[Federal Register Volume 61, Number 22 (Thursday, February 1, 1996)]
[Notices]
[Pages 3750-3752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2054]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21710; 812-9932]


Cityfed Financial Corp.; Notice of Application

January 26, 1996.
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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APPLICANT: Cityfed Financial Corp. (``Cityfed'').

RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 6(e) of 
the Act.

SUMMARY OF APPLICATION: Applicant requests an order that would exempt 
it from all provisions of the Act, except sections 9, 17(a) (modified 
as discussed herein), 17(d) (modified as discussed herein), 17(e), 
17(f), 36 through 45, and 47 through 51 of the Act and the rules 
thereunder until the earlier of one year from the date of the requested 
order or such time as Cityfed would no longer be required to register 
as an investment company under the Act. The requested exemption would 
extend an exemption granted until February 28, 1996.

FILING DATE: The application was filed on December 21, 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 February 20, 
1996, 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, NW., Washington, DC 20549. 
Applicant, 4 Young's Way, P.O. Box 3126, Nantucket, MA 02584.

FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563, or Robert A. 
Robertson, 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. Cityfed was a savings and loan holding company that conducted 
its savings and loan operations through its wholly-owned subsidiary, 
City Federal Savings Bank (``City Federal''). City Federal was the 
source of substantially all of Cityfed's revenues and income. As a 
result of substantial losses in its mortgage banking and real estate 
operations, City Federal was unable to meet its regulatory capital 
requirements. Accordingly, on December 7, 1989, the Office of Thrift 
Supervision (the ``OTS'') placed City Federal into receivership and 
appointed the Resolution Trust Corporation (the ``RTC'') as City 
Federal's receiver. City Federal's deposits and substantially all of 
its assets and liabilities were acquired by a newly created federal 
mutual savings bank, City Savings Bank, F.S.B. (``City Savings''). The 
OTS appointed the RTC as receiver of City Savings.
    2. Once City Savings was placed into receivership, Cityfed no 
longer conducted savings and loan operations through any subsidiary and 
substantially all of its assets consisted of cash that has been 
invested in money market instruments with a maturity of one year or 
less and money market mutual funds. As of September 30, 1995, Cityfed 
held cash and securities of approximately $8.9 million. Because of 
Cityfed's asset composition, it may be an investment company under the 
Act. Rule 3a-2 under the Act provides a one-year safe harbor to issuers 
that meet the definition of an investment company but intend to engage 
in a business other than investing in securities. Because of various 
claims against Cityfed and certain Cityfed officers and directors, 
Cityfed could not acquire an operating company within the one year safe 
harbor. The expiration of the safe harbor period necessitated the 
filing of an application for exemption from all provisions of the Act, 
with certain exceptions. In 1995, Cityfed was granted an exemption from 
all provisions of the Act until February 28, 1996.\1\

    \1\ Cityfed Financial Corp., Investment Company Act Release Nos. 
20877 (Feb 2, 1995) (notice) and 20929 (Feb. 28, 1995) (order).
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    3. While Cityfed's board of directors has considered from time to 
time whether to engage in an operating business, the board has 
determined not to engage in an operating business at the present time 
because of the claims filed against Cityfed, whose liability thereunder 
cannot be reasonably estimated and may exceed its assets.
    4. On June 2, 1994, the OTS issued a Notice of Charges and Hearing 
for Cease and Desist Order to Direct Restitution and Other Appropriate 
Relief and Notice of Assessment of Civil Money Penalties (``Notice of 
Charges'') against Cityfed and certain current or former directors and, 
in some cases, officers of Cityfed and City Federal. The Notice of 
Charges requests that an order be entered by the Director of the OTS 
requiring Cityfed to make restitution, reimburse, indemnify or 
guarantee the OTS against loss in an amount not less than $118.4 
million, which the OTS alleges represents the regulatory capital 
deficiency reported by City Federal in the fall of 1989. The Notice of 
Charges provides that a hearing will be held before an administrative 
law judge on the question of whether a final cease and desist order 
should be issued against Cityfed. As of the date of the filing of the 
application, no date has been set for such hearing. On November 30, 
1995, the OTS issued an Amended Notice of Charges and Hearing for Cease 
and Desist Order to Direct Restitution and Other Appropriate Relief and 
Notice of Assessment of Civil Money Penalties (``Amended Notice of 
Charges'') that is identical to the Notice of Charges except that the 
Amended Notice of Charges includes a reference to a federal statutory 
provision not referred to in the Notice of Charges that the OTS asserts 
provides an additional basis for the issuance of a Cease and 

[[Page 3751]]
Desist Order against Cityfed and certain current or former directors 
and, in some cases, officers of Cityfed and of Cityfed's former 
subsidiary (``Respondents'').
    5. Also on June 2, 1994, the OTS issued a Temporary Order to Cease 
and Desist (``Temporary Order'') against Cityfed. The Temporary Order 
required Cityfed to post $9.0 million as security for the payment of 
the amount sought by the OTS in its Notice of Charges. Cityfed 
unsuccessfully petitioned the district court for an injunction against 
the Temporary Order. Cityfed and the Respondents filed notices of 
appeal from the D.C. Court's Order to the United States Court of 
Appeals for the District of Columbia Circuit (``D.C. Circuit''), and 
the Respondents filed a motion in the D.C. Circuit for an expedited 
appeal and an order enjoining the enforcement of the Temporary Order 
during the pendency of the appeal. The D.C. Circuit denied the 
Respondents' motion for injunction on October 21, 1994. On July 11, 
1995, the D.C. Circuit affirmed the denial by the D.C. Court of the 
motions by Cityfed and the Respondents for a temporary restraining 
order and an injunction against the Temporary Order. On October 26, 
1994, Cityfed and the OTS entered into an Escrow Agreement (``Escrow 
Agreement'') with CoreStates Bank, N.A. (``CoreStates'') pursuant to 
which Cityfed transferred substantially all of its assets to CoreStates 
for deposit into an escrow account to be maintained by CoreStates. 
Cityfed's assets in the escrow account continue to be invested in money 
market instruments with a maturity of one year or less and money market 
mutual funds. Withdrawals or disbursements from the escrow account are 
not permitted without the written authorization of the OTS, other than 
for (a) monthly transfers to Cityfed in the amount of $15,000 for 
operating expenses, (b) the disbursement of funds on account of 
purchases of securities by Cityfed, and (c) the payment of the escrow 
fee and expenses to CoreStates. The Escrow Agreement also provides that 
CoreStates will restrict the escrow account in such a manner as to 
implement the terms of the Escrow Agreement and to prevent a change in 
status or function of the escrow account unless authorized by Cityfed 
and the OTS in writing.
    6. On December 7, 1992, the RTC filed suit against Cityfed and two 
former officers of City Federal seeking damages of $12 million dollars 
for failure to maintain the net worth of City Federal (``First RTC 
Action''). In light of the filing by the OTS of the Notice of Charges 
on June 2, 1994, the RTC and Cityfed agreed to dismiss without 
prejudice the RTC's claim against Cityfed in the First RTC Action.
    7. In addition, the RTC filed suit against several former directors 
and officers of City Federal alleging gross negligence and breach of 
fiduciary duty with respect to certain loans (``Second RTC Action''). 
The RTC seeks in excess of $200 million in damages. Under Cityfed's 
bylaws, Cityfed may be obligated to indemnify these former officers and 
directors and advance their legal expenses. Cityfed generally has 
agreed to advance expenses in connection with these requests. Because 
of the Temporary Order and the Escrow Agreement, however, Cityfed is 
not continuing to advance expenses in connection with these requests. 
Cityfed is unable to determine with any accuracy the extent of its 
liability with respect to these indemnification claims, although the 
amount may be material.
    8. On August 7, 1995, Cityfed, acting in its own right and as 
shareholder of City Federal, filed a civil action in the United States 
Court of Federal Claims seeking damages for loss of ``supervisory 
goodwill.'' Cityfed's goodwill suit is presently stayed (as are all 
Court Federal Claims supervisory goodwill cases) pending possible 
Supreme Court review of the recent decision of the United States Court 
of Appeals for the Federal Circuit in another supervisory goodwill 
case, Winstar Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995).
    9. Currently, Cityfed's stock is traded sporadically in the over-
the-counter market. Cityfed has one employee who is president, chief 
executive officer, and treasurer. Cityfed's secretary does not receive 
any compensation for her service. If Cityfed is unable to resolve the 
above claims successfully, Cityfed may seek protection from the 
bankruptcy courts or liquidate. Cityfed asserts that it probably will 
not be in a position to determine what course of action to pursue until 
most, if not all, of its contingent liabilities are resolved.
    10. During the term of the proposed exemption, Cityfed will comply 
with sections, 9, 17(a), 17(d), 17(e), 17(f), 36 through 45, and 47 
through 51 of the Act and the rules thereunder, subject to the 
following modifications. With respect to section 17(d), Cityfed 
represents that it established a stock option plan when it was an 
operating company. Although the plan has been terminated, certain 
former employees of City Federal have existing rights under the plan. 
Cityfed believes that the plan may be deemed a joint enterprise or 
other joint arrangement or profit-sharing plan within the meaning of 
section 17(d) and rule 17d-1 thereunder. Because the plan was adopted 
when Cityfed was an operating company and to the extent there are 
existing rights under the plan, Cityfed seeks an exemption to the 
extent necessary from section 17(d). In addition, Cityfed may become 
subject to the jurisdiction of a bankruptcy court. With respect to 
transactions approved by the bankruptcy court, applicant requests an 
exemption from sections 17(a) and 17(d) as further described in 
condition 3 below.

Applicant's Legal Analysis

    1. Section 3(a)(1) defines an investment company as any issuer of a 
security who ``is or holds itself out as being engaged primarily * * * 
in the business of investing, reinvesting or trading in securities.'' 
Section 3(a)(3) further defines an investment company as an issuer who 
is engaged in the business of investing in securities that have a value 
in excess of 40% of the issuer's total assets (excluding government 
securities and cash). Cityfed acknowledges that it may be deemed to 
fall within one of the Act's definitions of an investment company. 
Accordingly, applicant requests an exemption under sections 6(c) and 
6(e) from all provisions of the Act, subject to certain exceptions.
    2. In determining whether to grant an exemption for a transient 
investment company, the SEC considers such factors as whether the 
failure of the company to become primarily engaged in a non-investment 
business or excepted business or liquidate within one year was due to 
factors beyond its control; whether the company's officers and 
employees during that period tried, in good faith, to effect the 
company's investment of its assets in a non-investment business or 
excepted business or to cause the liquidation of the company; and 
whether the company invested in securities solely to preserve the value 
of its assets. Cityfed believes that it meets these criteria.
    3. Cityfed believes that its failure to become primarily engaged in 
a non-investment business by February 28, 1996 is due to factors beyond 
its control. Because of outstanding and potential claims against 
Cityfed and certain of its officers and directors, Cityfed cannot 
acquire an operating company. Cityfed has diligently pursued its claims 
against others and has taken steps to determine the extent of its 
contingent liabilities. Since the filing of its initial application for 
exemptive relief under sections 6(c) and 6(e) on October 19, 1990, 
Cityfed has invested in money market instruments and money market 
mutual funds solely to preserve the value of its assets.

[[Page 3752]]

    4. Cityfed requests an order that would exempt it from all 
provisions of the Act, subject to certain exemptions, until the earlier 
of one year from the date of any order issued on this application or 
such time as Cityfed would no longer be required to register as an 
investment company under the Act.

Applicant's Conditions

    Cityfed agrees that the requested exemption will be subject to the 
following conditions, each of which will apply to Cityfed from the date 
of the order until it no longer meets the definition of an investment 
company or during the period of time it is exempt from registration 
under the Act:
    1. Cityfed will not purchase or otherwise acquire any additional 
securities other than securities that are rated investment grade or 
higher by a nationally recognized statistical rating organization or, 
if unrated, deemed to be of comparable quality under guidelines 
approved by Cityfed's board of directors, subject to two exceptions:
    a. Cityfed may make an equity investment in issuers that are not 
investment companies as defined in section 3(a) of the Act (including 
issuers that are not investment companies because they are covered by a 
specific exclusion from the definition of investment company under 
section 3(c) of the Act other than section 3(c)(1)) in connection with 
the possible acquisition of an operating business as evidenced by a 
resolution approved by Cityfed's board of directors; and
    b. Cityfed may invest in one or more money market mutual funds that 
limit their investments to ``Eligible Securities'' within the meaning 
of rule 2a-7(a)(5) promulgated under the Act.
    2. Cityfed's Form 10-KSB, Form 10-QSB and annual reports to 
shareholders will state that an exemptive order has been granted 
pursuant to sections 6(c) and 6(e) of the Act and that Cityfed and 
other persons, in their transactions and relations with Cityfed, are 
subject to sections 9, 17(a), 17(d), 17(e), 17(f), 36 through 45, and 
47 through 51 of the Act, and the rules thereunder, as if Cityfed were 
a registered investment company, except insofar as permitted by the 
order requested hereby.
    3. Notwithstanding sections 17(a) and 17(d) of the Act, an 
affiliated person (as defined in section 2(a)(3) of the Act) of Cityfed 
may engage in a transaction that otherwise would be prohibited by these 
sections with Cityfed:
    (a) If such proposed transaction is first approved by a bankruptcy 
court on the basis that (i) the terms thereof including the 
consideration to be paid or received, are reasonable and fair to 
Cityfed, and (ii) the participation of Cityfed in the proposed 
transaction will not be on a basis less advantageous to Cityfed han 
that of other participants; and
    (b) In connection with each such transaction, Cityfed shall inform 
the bankruptcy court of: (i) The identity of all of its affiliated 
persons who are parties to, or have a direct or indirect financial 
interest in, the transaction; (ii) the nature of the alliliation; and 
(iii) the financial interests of such persons in the transaction.

    For the SEC, by the Division of Investment Management, under 
delegate authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2054 Filed 1-31-96; 8:45 am]
BILLING CODE 8010-01-M