[Federal Register Volume 64, Number 17 (Wednesday, January 27, 1999)]
[Notices]
[Pages 4165-4168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1803]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23659; 812-11436]


CityFed Financial Corp.; Notice of Application

January 20, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under sections 6(c) and 6(e) 
of the Investment Company Act of 1940 (``Act'') for exemption from all 
provisions of the Act, except sections 9, 17(a) (modified as discussed 
in the application), 17(d) (modified as discussed in the application), 
17(e), 17(f), 36 through 45, and 47 through 51 of the Act and the rules 
thereunder.

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SUMMARY OF APPLICATION: The requested order would exempt the applicant, 
City Fed Financial Corp. (``CityFed''), from certain provisions of the 
Act until the earlier of one year from the date the requested order is 
issued or such time as CityFed would no longer be required to register 
as an investment company under the Act. The order would extend an 
exemption granted until February 12, 1999.\1\

    \1\ CityFed Financial Corp., Investment Company Act Release Nos. 
22473 (January 17, 1997) (notice) and 22506 (February 12, 1997) 
(order).
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FILING DATE: The application was filed on December 17, 1998. Applicant 
has agreed to file an amendment during the

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notice period, the substance of which is reflected in the 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 
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 11, 
1999, 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. CityFed, 35 Old South Road, P.O. Box 3126, Nantucket, MA 02584.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Staff Attorney, at 
(202) 942-0634 or Edward P. Macdonald, 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''). During the five year 
period ending December 31, 1988, 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 
(``OTS'') placed City Federal into receivership and appointed the 
Resolution Trust Corporation (``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 Federal 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, 1998, CityFed 
held cash and securities of approximately $9.4 million.
    3. While CityFed's Board of Directors has considered from time to 
time whether to engage in 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 (``Net Worth Maintenance Claim'') reported by City Federal 
in the fall of 1989. 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 Desist Order against CityFed and 
certain current or former directors and, in some cases, officers of 
CityFed and of City Federal (``Respondents''). On February 1, 1996, an 
administrative law judge (``ALJ'') issued a prehearing order 
(``Prehearing Order'') granting the OTS's motion for partial summary 
disposition with respect to CityFed and denying both CityFed's motion 
for partial summary disposition of the OTS's assessment of civil money 
penalties and its cross-motion for summary adjudication. On June 12, 
1996, CityFed moved for interlocutory review by the acting director of 
the OTS of the conclusions in the Prehearing Order and, if necessary, 
will seek appellate review of any adverse decision. On August 20, 1997, 
the OTS Director issued a decision and order granting CityFed's motion 
for interlocutory review. The Director concluded that the ALJ had erred 
in recommending summary disposition on the OTS Net Worth Maintenance 
Claim against CityFed and held that there were disputed issues of fact 
on that claim that precluded summary judgment, and he remanded the case 
to the ALJ for further proceedings consistent with his decision. The 
ALJ has lifted the stay of the proceedings, and CityFed and OTS have 
begun to engage in discovery on the Net Worth Maintenance Claim.
    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

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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 its bylaws, 
CityFed may be obligated to indemnify these former officers and 
directors and advance their legal expenses. On the advice of counsel to 
a special committee of CityFed's Board of Directors, comprised of 
directors who have not been named in the First or Second RTC Action, 
CityFed advanced reasonable defense costs to such former directors and 
officers in such Actions. 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 pending in that court. 
The United States Court of Federal Claims has established a procedure 
for deciding supervisory goodwill claims that may affect CityFed's 
right to assert a claim for the loss of supervisory goodwill on the 
books of City Federal.
    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 received 
any compensation for her service.

Applicant's Legal Analysis

    1. Section 3(a)(1) defines an investment company as any issuer 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).
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person from any provision of the Act ``if and to the extent that 
such exemption is necessary or appropriate in the public interest.'' 
Section 6(e) provides that in connection with any SEC order exempting 
an investment company from any provision of section 7, certain 
specified provisions of the Act shall be applicable to such company, 
and to other persons in their transactions and relations with such 
company, as though such company were registered under the Act, if the 
SEC deems it necessary or appropriate in the public interest or for the 
protection of investors.
    3. CityFed acknowledges that it may be deemed to fall within one of 
the Act's definitions of an investment company. Accordingly, CityFed 
requests an exemption under sections 6(c) and 6(e) from all provisions 
of the Act, subject to certain exceptions described below. CityFed 
requests an exemption until the earlier of one year from the date of 
the requested order or such time as it would no longer be required to 
register as an investment company under the Act.
    4. 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.
    5. CityFed believes that its failure to become primarily engaged in 
a non-investment business by February 12, 1999 is due to factors beyond 
its control. CityFed asserts that the amount required to resolve its 
currently outstanding claims cannot be reasonably estimated and could 
exceed its assets. If CityFed is unable to resolve these claims 
successfully, it states that it may seek protection from the bankruptcy 
courts or liquidate. CityFed also 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. Additionally, 
CityFed states that its circumstances are unlikely to change over the 
requested one year period in light of the number of claims currently 
pending against it and because of the existence of the Escrow 
Agreement. 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.
    6. During the term of the proposed exemption, CityFed states that 
it will comply with sections 9, 17 (a) and (d) (subject to the 
exception below and the modifications described in condition 3, below), 
17(e), 17(f), 36 through 45, and 47 through 51 of the Act and the rules 
thereunder. 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).

Applicant's Conditions

    CityFed agrees that the requested exemption will be subject to the 
following conditions:
    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 
sections 3(c) of the Act other than sections 3(c)(1) and 3(c)(7)) 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)(10) 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

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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 as permitted by the requested 
order.
    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 than 
that of other participants; and
    b. in connections 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 affiliation; and 
(iii) the financial interests of such persons in the transaction.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-1803 Filed 1-26-99; 8:45 am]
BILLING CODE 8010-01-M