[Federal Register Volume 64, Number 234 (Tuesday, December 7, 1999)]
[Notices]
[Pages 68397-68400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31637]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24181; 812-11534]


Salomon Brothers Asset Management Inc., et al.; Notice of 
Application

December 1, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under sections 6(c) and 17(b) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 17(a) of the Act, and under section 17(d) of the Act and rule 
17d-1 under the Act to permit certain joint transactions.

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APPLICANTS: Salomon Brothers Assets Management Inc. (``SBAM''), Salomon 
Brothers High Income Fund II Inc. (``Fund''), Citicorp, and Citicorp 
North America, Inc. (``CNAI'').

SUMMARY OF APPLICATION: Applicants request an order to permit the Fund 
and any other registered closed-end management investment company for 
which SBAM or any entity controlling, controlled by, or under common 
control with SBAM serves as investment adviser (collectively with the 
Fund, the ``Funds'') to enter into secured loan transactions with a 
facility administered by CNAI.\1\

    \1\ All registered investment companies that currently intend to 
rely on the requested order are named as an applicant. Any Fund that 
relies on the order in the future will comply with the terms and 
conditions of the application.


[[Page 68398]]


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FILING DATES: The application was filed on March 11, 1999. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is reflected in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on December 27, 1999, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, by 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 Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, DC 
20549-0609. SBAM and the Fund, Seven World Trade Center, New York, NY 
10048; Citicorp and CNAI, 399 Park Avenue, New York, NY 10043.

FOR FURTHER INFORMATION CONTACT: Anu Dubey, Senior Counsel, at (202) 
942-0687, or Nadya Roytblat, Assistant Director, 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 
Commission's Public Reference Branch, 450 5th Street, NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. The Fund is a Maryland corporation and a diversified closed-end 
management investment company registered under the Act. SBAM, 
registered as an investment adviser under the Investment Advisers Act 
of 1940, serves as the investment adviser to the Fund. SBAM is an 
indirect, wholly-owned subsidiary of Citigroup, Inc. (``Citigroup''), a 
global financial services organization. Citigroup is a banking holding 
company and is wholly-owned by Citigroup. CNAI is a wholly-owned 
subsidiary of Citicorp. Among other activities, CNAI is an 
administrator of asset-backed commercial paper programs.
    2. The Fund's principal investment objective is to maximize current 
income by investing primarily in a diversified portfolio of high yield 
debt securities rated at the time of investment in medium or lower 
rating categories. Applicants state that the Fund has a policy of using 
leveraging techniques to seek higher returns for its shareholders. To 
this end, the Fund seeks to borrow money at the most desirable rate 
available, and use the proceeds of the borrowings to make investments 
with the expectation of higher yield. The Fund anticipates that 
interest payments on any borrowing of money or issuance of debt 
securities will reflect lower, short-term rates and that its 
investments, purchased with borrowed money, will have yields higher 
than the cost of the Fund's borrowings. The Fund currently is using 
collateralized bank financing for leverage.
    3. Applicants request relief to permit the Funds to obtain loans 
from a commercial paper conduit issuer (``Conduit'') for which CNAI 
acts as administrative agent. A loan from the Conduit to a Fund will be 
at an interest rate equal to the Conduit's cost of funds (i.e., the 
weighted average commercial paper rate plus commercial paper dealer 
commissions). The loan will be secured by Fund assets (``Pledged 
Assets''), pledged for the benefit of the Conduit, CNAI and Citicorp, 
that meet certain eligibility criteria based on a Fund's investment 
objectives and policies. The loan facility will require that the value 
of Pledged Assets exceed the outstanding principal amount of the loans 
made under the loan facility, plus unpaid accrued interest, by at least 
200 percent. The Pledged Assets will be available solely to secure 
repayments of the loans made under the loan facility to a Fund.
    4. Applicants state that the proposed loan facility would allow the 
Funds to borrow money at an advantageous interest rate because the 
Conduit's cost of funds is lower than that of other lenders, and this 
advantage will be passed on to the borrowers from the Conduit, 
including the Funds. No more than 10% of a Conduit's loans will be made 
to the Funds. The other borrowers will be unaffiliated entities, 
including unaffiliated closed-end funds. Applicants estimate that 
approximately 5% of the Conduit's loans currently are made to 
unaffiliated closed-end investment companies (``closed-end funds''). A 
Fund will have the right to terminate its participation in the loan 
facility at any time.
    5. Applicants state that financial institutions (``Liquidity 
Providers'') provide liquidity to a Conduit on a transaction-by-
transaction basis under agreements between the Liquidity Providers and 
the Conduit. Applicants state that the liquidity support is additional 
assurance that the Conduit's commercial paper will be paid at maturity 
notwithstanding any credit factors or other issues that may affect a 
borrower from the Conduit. In connection with the proposed loan 
facility for the Funds, CNAI will serve as the Liquidity Provider to 
the Conduit. Citicorp will guarantee CNAI's obligations under the loan 
facility.
    6. The Conduit at any time and for any reason may (i) sell an 
outstanding loan to CNAI as Liquidity Provider, or (ii) require CNAI as 
Liquidity Provider to provide financing to a Fund instead of the 
Conduit. Applicants state that this arrangement is necessary in order 
for the Conduit's commercial paper issuances to have high ratings. 
Applicants state that at least 90% of a Conduit's commercial paper will 
be rated A-1+/P-1. The rate at which CNAI as Liquidity Provider would 
make a loan to a Fund would not be as favorable as that of the Conduit, 
but would be comparable to the rates on secured lines of credit from 
banks. Applicants state that, absent extenuating circumstances, it is 
anticipated that a Conduit, rather than CNAI or another Liquidity 
Provider, will be the lender to the Funds under the loan facility.
    7. A Fund will pay certain fees to CNAI in connection with the loan 
facility. These include (i) a fixed amount up-front for structuring the 
loan facility, (ii) a fee for administering the loan facility, set as a 
percentage of a Fund's outstanding loans from the Conduit, and (iii) a 
fee for CNAI's commitment as Liquidity Provider, based on a percentage 
of the unused portion of CNAI's commitment.

Applicants' Legal Analysis

    1. Section 17(a)(2) of the Act prohibits an affiliated person of a 
registered investment company, or an affiliated person of that person, 
acting as principal, from purchasing a security or other property from 
the company. Section 2(a)(3) of the Act defines an ``affiliated 
person'' of another person to include any person directly or indirectly 
controlling, controlled by, or under common control with, the other 
person, and, in the case of an investment company, its investment 
adviser. Under section 2(a)(9) of the Act, a person that owns 
beneficially more than 25% of the voting securities of a company is 
presumed to control the company.
    2. Applicants state that, as the Funds' investment adviser, SBAM is 
an affiliated person of the Funds. Applicants also state that Citicorp 
and CNAI are affiliated persons of SBAM because they are under the 
common

[[Page 68399]]

control of Citigroup. Applicants state that, as a result, Citicorp and 
CNAI are affiliated persons of an affiliated person of the Funds. 
Applicants state that the pledge of Pledged Assets by a Fund in 
connection with the loan facility may constitute a purchase by an 
affiliated person of an affiliated person of a Fund prohibited by 
section 17(a)(2) of the Act.
    3. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person of a registered investment company or any 
affiliated person of that person, acting as principal, from effecting 
any transaction in connection with any joint enterprise or joint 
arrangement in which the investment company participates, unless an 
application regarding the joint arrangement has been filed with the 
Commission and granted by order. Applicants state that the loan 
facility may constitute a joint arrangement between a Fund and CNAI.
    4. Section 17(b) of the Act authorizes the Commission to exempt a 
transaction from section 17(a) if the terms of the proposed transaction 
are reasonable and fair and do not involve overreaching on the part of 
any person concerned, and if the proposed transaction is consistent 
with the policy of each registered investment company concerned and 
with the general purposes of the Act. Section 6(c) of the Act provides 
that the Commission may exempt any person, security, or transaction 
from any provision of the Act if the 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. Under rule 17d-1, in passing on applications for 
orders under section 17(d), the Commission must consider whether the 
investment company's participation in the joint enterprise or joint 
arrangement is consistent with the provisions, policies, and purposes 
of the Act and the extent to which such participation is on a basis 
different from or less advantageous than that of other participants.
    5. Applicants request an order under sections 6(c) and 17(b) of the 
Act and under section 17(d) of the Act and rule 17d-1 under the Act to 
permit the Funds to participate in the loan facility. Applicants state 
that borrowing from the facility is designed to provide benefits to the 
Funds. Applicants assert that there is no express or implied 
understanding between SBAM and CNAI or Citicorp that SBAM will give 
preference to the loan facility in selecting lenders for the Funds. 
Applicants also state that the borrowings by a Fund will be on an arms-
length basis and on terms and conditions similar to those of any other 
borrower from a Conduit. For these reasons, applicants believe that the 
requested relief meets the standards of sections 6(c) and 17(b) of the 
Act and rule 17d-1 under the Act.
    6. Under the proposed conditions, a Fund's participation in the 
facility will be overseen and monitored by a Fund's board of directors 
(``Board''), including a majority of the directors who are not 
interested persons of the Fund (``Disinterested Directors''). Among 
other things, the Board, including a majority of the Disinterested 
Directors, would be required to determine that the interest rate a Fund 
would pay to a Conduit (i) would be lower than that available from 
typical financing sources considered by the Fund, and (ii) would not 
exceed the rate on comparable loans by the Conduit to unaffiliated 
closed-end funds. Before a Fund may borrow from the Conduit, the Board 
also would have to consider, and compare to market rates, the interest 
rate that the Fund may be required to pay should the Conduit at a later 
time transfer the loan to CNAI as the Liquidity Provider.
    7. In addition, the proposed conditions would require that the fees 
a Fund would pay to CNAI in connection with the loan facility be no 
higher than similar fees paid by unaffiliated closed-end funds. The 
Board, including a majority of the Disinterested Directors, also would 
conduct quarterly reviews of a Fund's transactions with the loan 
facility, including the terms of each transaction, and would be 
required to make an annual re-evaluation of a Fund's continued 
participation in the loan facility. Should CNAI become the lender, the 
Board will have the option to terminate the Fund's participation in the 
loan facility.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Loans by a Conduit to the Funds in the aggregate will not exceed 
10% of the principal amount of the Conduit's outstanding loans and 
other assets.
    2. At least 90% of a Conduit's commercial paper will be rated in 
the category A-1+ or P-1.
    3. A loan by a Conduit to the Funds will be at an interest rate 
equal to the Conduit's cost of funds (i.e., the weighted average 
commercial paper rate plus commercial paper dealer commissions).
    4. Before a Fund may participate in the loan facility, the Fund's 
Board, including a majority of the Disinterested Directors, will 
determine that:
    (a) participation in the loan facility is consistent with the 
Fund's investment objectives and policies, and is in the best interests 
of the Funds and its shareholders; and
    (b) the terms of the Fund's participation are reasonable and fair, 
do not involve overreaching, and are no less advantageous than those of 
other participants.
    5. Before a Fund may participate in the loan facility, the Board, 
including a majority of the Disinterested Directors, will adopt 
procedures governing the Fund's participation in the loan facility 
(``Procedures''). In addition to any other provisions the Board may 
find necessary or appropriate to be included in the Procedures, the 
Procedures will require that, before a Fund may enter into a loan 
transaction with a Conduit, the Board, including a majority of the 
Disinterested Directors, will determine that:
    (a) the borrowing is in the best interests of the Fund and its 
shareholders;
    (b) the borrowing and pledge of assets are consistent with the 
Fund's investment objectives and policies;
    (c) the interest rate on the loan is expected to be lower than that 
available from typical financing sources considered by the Fund as 
consistent with its investment objectives and policies and in the best 
interests of its shareholders;
    (d) the interest rate does not exceed the rate on comparable loans 
by the Conduit to closed-end funds unaffiliated with Citigroup in 
similar transactions;
    (e) the Fund asset eligibility criteria are consistent with the 
Fund's investment objectives and policies and the Fund's investments 
consistent with the eligibility criteria will be in the best interests 
of the Fund and its shareholders;
    (f) any fee that the Fund will be required to pay to CNAI for 
structuring and administering the loan facility will be in the 
aggregate no higher than the percentage amount of similar fees paid by 
other closed-end funds with similar investment objectives and policies 
that are unaffiliated with Citigroup in similar transactions (taking 
into account the interest rate paid on the loans by these funds) with a 
Conduit;
    (g) any fee that the Fund will be required to pay CNAI as a 
percentage of CNAI's unused loan commitment as Liquidity Provider will 
be no higher than the percentage amounts paid by unaffiliated closed-
end funds with similar investment objectives and policies to a 
Liquidity Provider for the six month period before a loan transaction 
with a Conduit or to an

[[Page 68400]]

unaffiliated Liquidity Provider that participates in the loan facility; 
and
    (h) the interest rate that may be paid to CNAI as Liquidity 
Provider is expected to be no higher than that available for secured 
lines of credit from typical financial sources for similar transactions 
considered by the Fund as consistent with its objectives and policies 
and in the best interests of shareholders.
    6. If a Conduit determines (i) to require CNAI as Liquidity 
Provider to acquire from the Conduit outstanding loans made to a Fund, 
or (ii) not to extend additional loans to a Fund but require CNAI as 
the Liquidity Provider to do so, the Board, including a majority of the 
Disinterested Directors, will be notified promptly. As soon as 
practicable, the Board, including a majority of the Disinterested 
Directors, must determine whether it is in the best interests of a Fund 
and its shareholders to continue to participate in the loan facility or 
to terminate its participation in the loan facility in accordance with 
its terms and, if applicable, refinance the loans with proceeds from 
alternative sources. In determining that it is in the best interests of 
a Fund and its shareholders to participate in the loan facility, the 
Board shall find that the interest rate paid to CNAI as Liquidity 
Provider (i) is no higher than that available for secured lines of 
credit from typical financial sources for similar transactions that are 
considered by the Fund as consistent with it objectives and policies 
and in the best interests of shareholders and (ii) does not exceed the 
interest rate on comparable loans made by CNAI to closed-end funds 
unaffiliated with Citigroup in similar transactions.
    7. In making the determinations referred to in conditions 5(c), 
5(h) and 6 above, the Board will consider interest rate quotes from at 
least three loan facilities or other alternative financing sources 
unaffiliated with Citigroup.
    8. At each regular quarterly meeting, the Board, including a 
majority of the Disinterested Directors, will (a) review a Fund's loan 
transactions with the loan facility during the preceding quarter, 
including the terms of each transaction; and (b) determine whether the 
transactions were effected in compliance with the Procedures and the 
terms and conditions of this order. At least annually, the Board, 
including a majority of the Disinterested Directors, will (a) make the 
determinations concerning a Fund's continued participation in the loan 
facility required in condition 4 above; and (b) approve such changes to 
the procedures as it deems necessary or appropriate.
    9. The Funds will maintain and preserve permanently in an easily 
accessible place a written copy of the Procedures and any modifications 
to the Procedures. The Funds will maintain and preserve for a period of 
not less than six years from the end of the fiscal year in which any 
transaction with the loan facility occurred, the first two years in an 
easily accessible place, (a) a written record of each transaction 
setting forth a description of the terms of the transaction, including 
the amount, the maturity, and the rate of interest on the loan, and (b) 
all information upon which the determinations required by these 
conditions were made.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-31637 Filed 12-6-99; 8:45 am]
BILLING CODE 8010-01-M