[Federal Register Volume 67, Number 13 (Friday, January 18, 2002)]
[Notices]
[Pages 2707-2709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1352]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25362; 812-12716]


CityFed Financial Corp.; Notice of Application

January 14, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of an 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, CityFed 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 6, 2002.\1\
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    \1\ CityFed Financial Corp., Investment Company Act Release Nos. 
24825 (Jan. 11, 2001) (notice) and 24851 (Feb. 6, 2001) (order).
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    Filing Dates: The application was filed on December 7, 2001, and 
amended on January 14, 2002.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the SEC orders a hearing.

[[Page 2708]]

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 pm 
on February 5, 2002, 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-
0609. CityFed, 4 Young's Way, P.O. Box 3126, Nantucket, MA 02584.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 942-0634, or Nadya B. 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 
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 
20549-0102 (tel. no. 202-942-8090).

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, 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. 
Thus, since December 8, 1989, almost all of CityFed's assets consisted 
of cash that has been invested in (a) money market instruments with a 
maturity of one year or less; and (b) Money market mutual funds.
    3. On June 2, 1994, the OTS issued a Notice of Charges (``OTS 
Action'') against CityFed and certain current or former directors and, 
in some cases, officers of CityFed and City Federal (``Individual 
Respondents''). The OTS Action sought restitution from and a civil 
money penalty against both CityFed and the Individual Respondents. Also 
on June 2, 1994, the OTS issued a Temporary Order to Cease and Desist 
(``Temporary Order'') against CityFed. The Temporary Order sought to 
freeze CityFed's assets by placing them in various respects under the 
control of the OTS. On October 26, 1994, CityFed and the OTS entered 
into an escrow agreement with CoreStates Bank, N.A. (now First Union 
National Bank (``First Union'')) (``Escrow Agreement'') pursuant to 
which CityFed transferred substantially all of its assets to First 
Union for deposit into an escrow account. The Escrow Agreement provided 
CityFed with $15,000 per month for operating expenses and allowed 
CityFed to sell and purchase securities in the escrow account.
    4. On May 19, 2000, CityFed finalized with the OTS and the Federal 
Deposit Insurance Corporation (``FDIC''), the statutory successor to 
the RTC, a settlement of the OTS Action (``Settlement''). Pursuant to 
the Settlement, the OTS dismissed with prejudice the OTS Action and the 
FDIC gave full and complete releases to CityFed and the Individual 
Respondents. In turn, CityFed and the Individual Respondents gave full 
and complete releases to the OTS and the FDIC. The OTS also dissolved 
the Temporary Order and authorized First Union to release to CityFed 
all of its assets remaining in the escrow account. Although the Escrow 
Agreement was terminated, CityFed's assets continue to be invested in 
money market instruments and money market mutual funds.
    5. 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 of the OTS Action on June 2, 1994, 
the RTC and CityFed agreed to dismiss without prejudice the RTC's claim 
against CityFed in the First RTC Action. Pursuant to the Settlement, 
the FDIC released CityFed from all claims in the First RTC Action.
    6. The RTC also 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 sought in excess of $200 million in damages. CityFed states 
that all of the defendants in the Second RTC Action have settled with 
the RTC or the FDIC. Pursuant to the Settlement, the FDIC assigned any 
rights it acquired in these settlements to CityFed. Under its bylaws, 
CityFed may be obligated to indemnify these former officers and 
directors and pay their legal expenses, including settlement amounts. 
On the advice of counsel to a special committee of CityFed's board of 
directors, comprised of directors who were not named in the First or 
Second RTC Action, CityFed has paid a portion of the defendants' 
reasonable defense costs on behalf of former directors and officers in 
connection with the Actions. CityFed does not know whether the amounts 
claimed to date might change and thus is unable to determine with any 
accuracy the extent of its liability with respect to these 
indemnification claims. CityFed is in the process of making offers of 
settlement with respect to the claims of certain of its current and 
former officers and directors and employees who have previously 
requested indemnification from CityFed.
    7. 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'' on its books as a result of various acquisitions by City 
Federal of troubled depository institutions. Pursuant to the 
Settlement, CityFed assigned to the FDIC all of CityFed's interest in 
its supervisory goodwill action, ceased to be a party to the case, and 
has no right to share in the recovery in that case, should there be 
one.
    8. CityFed is subject to a number of loss contingencies for which 
it is currently unable to assess reasonably the probability or range of 
loss. CityFed intends to resolve all claims against it at the minimum 
cost possible. While CityFed's board of directors has considered from 
time to time whether to engage in an operating business, CityFed states 
that it cannot resume an operating business at the present time because 
the amount required to resolve its currently outstanding claims cannot 
be reasonably estimated and could exceed CityFed's assets. Following 
the Settlement, CityFed may reorganize, perhaps involving a bankruptcy 
proceeding. It is anticipated that CityFed's outstanding claims, 
including its indemnification claims, will be addressed prior to, or as 
part of, any reorganization.

[[Page 2709]]

    9. CityFed states that at present there is no public market for its 
stock and that it is traded sporadically in the over-the-counter 
market. Since City Federal's receivership, the operating expenses of 
CityFed have consisted of the employees' salaries, office expenses, and 
accounting and legal expenses. CityFed currently has one full-time 
employee and one office. As of September 30, 2001, CityFed held cash 
and securities of approximately $6.2 million.

Applicant's Legal Analysis

    1. Section 3(a)(1)(A) 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)(1)(C) 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 SEC 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 6, 2002, 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. 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 
modifications described in condition 4, below), 17(e), 17(f), 36 
through 45, and 47 through 51 of the Act and the rules thereunder.

Applicant's Conditions

    CityFed agrees that the requested order will be subject to the 
following conditions:
    1. CityFed will not purchase or otherwise acquire any securities 
other than short-term U.S. government securities, certificates of 
deposit, commercial paper rated A-1/P-1, and shares of registered money 
market funds; except that CityFed may acquire equity securities of an 
issuer that is not an investment company as defined in section 3(a) of 
the 1940 Act or is relying on an exclusion from the definition of 
investment company under section 3(c) of the Act other than section 
3(c)(1) or 3(c)(7), in connection with the acquisition of an operating 
business as evidenced by a resolution approved by CityFed's board of 
directors.
    2. CityFed will not hold itself out as being engaged in the 
business of investing, reinvesting, owning, holding, or trading in 
securities.
    3. 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 as permitted by the order 
requested hereby.
    4. 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 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 affiliation; and 
(iii) the financial interests of such persons in the transaction.

    For the Commission, by the Division of Investment Management, 
underdelegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-1352 Filed 1-17-02; 8:45 am]
BILLING CODE 8010-01-P