[Federal Register Volume 60, Number 190 (Monday, October 2, 1995)]
[Notices]
[Pages 51510-51511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24481]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21377; International Series Release No. 859; 812-9728]
The Canadian Depository for Securities Limited and the Investment
Dealers Association of Canada; Notice of Application
September 26, 1995.
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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APPLICANTS: The Canadian Depository for Securities Limited (``CDS'')
and the Investment Dealers Association of Canada (``IDA'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
that would exempt certain custodial arrangements from all provisions of
the Act.
SUMMARY OF APPLICATION: Applicants request an order under section 6(c)
to exempt the custodial arrangements for stripping certain Canadian
debt securities from all provisions of the Act.
FILING DATES: The application was filed on August 22, 1995, and amended
on September 20, 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 October 23, 1995
and should be accompanied by proof of service on the 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, CDS, 85 Richmond Street West, Toronto, Ontario, M5H 2C9
Canada; IDA, 121 King Street West, Suite 1600, Toronto, Ontario, M5H
3T9 Canada.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, 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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. CDS is the major securities depository and clearing corporation
in Canada. CDS is regulated by the Ontario Securities Commission and by
the Commission des valeurs mobilieres du Quebec pursuant to provincial
securities acts. CDS also has entered into an oversight agreement with
the Bank of Canada, and CDS cooperates with the Office of the
Superintendent of Financial Institutions. CDS is qualified to serve in
Canada as an eligible foreign custodian for registered United States
investment companies under rule 17f-5 of the Act.\1\
\1\ See The Canadian Depository for Securities Limited (pub.
avail. Aug. 4, 1994).
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2. IDA is the national self-regulatory organization for the
Canadian securities industry, and is the primary regulator of the
Canadian fixed income market, including Canadian treasury bills and
government and corporate bonds and debentures.
3. A group of CDS participants, including major IDA member firms
and certain Canadian chartered banks and trust companies, have created
payment strips (``Canadian Strips'') by stripping Canadian securities
into component parts for sale to investors. The most common form of
Canadian Strips involves separating bonds of Canadian federal or
provincial government issuers into individual interest and principal
payment components. Each individual Canadian Strip is then separately
held by the CDS participant or traded.
4. CDS participants sell Canadian Strips directly to investors and
maintain a secondary market for the Strips. Canadian Strips are
typically held by CDS participants as nominees for investors. The
investors have accounts with CDS participants and are the beneficial
owners of the Strips. CDS participants generally follow the
instructions of beneficial owners with respect to matters relating to
securities held by them as nominees, including matters relating to
defaults.
5. Originally, CDS participants created Canadian Strips by
physically separating individual coupons from bearer bond certificates
(``Physical Strips''). Certificates underlying Physical Strips are in
bearer form, held for CDS by Canadian banks or trust companies. In
1987, CDS participants began depositing Physical Strips into CDS and
also began stripping Canadian debt securities electronically on a book-
entry only basis under CDS procedures. The electronic ledger system at
CDS separates the underlying securities held in participants' accounts
into the corresponding book-entry only strip payment components
(``Book-Entry Strips''). The certificates underlying Book-Entry Strips
are registered on the books of the issuer in the name of CDS or its
custodian. Canadian Strips include Physical Strips deposited with CDS
and Book-Entry Strips which are recorded on CDS ledgers.
6. The total face value of Canadian Strips on deposit as of April
30, 1995 was Cdn $130 billion, of which more than 95% relate to bonds
issued or guaranteed either by Canada or a Canadian province,
approximately 3.5% relate to Canadian corporate issuers, and the
remainder relate to municipal and other Canadian issuers, such as
colleges and hospitals, that are typically supported by provincial
government credit. More than 85% of the face value of the Canadian
Strips as of April 30, 1995 were Book-Entry Strips.
7. The CDS custody arrangements are governed by the CDS rules and
operating procedures (``CDS Rules''), which allow participants to
create
[[Page 51511]]
Canadian Strips and thereafter trade them separately, combine them to
create strip payment packages, or reconstitute them into underlying
bonds.
8. Upon default or certain other events, such as a change in tax
laws, CDS would typically have certain rights as registered owner,
including the right in some instances to declare the principal of all
the underlying bonds then held by it to be immediately due and payable.
Under the terms of the underlying bonds, such as those issued by the
Government of Canada and Canadian provinces, the rights of a bondholder
to act upon a default can be exercised typically only by a person
recognized as a bondholder on the records of the bond issuer.
Beneficial owners of the underlying bonds do not appear to have the
legal right under applicable Canadian law to be recognized by the bond
issuer. Accordingly, since bonds underlying Canadian Strips are
commonly held in the name of CDS as bondholder, neither investors that
beneficially own strips nor CDS participants acting as nominees for
investors would be able to enforce their rights directly against the
issuer of such underlying bonds upon a default.
9. Under CDS Rules, CDS exercises its rights as registered owner in
accordance with instructions given by CDS participants. CDS
participants that hold Strips as nominees for investors will instruct
CDS generally in accordance with instructions received from such
investors. In the event of an underlying bond default, CDS will
endeavor to follow instructions from CDS participants to the extent
practicable, and take such action as it, in good faith and in light of
any legal advice it may receive, deems reasonable. Consequently,
investors in Canadian Strips are affected in their right to enforce the
terms of the underlying bond directly against the issuer because they
may proceed against the issuer only by giving directions to CDS through
their CDS participants. When the underlying bonds are in default or
accelerated, the entitlement of each holder of Canadian Strips will be
transformed into an undivided interest in the proceeds thereafter
received on the underlying bonds, allocated among the holders based on
the ``proportionate economic interest'' of their respective Canadian
strips determined in accordance with a specified procedure.
10. CDS acts as receiving and disbursing agent and depository/
recordkeeper for the Canadian Strips and, if directed to do so by the
holders in accordance with the CDS Rules, to exercise any rights of a
registered holder of the underlying bonds, including any right to
accelerate payment of principal thereunder. CDS has no authority to
exercise any investment discretion at any time with respect either to
any payments received or to any underlying bonds generally.
11. Any offers and sales of Canadian Strips to United States
investors will be made in full compliance with applicable United States
securities laws, including those relating to registration, disclosure,
and investor suitability requirements.
Applicants' Legal Analysis
1. Section 3(a)(3) of the Act defines an investment company as any
issuer which is engaged or proposes to engage in the business of
investing, reinvesting, owning, holding, or trading in securities, and
owns or proposes to acquire investment securities having a value
exceeding 40 per centum of the value of such issuer's total assets
(exclusive of Government securities and cash items) on an
unconsolidated basis.
2. Applicants recognize that the CDS custody arrangements may be
viewed as creating an investment company within the meaning of section
3(a)(3) of the Act by virtue of the procedures governing the exercise
of remedies and the allocation of any payments subsequently received.
The CDS custody arrangements may be viewed as constituting a separate
issuer that both (a) issues the Strips as securities with enforcement
and payment rights that differ from the enforcement and payment rights
of the underlying bonds and (b) holds the underlying bonds as separate
securities in the CDS arrangement. An issuer that issues securities
such as the Strips and holds other securities such as the underlying
bonds may be an investment company within the meaning of section
3(a)(3).
3. Applicants request an order under section 6(c) of the Act
exempting the CDS custody arrangements from all provisions of the Act.
Section 6(c) 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 in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the Act.
4. Applicants represent that the nature of the Canadian Strips and
the limited activities of the applicants are not of a character
intended to be regulated by the Act and do not give rise to the abuses
against which the Act was directed. CDS is not involved in a general
program of investing, trading or dealing in securities. CDS does not
exercise any investment discretion, and performs administrative
functions.
5. The investor in Canadian Strips is aware of the issuer of the
bonds underlying the Canadian Strips at the time of purchase.
Applicants represent that, since the Canadian Strips are sold
exclusively on the basis of the credit of the bond issuer, purchasers
look ultimately to the issuer for their assurance of repayment, rather
than to CDS.
6. Applicants represent that, given the remoteness of any claims of
CDS creditors, the CDS custody arrangements do not appear to present
any significant credit risk in addition to that presented by the
investment in the underlying bonds themselves.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret M. McFarland,
Deputy Secretary.
[FR Doc. 95-24481 Filed 9-29-95; 8:45 am]
BILLING CODE 8010-01-M