[Federal Register Volume 62, Number 229 (Friday, November 28, 1997)]
[Notices]
[Pages 63402-63404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31152]


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SECURITIES AND EXCHANGE COMMISSION

[Rel No. IC-22899; 812-10568]


Bank Austria AG and Bank Austria Mortgage Corp.; Notice of 
Application

November 20, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') granting relief from all 
provisions of the Act.

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SUMMARY OF APPLICATION: Bank Austria AG, acting through its New York 
Branch (``Bank Austria''), and Bank Austria Mortgage Corp. (``Mortgage 
Corp.'') request an order exempting Mortgage Corp., a real estate 
investment trust, from all provisions of the Act to permit Mortgage 
Corp. to hold certain real estate related assets of Bank Austria in 
order to obtain a more favorable tax treatment on the earnings from 
these assets.

FILING DATES: The application was filed on March 12, 1997. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is incorporated in this notice.

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 December 16, 
1997, 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 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. Applicants, 565 Fifth Avenue, New York, New York 10017.

FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at 
(202) 942-0526, or Mary Kay Frech, 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, 450 Fifth

[[Page 63403]]

Street, N.W., Washington, D.C. 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. Bank Austria is the largest bank in Austria, where its shares 
are publicly traded. Among its largest shareholders are 
Anteilsverwaltung-Zentralsparkasse, a mutual savings bank holding 
company affiliated with the municipal government of the City of Vienna, 
Austria, which holds 45% of the voting shares and the Republic of 
Austria, which holds 18.9% of the voting shares indirectly through a 
subsidiary. Bank Austria is exempt from the provisions of the Act under 
rule 3a-6.
    2. Mortgage Corp. is a Delaware corporation that has not begun 
business activities and has not yet issued any stock. When stock is 
issued, Bank Austria will be the sole holder of Mortgage Corp.'s common 
stock and Mortgage Corp. will be a wholly-owned subsidiary of Bank 
Austria.
    3. Currently, Bank Austria's New York and Grand Cayman Branches 
(together, the ``New York Branch'') \1\ own a substantial amount of 
real estate related assets, the earnings from which are subject to 
United States federal, New York state, and New York City income 
taxation. In order to obtain more favorable tax treatment for the 
earnings from the real estate related assets, Bank Austria would 
operate Mortgage Corp. as a real estate investment trust (``REIT'') for 
purposes of the Internal Revenue Code of 1986, as amended (``IRC''). To 
organize and capitalize Mortgage Corp., Bank Austria will acquire 100 
shares of common stock and 109 shares of non-voting preferred stock 
(with a liquidation preference of $1,000 per share and a right to 
receive a cumulative dividend of 9 percent per year) (``Preferred 
Shares'') from Mortgage Corp., with an aggregate value of $50 million. 
Thereafter, Mortgage Corp. will issue commercial paper, which will be 
fully guaranteed by Bank Austria, and use the proceeds to acquire 
approximately $1 billion of real estate related assets from the New 
York Branch.\2\ The liquidation preference of the Preferred Shares will 
be de minimis compared to the net capital of Mortgage Corp. The New 
York Branch will continue to administer the transferred assets pursuant 
to a service contract. Bank Austria may, from time to time, make loans 
with a maximum aggregate outstanding principal amount of approximately 
$50 million in order to assist Mortgage Corp. in the management of its 
cash flow.
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    \1\ Bank Austria's Grand Cayman Branch is managed from New York.
    \2\ Approximately 90% of the real estate related assets 
currently have an AAA rating or are securities issued by the United 
States government. The assets will consist of approximately $800 
million (or 80%) of Government securities (largely U.S. Treasury 
Notes and securities issued by the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corp., the Government 
National Mortgage Association, and a small number of securities 
issued by the Student Loan Marketing Association). The remainder of 
the assets will consist mostly of collateralized mortgage 
obligations issued by privately-sponsored securitization vehicles. 
Bank Austria expects that in the future 80% or more of Mortgage 
Corp.'s assets will be of comparable quality.
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    4. In order for Mortgage Corp. to qualify as a REIT under Section 
856 of the IRC, its shares must be beneficially held by 100 or more 
persons.\3\ Bank Austria therefore will transfer the Preferred Shares 
to no more than 109 employees of the New York Branch and the head 
office in Vienna, Austria, as a bonus. Mortgage Corp. will have 110 
shareholders: 109 employees of Bank Austria will each hold one 
Preferred Share and Bank Austria will hold all the shares of common 
stock. No employee of Bank Austria will (i) receive more than one 
Preferred Share; (ii) deliver money or other property in return for his 
or her Preferred Share; or (iii) suffer a reduction of his or her other 
compensation or benefits as a result of the receipt of a Preferred 
Share. Because under the IRC, the preferred stock of a REIT must be 
freely transferable, the holders of Preferred Shares generally cannot 
be prevented from selling their Shares. Bank Austria will offer to buy 
from each holder his or her Preferred Share when his or her employment 
with Bank Austria terminates. A similar offer to buy also will be made 
when a shareholder receives a bona fide offer from someone who is not 
an employee of Bank Austria. In each case, if the offer to purchase is 
accepted, Bank Austria will purchase the Preferred Share at its 
appraised value. To the extent advisable in connection with the 100-
shareholder requirement for REITs under the IRC, any Preferred Shares 
acquired in this manner by Bank Austria will, from time to time, be 
transferred as a bonus on the same terms described above to employees 
who do not then hold any Preferred Shares. Mortgage Corp. will maintain 
its own stock ledger and will not (i) register any purported transfer 
of a share of preferred stock to any person (other than Bank Austria) 
who already is a registered owner of a share or (ii) register a share 
of preferred stock in more than one name.
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    \3\ See 26 U.S.C. 856(a)(5) 1996.
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Applicants' Legal Analysis

    1. Section 3(a)(1)(C) of the Act defines an ``investment company'' 
to include 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 percent of the value of the issuer's total 
assets (exclusive of Government securities and cash items) on an 
unconsolidated basis. Under section 3(a)(2) of the Act, ``investment 
securities'' include all securities except Government securities and 
those issued by majority-owned subsidiaries or employees' securities 
companies. Applicants state that, upon commencing operations, 
approximately 100% of Mortgage Corp.'s future assets (approximately 
$275 million), exclusive of Government securities and cash items, will 
consist of investment securities. Therefore, Mortgage Corp. may be 
deemed to be an investment company under section 3(a)(1)(C) of the Act.
    2. Section 3(c)(5)(C) of the Act excepts from the definition of 
investment company any person who is not engaged in the business of 
issuing redeemable securities and who is primarily engaged in 
purchasing or otherwise acquiring mortgages and other liens on and 
interests in real estate. Applicants state that this exception is 
unavailable to them because all or almost all of the assets to be held 
by Mortgagee Corp. would constitute partial-pool certificates which do 
not qualify as ``interests in real estate'' under section 3(c)(5)(C) of 
the Act.
    3. Applicants state that Mortgage Corp. will be a wholly-owned 
subsidiary of Bank Austria, which is a foreign bank that is exempt from 
the provisions of the Act under rule 3a-6. Applicants also state that 
Mortgage Corp. will be organized for the purpose of holding certain 
real estate related assets of the New York Branch of Bank Austria. 
Moreover, applicants state that Preferred Shares of Mortgage Corp. will 
be given to a limited number of Bank Austria's employees as a bonus, at 
no cost, solely for the purpose of enabling Mortgage Corp. to rely on 
the REIT provisions under the IRC.
    4. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the Act if and 
to the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.
    5. Applicants request an exemption under section 6(c) from all 
provisions of the Act. Applicants assert that exempting Mortgage Corp. 
from the Act

[[Page 63404]]

is appropriate in the public interest because allowing Bank Austria to 
utilize a REIT to hold its real estate related assets in the United 
States will, under the IRC, allow the head office of Bank Austria to 
treat the earnings on those assets as not being effectively connected 
with a United States trade or business and to be taxed on those 
earnings on a pass-through basis, which will render Bank Austria's 
United States operations more efficient and less costly. In addition, 
applicants note that specific provisions of New York state tax law also 
provide more beneficial tax treatment to REITs than to certain other 
kinds of entities, including banks. Applicants believe that the 
combined effect of the treatment of REITs under the IRC and New York 
state tax law will lower their cost of doing business in the United 
States and encourage Bank Austria to continue investing in the United 
States, and perhaps expand its investment activities. Applicants state 
that the tax-treatment which Bank Austria seeks for its investments in 
the United States is generally available to REITs and no public 
interest is served by requiring Bank Austria to hold certain of its 
assets in its New York Branch rather than in a separate subsidiary.
    6. Applicants submit that exempting Mortgage Corp. from the Act is 
consistent with the protection of investors. Applicants claim that the 
proposed use of Mortgage Corp. to restructure the manner in which Bank 
Austria holds its United States real estate related assets will not 
subject investors to any of the abuses addressed by the Act. Applicants 
state that all of Mortgage Corp.'s common stock will be owned by Bank 
Austria and that Preferred Shares will be given to a limited number of 
employees as a bonus in order to enable Mortgage Corp. to rely on the 
REIT provisions of the IRC. It is anticipated that there will be fewer 
than 100 holders of Preferred Shares who are residents of the United 
States.
    7. Applicants submit that granting Mortgage Corp. the requested 
exemption is consistent with the policies and provisions of the Act. 
Applicants note that although the Act deals with companies which invest 
and reinvest in securities, it contains exemptions for some entities 
which would otherwise come within its purview, in particular entities 
that are wholly-owned subsidiaries of companies that are themselves 
exempt from the Act and through which exempt companies conduct their 
activities and entities that invest in real estate.

Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. Mortgage Corp. will operate as a REIT and its investments will 
be limited to those permitted for a REIT under the IRC.
    2. Mortgage Corp. will issue no securities other than shares of 
common stock to be held by Bank Austria, Preferred Shares to be given 
at no cost from time to time to employees of Bank Austria solely when 
necessary or advisable for maintaining a number of shareholders 
sufficient to rely on the REIT provisions of the IRC, commercial paper 
to finance or refinance any of its investments, and a credit agreement 
with Bank Austria in the approximate amount of $50,000,000. No 
participants in or syndication of the credit agreement will be made.
    3. No employee will own more than one Preferred Share. Bank Austria 
will offer to buy at their appraised value Preferred Shares from its 
employees under the circumstances described in the application. 
Mortgage Corp. also will not permit there to be more than 109 holders 
of Preferred Shares at any time.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary
[FR Doc. 97-31152 Filed 11-26-97; 8:45 am]
BILLING CODE 8010-01-M