[Federal Register Volume 61, Number 211 (Wednesday, October 30, 1996)]
[Notices]
[Pages 56069-56072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27807]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 22296; International Series Release 
No. 1023; 812-10170]


Deutsche Bank AG; Notice of Application

October 24, 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: Deutsche Bank AG.

RELEVANT ACT SECTIONS: Order under section 6(c) of the Act for an 
exemption from section 17(f).

SUMMARY OF APPLICATION: Applicant seeks an order that would supersede 
an existing order granting conditional exemptive relief from section 
17(f) of the Act. The requested order would allow certain foreign 
subsidiaries of applicant to maintain assets of registered investment 
companies in custody, in accordance with an agreement among applicant, 
the investment company (or its custodian), and the foreign subsidiary. 
The requested order would also allow these foreign subsidiaries to 
maintain such assets pursuant to a custody agreement between applicant 
and the investment company (or its custodian) and a separate 
subcustodian agreement between applicant and the foreign subsidiary.

FILING DATE: The application was filed on May 24, 1996 and amended on 
September 11, 1996.


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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 18, 
1996 and should be accompanied by proof of service on the 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicant: Post Box D, 60262 Frankfurt-am-Main, Germany; cc: J. Eugene 
Marans, Esq., Cleary, Gottlieb, Steen & Hamilton, 1752 N Street, NW., 
Washington, DC 20036.

FOR FURTHER INFORMATION CONTACT:
Harry Eisenstein, Staff Attorney, at (202) 942-0552, or Alison E. Baur, 
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.

Applicant's Representations

    1. Applicant is a bank organized and existing under the laws of 
Germany. Applicant is regulated in Germany by the Federal Bank 
Supervisory Office (Bundesaufsichtamt fur Kreditwesen). Applicant is 
the largest banking institution in Germany and currently provides 
worldwide financial services to foreign governments, central banks, 
financial institutions, and corporate and retail customers. Applicant 
has shareholders' equity in excess of $200 million and, as of December 
31, 1995, had consolidated worldwide assets of $491 billion.
    2. In 1995, the SEC exempted applicant (the ``Existing Order'') \1\ 
from section 17(f) of the Act to permit applicant to serve as custodian 
or sub-custodian of the securities and other assets of any management 
investment company registered under the Act other than an investment 
company registered under section 7(d) of the Act (a ``U.S. Investment 
Company''), and to maintain foreign securities and other assets in 
Malaysia with applicant (Malaysia) Berhad (``DBM'').
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    \1\ See Deutsche Bank AG, Investment Company Act Release No. 
21278 (Aug. 11, 1995).
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    3. Applicant requests an order superseding the Existing Order and 
granting several requests for exemptive relief. First, under the relief 
requested, Assets (as defined below) could be maintained in the custody 
of an Exemptive Order Network Subsidiary (as defined below) in 
accordance with an agreement (``Delegation Agreement'') among 
applicant, the Exemptive Order Network Subsidiary, and a U.S. 
Investment Company or its custodian (Custodial arrangements under a 
Delegation Agreement are referred to as ``Tri-Party Arrangements'').
    4. Second, as an alternative to Tri-Party Arrangements, Assets 
could be maintained in custody in accordance with an agreement (the 
``Custody Agreement'') between (i) applicant and (ii) a U.S. Investment 
Company or its custodian, whereby applicant would act as the custodian 
or subcustodian of the Assets of the U.S. Investment Company and would 
delegate its responsibilities to its foreign subsidiaries under an 
agreement with such subsidiaries (``Subcustodian Agreement,'' and 
custodial arrangements under Custody and Subcustodian Agreements, 
``Agency Custody Arrangements'').
    5. Third, applicant seeks relief so that Assets could be maintained 
in custody with DBM, Deutsche Bank Argentina, S.A. (``DBA''), Deutsche 
Bank S.A.--Banco Alemao (Brazil) (``DBBA'', and together with DBA and 
DBM, the ``Foreign Subsidiaries'') and all additional foreign 
subsidiaries of applicant that do not meet the minimum shareholder 
equity requirement of rule 17f-5 (``Additional Foreign Subsidiaries,'' 
and together with the Foreign Subsidiaries, ``Exemptive Order Network 
Subsidiaries'') at such time as such Exemptive Order Network 
Subsidiaries meet the terms and conditions applicable to the provision 
of the custodial services under the Tri-Party Arrangements and Agency 
Custody Arrangements.
    6. DBM, DBA and DBBA each is a subsidiary of applicant. DBM, DBA 
and DBBA are regulated as banking institutions by the central banks of 
Malaysia, Argentina, and Brazil, respectively. Each of the Foreign 
Subsidiaries offers custody services to support local and foreign 
investors. Each Exemptive Order Network Subsidiary satisfies the 
standards of rule 17f-5, except with respect to the minimum shareholder 
equity requirement.
    7. For purposes of this application, the term ``Foreign 
Securities'' includes: (i) securities issued and sold primarily outside 
the United States by a foreign government, a national of any foreign 
country, or a corporation or other organization incorporated or 
organized under the laws of any foreign country; and (ii) securities 
issued or guaranteed by the Government of the United States or by any 
state or any political subdivision thereof or by any agency thereof or 
by any entity organized under the laws of the United States or of any 
state thereof which have been issued and sold primarily outside the 
United States. Foreign Securities, cash and cash equivalents are 
referred to collectively as ``Assets.''

Tri-Party and Agency Custody Arrangements

    8. Pursuant to Tri-Party Custody Arrangements, Assets would be 
maintained in custody pursuant to a Delegation Agreement that would be 
required to remain in effect at all times during which the Exemptive 
Order Network Subsidiary fails to meet the minimum shareholders' equity 
requirements of rule 17f-5. Pursuant to such Delegation Agreement, 
applicant would undertake to perform specified custodial or 
subcustodial services and would delegate to the Exemptive Order Network 
Subsidiary such of the duties and obligations of applicant as would be 
necessary to permit the Exemptive Order Network Subsidiary to hold in 
custody in the country in which it operates Assets of U.S. Investment 
Companies.
    9. Pursuant to the Agency Custody Arrangements, Assets would be 
maintained in the custody of an Exemptive Order Network Subsidiary only 
in accordance with a Custody Agreement that is required to remain in 
effect at all times during which such Exemptive Order Network 
Subsidiary fails to meet the minimum shareholders' equity requirements 
of rule 17f-5. Pursuant to the Custody Agreement, which would be 
between applicant and a U.S. Investment Company or its custodian, 
applicant would act as custodian or subcustodian of Assets. Under the 
terms of a Subcustodian Agreement with the Exemptive Order Network 
Subsidiary, applicant would additionally delegate such of its duties 
and obligations as would be necessary to permit the Exemptive Order 
Network Subsidiary to hold in custody in the country in which it 
operates Assets of U.S. Investment Companies or their custodians. Each 
Subcustodian Agreement would also explicitly provide that U.S. 
Investment Companies or their custodian, as the case may be, that have 
entered into a Custody Agreement with applicant are third

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party beneficiaries of such Subcustodian Agreement, are entitled to 
enforce the terms of such Subcustodian Agreement, and are entitled to 
seek relief directly against the applicable Exemptive Order Network 
Subsidiary or against applicant.
    10. Applicant contends that Agency Custody Arrangements would be a 
more efficient arrangement for certain U.S. Investment Companies, since 
the protection afforded to such companies by applicant would be 
confirmed immediately upon execution of the Custody Agreement, rather 
than piecemeal through the time-consuming and more onerous process of 
entering into separate Delegation Agreements with the various Exemptive 
Order Network Subsidiaries. Applicant states that it would continue to 
offer the traditional Tri-Party Custody Arrangements for clients not 
desiring Agency Custody Arrangements.

Applicant's Legal Analysis

    1. Section 17(f) of the Act requires every registered management 
investment company to place and maintain its securities and similar 
investments in the custody of certain enumerated entities, including 
``banks'' having at all times aggregate capital, surplus, and undivided 
profits of at least $500,000. A ``bank'', as that term is defined in 
section 2(a)(5) of the Act, includes: (a) a banking institution 
organized under the laws of the United States; (b) a member bank of the 
Federal Reserve System; and (c) any other banking institution or trust 
company, whether incorporated or not, doing business under the laws of 
any state or of the United States, a substantial portion of which 
consists of receiving deposits or exercising fiduciary powers similar 
to those permitted to national banks under the authority of the 
Comptroller of the Currency, and which is supervised or examined by 
state or federal authority having supervision over banks, and which is 
not operated for the purposes of evading the Act.
    2. The only entities located outside the United States that section 
17(f) authorizes to serve as custodians for registered management 
investment companies are the overseas branches of qualified U.S. banks. 
Rule 17f-5 expands the group of entities that are permitted to serve as 
foreign custodians. Rule 17f-5(c)(2)(i) defines the term ``Eligible 
Foreign Custodian'' to include a banking institution or trust company, 
incorporated or organized under the laws of a country other than the 
United States, that is regulated by that company's government or an 
agency thereof and that has shareholders' equity in excess of 
$200,000,000.
    3. Applicant meets the requirements for an Eligible Foreign 
Custodian under the rule since it has shareholders' equity well in 
excess of the equivalent of $200,000,000, is organized and existing 
under the laws of a country other than the United States, and is 
regulated as a bank under the laws of Germany.
    4. Each of the Foreign Subsidiaries also satisfies, and each of the 
Additional Foreign Subsidiaries will satisfy, the requirements of rule 
17f-5 insofar as it is a banking institution incorporated or organized 
under the laws of a country other than the United States and is or will 
be regulated as such by that country's government or an agency thereof. 
However, none of the Foreign Subsidiaries meets, and none of the 
Additional Foreign Subsidiaries will meet, the minimum shareholders' 
equity requirement of rule 17f-5. Accordingly, none of the Foreign 
Subsidiaries is, and none of the Additional Foreign Subsidiaries will 
be, an Eligible Foreign Custodian under the rule, and, absent exemptive 
relief, they could not perform custodial or subcustodial services for 
U.S. Investment Companies.
    5. Section 6(c) provides, in relevant part, that the SEC may, 
conditionally or unconditionally, by order, exempt any person or class 
of persons from any provision of the Act or from any rule thereunder, 
if such exemption is necessary or appropriate in the public interest, 
consistent with the protection of investors, and consistent with the 
purposes fairly intended by the policy and provisions of the Act. 
Applicant submits that its request satisfies this standard.

Applicant's Conditions

    Applicant agrees that any order of the SEC granting the requested 
relief shall be subject to the following conditions:
    1. The foreign custody arrangements proposed with respect to the 
Exemptive Order Network Subsidiaries will satisfy the requirements of 
rule 17f-5 in all respects other than with regard to the shareholders' 
equity of the Exemptive Order Network Subsidiaries.
    2. Assets held in custody for U.S. Investment Companies or their 
custodians pursuant to Tri-Party Custody Arrangements will be 
maintained with an Exemptive Order Network Subsidiary only in 
accordance with a Delegation Agreement required to remain in effect at 
all times during which such Exemptive Order Network Subsidiary fails to 
satisfy all the requirements of rule 17f-5. Pursuant to such Delegation 
Agreement, applicant would undertake to provide specified custodial or 
subcustodial services and would delegate to such Exemptive Order 
Network Subsidiary such of applicant's duties and obligations as would 
be necessary to permit such Exemptive Order Network Subsidiary to hold 
in custody in the country in which it operates Assets of U.S. 
Investment Companies. The Delegation Agreement among applicant, such 
Exemptive Order Network Subsidiary and a U.S. Investment Company or its 
custodian would further provide that applicant's delegation of duties 
to such Exemptive Order Network Subsidiary would not relieve applicant 
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) or other risks of loss (excluding bankruptcy or insolvency 
of the Exemptive Order Network Subsidiaries) for which neither 
applicant nor the Exemptive Order Network Subsidiary would be liable 
under rule 17f-5 (e.g., despite the exercise of reasonable care, Acts 
of God and the like).
    3. Assets held in custody for U.S. Investment Companies or their 
custodians pursuant to Agency Custody Arrangements will be maintained 
with an Exemptive Order Network Subsidiary only in accordance with a 
Custody Agreement required to remain in effect at all times during 
which such Exemptive Order Subsidiary fails to satisfy all the 
requirements of rule 17f-5. The Custody Agreement would be between 
applicant and a U.S. Investment Company or its custodian and would 
provide that applicant would act as the custodian or the subcustodian, 
as the case may be, of the Assets of the U.S. Investment Company and 
would be able to delegate its responsibilities to the Exemptive Order 
Network Subsidiaries. The Custody Agreement would further provide that 
applicant's delegation of duties to the Exemptive Order Network 
Subsidiaries would not relieve applicant of any responsibility to a 
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) or 
other risks of loss (excluding bankruptcy or insolvency of the 
Exemptive Order Network Subsidiaries) for which neither applicant nor 
the Exemptive Order

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Network Subsidiaries would be liable under rule 17f-5 (e.g., despite 
the exercise of reasonable care, Acts of God and the like).
    4. With respect to the Agency Custody Arrangements, applicant will 
enter into a Subcustodian Agreement with each Exemptive Order Network 
Subsidiary pursuant to which applicant will delegate to the Exemptive 
Order Network Subsidiary such of applicant's duties and obligations as 
would be necessary to permit the Exemptive Order Network Subsidiary to 
hold in custody in the country in which it operates Assets of U.S. 
Investment Companies or their custodians. Each Subcustodian Agreement 
will provide an acknowledgement by the applicable Exemptive Order 
Network Subsidiary that it is acting as a foreign custodian for U.S. 
Investment Companies pursuant to the terms of the order requested 
hereby. Each Subcustodian Agreement will also explicitly provide that 
U.S. Investment Companies or their custodians, as the case may be, that 
have entered into a Custody Agreement with applicant will be third 
party beneficiaries of such Subcustodian Agreement, will be entitled to 
enforce the term thereof and will be entitled to seek relief directly 
against the applicable Exemptive Order Network Subsidiary so acting as 
foreign custodian or against applicant.
    5. Applicant will attempt to have such Subcustodian Agreement 
governed by New York law. However, if any Subcustodian Agreement is 
governed by the local law of the foreign jurisdiction in which the 
applicable Exemptive Order Network Subsidiary is located, applicant 
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. Applicant will 
not utilize Agency Custody Arrangements involving a Subcustodian 
Agreement governed by the law of a foreign jurisdiction that does not 
provide for the enforceability of third party beneficiary rights.
    6. Applicant currently satisfies and will continue to satisfy the 
minimum shareholders' equity requirement set forth in rule 17f-
5(c)(2)(i).

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-27807 Filed 10-29-96; 8:45 am]
BILLING CODE 8010-01-M