[Federal Register Volume 60, Number 103 (Tuesday, May 30, 1995)]
[Notices]
[Pages 28193-28197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13075]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC--21087; International Series Release No. 812; 812-7846]
Citibank, NA., et al.; Notice of Application
May 22, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: Citibank, N.A. (``Citibank'') and Citicorp.
relevant 1940 act sections: Exemption requested under section 6(c) from
section 17(f) and rule 17F-5.
summary of application: Applicants seek conditional exemptive relief
from section 17(f) of the 1940 Act and rule 17f-5 thereunder with
respect to two forms of foreign custody arrangements. The requested
exemption would amend an existing order (the ``1992 Order'') \1\
allowing Citibank, acting as custodian or subcustodian, to deposit the
securities of United States investment companies with certain foreign
subsidiaries of the Applicants. The requested exemption also would
allow Citibank to make available direct custody arrangements between
United States investment companies and certain foreign subsidiaries of
the Applicants.
\1\ Investment Company Act Release Nos. 18710 (May 15, 1992)
(notice) and 18782 (June 12, 1992) (order).
filing dates: The application was filed on January 7, 1992, and was
amended and restated on September 8, 1992, May 19, 1993, November 21,
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1994, April 24, 1995, and May 22, 1995.
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 June 16, 1995,
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 who wish to be
notified of a hearing may request notification by writing to the SEC's
Secretary.
addresses: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, c/o Caroline F. Marks, Esq., GTS-Legal, 111 Wall Street,
15th Floor, Zone 9, New York, New York 10043.
for further information contract: H.R. Hallock, Jr., Special Counsel,
at (202) 942-0564 (Office of Investment Company Regulation, Division of
Investment Management) .
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.
[[Page 28194]] Applicants' Representations
A. Background
1. Citibank, a United States national banking association, is a
wholly-owned subsidiary of Citicorp, a Delaware bank holding company.
Citibank operates an extensive custodian network through its branches
and through its own subsidiaries and subsidiaries of Citicorp, as well
as unaffiliated correspondent banks. As of December 31, 1993, Citibank
had approximately $648 billion in assets under custody.
2. In 1987, the SEC exempted Citibank (the ``1987 Order'') \2\ from
section 17(f) of the 1940 Act to permit it, as the custodian of the
securities and other assets (the ``Securities'') of any registered
management investment company, other than an investment company
registered under section 7(d) of the 1940 Act, or as subcustodian of
the Securities of such investment companies for which any other entity
is acting as custodian, to deposit such Securities under custodial
arrangements (the ``Agency Custody Arrangements'') with certain
specified foreign subsidiaries of Citibank (the ``Citibank
Subsidiaries'') or Citicorp (the ``Citicorp Subsidiaries'' and,
together with the Citibank Subsidiaries, the ``Foreign Subsidiaries'').
\2\ Investment Company Act Release Nos. 15580 (Feb. 13, 1987)
(notice) and 15617 (Mar 11, 1987) (order).
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3. In 1990, the SEC exempted Citibank (the ``1990 Order'') \3\ from
section 17(f) to permit it, acting as custodian or subcustodian, to
maintain the Securities of such investment companies with several
additional Foreign Subsidiaries. In the 1992 Order, the SEC exempted
Citibank to permit it to maintain the Securities of such investment
companies with certain additional Foreign Subsidiaries and to eliminate
the requirement of the 1987 and 1990 Orders that each Foreign
Subsidiary be a signatory to the custody agreement.
\3\ Investment Company Act Release Nos. 17329 (Feb. 1, 1990)
(notice) and 17360 (Feb. 28, 1990) (order).
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4. Each of the Foreign Subsidiaries currently providing custodial
services to U.S. Investment Companies is, and any additional Foreign
Subsidiary providing such services in the future will be, a banking
institution or trust company incorporated under the laws of a country
other than the United States and regulated as such by that country's
government or an agency thereof. Each of these Foreign Subsidiaries is,
or will be, experienced, capable and well qualified to provide such
services.
B. Relief Requested
1. Applicants seek exemptive relief to allow 14 Citibank
Subsidiaries that were granted relief in the 1992 Order \4\ to act as
custodians for any registered management investment company,
incorporated or organized under the laws of the United States or a
state thereof (a ``U.S. Investment Company'') under direct contractual
arrangements with such U.S. Investment Companies or their custodians
(the ``Direct Custody Arrangements''), as well as under the Agency
Custody Arrangements referred to above. Applicants also seek exemptive
relief for the Direct and Agency Custody Arrangements with respect to
one additional Citibank Subsidiary, Citibank a.s. in the Czech
Republic. Each of these 15 Citibank Subsidiaries is a majority-owned or
wholly-owned subsidiary of Citibank.
\4\ Citibank (Channel Islands) Limited; Citibank, S.A. in
France; Citicorp Investment Bank (The Netherlands) N.V.; Citibank
(Zaire) S.A.R.L., Citibank Zambia Limited; Citicorp Nominees Pty.
Limited in Australia; Citibank, Nominees (New Zealand) Limited;
Citibank Portugal, S.A., Banco de Honduras S.A.; Citibank Budapest
Rt.; Citibank-Maghreb in Morocco; Citibank (Trinidad & Tobago)
Limited; Cititrust Colombia S.A. Sociedad Fiduciaria; and Citibank
(Poland) S.A.
2. In addition, Applicants seek relief to modify the Agency Custody
Arrangements permitted by the 1992 Order to provide for the Citicorp
guarantee described in paragraphs 9 through 11 below and set forth in
Conditions 3(b), 5(c) and 9 below. Finally, Applicants seek to have any
order granting relief with respect to the Agency or Direct Custody
Arrangements apply to any other Foreign Subsidiary in the future that
does not meet the minimum shareholders' equity requirement of rule 17f-
5,\5\ except that the Direct Custody Arrangements would apply to the
Citicorp Subsidiaries only at such time as direct custody services are
to be offered by them in accordance with applicable law.\6\
\5\ Applicants do not request any relief with respect to
Citibank T/O or any other subsidiary or affiliate of Citibank
located in the Russian Federation. Should the Applicants request
exemptive relief in the future with respect to Citibank T/O, such
request would be the subject of a separate application.
\6\ Citibank is subject to certain constraints imposed by the
Federal Reserve Act with respect to its transactions with Citicorp
and its subsidiaries. Accordingly, Applicants presently intend to
permit only the existing and any additional Citibank Subsidiaries,
but not the Citicorp Subsidiaries, to offer Direct Custody
Arrangements.
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3. Applicants intend that may order granting the relief requested
by the application supersede the 1987, 1990, and 1992 Orders and
provide a single comprehensive order covering both the Direct and
Agency Custody Arrangements.
4. Under the Agency Custody Arrangements, the Securities are
maintained in the custody of the Foreign Subsidiaries only in
accordance with a custody agreement among (a) the U.S. Investment
Company or its custodian, (b) Citibank, and (c) Citicorp (the ``Agency
Custody Agreement''). Citibank acts as the custodian or subcustodian of
the Securities and delegates its responsibilities to the Foreign
Subsidiaries in accordance with the terms of a subcustodian agreement
(the ``Subcustodian Agreement'').
5. The Agency Custody Agreement provides that the delegation by
Citibank to a Foreign Subsidiary does not relieve Citibank of any
responsibility to the U.S. Investment Company or its custodian for any
loss due to such delegation except such loss as may result from
political risk (e.g., exchange control restrictions, confiscation,
expropriation, nationalization, insurrection, civil strife or armed
hostilities), and other risk of loss for which neither Citibank nor the
Foreign Subsidiary would be liable under rule 17f-5 (e.g., despite the
exercise of reasonable care, loss due to Act of God, nuclear incident
and the like). The Agency Custody Agreement also provides that Citicorp
is liable, in accordance with the terms of the guarantee described
below, for losses of Securities resulting from the bankruptcy or
insolvency of the Foreign Subsidiaries.
6. There may be instances in which a U.S. Investment Company would
prefer having a Foreign Subsidiary be engaged as a direct custodian,
receive direct instruction, and maintain separate accounts for it
without the involvement of Citibank. In addition, certain United States
banks that serve as custodians of U.S. Investment Companies do not
require the custody services of another United States custodian, but
nonetheless do require the services of foreign subcustodians in certain
foreign countries.
7. The Direct Custody Arrangements for which an exemption is being
sought would enable the Citibank Subsidiaries referred to in paragraph
1 and note 4 above to act as direct custodians in accordance with
either a master custody agreement under which a U.S. Investment Company
or its custodian would enter into a direct custodian relationship with
a number of Citibank Subsidiaries or an individual custody agreement
under which a U.S. Investment Company or its custodian would enter into
a direct custodial relationship with a particular Citibank Subsidiary
(either, a ``Direct Custody Agreement''). The Direct Custody
[[Page 28195]] Agreement would be among (i) the U.S. Investment Company
or custodian for which the Foreign Subsidiary acts as custodian or
subcustodian, (ii) the Foreign Subsidiary, (iii) Citicorp, and (iv)
Citibank. The terms of each Direct Custody Agreement would include a
confirmation by the Foreign Subsidiary that it will act as the
custodian or subcustodian, as the case may be, of the Securities under
the requested order, an agreement by Citicorp that it is liable, in
accordance with the terms of its guarantee, for losses of Securities
resulting from the bankruptcy or insolvency of the Foreign Subsidiary,
and an agreement by Citibank to be liable for any loss resulting from
the performance of the Foreign Subsidiary, except such loss as may
result from political risk (e.g., exchange control restrictions,
confiscation, expropriation, nationalization, insurrection, civil
strife or armed hostilities), and other risk of loss for which neither
Citibank nor the Foreign Subsidiary would be liable under rule 17f-5
(e.g., despite the exercise of reasonable care, loss due to Act of God,
nuclear incident and the like).
8. The extent of Citibank's liability for losses attributable to a
Foreign Subsidiary under the Direct Custody Arrangements would be the
same as that provided for under the Agency Custody Arrangements. Under
both the Agency Custody Arrangements and the Direct Custody
Arrangements, Citibank would be liable for the negligent acts or
omissions of the Foreign Subsidiaries.
9. Both the Agency and Direct Custody Agreements would provide that
Citicorp will be liable in accordance with the terms of a guarantee for
losses of Securities resulting from bankruptcy or insolvency of any of
the Foreign Subsidiaries. Under the 1987, 1990, and 1992 Orders,
Citicorp has issued a guarantee for losses resulting from the
bankruptcy or insolvency of each Foreign Subsidiary (the
``Guarantee''). If the requested order is issued, the Guarantee will be
amended to cover all the Securities held by the Foreign Subsidiaries
pursuant to an Agency Custody Agreement or a Direct Custody Agreement.
The dollar amount of the Guarantee applicable to all Foreign
Subsidiaries will equal or exceed the aggregate market value of the
Securities held in the custody of the Foreign Subsidiaries.
10. The value of the Securities held under Agency Custody Agreement
will be calculated by Citibank based on records maintained by Citibank,
as custodian, and reports by the Foreign Subsidiaries. The total amount
also will be reported to Citicorp. In addition, each Foreign Subsidiary
will submit to Citicorp monthly its calculation, and the basis on which
it was made, of the value of the Securities held by it under Direct
Custody Agreements. After review of the results of the monthly
monitoring, Citicorp will take the necessary steps to adjust the amount
of the Guarantee to cover the aggregate value of the Securities.
11. In the event that at the time of an insolvency a Foreign
Subsidiary holds Securities having an aggregate value in excess of the
aggregate value of Securities which such Foreign Subsidiary held at the
time of the previous adjustment of the Guarantee, Citicorp will
immediately take such steps as may be necessary to increase the size of
the Guarantee to cover the amount of such excess. This coverage will
remain in place until such time as the Foreign Subsidiary's bankruptcy
estate is settled, the amount of any loss to the U.S. Investment
Company attributable to the bankruptcy or insolvency is calculated, and
payment under the Guarantee, if necessary, is made.
Applicants' Legal Analysis
1. Applicants seek the requested exemptive relief because the
Foreign Subsidiaries do not qualify to serve as custodians for U.S.
Investment Companies under the terms of section 17(f) of the 1940 Act
or rule 17f-5 thereunder. Section 17(f) provides, in relevant part,
that a registered management investment company may place and maintain
its securities and similar assets in the custody of a bank or banks
meeting the requirements of section 26(a) of the 1940 Act. The Foreign
Subsidiaries, however, do not fall within the definition of a ``bank''
as that term is defined in section 2(a)(5) of the 1940 Act.
2. Rule 17f-5 would permit a U.S. Investment Company to deposit
securities, cash and cash equivalents with an ``eligible foreign
custodian,'' a term that is defined to include, as here relevant, a
majority-owned direct or indirect subsidiary of a qualified U.S. bank
or bank holding company that is incorporated or organized under the
laws of a country other than the United States and that has
shareholders' equity in excess of $100,000,000 (U.S. $ or equivalent).
None of the Foreign Subsidiaries currently meets or in the future will
meet the minimum shareholders' equity requirement of rule 17f-5.
3. Citibank believes that permitting U.S. Investment Companies and
their custodians to enter into direct custodial arrangements with the
Foreign Subsidiaries adequately would protect U.S. Investment Companies
and their shareholders against loss while permitting the Foreign
Subsidiaries to serve the needs of U.S. Investment Companies more
efficiently by being able to interact directly with the U.S. Investment
Company or its custodian. The proposed arrangements would enable the
Foreign Subsidiaries, as direct custodians, to carry out their
custodial duties and to respond to their customers' instructions,
inquiries and other operational needs without communications being
processed through Citibank, thereby reducing the cost and time involved
in administering custodial accounts.
4. Although Citibank would not be in an agency relationship with
the Foreign Subsidiaries under the Direct Custody Arrangements, it
nonetheless would provide the necessary review and independent
oversight of their performance and capabilities. Applicants submit that
Citibank's ongoing review insures that safeguards substantially equal
to those provided by its United States operations are in place and
provides for uniformity in procedures for custodial administration.
Because Citibank would be a party to each Direct Custody Agreement and
would agree to be responsible for negligent acts or omissions of the
Foreign Subsidiaries, Citibank would have a vested interest in
verifying that each Foreign Subsidiary maintained adequate standards
for the safekeeping of securities.
5. Under the Direct Custody Arrangements, Citibank will be in
privity of contract with the U.S. Investment Company or its custodian.
While it would be necessary for a U.S. Investment Company or its
custodian to establish the negligence of the applicable Foreign
Subsidiary in the action against Citibank, obtaining a judgment against
the particular Foreign Subsidiary would not be a condition precedent to
bringing an action against Citibank.
6. Under the Agency Custody Arrangements, Citibank, in its capacity
as custodian, would have custodial obligations to the U.S. Investment
Company or its custodian. In that case, the Foreign Subsidiary would be
the subcustodian and an agent of Citibank. Applicants assert that any
distinction between the agency and direct custodial relationships,
however, is not of consequence to U.S. Investment Companies and their
custodians, since in either case they would be able to seek recovery
for losses caused by the Foreign Subsidiaries' negligence from,
[[Page 28196]] and bring an action directly against, Citibank.
7. Applicants assert that provision of the Guarantee by Citicorp
(rather than by Citibank) under the Agency and Direct Custody
Arrangements does not negatively affect the level of protection
afforded the U.S. Investment Companies and custodians whose Securities
are held in the custody of the Foreign Subsidiaries. Since the total
Guarantee amount is available to cover one or more Foreign
Subsidiaries, Applicants assert that the Guarantee should be more than
sufficient to cover losses attributable to the bankruptcy of any one
particular Foreign Subsidiary.
8. Applicants submit that, as required by section 6(c) of the 1940
Act, the exemptions requested are (i) necessary or appropriate in the
public interest, (ii) consistent with the protection of investors, and
(iii) consistent with the purposes fairly intended by the policy and
provisions of the 1940 Act.
Applicants' Conditions
If the requested order is granted, Applicants agree to the
following conditions:
1. The foreign custody arrangements proposed with respect to the
Foreign Subsidiaries will satisfy the requirements of rule 17f-5 in all
respects other than with regard to shareholders' equity.
2. Securities of U.S. Investment Companies and their custodians
entering into Direct Custody Arrangements will be maintained with a
Foreign Subsidiary only in accordance with a Direct Custody Agreement,
required to remain in effect at all times during which the Foreign
Subsidiary fails to satisfy the requirements of rule 17f-5 relating to
shareholders' equity.
3. The Direct Custody Agreement will be among (i) each U.S.
Investment Company or custodian for which the Foreign Subsidiary serves
as custodian or subcustodian, (ii) the Foreign Subsidiary, (iii)
Citibank, and (iv) Citicorp. The Direct Custody Agreement will provide
the following:
(a) confirmation by the Foreign Subsidiary that it will act as the
custodian or subcustodian, as the case may be, of the Securities of the
U.S. Investment Company pursuant to the requested order;
(b) Citicorp will be liable, in accordance with the terms of the
Guarantee, for losses of the Securities of the U.S. Investment
Companies resulting from the bankruptcy or insolvency of the particular
Foreign Subsidiary; and
(c) Citibank will be liable for any loss resulting from the
performance of the Foreign Subsidiary, except such loss as may result
from (i) political risk (e.g., exchange control restrictions,
confiscation, expropriation, nationalization, insurrection, civil
strife, or armed hostilities) and (ii) other risks of loss for which
the Foreign Subsidiary would not be liable under rule 17f-5.
4. Under the Direct Custody Arrangements, U.S. Investment Companies
or their custodians, as the case may be, will be entitled to seek
relief directly against Citibank or the particular Foreign Subsidiary.
5. Securities of U.S. Investment Companies custodied pursuant to
Agency Custody Arrangements will be maintained with a Foreign
Subsidiary only in accordance with an Agency Custody Agreement,
required to remain in effect at all times during which the foreign
Subsidiary fails to satisfy the requirements of rule 17f-5 relating to
shareholders' equity.
6. The Agency Custody Agreement will be among (i) the U.S.
Investment Companies or custodians for which Citibank serves as
custodian or subcustodian, (ii) Citibank, and (iii) Citicorp. The
Agency Custody Agreement will provide the following:
(a) Citibank will act as the custodian or subcustodian, as the case
may be, of the Securities of the U.S. Investment Companies and will be
able to delegate its responsibilities to the Foreign Subsidiaries;
(b) Citibank's delegation of duties to a Foreign Subsidiary would
not relieve Citibank of any responsibility to the U.S. Investment
Company or its custodian for any loss due to such delegation except
such loss as may result from (i) political risk (e.g., exchange control
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) and (ii) other risks
of loss for which neither Citibank nor the Foreign Subsidiary would be
liable under rule 17f-5; and
(c) Citicorp will be liable, in accordance with the terms of the
Guarantee, for losses of U.S. Investment Company Securities resulting
from the bankruptcy or insolvency of the Foreign Subsidiary.
7. With respect to the Agency Custody Arrangements, Citibank has
entered, or will enter, into a Subcustodian Agreement with each Foreign
Subsidiary pursuant to which Citibank will delegate to the Foreign
Subsidiary such of its duties and obligations as would be necessary to
permit the Foreign Subsidiary to hold in custody, in the country in
which it operates, the Securities of the U.S. Investment Company. The
Subcustodian Agreement provides, or will provide, an acknowledgement by
the Foreign Subsidiary that it is acting as a foreign custodian for
U.S. Investment Companies and their custodians pursuant to the terms of
the exemptive order requested by the application. The Subcustodian
Agreement provides explicitly, or will explicitly provide, that U.S.
Investment Companies or their custodians, as the case may be, that have
entered into an Agency Custody Agreement with Citibank will be third
party beneficiaries of the Subcustodian Agreement, will be entitled to
enforce the terms thereof, and will be entitled to seek relief directly
against the Foreign Subsidiary or against Citibank.
8. Each Subcustodian Agreement is or will be governed by New York
law; or, if any Subcustodian Agreement were governed by the local law
of the foreign jurisdiction in which the Foreign Subsidiary is located,
Citibank has obtained or shall obtain an opinion of counsel from such
foreign jurisdiction opining as to the enforceability of the rights of
a third party beneficiary under the laws of such foreign jurisdiction.
9. The dollar value of the Guarantee applicable to the Foreign
Subsidiaries shall be at least equal to the aggregate value of the
Securities of U.S. Investment Companies held in the custody of the
Foreign Subsidiaries pursuant to the Direct Custody Agreements and the
Agency Custody Agreements, calculated at the close of the previous
calendar month. The value of U.S. Investment Company Securities held in
the custody of the Foreign Subsidiaries as Citibank's subcustodians
will be calculated by Citibank based on records maintained by Citibank
and reports by the Foreign Subsidiaries at the end of each calendar
month, and such amount will be reported to Citicorp. In addition each
Foreign Subsidiary will submit to Citicorp monthly its calculation, and
the basis on which it was made, of the market value of U.S. Investment
Company Securities held in custody by it under Direct Custody
Agreements. After reviewing the results of the monthly monitoring,
Citicorp will take such steps as may be necessary to adjust the amount
of the Guarantee to cover the aggregate value of the Securities held
under Agency and direct Custody Agreements. In the event of the
insolvency of a Foreign Subsidiary at a time when the aggregate value
of U.S. Investment Company Securities held by such Foreign Subsidiary
is in excess of the amount of such Securities which such Foreign
Subsidiary held at the prior month's end, Citicorp will immediately
take such steps as may be necessary to [[Page 28197]] increase the size
of the Guarantee to cover the amount of such excess.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13075 Filed 5-26-95; 8:45 am]
BILLING CODE 8010-01-M