[Federal Register Volume 59, Number 204 (Monday, October 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26278]


[[Page Unknown]]

[Federal Register: October 24, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20636; International Series Release No. 733; 812-9210]

 

Stadshypotek AB; Notice of Application

October 19, 1994.

AGENCY: Securities and Exchange Commission (``SEC'').

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

-----------------------------------------------------------------------

APPLICANT: Stadshypotek AB.

RELEVANT ACT SECTION: Order requested under section 6(c) for an 
exemption from all provisions of the Act.

SUMMARY OF APPLICATION: Applicant is a wholly-owned subsidiary of 
Konungariket Sveriges stadshypotekskassa (also known as the Urban 
Mortgage Bank of the Kingdom of Sweden) (``UMB''). Applicant seeks an 
exemption under section 6(c) from all provisions of the Act. UMB was 
established by the Swedish government to finance the acquisition and 
development of residential and commercial properties in Sweden through 
mortgage lending. UMB is being converted into a private sector limited 
liability company. Applicant is the corporation through which this 
privatization will be accomplished. As part of the privatization, 
applicant intends to offer and sell a tranche of its common shares 
(``Shares'') in the United States under rule 144A under the Securities 
Act of 1933. In addition, applicant may offer and sell other debt and 
equity securities in the United States in the future.

FILING DATES: The application was filed on September 7, 1994. Applicant 
has agreed to file an amendment during the notice period, the substance 
of which is incorporated herein.

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 November 7, 
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 notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Stadshypotek AB, c/o John Paul Ketels, Rogers & Wells, 607 
Fourteenth Street, N.W., Washington, D.C. 20005.

FOR FURTHER INFORMATION CONTACT:
Marc Duffy, Senior Attorney, (202) 942-0565, or C. David Messman, 
Branch Chief, (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 from 
the SEC's Public Reference Branch.

Applicant's Representations

    1. In 1909, UMB was established under a special act of the Swedish 
Parliament to finance the acquisition and development of residential 
and commercial properties in Sweden through mortgage lending. Before 
December 31, 1992, the mortgage business now conducted by applicant was 
conducted by (a) UMB, which was responsible for funding operations, and 
(b) 20 regional urban mortgage societies, which were responsible for 
lending operations. On January 1, 1993, the mortgage societies merged 
with UMB, and UMB emerged as a holding company owning all of the assets 
previously owned by the mortgage societies.
    2. In 1992, the Swedish Parliament adopted legislation providing 
for the conversion of UMB's business into a private sector limited 
liability company. As part of the privatization, on January 1, 1993, 
UMB contributed all of its assets to applicant in exchange for all of 
applicant's capital stock and intercompany debt obligations. Applicant 
has since been responsible for the operations of UMB.
    3. Applicant is incorporated as a credit market company was limited 
liability in Sweden. As of December 31, 1993, applicant's consolidated 
total equity was approximately 11.28 billion Swedish Kronor (``SEK'') 
(approximately U.S. $1.5 billion).
    4. Applicant is subject to an extensive regulatory regime in Sweden 
pursuant to the Swedish Act on Credit Market Companies. The Swedish 
Financial Supervisory Authority (``SFSA'') is responsible in Sweden for 
regulating applicant. Applicant does not make any loans outside of 
Sweden.
    5. Applicant, in addition to its principal business of extending 
mortgage loans, issues retail market bonds. Retail market bonds are 
debt securities issued in small denominations with maturities of 
various lengths including 90 days, two years, and five years, which are 
used as a means of competitively raising intermediate term funds. 
Retail market bonds constitute a general obligation of applicant that 
ranks pari passu with other general obligations of applicant. The 
redemption price prior to maturity is established each day in relation 
to the major public bonds of applicant. Applicant publishes on a daily 
basis the price at which it will buy or sell retail market bonds of a 
particular maturity. As of December 31, 1993, applicant had issued 
approximately 11 billion SEK aggregate face amount of retail market 
bonds, which constituted approximately 3.6% of applicant's short- and 
long-term securities outstanding.
    6. On August 31, 1994, UMB, as applicant's sole shareholder, 
approved a plan to privatize applicant. To effect the privatization, 
37,500,000 of applicant's Series A shares will be offered to the 
public. Rights to subscribe for the shares will be allocated to 
qualifying borrowers, qualifying employees of applicant, and UMB. If 
all rights are taken up, a total of 75,000,000 shares will be owned by 
the investing public and 42,500,000 by UMB. UMB's interest in applicant 
will consist of 10,000,000 Series A shares and all of the 32,500,000 
Series B shares. Although Series A and Series B shares have identical 
voting rights, Series B shares will receive a dividend that is SEK 3.6 
per share less than Series A shares. Series B shares will convert into 
Series A shares in 1999.
    7. In addition, international institutional investors will be 
offered Class A shares of applicant, certain of which applicant wishes 
to sell to U.S. ``qualified institutional buyers'' under rule 144A 
under the Securities Act of 1933 (the ``Offer''). Afterwards, UMB will 
own approximately 36% of the outstanding equity securities of 
applicant. In addition, applicant may offer and sell additional debt 
and/or equity securities in the United States in the future.

Applicant's Legal Analysis

    1. Section 3(a)(3) of the Act defines an investment company to 
include any issuer engaged in the business of investing, reinvesting, 
owning, holding, or trading in securities, and that owns or proposes to 
acquire investment securities having a value exceeding 40% of the 
issuer's total assets, exclusive of Government securities and cash 
items on an unconsolidated basis. Because all of the monies borrowed by 
applicant from time to time are loaned to its customers, all or 
substantially all of applicant's assets will consist of promissory 
notes and other obligations of customers to repay such loans. Such 
obligations could be deemed to be investment securities within the 
meaning of section 3(a)(3). As a result, applicant may be deemed to be 
an investment company.
    2. Rule 3a-6 exempts foreign banks from the definition of 
investment company for all purposes under the Act. A foreign bank is 
defined to include a banking institution engaged substantially in 
``commercial banking activity,'' which, in turn, is defined to include 
``accepting demand and other types of deposits.'' While applicant 
issues retail market bonds, it does not technically ``accept demand and 
other types of deposits,'' and therefore may not be able to rely on 
rule 3a-6.
    3. Applicant believes that it is functionally equivalent to a 
foreign bank because it issues financial products similar to those 
issued by banks, and it is subject to an extensive alternative 
regulatory scheme. Applicant argues that its customers view retail 
market bonds like demand deposits or certificates of deposit offered by 
banks. Applicant has issued approximately 20% of the outstanding retail 
market bonds in Sweden; the other 80% of retail market bonds are issued 
by commercial banks and the National Debt Office. Applicant believes 
that retail market bonds are a unique savings product for the Swedish 
market that would not be of interest outside of Sweden. Applicant has 
no intention of offering retail market bonds in the United States now 
or in the future. Applicant, however, may consider issuing bonds in 
accordance with market practice and custom in the United States. Any 
such issuance of bonds would be registered under the Securities Act of 
1933 or made pursuant to an available exemption from registration.
    4. Applicant is subject to extensive regulation by the SFSA, the 
entity that also regulates banks in Sweden. As with Swedish banks, 
applicant is subject to continuous filing requirements of financial and 
other information with the SFSA, and to SFSA spot inspections. The 
scope of applicant's business activities cannot be materially altered 
without the approval of the SFSA. Moreover, applicant is subject to the 
same capital adequacy requirements as Swedish banks.
    5. Sections 3(c)(5)(C) of the Act excepts from the definition of 
investment company any person who is not engaged in the business of 
issuing redeemable securities and who is engaged primarily in 
purchasing or otherwise acquiring mortgages and other liens on and 
interests in real estate. Applicant states that it is engaged primarily 
in purchasing or otherwise acquiring mortgages since 90% of its assets 
consist of mortgage loans secured exclusively by real estate. 
Applicant, however, may not be able to rely on the exception provided 
by section 3(c)(5)(C) because the retail market bonds it has issued 
could be deemed to be redeemable securities.\1\
---------------------------------------------------------------------------

    \1\A redeemable security is defined in section 2(a)(32) as any 
security, other than short-term paper, under the terms of which the 
holder upon presentation to the issuer is entitled to receive 
approximately his proportionate share of the issuers current net 
assets, or the cash equivalent thereof.
---------------------------------------------------------------------------

    6. Applicant does not believe that the issuance of retail market 
bonds raises the concerns that led Congress to restrict section 
3(c)(5)(C) to companies that do not issue redeemable securities. In 
extending the regulatory provisions of the Act to mortgage entities 
otherwise covered by section 3(c)(5)(C) that issue redeemable 
securities, Congress sought to apply such provisions to ``those 
companies which purport to model themselves after open-end companies by 
issuing a security redeemable at the option of the holder.''\2\ Unlike 
investors who invest in open-end investment companies relying on a pool 
of assets for their return, investors in retail market bonds are 
investing in short and intermediate fixed-term deposit instruments most 
typically sold by banks. Applicant is not marketing a return on 
interests in mortgage loans. Furthermore, unlike the holder of a 
redeemable security, the holder of a retail market bond may redeem it 
at a market price at the time of redemption and not for his or her 
``proportionate share of the net assets.'' Applicant is not in the 
business of issuing retail market bonds other than as a way of 
competitively raising intermediate term funds to support its principal 
business of making mortgage loans. Based on the structure and 
organization of applicant, and the nature and characteristics of the 
retail market bonds, applicant states that there is no need to be 
concerned with investors being confused that applicant is a vehicle for 
investing in mortgage pools.
---------------------------------------------------------------------------

    \2\Senate Report No. 184, 91st Cong., 1st Sess. 37 (1969).
---------------------------------------------------------------------------

    7. Section 6(c) of the Act provides that the SEC may exempt any 
person or transaction from any provision of the Act or any rule 
thereunder to the extent that 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.
    8. Applicant was created by the Government of Sweden to provide 
efficient mortgage financing for private households as well as property 
companies and municipalities. Applicant is limited and controlled in 
many respects as to the financings it can undertake and loans that it 
can make by a strict regime of regulation implemented by the Government 
of Sweden. Applicant asserts that its operations do not lend themselves 
to the abuses against which the Act is directed. Consequently, 
applicant believes that the standards for relief under section 6(c) are 
satisfied.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-26278 Filed 10-21-94; 8:45 am]
BILLING CODE 8010-01-M