63568 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

1Section 2(a)(48) generally defines a BDC to be

any closed-end investment company that operates

for the purpose of making investments in securities

described in sections 55(a) (1) through (3) of the Act

and makes available significant managerial

assistance with respect to the issuers of such

securities. Such issuers are small companies whose

securities typically are illiquid.

6. Final FY 1999 Appropriation Request.

7. Capital Investments.

a. Radio Frequency Identification

(RFI) Project.

b. Boise, Idaho, Processing &

Distribution Center.

c. Sioux Falls, South Dakota,

Processing & Distribution Center.

d. Church Street Station, New York,

Renovation Project, Phase 2.

e. Advanced Facer Canceler Systems.

f. Barcode Readers for the Flat Sorting

Machine 1000.

8. Briefing on the 1998 Stamp Program.

9. Report on the Pacific Area and Los

Angeles Performance Cluster.

10. Tentative Agenda for the January 5–

6, 1998, meeting in Washington,

D.C.

CONTACT PERSON FOR MORE INFORMATION:

Thomas J. Koerber, Secretary of the

Board, U.S. Postal Service, 475 L’Enfant

Plaza, S.W., Washington, D.C. 20260–

1000. Telephone (202) 268–4800.

Thomas J. Koerber,

Secretary.

[FR Doc. 97–31597 Filed 11–26–97; 2:43 pm]

BILLING CODE 7710–12–M

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–22902; 812–10870]

Allied Capital Corporation, et al.;

Notice of Application

November 21, 1997.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of application for

exemption under sections 6(c),

12(d)(1)(J), 17(b), 57(c), and 57(i) of the

Investment Company Act of 1940 (the

‘‘Act’’) and rule 17d–1 under the Act,

and under section 12(h) of the Securities

Exchange Act of 1934 (the ‘‘Exchange

Act’’).

Summary of Application: The order

would permit two business

development companies (‘‘BDCs’’), a

real estate investment trust, and the

investment adviser to these entities, to

merge into a third BDC. In addition, the

order would permit the surviving BDC

and its wholly-owned subsidiaries to

file reports on a consolidated basis and

to engage in certain transactions that

would otherwise be permitted if the

BDC and its subsidiaries were one

company. The order also would permit

asset coverage requirements for senior

securities issued by the BDC and its

BDC subsidiaries to apply on a

consolidated basis. Further, the order

would permit certain joint transactions

between two of the BDC’s subsidiaries

and two private venture capital

partnerships. The requested order

would supersede any exemption granted

to any applicant from provisions of the

Act and the Exchange Act, effective as

of the date of the merger.

Applicants: Allied Capital

Corporation (‘‘Allied I’’), Allied

Investment Corporation (‘‘Investment

I’’), Allied Capital Financial Corporation

(‘‘Financial I’’), Allied Capital

Corporation II (‘‘Allied II’’), Allied

Investment Corporation II (‘‘Investment

II’’), Allied Financial Corporation II

(‘‘Financial II’’), Allied Capital Lending

Corporation (‘‘Allied Lending’’), Allied

Capital SBLC Corporation (‘‘Allied

SBLC’’), Allied Capital Advisers, Inc.

(‘‘Advisers’’), and Allied Capital

Commercial Corporation (‘‘Allied

Commercial’’).

FILING DATE: The application was filed

on November 21, 1997.

Hearing or Notification of Hearing: An

order granting the application will be

issued unless the SEC orders a hearing.

Interested persons may request a

hearing by writing to the SEC’s

Secretary and serving applicants with a

copy of the request, personally or by

mail. Hearing requests should be

received by the SEC by 5:30 p.m. on

December 15, 1997, 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 SEC’s Secretary.

ADDRESSES: Secretary, SEC, 450 5th

Street, NW., Washington, DC 20549.

Applicants, 1666 K Street, NW., 9th

Floor, Washington, DC 20006–2803.

FOR FURTHER INFORMATION CONTACT:

Elaine M. Boggs, Senior Counsel, at

(202) 942–0572, or Mercer E. Bullard,

Branch Chief, at (202) 942–0564 (Office

of Investment Company Regulation,

Division of Investment Management).

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application

may be obtained for a fee at the SEC’s

Public Reference Branch, 450 5th Street,

NW., Washington, DC 20549 (telephone

(202) 942–8090).

Applicants’ Representations

1. Applicants are all Maryland

corporations. Stock of Allied I, Allied II,

Allied Lending, Allied Commercial, and

Advisers (the ‘‘Participating

Companies’’) trades over-the-counter on

the Nasdaq Stock Market’s National

Market. Allied I, Allied II, and Allied

Lending have each elected to be

regulated as a BDC, as defined under

section 2(a)(48) of the Act.1 Allied

Development Corporation

(‘‘Development’’), Investment I, and

Financial I are wholly-owned

subsidiaries of Allied I and Investment

II and Financial II are wholly-owned

subsidiaries of Allied II. Development,

Investment I and II, and Financial I and

II are registered under the Act as closedend management investment

companies. Development is currently

inactive. Investment I and II are licensed

small business investment companies

(‘‘SBICs’’) under the Small Business

Investment Act of 1958 (the ‘‘1958

Act’’). Financial I and II are specialized

small business investment companies

(‘‘SSBICs’’) under the 1958 Act. Allied

Lending participates in the Small

Business Administration’s (‘‘SBA’’)

general business loan program pursuant

to section 7(a) of the Small Business

Act. Allied SBLC and Allied Capital

Credit Corporation (‘‘Allied Credit’’) are

wholly-owned subsidiaries of Allied

Lending. Allied SBLC is a BDC and a

small business lending company

(‘‘SBLC’’) participating in the general

business loan program pursuant to

section 7(a) of the Small Business Act.

Allied Credit is currently inactive.

Allied Commercial is a real estate

investment trust (‘‘REIT’’) with three

subsidiaries. Advisers is registered as an

investment adviser under the

Investment Advisers Act of 1940 (the

‘‘Advisers Act’’) and serves as the

investment adviser to the other

Participating Companies. Advisers has

one wholly-owned subsidiary

established for the purpose of holding

an office building which it plans to sell.

2. Applicants have proposed a

reorganization in which Allied I, Allied

II, Allied Commercial, and Advisers

(collectively, the ‘‘Acquired

Companies’’) will merge into Allied

Lending and become ‘‘ACC’’ (the

‘‘Consolidation’’). ACC will be an

adviser registered under the Advisers

Act and will operate as an internally

managed BDC. Investment I and

Financial I will merge with Investment

II and Financial II, with Investment I

and Financial I as the surviving entities

(respectively, the ‘‘Surviving SBIC

Subsidiary’’ and the ‘‘Surviving SSBIC

Subsidiary’’). As part of the

Consolidation, the SBLC Subsidiary will
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63569

become the ‘‘Surviving SBLC

Subsidiary.’’ Prior to the Consolidation,

Development will be merged with

Allied I and Allied Credit will be

merged into Allied Lending. In addition,

prior to the Consolidation, Allied

Commercial’s three subsidiaries will be

merged into ‘‘Equity Holdings LLC’’ and

‘‘Acceptance LLC,’’ Allied Lending will

establish a REIT subsidiary that will

become a subsidiary of ACC following

the Consolidation (the ‘‘Surviving REIT

Subsidiary’’), and Advisers’ whollyowned subsidiary will be liquidated or

merged into ‘‘Property LLC,’’ which will

become a subsidiary of ACC following

the Consolidation.

3. Following the Consolidation, ACC

will have seven wholly-owned

subsidiaries (the ‘‘Surviving

Subsidiaries’’): Equity Holdings LLC,

Acceptance LLC, and Property LLC, and

the Surviving SBLC, SBIC, SSBIC, and

REIT Subsidiaries. Following the

Consolidation, Surviving SBIC and

SSBIC Subsidiaries will elect BDC status

and will no longer operate as registered

investment companies. Therefore, the

Surviving SBIC, SSBIC, and SBLC

Subsidiaries will all be BDCs (the

‘‘Surviving BDC Subsidiaries’’). The

Surviving REIT Subsidiary, Equity

Holdings LLC, Acceptance LLC, and

Property LLC will not be BDCs or

registered investment companies. In

addition, ACC may in the future create

additional wholly-owned subsidiaries

(the ‘‘Future Subsidiaries’’) which in

some cases may be BDCs (the ‘‘Future

BDC Subsidiaries’’).

4. The Consolidation will be effected

pursuant to a merger agreement dated

August 14, 1997, and amended and

restated on September 19, 1997 (the

‘‘Merger Agreement’’). The merger is

anticipated to occur on December 31,

1997 (the ‘‘Effective Date’’). On the

Effective Date, each share of common

stock of the Acquired Companies will be

converted into shares of Allied Lending

in the following amounts: (a) Each share

of Allied I will be converted into 1.07

shares of Allied Lending; (b) each share

of Allied II will be converted into 1.40

shares of Allied Lending; (c) each share

of Allied Commercial will be converted

into 1.60 shares of Allied Lending; and

(d) each share of Advisers will be

converted into 0.31 shares of Allied

Lending (collectively, the ‘‘Exchange

Ratios’’). The Exchange Ratios were

based on the relative market prices of

the Participating Companies’ stock, as

discussed below. The exchange agent

for the Consolidation will request that,

as soon as possible after the Effective

Date, shareholders of the Acquired

Companies surrender their respective

shares. Upon the surrender, the

exchange agent will mail the

shareholders a confirmation of

ownership of ACC common stock.

Shares of ACC common stock will be

issued in book entry form.

5. The Consolidation will be

conditioned on each Participating

Company receiving a tax opinion from

counsel stating that the Consolidation

will be a tax-free event under the

Internal Revenue Code of 1986, as

amended (the ‘‘Code’’). Each

Participating Company will be

responsible for a pro rata portion of

expenses related to the Consolidation,

based on each Company’s total market

capitalization as of August 13, 1997,

except that each Company will pay the

fees and expenses of the financial

adviser it engaged to assist it with the

Consolidation. Estimated total expenses

in connection with the Consolidation

are $672,000 for Allied I, $907,000 for

Allied II, and $458,000 for Allied

Lending. In addition, each of Allied I,

Allied II, and Allied Lending have paid

$120,000 for the services of its

respective independent financial

adviser.

6. In June 1997, Morgan Stanley & Co.

Incorporated (‘‘Morgan Stanley’’) was

retained by each of the Participating

Companies as the financial adviser to

provide advice and assistance with

respect to defining objectives,

performing valuation analysis,

structuring and planning the

Consolidation. In addition, each

Participating Company retained an

independent financial adviser to render

an opinion as to the fairness of the

Exchange Ratios. Each Participating

Company also obtained independent

legal counsel to provide that Company’s

board of directors with legal advice

concerning the directors’ duties with

respect to the consideration of the

Consolidation.

7. In determining the relative value of

each Participating Company, Morgan

Stanley approached the Consolidation

as a ‘‘merger of equals.’’ In preparing its

analysis, Morgan Stanley, among other

things, reviewed the strategic rationale

for the Consolidation; conducted due

diligence sessions with the management

of Advisers; developed an independent

valuation model for each of the

Participating Companies; developed

stand-alone valuations of each of the

Participating Companies using, among

other things, market valuation

parameters, discounted cash flow

analysis of projected cash flows and

analysis of each Participating

Company’s contribution to ACC; and

analyzed the pro forma impact of the

Consolidation on each Participating

Company and its stockholders in terms

of contributable earnings and market

value.

8. Morgan Stanley also compared the

historical price movement of the

Participating Companies’ stock from

June 22, 1994 through July 18, 1997.

Morgan Stanley advised the

management of Advisers and the board

of each of the Participating Companies

that the thirty-day period from June 16,

1997 to July 15, 1997 was the most

appropriate period over which to

measure market value for purposes of

developing the Exchange Ratios for each

of the Participating Companies. Morgan

Stanley considered that during this

period, no unusual events had occurred

that could have influenced the

movement of the Participating

Companies’ stock prices. In addition,

July 15, 1997 was chosen as the ending

date because on July 16, 1997

management of Advisers began to

contact the independent financial

advisers, which increased the number of

persons with knowledge of the proposed

transaction. The market prices for the

stock of the Participating Companies

from June 16, 1997 to July 15, 1997

formed the basis for Morgan Stanley’s

recommendation on valuation.

9. During the period beginning on July

30 and ending on August 5, 1997, each

of the Participating Companies held its

regular quarterly board of directors

meeting, including a session devoted

exclusively to the Consolidation. At

those meetings, the management of

Advisers provided the reasons for the

Consolidation and the business plan for

ACC. In addition, Morgan Stanley gave

its report on its valuation analysis.

Following the Morgan Stanley

presentation, the respective

Participating Company’s independent

financial adviser indicated that, based

on available information provided

through that date and subject to further

analyses and review, the applicable

Exchange Ratio appeared to be fair to

the shareholders from a financial point

of view. Further, the respective

Participating Company’s independent

legal counsel made a presentation

concerning the duties of the board of

directors to the applicable Participating

Company and its shareholders in

connection with the consideration of the

Consolidation. No formal action on the

merger proposal was sought or taken at

these board meetings.

10. Between August 11 and 14, 1997,

each Participating Company’s board of

directors met again to consider and

approve the Merger Agreement. Each

meeting was attended by the respective

independent financial adviser and legal

counsel for that Participating Company.

The independent financial advisers
63570 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

presented their opinions that the

Exchange Ratio was fair, from a

financial point of view, to the

shareholders of the respective

Participating Company. After

considering the presentation of the

respective independent financial

adviser and after discussion, each of the

boards, including the directors who are

not interested persons of the Company

under section 2(a)(19) of the Act or

officers of or otherwise affiliated with

any of the other Participating

Companies (‘‘Independent Directors’’),

unanimously approved its Participating

Company’s participation in the

Consolidation and agreed to the terms of

the Merger Agreement.

11. The boards of directors

considered, among other things: (a)

Information concerning the financial

performance and condition, business

operations, capital levels, asset quality

and prospects of each Participating

Company, and its projected future

financial performance as a separate

entity and on a combined basis; (b)

current industry, economic, and market

conditions and trends; (c) the

importance of economies of scale to

competing effectively; (d) the

Consolidation’s structure as a tax-free

merger of equals; (e) the possibility that

achieving cost savings and operating

efficiencies as a result of the

Consolidation might not be the same for

each Participating Company; (f) the

terms and conditions of the Merger

Agreement; (g) the current and historical

market prices of the common stock of

each Participating Company; (h) the

opinions of the respective independent

financial adviser as to the fairness, from

a financial point of view, of the

respective Exchange Ratios; (i) the

portfolio holdings, liabilities,

management, strategic objectives,

competitive positions, and prospects of

the respective Participating Company;

and (j) the impact of the Consolidation

on the shareholders and portfolios of

each Participating Company and on the

employees of Advisers.

12. A proxy statement was filed with

the Commission on September 26, 1997.

Proxy statements were mailed to

shareholders on October 14, 1997, and

shareholder meetings are scheduled for

November 26, 1997. At least two-thirds

of the voting shares of each Participating

Company will be required to approve

the Consolidation.

13. Applicants request an order to

permit the Consolidation. In addition,

applicants request an order to permit

ACC and its Surviving and Future BDC

Subsidiaries (the ‘‘BDC Subsidiaries’’) to

file reports on a consolidated basis and

to engage in certain transactions that

would otherwise be permitted if ACC

and its BDC Subsidiaries were one

company. The order also would permit

modified asset coverage requirements

for ACC and its BDC Subsidiaries on a

consolidated basis and for the Surviving

SBLC Subsidiary individually. Further,

the order would permit certain joint

transactions between the Surviving

SBIC and SSBIC Subsidiaries and two

private venture capital partnerships.

14. ACC will own all of the

outstanding common voting stock or

membership interests of the Surviving

and Future Subsidiaries (the

‘‘Subsidiaries’’). In addition, the

following types of transactions may

occur among ACC and the Subsidiaries:

(a) ACC may make additional

investments in a Subsidiary, as a

contribution to capital, purchase of

additional stock, or loan.

(b) A Subsidiary may pay dividends

and make other distributions to ACC.

Each BDC Subsidiary and the Surviving

REIT Subsidiary intend to qualify as a

regulated investment company and a

real estate investment trust,

respectively, pursuant to Subchapter M

of the Code. As such, each BDC

Subsidiary and the Surviving REIT

Subsidiary will be required to pay to

ACC substantially all of its income in

the form of a dividend in order not to

incur any Federal income tax.

(c) A Subsidiary may make loans or

other advances to ACC or another

Subsidiary. None of the Subsidiaries

will purchase or otherwise acquire any

of the capital stock of ACC.

(d) One or more of ACC and the

Subsidiaries may invest in the securities

of the same unaffiliated issuer, together

or at different times, and deal with such

investments separately or jointly. In

addition, ACC and the BDC Subsidiaries

may engage in purchase or sale

transactions with controlled portfolio

affiliates of one another.

(e) ACC may purchase all or some of

a portfolio investment held by a

Subsidiary. Similarly, a Subsidiary may

purchase all or some of a portfolio

investment held by ACC or another

Subsidiary.

(f) One or more of ACC and the

Subsidiaries may enter into a financial

arrangement with a third-party financial

institution in which one or more of ACC

and the Subsidiaries are co-borrowers or

guarantors.

Applicants’ Legal Analysis

A. The Consolidation

1. Section 57(a) generally prohibits,

with certain exceptions, sales or

purchases of securities between BDCs

and certain of their affiliates as

described in section 57(b) of the Act.

Section 57(b) includes the investment

adviser to, and any person under

common control with, the BDC. Allied

I, Allied II, and Commercial could be

deemed to be affiliates of Allied

Lending under section 57(b) because all

are under common control by virtue of

having a common investment adviser.

2. Section 17(a) of the Act generally

prohibits sales or purchases of securities

between a registered investment

company and certain affiliated persons

of the company as described in section

2(a)(3) of the Act. Affiliated persons

under section 2(a)(3)(C) include persons

under common control with the

investment company. When the assets

of Investment II and Financial II are

transferred to Investment I and

Financial I, respectively, all four

investment companies will be under the

common control of ACC.

3. Sections 57(c) and 17(b) of the Act

provide that the SEC will exempt a

proposed transaction from sections 57(a)

and 17(a), respectively, if the terms of

the proposed transaction, including the

consideration to be paid or received, are

reasonable and fair and do not involve

overreaching on the part of any person

concerned; and the proposed

transaction is consistent with the policy

of each registered investment company

concerned and consistent with the

general purposes of the Act. Applicants

believe that the requested relief from

sections 57(a) and 17(a) meets these

standards for the reasons discussed

below.

4. Applicants believe that the

Consolidation will benefit shareholders

of the Participating Companies.

Applicants state that ACC’s increased

size, increased portfolio diversity, and

mix of current and capital gain income

will provide increased benefits for all

shareholders. Applicants state that ACC

will have the ability to diversify into

larger and varied transactions, and that

ACC’s greater size will provide

opportunity for lower-cost debt capital

and institutional ownership of its

common stock. In addition, applicants

believe that the Consolidation will

eliminate the need for costly

duplication of efforts related to

maintaining and reporting for five

separate public entities. Applicants

further believe that the mergers of

Investment II and Financial II into

Investment I and Financial I,

respectively, will result in similar

benefits.

5. Applicants assert that the role of

the Independent Directors of Allied I

and II and Allied Lending, Morgan

Stanley’s valuation analysis, the fairness

opinions given by each independent
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63571

2Rule 60a–1 under the Act exempts from sections

12(d)(1)(A) and (C) the acquisition by a BDC of the

securities of a small business investment company

licensed under the 1958 Act which is operated as

a wholly-owned subsidiary of the BDC. Applicants

state that, because the Surviving SBIC and SSBIC

Subsidiaries are small business investment

companies licensed under the 1958 Act, ACC’s

acquisition of shares of the Surviving SBIC and

SSBIC Subsidiaries will be exempt from sections 12

(d)(1)(A) and (C) under rule 60a–1 under the Act.

Applicants state that sections 12(d)(1)(A) and (C) do

not apply to the non-BDC Subsidiaries because they

are not investment companies.

financial adviser, and the representation

by separate independent counsel of

Allied I and II and Allied Lending

ensure that no overreaching on the part

of any person will occur in connection

with the Consolidation. Applicants state

that the Consolidation will be consistent

with the public disclosures of each of

the Participating Companies and with

the general purposes of the Act, as will

be the merger of Investment II and

Financial II into Investment I and

Financial I, respectively. Further,

applicants state that the board of

directors of each Participating Company

has approved the transaction as being in

the best interests of the Company.

6. Applicants note that during the

process of considering and approving

the Consolidation, the board of directors

of each Participating Company

specifically considered the participation

of Advisers in the Consolidation.

Applicants state that each board of

directors concluded that ACC would be

a better business model than a

Participating Company would be

individually, in part because ACC will

be internally managed. Applicants note

that with external management,

Advisers must not only cover its costs,

but must earn a profit for its

shareholders and pay a corporate level

income tax. Applicants also note that

external management creates perceived

conflicts of interest because the goals of

an external adviser may conflict with

the goals of the fund. Applicants state

that the directors concluded that

Advisers’ participation in the

Consolidation was fair from a financial

point of view and that the management

of Advisers will receive no financial

benefit from the consolidation to the

detriment of any of the other

Participating Companies or their

shareholders.

B. Operation as One Company

1. Section 12(d)(1)

a. Section 12(d)(1)(A) of the Act, made

applicable to BDCs by section 60 of the

Act, limits the amount of securities a

registered investment company or BDC

(or company controlled by the registered

investment company or BDC) may hold

of other investment companies. Section

12(d)(1)(C) limits the amount of

securities of a closed-end investment

company that may be acquired by an

investment company. Applicants state

that any purchase of the voting stock of

the Surviving SBLC Subsidiary or a

Future BDC Subsidiary by ACC, or a

contribution to capital of the Surviving

SBLC Subsidiary or of a Future BDC

Subsidiary by ACC, may violate section

12(d)(1).2 In addition, applicants state

that section 12(d)(1) may apply to each

of the Subsidiaries with respect to their

purchase or acquisition of debt

securities issued by ACC or each other

because each will be a BDC or an entity

controlled by a BDC. Further, applicants

state that the making of loans or

advances by any of the Subsidiaries to

ACC or to each other may violate

section 12(d)(1).

b. Applicants request an exemption

from sections 12(d)(1)(A) and (C) to

permit: (a) the acquisition by ACC of

any securities of the Surviving SBLC

Subsidiary and the future BDC

Subsidiaries; and (b) the acquisition by

any of the Subsidiaries of any securities

representing indebtedness of ACC or of

any securities representing indebtedness

issued by any of the other Subsidiaries.

Applicants request the exemptions to

the extent that the transactions would

not be prohibited if each Subsidiary

were deemed to be part of ACC and not

a separate company.

c. Section 12(d)(1)(J) provides that the

SEC may exempt persons or transactions

from any provision of section 12(d)(1) if

the exemption is consistent with the

public interest and the protection of

investors. For the following reasons,

applicants believe that the proposal

meets this standard.

d. Applicants assert that section

12(d)(1) is intended to prevent certain

abuses associated with the pyramiding

of investment companies, and that the

holding company structure will not

entail these types of abuses. Applicants

state that these abuses include the

investing fund exercising undue

influence over the underlying funds, the

layering of fees, and the creation of

overly complex and confusing

structures.

e. Applicants believe that ACC, as the

sole shareholder of the Subsidiaries,

will have no incentive to act contrary to

the interests of a Subsidiary. Applicants

also contend that the Consolidation will

not result in investors incurring

duplicative sales charges or advisory

fees, and will result in a structure that

is less complex than the current

structure. Applicants also note that the

parent/subsidiaries structure that will

result from the Consolidation will serve

a valid business purpose by facilitating

more efficient public investment in the

alternative asset class of small business

debt securities.

2. Section 12(d)(3)

a. Section 12(d)(3) of the Act, made

applicable to BDCs by section 60,

generally makes it unlawful for any

registered investment company to

purchase any security issued by an

investment adviser to an investment

company. Applicants state that the

Consolidation could be deemed to

involve the purchase or acquisition by

Allied I or II, Allied Lending, or ACC of

securities issued by Advisers.

Applicants request an exemption to

permit the purchase of Advisers in

connection with the Consolidation.

b. Section 6(c) of the Act permits the

SEC to exempt any person or transaction

from any provision of the Act, if the

exemption is 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. Applicants

believe that the requested relief meets

the section 6(c) standard for the reasons

discussed below.

c. Applicants state that section

12(d)(3) was intended to limit the

exposure of registered investment

companies to the entrepreneurial risks

associated with securities related

business and to prevent potential

conflicts of interest and reciprocal

practices. Applicants state that the

Consolidation does not present the

potential for these abuses. Applicants

believe that the procedures and policies

adopted by ACC with respect to its

investment advisory operations will

ensure that ACC and the Subsidiaries

are being operated and managed in the

best interests of ACC and its

shareholders. Applicants also note that

ACC could engage directly in the

business of investment management

without the need for exemptive relief.

3. Section 18

a. Section 18(a) of the Act prohibits a

registered closed-end investment

company from issuing any class of

senior security unless the company

complies with the asset coverage

requirements set forth in section 18(a).

Section 18(k) provides for modified

asset coverage requirements for SBICs.

Section 61 makes section 18, with

certain modifications, applicable to a

BDC.

b. Applicants believe that section 61

may require that ACC and the BDC

Subsidiaries comply with the asset
63572 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

coverage requirements of section 18(a)

(as modified by section 61(a)) on a

consolidated basis because ACC could

be deemed to be an indirect issuer of

any class of senior securities issued by

the Subsidiaries. In addition, applicants

believe that the Surviving SBLC

Subsidiary may not be permitted to rely

on the modified asset coverage

requirements of section 18(k) because

section 18(k) does not apply to an SBLC

licensee but only to SBIC licensees.

c. Applicants request an exemption

under section 6(c) (a) for the Surviving

SBLC Subsidiary from sections

18(a)(1)(A) and (B), and (b) for ACC to

permit senior securities issued by the

Surviving BDC Subsidiaries that are

excluded from the individual asset

coverage ratio by section 18(k) or this

order to be excluded from ACC’s

consolidated asset coverage ratio.

Applicants believe the relief satisfied

the section 6(c) standard for the

following reasons.

d. Applicants state that the Surviving

SBLC Subsidiary should be treated like

an SBIC licensee because SBLCs and

SBICs are analogous in their common

purpose to assist small business in

raising capital and both are subject to

the regulation and oversight of the SBA.

Applicants assert that policy rationale

for the section 18(k) exemption is that

the SBA’s regulation of the permissible

leverage of an SBA-licensed investment

company is an effective substitute for

the SEC’s regulation of asset coverage

for senior securities issued by a

registered closed-end company or a

BDC. Applicants state that SBICs,

SSBICs, and SBLCs are SBA-licensed

investment companies and subject to

the SBA’s substantive regulations of

permissible leverage in their capital

structure.

e. Applicants contend that if ACC

applies the asset coverage requirements

of section 18(a) on a consolidated basis,

ACC should be able to apply the same

exemptions available to the Surviving

BDC Subsidiaries. Applicants also

contend that to the extent that the

Surviving BDC Subsidiaries on a standalone basis are entitled to rely on

section 18(k) for an exemption from the

asset coverage requirements of section

18(a), there is no policy reason to deny

the parent the benefit of the exemption

when the parent consolidates its assets

with the Surviving BDC Subsidiaries

when testing compliance with section

18(a).

4. Sections 2(a)(48) and 55(a)

a. Section 2(a)(48) of the Act generally

defines a BDC to be any closed-end

investment company that operates for

the purpose of making investments in

securities described in sections 55(a) (1)

through (3) of the Act and makes

available significant managerial

assistance with respect to the issuers of

these securities. Section 55(a) of the Act

requires a BDC to have at least 70% of

its assets invested in assets described in

sections 55(a) (1) through (6)

(‘‘Qualifying Assets’’). Qualifying Assets

generally include securities issued by

eligible portfolio companies as defined

in section 2(a)(46) of the Act. Section

2(a)(46)(B) of this definition generally

excludes (a) an investment company, as

defined under section 3 of the Act,

unless the company is an SBIC licensed

by the SBA to operate under the 1958

Act and is a wholly-owned subsidiary of

the BDC, and (2) a company that would

be an investment company but for the

exclusion from the definition of

investment company in section 3(c) of

the Act.

b. Applicants believe that the

Surviving SBLC and REIT Subsidiaries

may not be deemed eligible portfolio

companies because the Surviving SBLC

Subsidiary is not an SBIC licensed by

the SBA but an SBLC, and the Surviving

REIT Subsidiary may be an investment

company but for the exclusion from the

definition of investment company in

section 3(c). Applicants request relief

under section 6(c) from section 55(a) to

permit ACC to treat the Surviving SBLC

Subsidiary as an eligible portfolio

company within the meaning of section

2(a) (46) solely to the extent that the

Surviving SBLC Subsidiary may not

qualify as an eligible portfolio company

for reasons stated above. Further,

applicants request relief from sections

2(a)(48) and 55(a) to permit the assets

held by the REIT Subsidiary, rather than

the REIT Subsidiary itself, to be treated

as assets held by ACC for purposes of

(1) determining whether ACC is

operated for the purpose of making

investments in securities described in

paragraphs (1) through (3) of sections

55(a), (2) determining whether ACC

makes available managerial assistance to

companies as described in section

2(a)(48), and (3) applying the 70% test

in section 55(a). Applicants believe the

relief satisfies the section 6(c) standard

for the following reasons.

c. Applicants believe that relief for the

Surviving Subsidiary is appropriate

because the loans to be made by the

SBLC will be made to the same category

of small business borrowers that

represent the type of securities included

in the definition of Qualifying Assets. In

addition, applicants note that the

Surviving SBLC Subsidiary will invest

all of its assets in Qualifying Assets and

itself will be a BDC.

d. Applicants believe that relief for

the REIT Subsidiary is appropriate

because all of the voting securities of the

REIT Subsidiary will be held by ACC

and ACC will control the operations of

the REIT Subsidiary, including the

acquisition and disposition of its assets.

Applicants also state the assets of the

REIT Subsidiary will be held by the

REIT Subsidiary and not directly by

ACC only for bona fide business reasons

that are unrelated to the policies

underlying the Act and that do not

reflect a substantive economic

difference from the assets being held by

ACC. Applicants therefore contend that

the assets held by the REIT Subsidiary

are, in economic effect, assets held by

ACC, and should be treated as such in

determining ACC’s compliance with the

relevant provisions of sections 2(a) (48)

and 55(a) of the Act.

5. Sections 57(a) (1) and (2)

a. As discussed above, sections 57(a)

(1) and (2) generally prohibit, with

certain exceptions, sales or purchases of

securities between BDCs and certain of

their affiliates as described in section

57(b) of the Act. Because they are under

the common control of ACC, each

Subsidiary will be an affiliated person

of each other Subsidiary within the

meaning of section 57(b).

b. Applicants request relief from

sections 57(a) (1) and (2) under section

57(c) to exempt any transaction between

ACC and any BDC Subsidiary and any

transaction between any BDC

Subsidiaries and any Subsidiary with

respect to the purchase or sale of

securities or other property. In addition,

applicants request relief from sections

57(a) (1) and (2) to exempt any purchase

or sale transaction between ACC and a

controlled portfolio affiliate of a BDC

Subsidiary and any purchase or sale

transaction between a BDC Subsidiary

and a controlled portfolio affiliate of

ACC or of another BDC Subsidiary, but

only to the extent that any such

transaction would not be prohibited if

the BDC Subsidiary were deemed to be

part of ACC and not a separate

company. For the following reasons,

applicants believe that the requested

relief satisfies the section 57(c)

standard.

c. Applicants state that there may be

cases when it is in the interest of ACC’s

shareholders for a BDC Subsidiary to

invest in securities of an issuer that may

be an affiliated person of ACC or for

ACC to invest in securities of an issuer

that may be an affiliated person of a

BDC Subsidiary. Likewise, applicants

state that a BDC Subsidiary may want to

invest in securities of an issuer that is

an affiliated person of another BDC
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63573

3Applicants state that there is no separate

requirement under the Exchange Act that the BDC

Subsidiaries register their shares because they do

not have the requisite number of shareholders

under the relevant provisions of the Exchange Act.

4 Investment Company Act Release Nos. 14694

(Aug. 26, 1985) (notice) and 14725 (Sept. 17, 1985)

(order); 15787 (June 9, 1987 (notice) and 15833

(June 30, 1987) (order; and 17124 (Sept. 1, 1989)

(notice) and 17155 (Sept. 26, 1989) (order).

Subsidiary. Applicants note that the

relief would permit ACC and the BDC

Subsidiaries to do what the Act would

otherwise permit if they were one

company.

6. Sections 21(b) and 57(a)(3)

A. Section 57(a)(3) generally prohibits

the borrowing of money or other

property by an affiliated person of a

BDC, as described in section 57(b), from

the BDC except as permitted in section

21(b). Section 21(b) (made applicable to

BDCs by section 62) of the Act generally

prohibits loans between BDCs and

persons controlling or under common

control with the BDC, except for loans

to a company that owns all of the

outstanding securities of the BDC. As

described above, each Subsidiary will

be under the common control of ACC

and, therefore, will be affiliated under

section 57(b) and subject to section

21(b).

b. Applicants request relief from

section 57(a)(3) under section 57(c) to

exempt any transaction between a BDC

Subsidiary and another Subsidiary with

respect to the borrowing of money or

other property and any borrowing of

money or other property by ACC from

a BDC Subsidiary. Applicants also

request relief from section 21(b) under

section 6(c) to exempt the lending of

money or other property by a BDC

Subsidiary to ACC or another

Subsidiary. For the following reasons,

applicants believe that the requested

relief satisfies the section 57(c)

standard.

c. Applicants state that the proposed

transactions will have no substantive

economic effect because they will either

be between ACC and its wholly-owned

Subsidiaries, or be between Subsidiaries

under the common ownership of ACC.

Applicants note that the relief would

permit ACC and its Subsidiaries to do

what the Act would otherwise permit if

they were one company.

7. Section 57(a)(4) and Rule 17d–1

a. Section 17(d) and rule 17d–1 make

it unlawful for an affiliated person of a

registered investment company or any

affiliated person of an affiliated person,

acting as principal, to participate in or

effect any joint transaction in which the

registered company or a company it

controls participates, unless the

transaction has been approved by the

SEC. Section 57(a)(4) imposes

substantially the same prohibitions on

joint transactions involving BDCs and

certain of their affiliates as described in

section 57(b). Section 57(i) provides that

the rules and regulations under section

17(d) shall apply to transactions subject

to section 57(a)(4) in the absence of

rules under that section. No rules with

respect to joint transactions have been

adopted under section 57(a)(4) and,

therefore, the standard set forth under

rule 17d–1 governs applicants’ request.

b. Applicants state that a joint

transaction in which a BDC Subsidiary

and ACC or another Subsidiary

participates will be deemed to be

prohibited under section 57(a)(4).

Therefore, applicants request relief

under section 57(i) and rule 17d–1 to

permit any joint transaction in which a

BDC Subsidiary and ACC or another

Subsidiary participate to the extent that

the transaction will not be prohibited if

the BDC Subsidiary were deemed to be

part of ACC and not a separate

company.

c. In passing upon applications filed

pursuant to rule 17d–1, the SEC

considers whether the participation of

the registered investment company in

the joint transaction is consistent with

the provisions, policies and purposes of

the Act and the extent to which such

participation is on a basis different from

or less advantageous than that of other

participants. Applicants believe that

this standard is satisfied because the

request would simply permit ACC and

its Subsidiaries to conduct their

operations as if they were one company.

C. Consolidated Reporting

1. Section 54 of the Act provides that

a closed-end investment company may

elect BDC treatment under the Act if the

company has registered or filed a

registration statement under section 12

of the Exchange Act for a class of its

equity securities. Section 13(a) of the

Exchange Act requires that issuers of

securities registered under the Exchange

Act file certain information and reports

with the SEC. Applicants request an

order that the BDC Subsidiaries be

exempt from the reporting requirements

of section 13(a) of the Exchange Act in

order to permit them to file consolidated

reports with ACC.3

2. Section 12(h) of the Exchange Act

provides that the SEC may exempt an

issuer from section 13 of the Exchange

Act if the SEC finds that by reason of the

number of public investors, amount of

trading interest in the securities, the

nature and extent of the activities of the

issuer, income or assets of the issuer, or

otherwise, the exemption is not

inconsistent with the public interest or

the protection of investors. Applicants

believe that the requested exemption

meets this standard for the following

reasons.

3. Applicants state that each BDC

Subsidiary will have only one investor

and no public investors and, therefore,

there will be no trading in the securities

of the BDC Subsidiaries. Applicants

further state that the nature and extent

of the activities of the BDC Subsidiaries

will be fully disclosed through

consolidated reporting in accordance

with Commission rules and generally

accepted accounting principles.

D. Co-Investing

1. Allied Venture Partnership

(‘‘Venture’’) and Allied Technology

Partnership (‘‘Technology’’) are private

venture capital limited partnerships

organized under the laws of the District

of Columbia. They are not registered

under the Act in reliance on the

exemptions provided by sections 3(c)(1)

and (7) of the Act. After the

Consolidation, ACC will be the

investment adviser to Venture and

Technology.

2. In reliance on certain prior orders

(‘‘Prior Orders’’), Allied I and its

wholly-owned subsidiaries, and Allied

II and its wholly-owned subsidiaries

have co-invested with Venture and

Technology.4 Venture and Technology

are fully invested in portfolio

companies and are not expected to raise

additional capital or to make new

investments (other than possible

‘‘follow-on investments’’ as permitted

by the Prior Orders). Venture and

Technology are gradually liquidating

their existing investments in portfolio

companies and distributing the

proceeds to their partners. The Prior

Orders were subject to detailed

conditions regarding liquidation

transactions and follow-on investments

(‘‘Co-investing Conditions’’).

3. As noted above, section 57(a)(4)

and rule 17d–1 generally prohibit joint

transactions involving BDCs and certain

of their affiliates unless the SEC has

approved the transaction. Venture and

Technology will be affiliated persons of

the Surviving SBIC and SSBIC

Subsidiaries within the meaning of

section 57(b) because they all will be

under the common control of ACC.

Because many of the investments being

liquidated are previous co-investments,

the liquidation transactions could be

deemed to constitute joint transactions

otherwise prohibited by section 57(a)(4)

and rule 17d–1. The Surviving SBIC and

SSBIC Subsidiaries request an order
63574 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

pursuant to section 57(i) and rule 17d–

1 to permit them to participate in the

liquidation transactions and possible

follow-on investments with Venture

and/or Technology, to the extent that

the transactions may otherwise be

prohibited by section 57(a)(4) and rule

17d–1.

4. Applicants believe that the

transactions satisfy rule 17d–1(b)’s

standard, as described above, and that

the Co-investing Conditions are

unnecessary, because ACC, the parent of

the SBIC and SSBIC Subsidiaries, will

be internally managed; Venture and

Technology are in the process of

liquidation and will not be engaging in

a broad range of transactions; and

Venture and Technology and the SBIC

and SSBIC Subsidiaries will be treated

on an equal basis in any transaction.

Applicants also contend that the relief

is consistent with rule 57b–1, which

exempts from section 57(a)(4) any

transactions in which the BDC controls

the relevant affiliate. Applicants asset

that the SBIC and SSBIC Subsidiaries

should be deemed to control Venture

and Technology, for purposes of rule

57b–1, because they are wholly-owned

subsidiaries of ACC.

Applicants’ Conditions

Applicants agree that the order

granting the requested relief will be

subject to the following conditions:

1. ACC will at all times own and hold,

beneficially and of record, all of the

outstanding voting capital stock of the

Subsidiaries.

2. No person will serve or act as

investment adviser to any Subsidiary

unless the directors and stockholders of

ACC will have taken the action with

respect thereto also required to be taken

by the directors and sole stockholder of

the Subsidiary.

3. The Consolidation will not be

consummated unless it has been

approved by the holders of a majority of

outstanding common stock of Allied I,

Allied II, and Allied Lending.

4. ACC will: (a) file with the

Commission, on behalf of itself and the

Subsidiaries, all information and reports

required to be filed with the SEC under

the Exchange Act and other applicable

federal securities laws, including

information and financial statements

prepared solely on a consolidated basis

as to ACC and the Subsidiaries, these

reports to be in satisfaction of any

separate reporting obligations of the

Subsidiaries; and (b) provide to its

stockholders the information and

reports required to be disseminated to

ACC’s stockholders, including

information and financial statements

prepared solely on a consolidated basis

as to ACC and the Subsidiaries, these

reports to be in satisfaction of any

separate reporting obligations of the

Subsidiaries. Notwithstanding anything

in this condition, ACC will not be

relieved of any of its reporting

obligations, including, but not limited

to, any consolidating statement setting

forth the individual statements of the

Subsidiaries required by rule 6–03(c) of

Regulation S–X.

5. ACC and the Subsidiaries may file

on a consolidated basis under condition

4 above only so long as the amount of

ACC’s total consolidated assets invested

in assets other than (a) securities issued

by the Subsidiaries or (b) securities

similar to those in which the

Subsidiaries invest, does not exceed ten

percent.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 97–31395 Filed 11–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–22901; File No. 812–10788]

The Western National Life Insurance

Company, et al.; Notice of Application

November 21, 1997.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’).

ACTION: Notice of application for an

order under Section 26(b) of the

Investment Company Act of 1940

(‘‘1940 Act’’) approving the proposed

substitution of securities.

SUMMARY OF APPLICATION: Applicants

request an order approving the

substitution of shares of the Salomon

Brothers U.S. Government Securities

Portfolio of WNL Series Trust (the

‘‘Salomon Portfolio’’) for shares of the

Black Rock Managed Bond Portfolio of

WNL Series Trust (the ‘‘BlackRock

Portfolio’’) to fund individual fixed and

variable deferred annuity contracts (the

‘‘Contracts’’) issued by Western National

Life Insurance Company (‘‘Western

National’’).

APPLICANTS: Western National and WNL

Separate Account A (the ‘‘Account’’).

FILING DATE: The application was filed

on September 17, 1997.

HEARING OR NOTIFICATION OF HEARING:

And order granting the application will

be issued unless the Commission orders

a hearing. Interested persons may

request a hearing by writing to the

Secretary of the Commission and

serving Applicants with a copy of the

request, personally or by mail. Hearing

requests should be received by the

Commission by 5:30 p.m. on December

16, 1997, and 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 requester’s interest, the

reason for the request and the issues

contested. Persons may request

notification of a hearing by writing to

the Secretary of the Commission.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549.

Applicants, c/o Raymond A. O’Hara III,

Esq., Blazzard, Grodd & Hasenauer, PC.,

943 Post Road East, Westport,

Connecticut 06880.

FOR FURTHER INFORMATION CONTACT:

Laura A. Novack, Senior Attorney, or

Kevin M. Kirchoff, Branch Chief, Office

of Insurance Products, Division of

Investment Management, at (202) 942–

0670.

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application is

available for a fee from the SEC’s Public

Reference Branch, 450 Fifth Street,

N.W., Washington, D.C. 20549 (tel. (202)

942–8090).

Applicants’ Representations

1. Western National, a stock life

insurance company incorporated in

Texas, is a wholly-owned subsidiary of

Western National Corporation.

American General Life Insurance

Company (‘‘AG Life’’), a Missouridomiciled life insurer, owns

approximately 40% of Western National

Corporation. In turn, AG Life is a

wholly-owned subsidiary of American

General Corporation, also a Texas

corporation. Western National is the

depositor of the Account.

2. The Board of Directors of Western

National authorized the Account on

November 9, 1994. The Account is

registered under the 1940 Act as a unit

investment trust for the purpose of

funding the Contracts. Security interests

under the Contracts have been

registered under the Securities Act of

1933 (‘‘Securities Act’’) (File No. 33–

86464). The Account currently is

divided into eight sub-accounts, each of

which reflects the investment

performance of a corresponding

portfolio of WNL Series Trust (the

‘‘Trust’’).

3. The Trust was organized as a

Massachusetts business trust on

December 12, 1994. It is registered

under the 1940 Act as an open-end

management investment company. The