[Federal Register Volume 68, Number 64 (Thursday, April 3, 2003)]
[Notices]
[Pages 16321-16323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8104]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25986; 812-12704]


FSA Capital Management Services LLC; Notice of Application

March 28, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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Summary of Application: FSA Capital Management Services LLC 
(``Applicant'') requests an order to permit Applicant to issue and sell 
certain debt securities and use the proceeds to finance the business 
activities of Financial Security Assurance Holdings Ltd. (``FSAH'') and 
its direct and indirect subsidiaries.

Filing Dates: The application was filed on December 4, 2001, and 
amended on March 26, 2003.
    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 applicant with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on April 22, 2003, 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 Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicant: 350 Park Avenue, New York, NY 10022.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at 
202-942-0567, 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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone 202-942-8090).

Applicant's Representations

    1. Applicant is a Delaware limited liability company and direct 
wholly-

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owned subsidiary of FSAH, a New York corporation.\1\ FSAH is a holding 
company primarily engaged, through its direct wholly-owned subsidiary, 
Financial Security Assurance Inc. (``FSA''), in the financial guarantee 
insurance business. FSAH is an indirect, approximately 98.9%-owned 
subsidiary of Dexia S.A., a publicly owned Belgium corporation 
(``Dexia''), the shares of which are listed and traded on Euronext 
Brussels, Euronext Paris and the Luxembourg stock exchange. Dexia is 
primarily engaged through its operating subsidiaries in the banking and 
investment management business in Europe.
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    \1\ Applicant also requests relief for any other wholly-owned 
finance subsidiary of FSAH that FSAH establishes in the future. 
Applicant is the only wholly-owned finance subsidiary of FSAH that 
presently intends to rely on the requested order. Any other wholly-
owned finance subsidiary of FSAH that subsequently relies on the 
requested order will comply with the terms and condition stated in 
the application.
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    2. FSA is a New York stock insurance corporation that is a leading 
insurer of asset-backed and municipal obligations. FSA is licensed to 
do business as an insurance company in all 50 states, the District of 
Columbia, the Commonwealth of Puerto Rico, Guam and the U.S. Virgin 
Islands. FSAH depends primarily on dividends and other payments from 
FSA to pay dividends on its capital stock, to pay principal and 
interest on its indebtedness and to pay its operating expenses.
    3. Applicant was organized to issue and sell municipal investment 
contracts and similar investment agreements (together, the ``MICs''). 
Applicant presently sells MICs on a private placement basis primarily 
to state or local government entities or agencies and trustees for bond 
issues of such entities or agencies (collectively, the ``MIC holders'') 
for the investment of proceeds from municipal bond offerings.
    4. MICs are debt securities that provide for an agreed-upon rate of 
return on the principal invested. MICs may be collateralized by U.S. 
Treasury or other high quality securities. Municipal bond issuers find 
MICs attractive because their bonds are often issued to finance 
projects for which the issuer does not need the full proceeds of the 
issue immediately. A MIC holder may also purchase a MIC as a means of 
investing amounts on deposit in debt service reserve funds and other 
similar funds held by the MIC holder. MICs provide the municipal bond 
issuer with a guaranteed yield that is advantageous relative to the 
interest rate on the bonds and can be structured to provide draw-downs 
to meet the municipality's needs.
    5. Because of restrictions on their permitted investments, some 
municipalities are expected to request that Applicant enter into MICs 
styled as repurchase agreements (each, a ``Repo''), which would provide 
such municipalities with the economic equivalent of entering into a 
collateralized MIC. Applicant considers entering into such Repos to be 
equivalent to issuing a MIC in the form of a collateralized investment 
contract and will treat the proceeds generated thereby the same as any 
other proceeds raised in a debt issuance (hereinafter, any reference to 
``MIC'' shall include such Repos).
    6. The proceeds of MIC sales will be loaned to FSAH and/or its 
direct and indirect subsidiaries (collectively, the ``Recipients'') for 
use in financing their respective business activities. It is 
anticipated that substantially all of the proceeds from the MICs will 
be loaned by Applicant to the Recipients contemporaneously with the 
issuance of the related MIC, but in no event will less than 85 percent 
of such proceeds be loaned later than six months after Applicant's 
receipt of such proceeds. It also is anticipated that substantially all 
loans to Recipients will be collateralized by the Recipients 
themselves.
    7. Pursuant to an insurance and indemnity agreement with FSA (the 
``Agreement''), Applicant's obligations under each MIC issued by it 
will be fully insured by a financial guarantee policy (each, a 
``Policy'') issued by FSA. The Policy provides that in the event of 
default by Applicant on the payment of principal, premium (if any) and 
interest on the MIC, FSA will make the scheduled payment. In addition, 
the MIC holder may institute legal proceedings directly against FSA to 
enforce such payment without first proceeding against Applicant. The 
Agreement requires Applicant to reimburse FSA for any payments made by 
FSA under the Policies.
    8. In order to secure its performance under the Agreement, 
Applicant will rehypothecate all collateral received in respect of 
loans of proceeds to Recipients either directly to FSA or to one or 
more trustees, custodians, collateral agents or other similar agents 
acting for the benefit of FSA under one or more trust, custody, 
collateral agency or other similar agency agreements. With respect to 
MICs in the form of collateralized investment contracts or Repos, 
however, the collateral pledged to secure the related loan of proceeds 
will be rehypothecated to the MIC holder.
    9. Applicant may come within the definition of investment company 
under section 3(a) of the Act to the extent that its loans to FSAH and 
the other Recipients may be considered as investing or reinvesting in 
debt securities of FSAH and the other Recipients. Applicant currently 
is relying on the exception from the Act provided by section 3(c)(1). 
It will be unable to continue to do so, however, at such time as the 
100 owner limit contained therein is exceeded or if Applicant were to 
make a public offering of its securities.

Applicant's Legal Analysis

    1. Applicant requests an order under section 6(c) of the Act for an 
exemption from all provisions of the Act. Rule 3a-5 under the Act 
provides an exemption from the definition of investment company for 
certain companies organized primarily to finance the business 
operations of their parent companies or companies controlled by their 
parent companies.
    2. Rule 3a-5(b)(2)(i) in relevant part defines a ``parent company'' 
to be a corporation, partnership, or joint venture that is not 
considered an investment company under section 3(a) or that is excepted 
or exempted by order from the definition of investment company by 
section 3(b) or by the rules or regulations under section 3(a). 
Applicant states that because FSAH relies on an exception in section 
3(c)(6) of the Act as an insurance holding company, FSAH would not 
qualify as an eligible parent company under rule 3a-5.
    3. Rule 3a-5(b)(3)(i) in relevant part defines a ``company 
controlled by the parent company'' to be a corporation, partnership, or 
joint venture that is not considered an investment company under 
section 3(a) of the Act or that is excepted or exempted by order from 
the definition of investment company by section 3(b) of the Act or by 
the rules and regulations under section 3(a). FSAH engages in certain 
activities (including certain investment activities) through wholly-
owned subsidiaries that have no outstanding securities other than those 
owned directly or indirectly by FSAH. Such subsidiaries would be 
eligible for exemption under rule 3a-3 under the Act, except that FSAH, 
as a section 3(c)(6) exempt company, is not an eligible parent of a 
rule 3a-3 exempt company.\2\ In addition, Applicant might

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choose in the future to lend the proceeds of its MIC offerings to FSA, 
which, as an insurance company, is excluded from the definition of 
investment company under section 3(c)(3) of the Act and to any other 
insurance company subsidiaries now or hereafter controlled by FSAH that 
derive their non-investment company status under section 3(c)(3) (such 
insurance companies, including but not limited to FSA, ``FSAH's 
Insurance Company Subsidiaries'').
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    \2\ Rule 3a-3 generally exempts an issuer from the definition of 
investment company if all of its outstanding securities (other than 
short-term paper, directors' qualifying shares, and debt securities 
owned by the Small Business Administration) are owned by an eligible 
parent company. A parent company generally is eligible if it meets 
certain asset and income tests and it is (i) not an investment 
company as defined in section 3(a) of the Act; (ii) excluded from 
the definition of investment company by section 3(b) of the Act; or 
(iii) deemed not to be an investment company under rule 3a-1 under 
the Act.
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    4. Rule 3a-5(a)(1) requires that any debt securities of a finance 
subsidiary issued to or held by the public be unconditionally 
guaranteed by the parent company. Rule 3a-5(a)(3) requires that any 
parent guarantee provide that, in the event of a default in payment of 
amounts due under such debt securities, the holders of those securities 
be allowed to proceed directly against the parent company without first 
having to proceed against the finance company.
    5. Applicant states that the Policies to be issued by FSA covering 
the MICs serve the underlying objectives of the rule 3a-5 guarantee, 
because the MIC holders will be provided with benefits substantially 
similar to those provided by the guarantee requirement of rule 3a-5. 
Each Policy will be an unconditional and irrevocable guarantee of 
payment of all amounts due under the MICs. Applicant asserts that there 
are no differences in the procedures that would be followed by the MIC 
holders to recover for any loss in the event of Applicant's default on 
a MIC as compared to the procedures for recovery in the event of a 
default under a rule 3a-5 guarantee. Applicant further states that FSA 
is subject to a comprehensive scheme of regulation and supervision 
under the insurance laws of each U.S. jurisdiction where it is licensed 
to do business, so that there is higher likelihood that FSA would be 
able to meet it obligations.
    6. Applicant further asserts that the receipt of a Policy from FSA 
in lieu of an FSAH guarantee increases the likelihood that the MIC 
holders will be paid in full because creditors of FSAH are in effect 
structurally subordinated to creditors of FSA (and its subsidiaries). 
This is because FSAH's equity interest in FSA (including its 
subsidiaries) is approximately 68% of FSAH's assets and FSAH's only 
significant source of funds with which to make payments is dividends or 
other payments from FSA.
    7. Section 6(c) of the Act, in pertinent part, provides that the 
Commission, by order upon application, may conditionally or 
unconditionally exempt any person, security or transaction, or any 
class or classes of persons, securities or transactions, from any 
provision or provisions of the Act 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. Applicant submits that its exemptive request 
meets the standards set out in section 6(c).

Applicant's Condition

    Applicant agrees that any order issued on the application shall be 
subject to the following condition:
    Applicant will comply with all of the provisions of rule 3a-5 under 
the Act, except: (1) In lieu of the parent guarantee requirement in 
rule 3a-5(a)(1), Applicant's obligations under each MIC will be fully 
insured by a Policy issued by FSA; (2) FSAH will not meet the portion 
of the definition of ``parent company'' under rule 3a-5(b)(2)(i) solely 
because it is excluded from the definition of investment company under 
section 3(c)(6) of the Act; (3) Applicant will be permitted to make 
loans to each of FSAH's Insurance Company Subsidiaries, which do not 
meet the portion of the definition of ``company controlled by the 
parent company'' in rule 3a-5(b)(3)(i) solely because they are excluded 
from the definition of investment company under section 3(c)(3) of the 
Act; and (4) Applicant will be permitted to make loans to subsidiaries 
of FSAH that do not meet the portion of the definition of ``company 
controlled by the parent company'' solely because they would be 
excluded from the definition of investment company by virtue of rule 
3a-3 under the Act, but FSAH's status as their parent company.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8104 Filed 4-2-03; 8:45 am]
BILLING CODE 8010-01-P