[Federal Register Volume 60, Number 112 (Monday, June 12, 1995)]
[Notices]
[Pages 30915-30917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14326]



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


SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-21115; 812-9286]


AMBAC Capital Management, Inc.; Notice of Application

June 6, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption Under the Investment 
Company Act of 1940 (the ``1940 ACT'').

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

applicant: AMBAC Capital Management, Inc.

relevant 1940 act sections: Order requested under section 6(c) of the 
1940 Act for an exemption from the provisions of paragraphs (a)(1), 
(b)(2)(i) and (b)(3)(i) of rule 3a-5 under the 1940 Act.

summary of application: Applicant seeks relief from certain provisions 
of rule 3a-5 to enable it and other future wholly-owned finance 
subsidiaries of AMBAC, Inc. (``AMBAC'') to rely on the exemption from 
all provisions of the 1940 Act afforded by the rule while engaging in 
certain lending and investing activities not included within the 
express terms of the rule.

filing dates: The application was filed on October 17, 1994, and 
amended and restated on June 2, 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 
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 June 30, 1995, 
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; Applicant, 10 Glenville Street, Greenwich, Connecticut 06831.

FOR FURTHER INFORMATION CONTACT:
H.R. Hallock, Jr., Special Counsel, at (202) 942-0564 or C. David 
Messman, 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.

Applicant's Representations

    1. Applicant is a Delaware corporation and wholly-owned subsidiary 
of AMBAC Capital Corporation, a Delaware corporation,which in turn is a 
wholly-owned subsidiary of AMBAC. AMBAC is a holding company primarily 
engaged through another wholly-owned subsidiary, AMBAC Indemnity 
Corporation (``AMBAC Indemnity''), in the financial guarantee insurance 
business. AMBAC's shares are publicly traded on the New York Stock 
Exchange.
    2. AMBAC Indemnity is a licensed insurance company in all 50 
states, the District of Columbia, the Commonwealth of Puerto Rico and 
Guam that primarily insures newly issued municipal bonds. AMBAC 
Indemnity has been assigned triple-A claims-paying ability ratings, the 
highest ratings of Moody's Investors Service, Inc. (``Moody's''), 
Standard & Poor's Corporation (``S&P'') and Fitch Investors Service, 
Inc. AMBAC depends primarily on dividends from AMBAC Indemnity to pay 
dividends on its capital stock, to pay principal and interest on its 
indebtedness, and to pay its operating expenses.
    3. Applicant was organized to issue and sell municipal investment 
contracts and similar investment agreements (together, the ``MICs''). 
Applicant presently sells the MICs on a private placement basis 
primarily to state or local government entities or agencies and 
trustees for bond issues of such entities or agencies (collectively, 
the ``MIC Holders''), for the investment of proceeds from municipal 
bond offerings.
    4. The MICs are debt securities with an agreed-upon rate of return 
that may be collateralized by U.S. Treasury or other high quality 
securities. Municipal bond issuers find MICs attractive because their 
bonds are often issued to finance projects for which they have no 
immediate need for the entire proceeds of the issue. A MIC Holder may 
also purchase a MIC from the Applicant as a means of investing debt 
service reserve an similar funds held by the MIC Holder. The MICs 
provide the municipal bond issuer with a guaranteed yield that is 
advantageous relative to the interest rate on the bonds and can be 
structured to provide draw-downs as needed.
    5. Because of restrictions on their permitted investments, some 
municipalities have requested that Applicant enter into MICs styled as 
repurchase agreements (each, a ``Repo''), which would provide such 
municipalities with the economic equivalent of entering into a 
collateralized MIC. Applicant considers entering into such Repos to be 
equivalent to issuing a MIC in the form of a collateralized investment 
contract and will treat the proceeds generated thereby the same as any 
other proceeds raised in a debt issuance (hereinafter, any reference to 
``MIC'' shall include such Repos).
    6. The proceeds of MIC sales will be on-lent by Applicant to AMBAC 
and/or its direct and indirect subsidiaries (the ``Recipients'') for 
use in financing their respective operations. It is anticipated that 
substantially all of the proceeds from the MICs will be loaned by 
Applicant to the Recipients contemporaneously with the issuance of the 
related MIC, but in no event will less than 85 percent of such proceeds 
be loaned later than six months after Applicant's receipt of such 
proceeds. It is also anticipated that substantially all loans to 
Recipients will be collateralized by the Recipients themselves.
    7. Pursuant to an Insurance and Indemnity Agreement with AMBAC 
Indemnity (the ``Agreement''), Applicant's obligations under each MIC 
issued by it are fully insured by AMBAC Indemnity. The insurance policy 
(each, an ``Indemnity Policy'') provides that in the event of default 
by Applicant on the payment of principal or interest on the MIC, AMBAC 
Indemnity will make the scheduled payment. In addition, the MIC Holder 
may institute legal proceedings directly against AMBAC Indemnity to 
enforce such payment without first proceeding against Applicant. The 
Agreement requires [[Page 30916]] Applicant to reimburse AMBAC 
Indemnity for any payments made by AMBAC Indemnity under the Indemnity 
Policies.
    8. In order to secure its performance under the Agreement, 
Applicant generally will rehypothecate all collateral received in 
respect of loans of proceeds to Recipients to The Bank of New York as 
trustee (together with any successor trustee, the ``Trustee'') for the 
benefit of AMBAC Indemnity under a Master Trust Agreement. With respect 
to MICs in the form of collateralized investment contracts or Repos, 
however, the collateral pledged to secure the related loan of proceeds 
will be rehypothecated to the MIC Holder rather than to the Trustee.
    9. Applicant may come within the definition of an investment 
company under section 3(a) of the 1940 Act to the extent that its loans 
to AMBAC and the other Recipients may be considered as investing or 
reinvesting in debt securities of AMBAC and the other Recipients. 
Applicant presently is relying on the exception from the 1940 Act 
provided by section 3(c)(1). It will be unable to continue to do so, 
however, at such time as the 100 owner limit contained therein is 
exceeded or if Applicant were to make a public offering of its 
securities.

Applicant's Legal Analysis

    1. Generally, rule 3a-5 grants an exemption from all provisions of 
the 1940 Act, subject to certain conditions, to any finance subsidiary 
(as defined in the rule) of an eligible parent company so as to permit 
the finance subsidiary to offer debt securities or non-voting preferred 
stock in the United States. Rule 3a-5 also permits a finance subsidiary 
to loan the proceeds of its securities offerings to eligible companies 
controlled by the parent company.
    2. Applicant's proposed activities will not meet the requirement of 
paragraph (a)(1) of rule 3a-5 that any debt securities of the finance 
company issued to or held by the public be unconditionally guaranteed 
by the parent company. In Applicant's case, all MICs will receive a 
guarantee in the form of an unconditional insurance policy to be issued 
by AMBAC Indemnity, unless the parent company guarantee required by 
rule 3a-5 is delivered instead.
    3. Applicant submits that its planned operations raise two further 
issues under rule 3a-5. First, paragraph (b)(2)(i) of rule 3a-5 defines 
an eligible parent company as a company that, among other things, is 
not an investment company under section 3(a) or that is excepted or 
exempted by order from the definition of investment company by section 
3(b) or by the rules and regulations under section 3(a). Applicant 
states that there may be some uncertainty over AMBAC's status under 
section 3(a)(3) of the 1940 Act. Consequently, to the extent that AMBAC 
must rely on a section 3(c)(6) exception as an insurance holding 
company, AMBAC would not qualify as an eligible parent under rule 3a-5. 
Second, paragraph (b)(3)(i) of rule 3a-5 defines a ``company controlled 
by the parent company'' as a company that, among other things, is not 
an investment company under section 3(a) or that is excepted or 
exempted by order from the definition of investment company by section 
3(b) or by the rules and regulations under section 3(a). AMBAC engages 
in certain activities (including certain investment activities) through 
wholly-owned subsidiaries that have no outstanding securities other 
than those owned directly or indirectly by AMBAC. Such subsidiaries 
would be eligible for exemption under rule 3a-3 under the 1940 Act, 
except that a section 3(c)(6) exempt entity is not an eligible parent 
of a rule 3a-3 exempt company. In addition, the Applicant might choose 
in the future to lend the proceeds of its MIC offerings to AMBAC 
Indemnity, which is a section 3(c)(3) exempt insurance company. 
Accordingly, Applicant requests exemptive relief from rule 3a-
5(b)(3)(i) to permit it to lend the proceeds of its debt offerings to 
subsidiaries of AMBAC that would be exempt by virtue of rule 3a-3, but 
for AMBAC's status as their parent company, and to AMBAC Indemnity.
    4. Section 6(c) of the 1940 Act provides, as here relevant, that 
the SEC, by order upon application, may conditionally or 
unconditionally exempt any person or persons from any provision of the 
1940 Act or any rule thereunder, if such exemption is necessary and 
appropriate in the public interest and consistent with the protection 
of investors and purposes fairly intended by the policy and provisions 
of the 1940 Act. Applicant submits that the exemptive relief requested 
meets those standards.
    5. Applicant submits that the Indemnity Policy issued by AMBAC 
Indemnity covering the MICs serves the underlying objectives of the 
rule 3a-5 guarantee since the MIC Holders will be provided with 
benefits substantially similar to those provided by the guarantee 
requirement of rule 3a-5. There will at all times be an uninterrupted 
payment of funds to the MIC Holders. MIC Holders will also benefit from 
safeguards that are not present in the guarantee of a non-regulated 
parent company, since AMBAC Indemnity is subject to a comprehensive 
scheme of regulation and supervision under the insurance laws of 
Wisconsin, its state of incorporation, as well as the insurance laws 
and regulations of other jurisdictions in which it does business.
    6. Applicant further asserts that the receipt of an insurance 
policy from AMBAC Indemnity in lieu of an AMBAC guarantee increases the 
likelihood that the MIC Holders will be paid in full. This is because 
AMBAC's equity interest in AMBAC Indemnity is in excess of 99% of its 
assets, so that AMBAC's only significant source of funds with which to 
make payments is dividends on its AMBAC Indemnity stock. Furthermore, 
AMBAC Indemnity's triple-A rated claims paying ability has been 
assigned higher ratings than AMBAC's double-A rated senior debt by 
Moody's and S&P, reflecting an assessment by such rating agencies of 
the increased likelihood of payment in the case of AMBAC Indemnity. 
Based on the foregoing, Applicant requests exemptive relief from rule 
3a-5(a)(1) to permit AMBAC Indemnity to issue insurance policies in 
lieu of the parent guarantees otherwise required.
    7. Applicant's parent AMBAC may be considered a section 3(c)(6) 
exempt company, as noted above, because it is primarily engaged in a 
section 3(c)(3) business (insurance) through AMBAC Indemnity. Applicant 
contends that the types of businesses enumerated in section 3(c)(3) do 
not present the potential for investment company type activities with 
which the SEC was concerned when it limited the definition of parent 
company (such as AMBAC) and controlled company (such as AMBAC 
Indemnity) under rule 3a-5. Similarly, where AMBAC engages in certain 
activities through wholly-owned subsidiaries that would qualify for 
exemption under rule 3a-3, except for the fact that a section 3(c)(6) 
entity is not an eligible parent of a rule 3a-3 company, Applicant 
contends that there is no reason to impose the requirements of the 1940 
Act on such subsidiaries. Accordingly, Applicant believes it is 
appropriate to grant relief from paragraphs (b)(2)(i) and (b)(3)(i) of 
rule 3a-5 to enable Applicant to lend the proceeds of its offerings to 
its parent company, AMBAC, and to the other Recipients.
    8. Applicant believes that neither its structure nor its mode of 
operations resembles that of an investment company. Applicant asserts, 
therefore, that it is not the type of company [[Page 30917]] Congress 
intended to regulate under the 1940 Act, and that under the 
circumstances, AMBAC's status as a section 3(c)(6) excepted company 
should not prevent the SEC's grant of requested relief.
    9. Applicant and any other future wholly-owned subsidiary of AMBAC 
relying on any order granting the application will comply with the 
provisions of rule 3a-5 except to the limited extent for which relief 
is sought in the application. AMBAC believes that any such future 
subsidiaries would be formed in response to business or market 
concerns, such as business differentiation between products or to more 
specifically manage the risks of different MIC categories.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14326 Filed 6-9-95; 8:45 am]
BILLING CODE 8010-01-M