[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] ----------------------------------------------------------------------- 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''). ----------------------------------------------------------------------- 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