-----------~~~t__Ii!~__II__!I_II___!_-------------I\_B_I9_'g______"Il_RtE¥.ir__-------

Our Ref. No. 93-167-CC 

Alliance Capital 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Management L.P. 

DIVISION OF INVESTMENT MANAGEMENT 	 File No. 801-32361 

Your letter of April 5, 1993, requests our assurance that we 

would not recommend enforcement action to the Commission under 

Section 18(f) (1) of the Investment Company Act of 1940 (the "1940 

Act") 1./ if registered open-end investment companies ("Funds") 

advised by Alliance capital Management L.P. or by certain of its 

majority-owned subsidiaries borrow from certain foreign banks 

that have banking activities in the United States ("Banks") as 

described in your letter. 

Each Fund proposes to borrow from one or more Banks. £/ 

Each Bank will be a "high-quality" commercial bank, incorporated 

or organized under the laws of one of the foreign countries 

specified in your letter. The government or a governmental 

agency of a Bank's horne country, or a political subdivision 

thereof, will regulate the Bank as a bank. Each Bank will be 

engaged substantially in commercial banking activity. 1/ A Bank 

will not be operated for the purpose of evading the 1940 Act. In 

addition, no Bank or Bank employee will be an "interested person" 

~/ Section 18(f) (1) permits a registered open-end investment 

company to borrow from a bank if immediately after the 

borrowing the company maintains an asset coverage of at 

least 300 percent for all of its borrowings. Section 

2 (a) (5,) of the 1940 Act generally defines "bank" to include 

(A) a nanking institution organized under the laws of the 

United States, (B) a member bank of the Federal Reserve 

System, or (C) any other banking institution or trust 

company doing business under the laws of any State or of the 

United States, a sUbstantial portion of the business of 

which consists of receiving deposits or exercising fiduciary 

powers similar to those permitted to national banks by the 

Comptroller of the Currency, and which is supervised and 

examined by State or Federal banking authorities having 

supervision over banks, and which is not operated for the 

purpose of evading the 1940 Act. 

£/ 	 A Fund may borrow from a Bank directly or from a syndicate 

of Banks. Each Fund's borrowing from a Bank will comply 

with the asset coverage limitation of Section 18(f) (1). 

1/ 	 Each Bank will be engaged regularly in, and derive a 

sUbstantial portion of its business from, extending 

commercial and other types of credit, and accepting demand 

and other types of deposits, that are customary for 

commercial banks in its horne country. 
(as defined in section 2(a) (19) of the 1940 Act) of a borrowing 

Fund or the Fund's investment adviser or principal underwriter. 

Each Bank will do business in the united States through one 

or more state licensed branches or agencies or federal licensed 

branches. Each branch or agency will be subject to banking 

regulation that is substantially equivalent to that applied to a 

state-chartered or national bank, as the case may be. A 

sUbstantial portion of the business of each branch or agency will 

consist of receiving deposits or exercising fiduciary powers 

similar to those of national banks. Federal, or state and 

federal, banking authorities will supervise and examine each 

branch or agency. No branch or agency will be operated for the 

purpose of evading the 1940 Act. 

The state or federal banking authority that licenses the 

branch or agency will have the power, in proper circumstances, to 

request and obtain information concerning the condition of the 

entire Bank. For example, you state that the Comptroller of the 

Currency requires "parent" foreign banks of federal branches or 

agencies to provide information about the parent foreign banks' 

general affairs in connection with the Comptroller's supervision 

and regulation of the branches and agencies. ~/ 

A Bank's branches or agencies in the United states will have 

aggregate assets of at least $500 million. Further, at the time 

a loan agreement is entered into, at least one of the Bank's 

branches or agencies (together with its predecessors) will have 

been in business in the united states for at least five years, 

and the Bank will have no present intention to cease its banking 

operations in the United states. 

Each borrowing from a Bank will be for a specified term, and 

the lending Bank may not call a loan on demand. Each loan 

agreement will explicitly provide that a Bank may accelerate the 

loan only if the Fund defaults. ~/ In addition, each loan 

agreement will explicitly provide that the laws of a state of the 

United states govern the agreement. Accordingly, you state that 

a united states court should give the terms of a loan agreement 

with a Bank the same effect as it would the terms of a loan 

~/ 12 C.F.R. § 28.101. You state that the Comptroller 

ordinarily requests extensive information from a parent 

foreign bank that applies for permission to create a federal 

branch or agency. Thereafter, the Comptroller requires the 

parent foreign bank to submit financial reports and other 

information periodically. Id. 

2/ Under certain circumstances, however, the Fund could elect 

to prepay the loan, including when necessary to maintain the 

requisite asset coverage. 

- 2 -
., . agreement with' a domestic bank. You believe that the risk is ----;minimal that a Bank seeking to call a loan ~n violation of the 

terms of the loan agreement would be able to obtain and execute a 

foreign judgment against the Fund (absent the Fund breaching the 

agreement) • 

Even if a Bank were able to obtain a judgment in its country 

for breach of the loan agreement in contradiction of the express 

terms of the loan agreement and could locate and seize any assets 

that the Fund maintained in the country in which the Bank was 

located, §/ you maintain that it is unlikely that such assets 

would be sufficient to satisfy a judgment in the amount of the 

outstanding loan. As a result, the Bank likely would have to 

commence an action against the Fund in the united states to 

enforce the judgment. Moreover, in your view, the Uniform 

Foreign Money-Judgments Recognition Act, 2/ which governs the 

recognition of foreign money-judgments in New York and at least 

21 other states, would not require a New York court to recognize 

a foreign money-judgment against the Fund under these 

circumstances. ~/ 

Each borrowing from a Bank will be an arm's length 

transaction and will not be conditioned on: '(i) the Fund's 

purchase of securities that the Bank or any affiliate of the Bank 

issues or underwrites,~or (ii) any other transaction or 

relationship between the Bank (or any of its affiliates) and the 

Fund (or any of its affiliates). Moreover, a Fund only will 

borrow from a Bank when (i) the borrowing is cons-istent with the 

Fund's borrowing policies, (ii) the Fund's adviser deems the 

borrowing to be in the best interests of the Fund and its 

shareholders, and (iii) the borrowing is otherwise consistent 

with the 1940 Act. The Fund's borrowing policies will be 

disclosed in the Furid's prospectus. 

The Commission has taken the position that foreign banking 

institutions generally do not fall within the definition of 

§/ 	 Certain Funds maintain assets outside the united states 

through custodial or subcustodial arrangements under Rule 

17f-5 of the 1940 Act. As a result, a Fund's assets may be 

located in the same country as a Bank that lends to the 

Fund. It is also possible that a Fund may borrow from its 

custodian or subcustodian. 

2/ 	 13 U.L.A.: Civil Proc. & Rem. Laws 261 (1962). 

~/ Your letter focuses on how a New York court would apply the 

Uniform Foreign Money-Judgments Recognition Act because the 

investment activities of each Fund are centered in New York . 

....: 3 ­
"bank" under section 2(a) (5). 9/ The Commission also has stated, 

however, that the question of whether and under what conditions a 

foreign bank should be permitted to fulfill the important roles 

assigned to domestic banks under the 1940 Act "should be 

evaluated based upon the particular role involved. 1I 10/ You 

state that each Fund's adviser believes that the Fund's ability 

to borrow from the Banks will permit increased competition among 

lenders to the Fund and result in potential savings and other 

. benefits to the Fund and its shareholders. 

On the basis of the facts and representations in your 

letter, and without necessarily agreeing with your legal 

analysis, we would not recommend enforcement action if the Funds 

borrow from the Banks in the manner described in your letter. 

Our response is limited to the proposed borrowings from Banks 

under section 18; it does not express our opinion regarding a 

Bank's status as a IIbank" for any purpose under the 1940 Act. 

You should note that any different facts or representations may 

require a different response. Further, this response only 

expresses the Division's position on enforcement action and does 

not purport to express any legal conclusions on the ,questions 

presented. ' 

7Z~::~t~~~ Senior Counsel 

2./ 	 See,~,Investment Company Act Rel. No. 18381 (Oct. 29, 

1991) (adopting Rule 3a-6 which excepts foreign banks and 

foreign insurance companies from the' definition of 

lIinvestment company" under the 1940 Act); Investment Company 

Act Rel. No. 15314 (Sep. 17, 1986) at note 4 and 

accompanying text (proposing former Rule 6c-9 to exempt from 

the 1940 Act foreign banks or foreign bank finance 

subsidiaries that offer or sell debt securities and nonvoting preferred stock); and Investment 60mpany Act ReI. No. 

12679 (Sep. 22, 1982) at note 17 and accompanying text 

(proposing amendments to former Rule 6c-1 to exempt from the 

1940 	Act certain finance subsidiaries of domestic and 

foreign issuers). 

10/ 	 Investment Company Act ReI. No. 18381 at note 9. 

- 4 ­
J.JG[N[ p. SOU~ .. [_q SE\\'ARD & KISSEL GtO"G£ c. StwA.c• :r.tCG[~ 1tI4. Z.o\i':'Z[r'F" S£NIOR eouN!I':.. 

e:,..&'s£ G .& 0.S2""00'" 1200 G STREET. X.W. A .. !lt!:<~ ~ v.A...s.. " LESTEtIi ","SSEL 

ARRlA.. S. COG.'" RlC"",.&.RC'" "'..... [NTI""[ 

BRuCE C $[NZ[I­ \\ASHI:SGTO:S, D.G. 20005 EC~"'RC w !I[uC ... (RT 

MAI:!~["'[ ~ CA",,·L_S Roe£R~ e 5IMO"" 

.,.,A""£.S '''L ""'AfrrIICOC";" <2021737-8833 COUIllS£1. 
 A","~"-ON'" R "".0\1'0,15,-,[ .. 0· 


",N·WON'" C oJ. NUI-ANO­
 ,AX (2021 737-5184 ONe BAnE." PAR~ P.AlA 

.... WI~;"IA"" MUN"'C NEW TORK, N.Y. ,ooc" BRAorO_OJ ~.CE.~~. '2121 ~? ..·,i'OC 

P[T[R E. PRONT­ 'AX 1212 ".0-.4.21 OA.E C. C..-A'STENS£Jrrot • .,JR. 

C",VIC 1,.. J'08£S 

~AO;..£'f S. ROt A£.PRESEh"A"IV[ O'''IC[ 

RuSS£I.L NACOR uTe,,- ff c. "~INe[ 

1011 BUC.o\PES"r. "'UNGAR" 

.,J ...... [T Q. %/11.11...-[101­

AOetRT.o\ WAL.O£R 

CRAIG T. ,",ICK£IIIN£:"1­

..,)0 ..... t. T.vSS 

GAR.,...J. wOL't Investment Company Act of 1940-­ L ... WRENC[ RUTKOWSKI 

RON ..... C I.. COM[N Section 18 (f) (1) ~ARK .;. I"(Y;..AN:;: 

""IC"".o\[1. iI=l. S..JOGIIi[N 

"AU L. ". C\,..ARK­

.JOl'\jA"~AN e[RG[1=!' 

.,. ... 0104.0\$ G. ""ACOO .. A .. :: 

""A~t( A. 8ROO'" 

~AU ....... GO~ ... I[e April 5, 1993 

',~t ~A- 10C-jo

Thomas Harman, Esq. .-. -- / L) Chief Counsel i,.-~~~~__uIO~LL-f~:rJ-,jt~______-------------­ Division of Investment Management \:::>..l3ction D 

Secur~ties and Exchange Commission \R\11~e_______--7"""'-I-----"""'--­

450 F~fth Street, N.W. ;.- J' L 

Washington, DC 20549 \~'ubl1r .L/ ~~ q3 _. .';~\l::e~il::a::b~1~11::t~Y~_.,.JJ;~_~-t;-~"':::::--~--"""-

Dear Mr. Harman: 

On behalf of Alliance Capital Management L.P., an 

investment adviser registered under the Investment Advisers 

Act of 1940 (the "Advisers Act"), and each of its direct and 

indirect majority-owned subsidiaries that are registered as 

investment advisers under the Advisers Act (collectively and 

separately referred to as the "Adviser"), we hereby request 

confirmation that the staff of the Division of Investment 

Management (the "Division") would not recommend to the 

Commission enforcement action against the Adviser, any openend investment company registered under the Investment 

Company Act of 1940, as amended (the "1940 Act"), for which 

the Adviser is the investment adviser (each, a "Fund") or 

any Bank (as defined herein) if the Fund were to borrow 

pursuant to Section 18(f) (1) of the 1940 Act as described 

herein from a Bank incorporated under the laws of a foreign 

country that has banking activities in the United States. 

Relevant Statutes 

Section 18 (f) (1) of the 1940 Act prohibits any 


registered open-end investment company from issuing any 


class of senior security, or selling any senior security of 


which it is the issuer, except that the investment company 


is permitted to borrow from any bank subject to a 300 

Thomas Harman, Esq. -2- April 5, 1993 

percent asset coverage restriction contained in Section 

18 (f) (1). Section 2 (a) (5) of the 1940 Act defines a "bank", 

for purposes of the 1940 Act, as: 

• . . (A) a banking institution organized under the 

laws of the United States, (B) a member bank of the 

Federal Reserve System, (C) any other banking 

institution or trust company, whether incorporated 

or not, doing business under the laws of any State 

or the United States, a substantial portion of the 

business of which consists of receiving deposits or 

exercising fiduciary powers similar to those 

permitted to national banks under the authority of 

the Comptroller of the Currency, and which is 

supervised and examined by State or Federal 

authority having supervision over banks, and which 

is not operated for the purpose of evading the 

provisions of this title .... 

The Proposed Transactions 

Subject to the asset coverage limitation of Section 

18 (f) (1), the Fund proposes to borrow from one or more 

foreign banks (each, a "Bank"), either directly or as a 

member of a syndicate of Banks that may include one or more 

domestic banks, when the borrowings (i) are consistent with 

the Fund's borrowing policies, (ii) are deemed by the 

Adviser to the Fund to be in the best interests of the Fund 

and its shareholders, and (iii) are otherwise consistent 

with the 1940 Act. Each borrowing from a Bank would be an 

arm's length transaction between the Bank and the Fund and 

would not be linked to, or conditioned upon, (i) the 

purchase by the Fund of securities issued or underwritten by 

the Bank or any affiliate of the Bank or (ii) any other 

transaction or relationship between the Bank (or any of its 

affiliates) and the Fund (or any of its affiliates). 

The Fund's borrowing pursuant to Section 18 (f) (1) 

would be disclosed in the Fund's prospectus. Among other 

things, the prospectus would disclose the effects of 

leveraging, including the possibility that sales of the 

Fund's portfolio securities might be required in order to 

permit the Fund to make the loan repayments necessary to 

maintain the asset coverage of outstanding borrowings 

required by Section 18(f) (1). 

Each loan agreement would, by its terms, be 

governed by the laws of a state of the United States. Each 
Thomas Harman, Esq. -3- April 5, 1993 

borrowing from a Bank would be for a specified term, would 

not be callable on demand by the lending Bank and could be 

accelerated by the Bank only upon an event of default with 

respect to the Fund as specified in the loan agreement. 

Under certain circumstances, however, the loan could be 

prepaid at the option of the Fund, including when necessary 

to maintain the asset coverage requirement of Section 

18(f)(1). 

Each Bank would be a high-quality commercial bank, 

incorporated or organized under the laws of one of the 

following countries: (i) the Western European countries of 

Austria, Belgium, Denmark, France, Germany, Italy, 

Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, 

and the United Kingdom; (ii) Mexico and the South American 

countries of Argentina, Brazil and Chile; (iii) Japan, 

Korea, and Taiwan; (iv) Australia and New Zealand; (v) 

Canada; and (vi) Israel. Each Bank (i) would be regulated 

as a bank by the government or a governmental agency of its 

home country or by a political subdivision thereof, (ii) 

would be engaged substantially in commercial banking 

activity in that it would be engaged regularly in, and 

derive a substantial portion of its business from, extending 

commercial and other types of credit, and accepting demand 

and other types of deposits, that are customary for 

commercial banks in its home country, and (iii) would not be 

operated for the purpose of evading the provisions of the 

1940 Act. No Bank or Bank employee would be an "inter~sted 

person" (as defined in Section 2 (a) (19) of the 1940 Act) of 

the Fund or of any investment adviser of, or principal 

underwriter for, the Fund. 

Each Bank would do business in the United States 

through one or more state licensed branches or agencies or 

federal licensed branches, a substantial portion of the 

business of which would consist of receiving deposits or 

exercising fiduciary powers similar to those permitted to 

national banks under the authority of the Comptroller of the 

Currency (each, a "Branch" or "Agency"). A Bank's Branches 

and Agencies in the United States would have aggregate 

assets of at least $500 million and no Branch or Agency 

would be operated for the purpose of evading the provisions 

of the 1940 Act. Moreover, at the time of the loan 

agreement, at least one of the Bank's Branches or Agencies 

(together with its predecessors) would have been in business 

in the United States for at least five years and the Bank 

would have no present intention to cease its banking 

operations in the United States. 
, [ 

Thomas Harman, Esq. -4-	 AprilS, 1993 

Each state licensed Branch or Agency would be 

supervised and examined by state and federal authorities 

having supervision over banks and would be subject to state 

and federal regulation that would be substantially 

equivalent to that applicable to a bank chartered in the 

state in which the Branch or Agency was licensed. Each 

federal licensed Branch would be supervised and examined by 

federal authorities having supervision over banks and would 

be subject to federal regulation that would be substantially 

equivalent to that applicable to a national bank. In each 

case, the state or federal licensing authority would have 

the power pursuant to its licensing and reporting powers to 

request and obtain information concerning the condition of 

the entire Bank in proper circumstances. 1 

In addition, pursuant to the International Banking 

Act of 1978 (the "International Banking Act"), by virtue of 

maintaining a Branch or Agency in the United States, the 

Bank would be subject to various provisions of the Bank 

Holding Company Act of 1956 (the "BHCA"), including 

limitations on its non-banking activities in the United 

States and on its acquisition of securities of companies 

engaged directly or indirectly in United States activities, 

and would be required to file various reports with the Board 

of Governors of the Federal Reserve System (the "Board"). 

Among other things, a Bank would be required to file an 

annual report that included its financial statements and 

certain information on its direct and indirect non-banking 

activities in the United States. Each Bank also would be 

required to file an annual confidential report of operations 

1. 	 For example, a 1979 policy statement outlining the responsibilities 

of the various federal regulators on the supervision of United 

States branches and agencies of foreign banks announced the 

agencies' intention to seek to assure themselves that the entire 

foreign bank was financially sound and that, to that end, the 

agencies planned to collect information on the consolidated 

operations of the foreign banks and to expand their contacts with 

senior management of the banks. Release and Policy Statement of 

the Federal Financial Institutions Examination Council (July 20, 

1979). The regulations of the Comptroller of the Currency (the 

"Comptroller") governing federal branches and agencies and 

interpretations thereto explain that the Comptroller will require 

information from "parent" foreign banks concerning their general 

affairs and that extensive information will ordinarily be requested 

upon receipt of an initial application for a federal branch or 

agency. Thereafter, the foreign bank will be required to submit 

financial reports and certain other information periodically. 12 

C.F.R. §28.101. Although state laws differ, banking authorities in 

most states have similar powers. 
Thomas Harman, Esq. -5- AprilS, 1993 

containing information concerning the Bank's earnings, loan 

loss experience and reserves and setting forth financial 

information concerning the Bank's foreign subsidiaries. 

Through custodial or subcustodial arrangements, 

certain Funds maintain assets outside the United States. 

Those assets may be segregated or may be commingled by the 

custodian or subcustodian of a Fund with custodied assets of 

other entities and, accordingly, might not be maintained in 

a separate account in the name of the Fund. In those 

instances, the assets are not readily identifiable as assets 

of the particular Fund by persons and entities without 

knowledge of the custodial arrangement. It is possible that 

Fund assets would be maintained for the Fund by a custodian 

or subcustodian in the country in which the Bank that made 

the loan to the Fund, or that participated in a syndicate of 

banks that made the loan to the Fund, is located, and it is 

possible also that the Fund might borrow from a custodian or 

subcustodian. For the reasons discussed above, however, the 

Fund's assets would not necessarily be identifiable as Fund 

property. Moreover, in most cases, the Fund would not 

maintain enough assets in the foreign country to satisfy a 

judgment for the amount of the outstanding loan. 

Commission's Position on Status of a Foreign 

Bank as a "Bank" under Section 2 (a) (5) 

By its terms, Section 2 (a) (5) of the 1940 Act 

requires that a "bank" be either (i) "organized under the 

laws of the United States" or a State thereof or (ii) "doing 

business under the laws of any State or of the United 

States" and supervised by United States banking authorities. 

The Commission and its staff have consistently taken the 

position that Section 2 (a) (5) generally applies to domestic 

banks while recognizing, as discussed below, that a foreign 

bank may also qualify as a bank under certain circumstances 

if it is doing business under the laws of the United States. 

The Commission's general position on foreign banks 

is exemplified by the 1982 release proposing amendments to 

Rule 6c-1 under the 1940 Act to exempt certain finance 

subsidiaries of foreign issuers from the 1940 Act. In that 

release, the Commission stated that, although pursuant to 

Section 3 (c) (3) of the 1940 Act banks are excluded from the 

definition of investment company, "foreign banks do not fall 

within the definition of a bank, which includes only United 

States banks. ,,2 

2. Investment Company Act Release No. 12679, note 17 (Sept. 22, 1982). 
Thomas Harman, Esq. -6-	 AprilS, 1993 

In a 1986 release proposing Rule 6c-9, which was 

intended to exempt foreign banks and their finance 

subsidiaries from the registration requirement of the 1940 

Act in connection with their issuance of certain debt 

securities and non-voting preferred stock in the United 

States, the Commission similarly concluded that a foreign 

bank may not rely on the exclusion for banks provided by 

Section 3(c) (3) of the 1940 Act (the "1986 Release,,).3 

In the 1986 Release, however, the Commission also 

cited two instances in which the Commission (or the staff) 

had recognized that a foreign bank might be a "bank" for 

purposes of the 1940 Act if it were doing business in the 

United States and were adequately supervised by United 

States banking authorities. First, the Commission cited a 

1984 release publishing revised proposed Rule 17f-5, which 

set forth an exemption from the custody requirements of the 

1940 Act to permit investment companies to maintain assets 

with foreign custodians. In that release, the Commission 

stated that, while a foreign bank generally does not fall 

within the definition of a bank under Section 2 (a) (5) of the 

1940 Act, a foreign bank with a branch or branches in the 

United States might fall within the definition of a bank 

because, with the adoption of the International Banking Act 

in 1978, the primary responsibility for supervising and 

examining U.S. branches of foreign banks was assigned to 

United States federal and state banking regulators. 4 

Second, the 1986 Release cited a no-action letter 

dated July 28, 1976 involving an Israeli bank, Bank Leumi 

le-Israel B.M. ("Bank Leumi") (the "Bank Leumi Letter"). In 

that lettE~, the Division of Investment Management (the 

"Division") stated that, based on the representations in the 

incoming letter, it would not recommend that the Commission 

take enforcement action against Bank Leumi if it offered 

bonds issued by Bank Leumi and guaranteed by the ExportImport Bank of the United States in the United States 

without registering as an investment company under the 1940 

3. 	 Investment Company Act Release No. 15314 (Sept. 17, 1986). The 

Division of Investment Management also has issued letters in which 

it declined to grant favorable no-action positions on the grounds 

that a foreign banking organization was not a "bank" excluded from 

the definition of investment company under the 1940 Act. 

Continental Illinois Limited (pub. avail. Apr. 1, 1973); Bank of 

ArnericaCanada (pub. avail. July 25, 1983); CCBP International, 

Inc. (pub. avail. Dec. 1, 1987). 

4. 	 Investment Company Act Release No. 13724 (January 24, 1984). 
Thomas Harman, Esq. -7-	 AprilS, 1993 

Act in reliance upon its counsel's opinion that it was a 

bank under Section 2 (a) (5) (C) of the 1940 Act and thereby 

excluded from the registration requirements of the 1940 Act 

by virtue of Section 3 (c) (3) thereof. 

In Bank Leumi's incoming request letter, Bank 

Leumi's counsel represented that Bank Leumi had a subsidiary 

trust company in New York, a branch in Illinois and agencies 

in New York and California and was, therefore, subject to 

examination and supervision by the banking authorities in 

those states. Counsel also stated that, in connection with 

its establishment of its New York agency, Bank Leumi had 

been required to furnish detailed information about its 

Israeli banking operations, that the financial condition of 

the entire bank was reviewed at least annually by the New 

York banking authorities in connection with the agency's 

annual license renewals, and that the investigative power of 

the New York banking authorities in a proper case extended 

to the entire bank, both in New York and overseas. Bank 

Leumi's counsel further represented that, as a result of 

Bank Leumi's maintaining the trust company in New York, Bank 

Leumi was subject to the New York banking authorities' power 

to examine Bank Leumi when deemed necessary or advisable and 

was subject to the supervision of the Board pursuant to the 

provisions of the BHCA. Accordingly, because Bank Leumi met 

the other criteria set forth in Section 2 (a) (5) (C) of the 

1940 Act, counsel represented that Bank Leumi qualified as a 

"bank" as defined in Section 2(a) (5) (C) of the 1940 Act. 5 

Counsel for Bank Leumi further argued in the 

incoming letter that there were no supervening public policy 

considerations that would conflict with the no-action 

position requested. Counsel for Bank Leumi stated that, 

since Bank Leumi (i) was subject to banking regulation and 

supervision in Israel, (ii) was subject to examination and 

supervision by the banking authorities of New York, Illinois 

and California, and (iii) was, and for the past fifteen 

5. 	 In support of the contention that Bank Leumi qualified as a "bank" 

as defined in Section 2 (a) (5) (C) of the 1940 Act, counsel for Bank 

Leumi noted that the Commission staff had taken a favorable noaction position in a letter in 1969 with respect to a registration 

statement for lOB Bankholding Corporation Limited. Counsel for 

Bank Leumi stated that the staff's no-action position had been 

based on the opinion of counsel for Israel Discount Bank Limited 

("lOB") that, based on lOB's operation of two branches in New York, 

lOB should be excluded from the definition of an investment 

company. lOB Bankholding Corporation Limited (November 7, 1969) 

(the "Israel Discount Bank Letter"), a copy of which is attached as 

Appendix A. 
Thomas Harman, Esq. -8-	 AprilS, 1993 

years had been, subject to the reporting requirements of the 

Securities Exchange Act, it was consistent with the 

protection of investors and purposes fairly intended by the 

policy and provisions of the 1940 Act for Bank Leumi to be 

excluded from the registration provisions of the 1940 Act. 6 

In 1990, the Commission codified the position it 

had taken in two prior 1988 no-action letters 7 by issuing 

an interpretive release stating that a United States branch 

or agency of a foreign bank would be considered a "bank" as 

defined in Section 2 (a) (5) (C) for the limited purpose of the 

issuance of securities in the United States by the branch or 

agency if, in addition to the requirements of Section 

2 (a) (5) (C), the nature and extent of the federal and state 

regulation and supervision of the particular branch or 

agency was substantially equivalent to that applicable to 

banks chartered under Federal or state law in the same 

jurisdiction (the "1990 Release").8 In the 1990 Release, 

the Commission cited the Bank Leumi Letter as being a letter 

from a branch or agency of a foreign bank requesting noaction advice on the status of United States branches and 

agencies of foreign banks under the 1940 Act. The Bank 

Leumi Letter was referred to in the 1990 Release as the only 

letter that the Division had received from a branch or 

agency on that subject as of the time Rule 6c-9 was adopted 

in October 1987. 9 

In a number of instances since the Bank Leumi 

Letter, the Commission and the staff have granted favorable 

relief to foreign banks having United States banking 

activities without expressly addressing whether or not the 

foreign banks could qualify as "banks" within the meaning of 

6. 	 Note that the Commission staff had granted an earlier letter to 

Bank Leumi dated June 19, 1969 (the "1969 Bank Leumi Letter"), in 

which the staff also agreed not to recommend enforcement action to 

the Commission if Bank Leumi made a public distribution of its 

equity securities in the United States without registering as an 

investment company under the 1940 Act, provided Bank Leumi retained 

its license under New York Banking laws. Bank Leumi le-Israel 

B.M. (June 19, 1969), a copy of which is attached as Appendix B. 

7. 	 See Bank Bumi Daya (pub. avail. June 8, 1988) and Bank Ekspor Impor 

Indonesia (pub. avail. July 15, 1988). 

8. 	 Investment Company Act Release No. 17681 (Aug. 17, 1990). 

9. 	 Note, however, that the Bank Leumi Letter was not limited to Bank 

Leumi's branches or agencies but extended to the entire bank. Note 

also the Israel Discount Bank Letter and the 1969 Bank Leumi Letter 

referred to above. 
Thomas Harman, Esq. -9-	 AprilS, 1993 

Section 2 (a) (5) of the 1940 Act. For example, the 

Commission has granted various orders under Section 6(c) of 

the 	1940 Act exempting foreign banks from the provisions of 

the 	1940 Act with respect to their issuance of equity 

securities in the United States based upon, among other 

things, representations by the banks that they would issue 

such securities only so long as they were supervised and 

examined by state and federal banking authorities in the 

United States. 10 The Commission staff also has issued at 

least three no-action letters to foreign banks permitting 

them, without registering as investment companies, to offer 

securities to employees of their United States branches, 

agencies or subsidiaries in reliance on one of the limited 

offering exemptions from registration under the 1933 Act 

provided by Rule 505 or 701 of that Act, which exemptions 

are 	not available to investment companies. 11 

More recently, in 1991 the Commission rescinded 

Rule 6c-9 and adopted new Rule 3a-6 under the 1940 Act, 

10. 	 E.g., Australia and New Zealand Banking Group Limited, Investment 

Company Act Release No. 16537 (Aug. 26, 1988) and Investment 

\ 	 Company Act Release No. 16510 (July 29, 1988). In proposing 

revisions to Rule 6c-9, however, to exempt equity offerings by 

foreign banks from the 1940 Act, the Commission determined not to 

make a United States "presence" a pre-condition to a foreign bank's 

reliance on the proposed exemptive rule. Investment Company Act 

Release No. 17682 (Aug. 17, 1990), text at note 17. 

11. 	 In the first of these letters, counsel for several requesting 

German banks did not argue that the foreign banks would be "banks" 

within the meaning of Section 2 (a) (5) of the 1940 Act, but rather 

argued that, in light of the limited nature of the offering to 

employees, the regulatory purposes of the 1940 Act would not be 

served by subjecting the foreign banks to regulation under the 1940 

Act. Shaw, Pittman, Potts & Trowbridge (pub. avail. Apr. 14, 

1988). In granting the no-action request, the Division noted "the 

unique facts, especially the nature of the offerings as part of 

employee stock purchase programs maintained by the Banks for the 

benefit of the employees of their Branches." 

In two subsequent no-action letters, counsel for the 

requesting foreign banks argued that the foreign banks would be 

"banks" within the meaning of Section 2(a) (5) (C) of the 1940 Act 

because of the nature and extent of their United States operations 

and of their regulation by United States banking authorities. 

Canadian Imperial Bank of Commerce (pub. avail. Jan. 18, 1989); 

Union Bank of Finland Ltd. (pub. avail. March 14, 1990). In 

addition, counsel argued that, even if the foreign banks were not 

deemed to be "banks" under Section 2(a) (5) (C) of the 1940 Act, the 

proposed offerings to employees would not violate the spirit or 

purposes of the 1940 Act. In granting these no-action requests, 

the Division did not articulate its reasoning behind its position 

and stated that it was not expressing any legal conclusions on the 

questions presented. 
Thomas Harman, Esq. -10-	 AprilS, 1993 

which excludes foreign banks (whether or not they have 

United States banking activities) from the definition of 

investment company for all purposes under the 1940 Act. The 

stated purpose of that rule was to define a group of foreign 

entities that would be banks under the Act if those entities 

were organized under the laws of the United States or of a 

statel2 and to place such entities that are selling 

securities in the United States "on an equal footing under 

the [1940] Act with banks in like circumstances organized 

under the laws of the United States.,,13 The Commission 

expressly declined to include foreign banks within the 

definition of bank in Section 2 (a) (5) of the 1940 Act, 

stating that: "The question of whether and under what 

conditions a foreign bank ... should be permitted to 

fulfill the important roles assigned to domestic banks . 

under the Act should be evaluated based upon the particular 

role involved."14 

We are unaware of any other instances in which the 

Commission or its staff has addressed the issue of whether a 

foreign bank doing business in the United States would be a 

"bank" within the meaning of Section 2 (a) (5) (C) of the 1940 

Act. We are also unaware of any instances in which the 

Commission or its staff has addressed this issue in the 

context of Section 18(f) of the 1940 Act. IS 

Analysis 

Statutory Recuirements 

Following the rationale of the Bank Leumi Letter, 

we believ~ that a Bank, depending on the nature and extent 

12. 	 Rule 3a-6 defines a foreign bank as a foreign banking institution 

that is (i) regulated as such by its home country's or 

subdivision's government or any agency thereof, (ii) engaged 

substantially in commercial bank activity, and (iii) not operated 

for the purpose of evading the 1940 Act. "Engaged substantially in 

commercial banking activity" is defined to mean engaging regularly 

in and deriving a substantial portion of its business from 

extending commercial and other credit, and accepting demand and 

other deposits, that are customary for commercial banks in the 

foreign bank's home country. 

13. 	 Investment Company Act Release No. 18379 (Oct. 25, 1991), text at 

notes 13-14. 

14. 	 rd. at note 9. 

15. 	 Note, however, the 1960 exemptive order issued to Income Fund of 

Boston, Inc. and discussed below. 
Thomas Harman, Esq. -11- AprilS, 1993 

of its banking business in the United States and its 

regulation under state and federal laws, should be able to 

satisfy the requirements of Section 2 (a) (5) (C) of the 1940 

Act and thereby to qualify as a "bank" for purposes of 

Section 18 (f) (1). In order to qualify as a "bank" under the 

definition set forth in Sect ion 2 (a) (5) (C) of the 1940 Act, 

a Bank would be required to satisfy the following four 

criteria set forth in that section: (i) the Bank must 

qualify as a banking institution, whether incorporated or 

not, doing business under the laws of any State or of the 

United States, (ii) a substantial portion of the Bank's 

business must consist of receiving deposits or exercising 

fiduciary powers similar to those permitted to national 

banks under the authority of the Comptroller of the 

Currency, (iii) the Bank must be supervised and examined by 

State or Federal authority having supervision over banks, 

and (iv) the Bank cannot be operated for the purpose of 

evading provisions of the 1940 Act. 

Doing Business under the Laws of Any State or the 

United States. Each Bank would engage in domestic and 

international banking services and would be regulated as a 

banking institution in its home country. In the United 

States, the Bank would maintain and operate one or more 

state or federal-licensed branches or federal-licensed 

agencies in the United States and thereby conduct the 

business of banking under the laws of those states or of the 

United States, as the case may be. 

Receiving Deposits or Exercising Fiduciary Powers. 

Since each Bank would be a commercial bank, it would be 

engaged regularly in, and derive a substantial portion of 

its business from, extending commercial credit and accepting 

demand and other types of deposits within the meaning of 

Rule 3a-6 under the Act. As the Commission recognized when 

adopting Rule 3a-6, such activities constitute the business 

of a bank within the meaning of Section 2 (a) (5) of the 1940 

Act. In addition, the Bank, through its Branch or Agency in 

the United States would receive deposits or exercise 

fiduciary powers similar to those permitted to national 

banks. 

Supervision and Examination by State or Federal 

Banking Authority. As discussed above, a Bank's United 

States banking activities would be supervised and examined 

by federal, or state and federal, banking authorities and 

would be subject to state or federal banking regulation that 

is substantially equivalent to that applied to banks 
Thomas Harman, Esq. -12- April 5, 1993 

chartered in those states or to national banks, as the case 

may be. As discussed at note one, supra, the applicable 

state or federal licensing authority would have the power 

pursuant to its licensing and reporting powers to request 

and obtain information concerning the condition of the 

entire Bank in proper circumstances. In addition, pursuant 

to the International Banking Act, the Bank would be subject 

to various provisions of the BHCA, including limitations on 

its direct and indirect non-banking activities in the United 

States, and would be required to file with the Board annual 

and other reports governing the Bank's overall financial 

condition. 

Not Ooerated for Purposes Of Evading the 1940 Act. 

Neither the Bank nor its Branches or Agencies would be 

operated for the purpose of evading the 1940 Act. 

Based on the above, each Bank would have United 

States banking operations that would qualify as a "bank" for 

purposes of Section 2 (a) (5) (C) of the 1940 Act as set forth 

in the 1990 Release. Moreover, following the rationale of 

the Bank Leumi Letter, the language of the statute is broad 

enough to conclude that the Bank itself, not just its United 

States banking operations, would be a "bank" under Section 

2 (a) (5) (C) of the 1940 Act since, by acting through its 

branches and agencies in the United States, the Bank does 

business under the laws of various states and is supervised 

and examined by state and federal banking authorities within 

the meaning of Section 2(a) (5) (C) of the 1940 Act. 

U~der the foregoing analysis, the extent to which 

United Sta~es federal and state regulation extends beyond 

the Bank'£ activities in the United States to reach 

activities outside the United States is not relevant. While 

we believe that there is a valid basis for arguing that the 

regulation of the Bank's United States activities alone is 

sufficient to constitute the Bank a bank for purposes of 

Section 18 (f) (1) of the 1940 Act, we note that United States 

regulation would extend to activities and operations of the 

Bank beyond those of its Branch or Agency. Both of these 

approaches appear to have been considered in the Bank Leumi 

Letter. 

As with Bank Leumi, the Bank would be a commercial 

bank organized under the laws of a foreign jurisdiction, 

would be subject to regulation as a bank under the laws of 

its home country, and would conduct banking activities 

(including deposit-taking or fiduciary activities) under the 
Thomas Harman, Esq. -13- AprilS, 1993 

laws of the United States, or a state thereof, through a 

branch or agency in the United States. There are only 

limited distinctions between the Bank Leumi Letter and the 

Bank's situation. Although Bank Leumi represented that it 

had a New York-chartered trust company subsidiary that 

subjected both the domestic and overseas operations of Bank 

Leumi, as an affiliate, to the power of examination by New 

York State banking authorities, a Bank might not have a bank 

subsidiary. A Bank, therefore, might not be expressly 

subject to the same power of examination under New York law 

that exists in relation to such a subsidiary but, as 

discussed above, would be subject to investigation by state 

or federal banking authorities in connection with the 

licensing and reporting powers of those authorities. In 

addition, a Bank, unlike Bank Leumi, might not be subject to 

the reporting requirements of the Securities Exchange Act of 

1934 (the "1934 Act") . 

Although it is unclear to what extent these factors 

may have been significant to the staff's position at the 

time of the Bank Leumi Letter, we do not believe that the 

differences between a Bank today and Bank Leumi in 1976 

should be viewed as significant in light of the authority 

over the Bank retained by the relevant state or federal 

licensing authority. Moreover, since the adoption of the 

International Banking Act in 1978, a Bank with either a 

state or federal licensed Branch or Agency would be subject 

to the same degree of federal banking regulation as Bank 

Leumi was in 1976 by virtue of its trust company subsidiary, 

which as described above includes the authority of federal 

banking authorities to investigate the condition of the 

entire Bank and to require both publicly-available and 

confidential reports concerning the Bank. 

Policy Considerations 

Note also that the Bank Leumi Letter was issued in 

connection with the issuance of securities in the United 

States without Bank Leumi being required to register as an 

investment company while the current proposed transactions 

relate to whether a registered investment company may borrow 

from a Bank without violating Section 18(f) of the 1940 Act. 

We believe that the policies underlying Section 18 (f) (1) of 

the 1940 Act do not require the Commission to interpret the 

term "bank" as used in Section 18 (f) (1) of the 1940 Act as 

excluding a Bank and that, even if a Bank were not deemed a 

"bank" within the meaning of Section 2 (a) (5) of the 1940 
Thomas Harman, Esq. -14- AprilS, 1993 

Act, permitting the borrowings from a Bank as proposed would 

not violate the policies of Section IS(f) (1). 

Section IS(f) was enacted in response to a lack of 

regulation which permitted investment companies (i) to 

establish complex capital structures in which the control 

exercised by junior classes of securities was diluted and 

their investment risk increased and (ii) to engage in 

speculative leveraged investing. Section IS(f) (1) addressed 

both practices by limiting the ability of open-end 

investment companies to issue senior securities and 

restricting investment companies from borrowing other than 

from banks and in compliance with a 300 per centum asset 

coverage requirement. 

In enacting Section 18(f), Congress sought to 

prevent investment companies from engaging in, or acting as 

conduits for investors to engage in, the same types of 

speculative practices regulated by the Board's Regulations T 

and U, both of which were adopted under the 1934 Act prior 

to the enactment of the 1940 Act. Regulation T was adopted 

to "regulate extensions of credit by and to brokers and 

dealers" and to "impose . . . initial margin requirements 

and payment rules on securities transactions".16 

Regulation U was adopted to "impose credit restrictions upon 

'banks' . that extend credit for the purpose of buying 

or carrying margin stock" ("purpose loan") .17 

When the 1940 Act was enacted, borrowings by an 

entity (other than a broker-dealer subject to Regulation T) 

from an entity other than a domestic bank (or broker-dealer) 

were not subject to any margin restrictions. Since 1940, 

however, the Board has adopted Regulations G and X. 

Regulation G imposes margin restrictions in connection with 

"purpose" loans extended by certain lenders that are not 

domestic banks or broker-dealers. Regulation X applies the 

requirements of Regulation G to loans obtained abroad from a 

foreign lender that is not subject to Regulations G, T or U. 

As a result of the promulgation of Regulation G, a 

purpose loan to a United States investment company by a nonbank, non-broker-dealer domestic lender is subject to 

essentially the same margin restrictions as a similar loan 

from a domestic bank subject to Regulation U. As a result 

16. 12 C.F.R. 220.1(a). 

17. 12 C.F.R. 221.1(a). 
Thomas Harman, Esq. -15-	 AprilS, 1993 

of the promulgation of Regulation X, a purpose borrowing by 

a United States investment company from a foreign lender is 

subject to the same requirements as a purpose borrowing from 

a Regulation G lender. 

In Section 18(f), Congress established two levels 

of protection against excessive speculation by investment 

companies. First, by restricting investment companies to 

borrowing from banks, Congress ensured that investment 

companies could borrow for the purpose of purchasing margin 

stock only in compliance with Regulation U. Second, by 

imposing an asset coverage requirement, Congress limited the 

overall amount of leverage an investment company could use 

in borrowing for any purpose. 

Treating a Bank as a "bank" for purposes of Section 

18 (f) (1) would preserve the protections against securities 

speculation on margin that Regulation U provides in the case 

of loans by domestic banks and, accordingly, would be 

consistent with the bi-Ievel protection scheme established 

by Congress in that Section. Because the term "bank" in 

Regulation U utilizes the 1934 Act definition of bank, which 

is virtually identical to the 1940 Act definition, an 

argument can be made that a foreign bank with a branch or 

agency in the United States should be deemed a bank subject 

to Regulation U in connection with a "purpose loan" made in 

the United States. If the 1934 Act definition of bank were 

not construed sufficiently broadly to reach such a bank, 

however, a "purpose loan" from a foreign bank to an 

investment company would still be subject to substantially 

the same restrictions as those imposed by Regulation U as a 

result of the application to the loan of Regulations G and 

X.18 

In addition, the source of an investment company's 

borrowing, whether a United States bank, a foreign bank or a 

non-bank, would not affect the application of the 300 per 

centum asset coverage test or diminish the protections it 

provides against speculative activities. In this regard, to 

18. 	 "Regulation X, adopted November 1, 1971, provides that, if credit 

is obtained abroad from a foreign lender not subject to Regulations 

G, T, or U, then the borrower's loan is required to conform with 

Regulation G as though the lender were subject to that Regulation." 

Staff Op. of November 1, 1973, FRRS Securities Credit Transaction 

Handbook, 5-989. Regulation G, adopted March 11, 1968, imposes 

margin requirements on persons not covered by Regulations T and U 

who extend credit in connection with the purchase or carrying of 

margin stock. 
Thomas Harman, Esq. -16- AprilS, 1993 

the extent that Section 18(f) was designed to protect debt 

holders of an investment company from speculative practices 

by the investment company, a Bank making a loan to a Fund 

should require no greater protection under the 1940 Act than 

should a domestic bank. 

Moreover, in permitting foreign banks with United 

States branches or agencies to be treated as banks for 

purposes of issuing and selling securities in the United 

States, as in the Bank Leumi Letter, the Commission staff 

seems to have made a more difficult policy judgment than 

that required to permit similar entities to be treated as 

banks for purposes of Section 18(f) (1) of the 1940 Act. 

Purchasers of securities are subject to the risk of default 

by the issuer, in the case of debt securities, or the risk 

of the issuer's insolvency in the case of preferred and 

equity securities. A borrower, on the other hand, is 

subject to little, if any, risk growing out of the lender's 

condition or activities. 

Upon loaning funds to a borrower, a lender 

completes his obligations in connection with the loan while 

the obligation of performance (i.e., the repayment of the 

loan) rests with the borrower. The lender assumes the risk 

of nonperformance by the borrower and may be required to 

enforce his rights under the loan agreement. These rights 

typically include the right to accelerate the repayment of 

the loan upon the occurrence of specified events of default. 

In the event of nonpayment by the borrower, it is the lender 

that is required to take action against the borrower for the 

return of funds. 

In the context of a loan by a Bank, the Fund would 

not be in the position of having to reach the Bank's assets. 

Rather it is the Bank that would be in the position of 

having to enforce its rights against the Fund. Since the 

Fund would be a United States person and the loan agreement 

would be governed by United States law, the terms of the 

loan agreement should be given effect in any United States 

court to the same extent as the terms of a loan from a 

domestic bank. By its terms, the loan would be repayable 

only upon maturity or upon an event of default by the Fund. 

Accordingly, absent a default by the Fund, a Bank could not 

expect to call the loan prior to maturity and expect to 

obtain a judgment in a United States court against the Fund 

for the Fund's failure to repay the loan at the time of the 

call. 
Thomas Harman, Esq. -17-	 AprilS, 1993 

We also believe the risk is minimal that, absent a 

breach by the Fund, a Bank seeking to call the loan in clear 

violation of the terms of the loan agreement would be able 

to obtain and execute a foreign judgment against the Fund. 19 

New York, which is the jurisdiction in which the investment 

activities of each Fund are centered, and at least 21 other 

states have adopted the Uniform Foreign Money-Judgments 

Recognition Act (the "Uniform Act"), which governs the 

circumstances under which foreign country judgments are to 

be given recognition. In general, a foreign country 

judgment is not given recognition under the Uniform Act if 

(i) the judgment was rendered under a system which does not 

provide impartial tribunals or procedures compatible with 

the requirements of due process of law or (ii) the foreign 

court did not have personal jurisdiction over the subject 

matter. In addition, the Uniform Act permits a court in its 

discretion, to refuse to recognize a foreign judgment in a 

number of other circumstances. 

In our view, the Uniform Act would not require a 

New York court to recognize a foreign judgment under the 

circumstances described above. First, we believe it would 

be self-evident, and could readily be demonstrated to a New 

York court, that a foreign court that rendered a judgment 

against a Fund for breach of contract for the Fund's refusal 

to comply with a Bank's acceleration demand, in direct 

contradiction of the express terms of the agreement under 

which the loan sought to be accelerated was made, was not an 

impartial tribunal. 

Second, we do not believe it is likely that the 

foreign court would be considered to have personal 

jurisdiction over the Fund. None of the bases of personal 

jurisdiction expressly recognized by the Uniform Act would 

19. 	 We are unable to provide a legal analysis concerning the 

prospective actions of foreign governments and their court systems 

in each of the foreign countries in which a Bank might be 

organized. However, even if a Bank, through the intervention of 

its government or otherwise, were able to obtain a judgment in a 

court in its country for breach of the loan agreement in 

contradiction of the express terms of the loan agreement and could 

locate and seize any assets that might be maintained by the Fund in 

the country in which the Bank was located, it is unlikely such 

assets would be sufficient to satisfy a judgment in the amount of 

the outstanding loan. Accordingly, the Bank likely would have to 

commence an action against the Fund in the United States in order 

to enforce the judgment. 
Thomas Harman, Esq. -18-	 April 5, 1993 

apply to the Fund. 20 Although the Uniform Act permits a 

court to recognize other bases of personal jurisdiction, 

such as whether the Fund has a sufficient presence in the 

foreign country or has committed the types of acts specified 

in New York's "long-arm" statute,21 we believe it unlikely 

that the instant circumstances would be found to constitute 

a valid basis of personal jurisdiction under New York law 

since the loan agreement would be negotiated and executed in 

New York and the Fund's main business activities -- the 

investment in securities subject to the investment manager's 

discretion -- would not be conducted in the foreign country. 

We further believe that the risk of a foreign 

government, or a Bank acting under express or implied 

authority of its governme~t, simply seizing the assets of a 

Fund in a foreign country is small. First, it is highly 

unlikely that a Fund would maintain significant assets in, 

or borrow from a Bank organized under the laws of, a 

jurisdiction whose government was likely to seize assets 

without justification. Second, as the staff is aware, 

pursuant to Rule 17f-5 adopted under the 1940 Act, the 

directors of a Fund are required to determine that 

maintaining the Fund's assets in a particular country is in 

the best interests of the Fund and its shareholders. That 

requirement insures that the level of expropriatory risk 

involved in leaving Fund assets with custodians in a foreign 

jurisdiction is reviewed. Accordingly, in light of the 

review associated with a Fund's Rule 17f-5 determination, 

whether made by the Fund's directors (as is required 

currently) or by some other person (as may be required if 

the Division's recommendations contained at pages 270 and 

271 of its May 1992 report are adopted), it is unlikely that 

the Fund would have substa~tial assets custodied in 

jurisdictions that would permit unjustified seizures of the 

Fund's assets. 

Moreover, because the Bank would have one or more 

Branches or Agencies with substantial assets in the United 

20. 	 These include personal service in the foreign state, voluntary 

appearance in the foreign proceedings, prior agreement to submit to 

foreign jurisdiction, being domiciled or incorporated in the 

foreign jurisdiction, and having a business office in the foreign 

jurisdiction out of which the cause of action arose. 

21. 	 New York's "long-arm" statute provides a basis for personal 

jurisdiction over a defendant who in person or through an agent 

does business or possesses real property in the state or commits a 

tortious act in the state. 
Thomas Harman, Esq. -19-	 AprilS, 1993 

States, a Fund could commence an action against the Bank in 

the United States for breach of contract and conversion of 

the Fund's assets if the Fund's assets custodied in a 

foreign country were seized in violation of the loan 

agreement. 22 

For the above reasons, the Fund's repayment 

obligation (and, therefore, Fund's assets) should not be 

subject to, or dependent upon, the financial condition or 

activities of the Bank and there should be no greater risk 

to the Fund in borrowing from a foreign bank than from a 

domestic bank. Accordingly, as long as a borrowing complies 

with the asset coverage requirements of Section 18 (f) (1), 

there appears to be substantially less of a policy basis for 

precluding borrowing from foreign banks with United States 

branches or agencies than there would have been for 

restricting sales in the United States of securities issued 

by those entities. 

A further indication that the policies underlying 

Section 18 (f) (1) of the 1940 Act should not be violated if 

the Bank were deemed to be a "bank" for purposes of Section 

18(f) of the 1940 Act is the Commission's grant in 1960 of 

an order under Section 6(c) of the 1940 Act exempting an 

open-end investment company registered under the 1940 Act 

("Applicant") from the requirements of Section 18 (f) (1) of 

the 1940 Act to the extent necessary to permit the applicant 

to borrow from foreign banks provided such borrowings were 

consistent with'the Applicant's borrowing policy, were 

otherwise consistent with the 1940 Act, and could be 

obtained on more favorable terms than domestic banks (the 

"18 (f) (1) Order") .23 

In connection with its application, Applicant 

argued that an exception to Section 18 (f) (1) was made to 

permit borrowings to be made from a bank "apparently for the 

reason that the practical difficulties in maintaining 

adequate asset coverage for a security senior to a fully 

redeemable common stock would not raise problems adverse to 

the interest of investors in the case of bank borrowings.,,24 

22. 	 The Fund might also have a cause of action against any global 

custodian for which the Bank was acting as subcustodian when it 

seized the assets. 

23. 	 Income Fund of Boston, Inc., Investment Company Act Release No. 

3043 (June 10, 1960), 

24. 	 Income Fund of Boston, Inc., Investment Company Act Release No. 

3037 (May 26, 1960), 
Thomas Harman, Esq. -20-	 AprilS, 1993 

Applicant stated that there appeared to be no reason to 

distinguish between banks and foreign banking firms in 

implementing this policy. 

Consistent with the 18(f) (1) Order, borrowings from 

a Bank would be made only in arm's length transactions when 

they were deemed by the Fund to be in the best interests of 

the Fund and its shareholders and otherwise consistent with 

the 1940 Act and the Fund's borrowing policies. As with 

other bank borrowings, loans by a Bank could be prepaid by 

the Fund when necessary to satisfy the asset coverage 

requirements of Section 18 (f) (1). Under these 

circumstances, as in the 18 (f) (1) Order, there appears to be 

no reason to distinguish between borrowings from a domestic 

bank and borrowings from a Bank. 

The treatment of a Bank as a bank for purposes of 

Section 18 (f) (1) of the 1940 Act is also consistent with the 

United States national policy of supporting competitive 

equality between domestic and foreign banks 25 and with other 

actions taken by the Commission and its staff to provide 

equitable treatment for foreign banks under the 1940 Act in 

light of the increasing internationalization of today's 

economy. 

Conclusion 

Based on the foregoing, we believe that a Bank 

should be treated as a bank for purposes of Section 18 (f) (1) 

of the 1940 Act and that the Fund should be permitted to 

borrow from a Bank pursuant to Section 18 (f) (1) as proposed 

above. As discussed above, we believe the language of 

Section 2 (a) (5) (C) is broad enough to include a Bank by 

virtue of its doing business in the United States through 

its Branches or Agencies. Moreover, even if a Bank is not 

deemed a "bank" within the meaning of Section 2(a) (5) (C), we 

believe the treatment of a Bank as a bank for purposes of 

Section 18 (f) (1) would not conflict with any policies under 

the 1940 Act. Lastly, the Adviser to the Fund believes that 

the ability to borrow from the Banks would permit increased 

competition among lenders to the Fund and would result in 

potential savings and other benefits to the Fund and its 

shareholders. 

25. 	 This policy was recognized by Congress, for example, when enacting 

the International Banking Act. S. Rep. No. 1073, 95th Cong., 2d 

Sess. 2 (1978); H.R. Rep. No. 910, 95th Cong., 2d Sess. 5-7 (1978). 
Thomas Harman, Esq. -21- AprilS, 1993 

Accordingly, we request that the Division confirm 

that it would not recommend enforcement action against the 

Adviser, the Fund or any Bank if the Fund were to borrow 

from a Bank pursuant to Section 18 (f) (1) of the 1940 Act as 

described herein. If it appears that the staff is unable to 

concur with our views expressed herein, we would appreciate 

the opportunity to discuss the matter with you further prior 

to the issuance of a response to our request. If you have 

any further questions concerning our request, please contact 

me or Janet R. Zimmer at (202) 737-8833. 

Jmthony c. J. Nuland 

VIA PJrnD DELIVERY 

002!>0182 .... H2