[Federal Register Volume 68, Number 243 (Thursday, December 18, 2003)]
[Notices]
[Pages 70547-70549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31170]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26292; 812-12854]


Citicorp North America, Inc.; Notice of Application

December 12, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') for an exemption from section 
18(f)(1) of the Act.

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    Applicant: Citicorp North America, Inc. (``CNAI'').
SUMMARY: Applicant requests an order permitting registered open-end 
management investment companies to enter into secured loan transactions 
with commercial paper and medium-term note conduits administered by 
CNAI.

DATES: The application was filed on July 17, 2002, and amended on May 
8, 2003, and August 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 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 January 5, 2004, and should be accompanied by proof of 
service on 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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicant, c/o Marc B. Adelman, 
Director and Vice President, Citicorp North America, Inc., 388 
Greenwich Street, New York, NY 10013.

FOR FURTHER INFORMATION CONTACT: Julia Kim Gilmer, Senior Counsel, at 
(202) 942-0528, or Janet M. Grossnickle, 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 (tel. 202-942-8090).

Applicant's Representations

    1. CNAI is a wholly-owned subsidiary of Citicorp, a bank holding 
company, that is, in turn, wholly-owned by Citigroup Inc. 
(``Citigroup''), a global financial services organization. CNAI has 
extensive experience and expertise as an administrator of asset-backed 
commercial paper and medium-term note conduit programs, having managed 
such programs since 1983. CNAI administers approximately $43 billion in 
assets in such programs worldwide. Applicant states that several open-
end investment companies have expressed interest in borrowing from the 
commercial paper and medium-term note conduit programs that CNAI 
administers.
    2. Applicant requests relief to permit any registered open-end 
management investment company or series thereof to participate from 
time to time as borrowers (``Borrowing Funds'') in loan facilities 
administered by CNAI (``Loan Facilities''). The entities proposed to be 
used in connection with a Loan Facility issue commercial paper and, in 
certain cases, medium-term notes (collectively, ``Promissory Notes'') 
and will use liquidity support provided by financial institutions that 
are ``banks'' within the meaning of section 2(a)(5) of the Act 
(``Liquidity Providers'') in connection with the Loan Facility (each 
such CNAI-administered entity, a ``Conduit''). The Conduits are limited 
liability companies organized under the laws of Delaware that issue 
Promissory Notes to fund loans secured by receivables or other 
financial assets of the borrowers.
    3. The Promissory Notes issued by the Conduits generally are sold 
to institutional investors that are ``accredited investors'' as defined 
in rule 501(a) of Regulation D under the Securities Act of 1933 (the 
``Securities Act'') or ``qualified institutional buyers'' as defined in 
rule 144A under the Securities Act. As administrator, CNAI negotiates 
business arrangements on behalf of a Conduit, including loan amounts, 
interest rates and fees. CNAI will act as agent for the Conduits and 
the related Liquidity Providers under the agreements entered into with 
each Borrowing Fund and in such capacity will exercise rights and 
enforce remedies on behalf of the Conduit and Liquidity Providers. 
Personnel employed by CNAI have substantially similar levels of 
experience and expertise as personnel that administer loans backed by 
financial assets made by Citibank, N.A., which may act as a Liquidity 
Provider.
    4. As security for a loan, Borrowing Funds will pledge assets 
(``Pledged Assets'') for the benefit of the Conduit and the Liquidity 
Providers. The Pledged Assets will meet eligibility criteria set by the 
Conduit and such criteria will be consistent with the Borrowing Fund's 
investment objectives and policies. For each loan transaction, CNAI 
will evaluate (a) the type and nature of a Borrowing Fund's Pledged 
Assets to determine whether they meet the Conduit's standards for 
collateral; (b) the operations and history of the Borrowing Fund; and 
(c) the financial position and operations of the Borrowing Fund's 
investment adviser.
    5. Applicant states that a Conduit would make loans to a Borrowing 
Fund on an uncommitted basis and the related Liquidity Providers would, 
subject to the terms of the Loan Facility, be obligated to make loans 
to the Borrowing Fund in the event the Conduit was unable or unwilling 
to make such loans. The Conduit at any

[[Page 70548]]

time and for any reason may (a) sell an outstanding loan to a Liquidity 
Provider, or (b) require a Liquidity Provider to provide financing to a 
Borrowing Fund instead of the Conduit. CNAI states that these 
arrangements provide additional assurances to holders of Promissory 
Notes that the Promissory Notes will be paid at maturity.
    6. A Conduit purchases receivables and other assets from, and makes 
secured loans to, a broad range of sellers and borrowers in a variety 
of industries. Aggregate loans made by a Conduit to Borrowing Funds are 
not expected to be more than 10%, and usually would be considerably 
less than 10%, of the Conduit's outstanding loans and other assets.
    7. CNAI represents that the revolving credit and security agreement 
of a Loan Facility, which will be negotiated by the parties, will 
contain representations, warranties, covenants and events of default 
that are customary for secured loan transactions involving open-end 
investment companies as well as such other terms that are specific to a 
particular Borrowing Fund and the conduct of its business. A Borrowing 
Fund will have the right to prepay its loans and terminate its 
participation in a Loan Facility upon prior notice at any time. The 
Pledged Assets of a Borrowing Fund will be available solely to secure 
repayment of the loans and other outstanding obligations incurred by 
that Borrowing Fund under a Loan Facility. CNAI further states that a 
Borrowing Fund would have the same rights and remedies under state and 
federal law with respect to a loan from a Conduit that it would have 
with respect to a comparable loan from a bank. CNAI also states that 
the arrangements with the Liquidity Providers protect Borrowing Funds 
by providing an alternative source of financing in the event a Conduit 
is unable to continue lending funds.
    8. No Borrowing Fund will participate in a Loan Facility unless it 
has represented, in writing, to CNAI, that (a) its policies permit 
borrowing and, if applicable, the use of leverage; (b) all borrowing 
transactions pursuant to the Loan Facility will be subject to the 
requirements of the Act, the rules and regulations thereunder, and any 
other applicable interpretations or guidance from the Commission or its 
staff; and (c) each borrowing transaction will be conducted in 
accordance with all applicable representations and conditions of the 
application. Before a Borrowing Fund may participate in a Loan 
Facility, the Borrowing Fund's Board of Directors or Trustees 
(``Board'') including a majority of the directors or trustees that are 
not ``interested persons'' within the meaning of section 2(a)(19) of 
the Act (``Disinterested Directors'') will determine that such 
participation is consistent with the Borrowing Fund's investment 
objectives and policies and in the best interests of the Borrowing Fund 
and its shareholders. Each Borrowing Fund's Board, including a majority 
of the Disinterested Directors, will also adopt procedures for 
evaluating and making certain determinations concerning the terms of 
each loan transaction between the Borrowing Fund and a Conduit.
    9. CNAI states that the proposed Loan Facilities would enable 
Borrowing Funds to borrow money from the Conduits at lower cost than 
obtaining comparable loans from a bank. CNAI states that a Conduit's 
cost of funds is lower than that of banks, and this advantage will be 
passed on to the Borrowing Funds.\1\
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    \1\ The rate at which a Liquidity Provider would make a loan to 
a Borrowing 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. CNAI anticipates that a Conduit, rather than a Liquidity 
Provider, will be the lender to the Borrowing Funds under a Loan 
Facility, absent extenuating circumstances.
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Applicant's Legal Analysis

    1. Section 18(f)(1) of the Act prohibits open-end investment 
companies from issuing any senior security except that a company is 
permitted to borrow from any bank, if immediately after the borrowing, 
there is an asset coverage of at least 300 per cent for all borrowings 
of the company.\2\ Section 2(a)(5) defines ``bank'' as a depository 
institution, a branch or agency of a foreign bank, a member bank of the 
Federal Reserve System, a banking institution or other trust company 
that, as a substantial portion of its business, receives deposits or 
exercises fiduciary powers similar to those permitted to national 
banks, or a receiver, conservator or liquidating agent of any of the 
foregoing. Applicant states that while a Conduit engages in many of the 
same business activities as banks, it is not a ``bank'' under this 
definition.
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    \2\ Under section 18(g) of the Act, the term ``senior security'' 
includes any bond, debenture, note, or similar obligation or 
instrument constituting a security and evidencing indebtedness.
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    2. Section 6(c) of the Act permits the Commission to exempt any 
person or transaction or any class or classes of persons or 
transactions from any provision or provisions 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. CNAI 
requests exemptive relief from section 18(f)(1) solely to the extent 
necessary to allow a Borrowing Fund to borrow from a Conduit that is 
not a bank. CNAI believes that permitting the Borrowing Funds to borrow 
from a Conduit is fully consistent with the purposes and policies of 
section 18(f)(1) and would not implicate the concerns underlying that 
provision.
    3. CNAI states that section 18(f) of the Act reflects Congressional 
concern about excessive borrowing and the issuance of senior securities 
by open-end investment companies because these practices could unduly 
increase the speculative character and investment risk of junior 
securities. CNAI notes that Borrowing Funds would remain subject to the 
300% asset coverage requirement in section 18(f)(1) of the Act for all 
borrowings, including those from a Conduit. CNAI further represents 
that Conduit loans will not impose any restrictions on a Borrowing 
Fund's shareholders that are different from those imposed by a 
collateralized bank loan. Finally, CNAI argues that permitting a 
Borrowing Fund to borrow from a Conduit rather than a bank is expected 
to reduce its costs of borrowing, which should decrease the risk that a 
Borrowing Fund's borrowing costs will exceed the return from securities 
purchased with borrowed money and lessen any related incentive to 
purchase more speculative portfolio securities to cover those costs.
    4. CNAI states that section 18(f) of the Act also limited open-end 
investment companies to borrowing from traditional institutional 
lending sources out of a Congressional concern that public holders of 
senior securities might be unaware that they were much riskier 
instruments than senior securities issued by operating companies. 
Senior securities of investment companies typically were secured by 
assets that were subject to wide fluctuations in value. Further, common 
shareholders could redeem at any time, which also might affect an open-
end investment company's ability to repay its outstanding debt.
    5. CNAI argues that the Loan Facilities do not involve the type of 
senior security holder that section 18(f)(1) of the Act was designed to 
protect and that the structure of the Loan Facilities and related 
Conduits provide sufficient protection to the parties that face any 
risk of loss by lending to an open-end investment company. A Conduit is 
administered by CNAI, which has extensive expertise in administering 
loans collateralized by financial instruments that equals or

[[Page 70549]]

exceeds the expertise of most banks. The Liquidity Providers are banks 
as defined by the Act and thus not the type of senior security holder 
that Congress believed needed protection. CNAI states that the 
Promissory Notes are general obligations of the Conduit and loans to 
Borrowing Funds are not expected to exceed 10% of a Conduit's assets. 
Any risk of loss on the Promissory Notes posed by loans to open-end 
investment companies is further reduced by CNAI's expertise, the 
Conduit's ability to sell the loans to the Liquidity Providers, and the 
Conduit-wide liquidity sources.
    6. Applicant states that section 18(f) also reflects a concern that 
complex capital structures may permit insiders to manipulate the 
allocation of expenses and profits; facilitate control of the 
investment company by junior security shareholders with little 
investment; and make it difficult for investors in the investment 
company to understand what their stock is worth. CNAI states that 
borrowing from Conduits would not facilitate pyramiding of control or 
manipulative reallocation of expenses and profits. Further, CNAI 
believes that borrowings from a Conduit would not be any more difficult 
for shareholders of a Borrowing Fund to understand than bank 
borrowings.
    7. Applicant also states that section 18(f) reflects a concern that 
existed when the Act was adopted that borrowings by open-end investment 
companies could be used to invest in securities without being subject 
to limitations of the Board of Governors of the Federal Reserve System 
(``FRB'') on the amount of credit that could be used for these purposes 
(``margin requirements''). Under Regulations U and T under the 
Securities Exchange Act of 1934, in effect prior to enactment of the 
Act, only borrowings for such purposes made by a domestic bank or 
broker-dealer were subject to margin requirements. CNAI states that a 
Conduit would be subject to the same credit restrictions as a bank 
under Regulation U as currently in effect.
    8. Finally, applicant believes the requested relief will benefit 
Borrowing Funds by providing them with an alternative, lower-cost 
source of financing. For all of these reasons and in light of the 
protections afforded by the conditions set forth below, CNAI believes 
that permitting Borrowing Funds to borrow from the Conduits would be in 
the best interests of the Borrowing Funds and their shareholders, 
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's Conditions

    Applicant agrees that any order granting the requested relief will 
be subject to the following conditions:
    1. All Borrowing Funds will comply with the asset coverage 
requirements in section 18(f)(1) of the Act, including with respect to 
all borrowings from a Conduit.
    2. A loan by a Conduit to a Borrowing Fund will be at an interest 
rate equal to the Conduit's cost of funds (i.e., the weighted average 
Promissory Note rate plus dealer commissions).
    3. Before a Borrowing Fund may participate in a Loan Facility, the 
Borrowing Fund's Board, including a majority of the Disinterested 
Directors, will determine that participation in the Loan Facility is 
consistent with the Borrowing Fund's investment objectives and policies 
and is in the best interests of the Borrowing Fund and its 
shareholders. In addition, a Borrowing Fund will disclose in its 
statement of additional information all material facts about its 
participation in the Loan Facility.
    4. Before a Borrowing Fund may participate in a Loan Facility, its 
Board, including a majority of the Disinterested Directors, will adopt 
procedures governing the Borrowing 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 Borrowing Fund 
may enter into loan transactions 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 Borrowing Fund 
and its shareholders;
    (b) The borrowing and pledge of assets are consistent with the 
Borrowing Fund's investment objectives and policies;
    (c) The interest rate on the loan does not exceed the rate on a 
comparable collateralized bank loan;
    (d) The Borrowing Fund's asset eligibility criteria are consistent 
with its investment objectives and policies; and
    (e) Each Borrowing Fund's investments, consistent with the asset 
eligibility criteria and any other requirements of participating in the 
Loan Facility, will be in the best interests of the Borrowing Fund and 
its shareholders.
    5. If a Conduit determines (a) to require the Liquidity Providers 
to acquire from the Conduit outstanding loans made to a Borrowing Fund, 
or (b) not to extend additional loans to a Borrowing Fund, the Board of 
the Borrowing Fund, 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 the Borrowing Fund and 
its shareholders to continue to participate in the Loan Facility or to 
terminate the Borrowing Fund's participation in the Loan Facility in 
accordance with its terms.
    6. At each regular quarterly meeting, the Board, including a 
majority of the Disinterested Directors, will (a) review a Borrowing 
Fund's loan transactions under a 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 the order. At least 
annually, the Board, including a majority of the Disinterested 
Directors, will (a) with respect to a Borrowing Fund's continued 
participation in a Loan Facility, make the determinations required in 
condition 3 above and (b) approve such changes to the Procedures as it 
deems necessary or appropriate.
    7. A Borrowing Fund will maintain and preserve permanently in an 
easily accessible place a written copy of the Procedures and any 
modifications to the Procedures. The Borrowing Fund 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 a Loan Facility occurred, the 
first two years in an easily accessible place, 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 all information upon which the determinations 
required by these conditions were made.
    8. The applicant will not enter into a Loan Facility with any 
Borrowing Fund if, at the time of such transaction, the applicant, 
Conduit or Liquidity Provider is an affiliated person of a Borrowing 
Fund, within the meaning of section 2(a)(3) of the Act, or an 
affiliated person of an affiliated person of a Borrowing Fund.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31170 Filed 12-17-03; 8:45 am]
BILLING CODE 8010-01-P