusts sponsored by these and 
other sponsors. Under each trust indenture, and as required by the Act, 
applicant has responsibility for the custody of the securities held in 
the trust.
    2. Various sponsors of trusts for which applicant acts as trustee 
have created, or have expressed an interest in creating, trusts whose 
investment objectives contemplate investment in securities denominated 
in foreign currencies and in foreign securities. Foreign securities, 
especially securities issued in the European market, are issued 
generally in bearer form. With the growth of the European securities 
markets, the problems with bearer instruments entailed by the necessity 
for presentment of certificates or coupons for payment of principal of 
or interest on the securities have led to the increased importance of a 
book-entry system to speed clearance of trades and collection of 
principal and interest payments.
    3. Euroclear and CEDEL are the largest clearance and custody 
systems of internationally traded securities in the world. They were 
organized principally to provide a simple, economic and automated means 
of settling secondary market transactions in internationally traded 
securities regardless of the geographical location of the parties to 
the transaction. The branch of Morgan Guaranty in Brussels, Belgium 
operates Euroclear, and is subject to regulation by the New York and 
federal banking authorities and the Belgian Banking Commission. Belgian 
law governs Morgan Guaranty's liability as custodian and operator of 
Euroclear under the contract between Euroclear and each participating 
entity. CEDEL was founded as a limited company under the laws of the 
Grand Duchy of Luxembourg. CEDEL is headquartered in Luxembourg and has 
representative offices in London, Tokyo, New York, and Hong Kong. CEDEL 
operates under the supervision of the Institute Monetaire 
Luxembourgeois, the Luxembourg Monetary Authority, which is also the 
banking control authority.
    4. Applicant believes that securities deposited in Euroclear or 
CEDEL are at least as effectively protected as the same securities 
would be if directly deposited with a foreign branch of a United States 
bank, or shipped to the United States for custody, for several reasons, 
including:
    (a) the insurance coverage for Euroclear and CEDEL depositaries and 
their outstanding loss records;
    (b) the expertise and experience of the banks holding securities 
for Euroclear or CEDEL;
    (c) the efficiencies resulting from handling large quantities of 
the same issue;
    (d) the excellent track records of Euroclear and CEDEL;
    (e) the close scrutiny of Euroclear and CEDEL services resulting 
from the market's dependence upon (and hence concern for) these 
services and the oversight of the depositaries; and
    (f) the depositary agreements pursuant to which securities are held 
by Euroclear and CEDEL depositaries, which impose high standards of 
care on the depositaries.
    5. Applicant believes that the exposure to certain custodial risks 
is reduced when securities are held through Euroclear or CEDEL, rather 
than directly by a United States bank branch, since securities held in 
Euroclear or CEDEL do not have to be transported for deposit outside 
these systems to effect sale. Furthermore, holding foreign securities 
outside of Euroclear and CEDEL would give rise to substantially higher 
costs and probably would involve other significant problems.

Applicant's Legal Analysis

    1. Section 26(a)(1) provides that a unit investment trust must be 
governed by a trust indenture that designates one or more trustees or 
custodians, each of which is a bank, and section 26(a)(2)(D) requires 
that the trust indenture provide that the trustee or custodian have 
possession of all securities and other property in which the funds of 
the trust are invested.
    2. Euroclear and CEDEL do not qualify under the Act as custodians 
for unit investment trust assets. The term ``bank'' is defined in 
section 2(a)(5) as a banking institution organized under the laws of 
the United States, a member bank of the Federal Reserve System, and any 
other banking institution or trust company doing business under the 
laws of any state or the United States that receives deposits or 
exercises fiduciary powers. The SEC has stated that an overseas branch 
of a domestic bank is the only facility located outside the United 
States that qualifies as a custodian under section 26. See Exemption 
for Custody of Investment Company Assets Outside the United States, 
Investment Company Act Release No. 13724 (Jan. 17, 1984). The SEC also 
has indicated that a foreign-incorporated subsidiary does not meet this 
definition. See International Resources Funds, Inc., Investment Company 
Act Release No. 2874 (May 4, 1959). Accordingly, neither Euroclear nor 
CEDEL meets the definition of a bank under the Act, and, as a result, 
neither qualifies as a custodian.
    3. Section 6(c) provides in relevant part that the SEC, by order 
upon application, may exempt any transactions 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 and provisions of the Act. 
Applicant believes that the requested relief satisfies the section 6(c) 
standard.
    4. Rule 17f-5 permits a registered management investment company to 
hold foreign securities in foreign security depositories or clearing 
agencies such as Euroclear or CEDEL, subject to certain provisions. 
Rule 17f-5 permits investment companies to place and maintain foreign 
securities, as defined in the rule, with certain foreign custodians, 
provided that a majority of the board of directors, (a) determines that 
maintaining the company's assets in a particular country is consistent 
with the best interests of the company and its shareholders, (b) 
determines that maintaining the company's assets with a particular 
foreign custodian is consistent with the best interests of the company 
and its shareholders, and (c) approves, as consistent with the best 
interests of the company and its shareholders, a written contract that 
will govern the manner in which such custodian will maintain the 
company's assets. The directors also must establish a system to monitor 
these arrangements and annually review and approve the continuance of 
these arrangements. Both Euroclear and CEDEL qualify as foreign 
custodians under rule 17f-5. There, however, is no rule analogous to 
rule 17f-5 applicable to the safekeeping of the assets of a unit 
investment trust when those assets are held outside of the United 
States.
    5. Applicant proposes to provide to a trust custody services that 
would permit the foreign securities of the trust to be held abroad in 
the custody of Euroclear or CEDEL. These arrangements will be in total 
agreement with those applicable to registered management investment 
companies as contemplated by rule 17f-5, except that (a) certain duties 
and responsibilities of the directors of such companies will be 
performed by applicant as trustee, (b) applicant will provide 
indemnification to the unit holders, and (c) only Euroclear and CEDEL 
will qualify as foreign custodians for the trusts.
    6. Applicant views the deposit of trust assets with Euroclear and 
CEDEL to be consistent with the purposes of section 26. Euroclear and 
CEDEL are the largest clearance and custody systems of internationally 
traded securities. Their insurance coverage, governing terms and 
conditions, and the high calibre of their depositories provide trust 
and unit holders with a great degree of security.

Applicant's Conditions

    Applicant agrees that the exemptive order requested herein will be 
subject to the following conditions:
    1. Applicant will comply with the provisions of Rule 17f-5 under 
the Act as if each trust was a registered investment company and 
applicant was its board of directors; except that Euroclear and CEDEL 
shall be the only qualified ``eligible foreign custodians'' for the 
trusts.
    2. Applicant will indemnify and hold each of the trusts harmless 
from and against any loss that shall occur as the result of the failure 
of a Transnational Agency holding the foreign securities of a trust to 
exercise reasonable care with respect to the safekeeping of such 
foreign securities to the same extent that applicant would be required 
to indemnify and hold a trust harmless if applicant were holding such 
foreign securities in the jurisdiction of the United States whose laws 
govern the relevant trust indenture; provided, however, that applicant 
shall not be liable for loss except by reason of the gross negligence, 
bad faith, or willful misconduct of applicant or a Transnational 
Agency.
    3. Applicant will assure that the sponsors of each of the trusts 
agree that the potential exposure of loss to unit holders resulting 
from the use of a Transnational Agency will be disclosed, if material, 
in the prospectus relating to the relevant trust.
    4. Applicant will maintain and keep current written records 
regarding the basis for choice or continued use of a particular 
Transnational Agency, and such records will be available for inspection 
at applicant's offices at all reasonable times during its usual 
business hours by unit holders and the SEC.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-19563 Filed 8-10-94; 8:45 am]
BILLING CODE 8010-01-M