[Federal Register Volume 62, Number 58 (Wednesday, March 26, 1997)]
[Notices]
[Pages 14481-14484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7647]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-22575; International Series Release No. 1068; 812-
10468]


Citibank, N.A., et al.; Notice of Application

March 20, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (``1940 Act''). 
APPLICANTS: Citibank, N.A. (``Citibank'') and Citicorp.

RELEVANT 1940 ACT SECTIONS: Exemption requested under section 6(c) from 
section 17(f) and rule 17f-5.

SUMMARY OF APPLICATION: Applicants seek conditional exemptive relief 
from section 17(f) of the 1940 Act and rule 17f-5 thereunder. The 
requested exemption would allow Citibank to make available direct and 
agency custody arrangements for certain securities and other assets 
between United States investment companies and Citibank T/O in the 
Russian Federation.

FILING DATE: The application was filed on December 24, 1996. Applicants 
have agreed to file an additional amendment during the notice period, 
the substance of which is incorporated herein.

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 April 14, 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, N.W., Washington, D.C. 
20549. Applicants, c/o Wayne J. Rapozo, Esq., Skadden, Arps, Slate, 
Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022-3897.

FOR FURTHER INFORMATION CONTACT: Joseph B. McDonald, Jr., Senior 
Counsel, at (202) 942-0533, or Mary Kay Frech, Branch Chief, at (202) 
942-0564 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

A. Background

    1. Citibank, a United States national banking association, is a 
wholly-owned subsidiary of Citicorp, a Delaware bank holding company. 
Citibank operates an extensive custodian network through its branches 
and through its own subsidiaries and subsidiaries of Citicorp, as well 
as unaffiliated correspondent banks. As of December 31, 1995, Citibank 
had approximately $966 billion in assets under custody.
    2. In 1995, Citibank received exemptive relief from the Commission 
with respect to 15 foreign subsidiaries of Citibank \1\ from the 
provisions of section 17(f) of the 1940 Act to permit, among other 
things, Citibank as the custodian of securities and other assets (other 
than cash) (the ``MIC Securities'') and cash (the ``MIC Cash'') of any 
registered management investment company, incorporated or organized 
under the laws of the United States or a state thereof (``U.S. 
Investment Company''), or as subcustodian of MIC Securities and MIC 
Cash for which any other entity is acting as custodian (the ``MIC 
Custodian''), and such U.S. Investment Company or MIC Custodian for 
which Citibank so acts, to deposit or to cause to permit the deposit of 
MIC Securities and MIC Cash with such foreign subsidiaries of Citibank 
(``Agency Custody Arrangements'') (the ``1995 Order'').\2\
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    \1\ Citibank (Channel Islands) Limited; Citibank, S.A. in 
France; Citicorp Investment Bank (The Netherlands) N.V.; Citibank 
(Zaire) S.A.R.L.; Citibank Zambia Limited; Citicorp Nominees Pty. 
Limited in Australia; Citibank Nominees (New Zealand) Limited; 
Citibank Portugal, S.A.; Banco de Honduras S.A.; Citibank Budapest 
Rt.; Citibank-Maghreb in Morocco; Citibank (Trinidad & Tobago) 
Limited; Cititrust Columbia S.A. Sociedad Fiduciaria; Citibank 
(Poland) S.A.; and Citibank a.s. in the Czech Republic 
(collectively, the ``Citibank Subsidiaries'').
    \2\ Investment Company Act Release Nos. 21087 (May 22, 1995) 
(notice)and 21145 (June 19, 1995) (order).
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    3. The 1995 Order also granted exemptive relief permitting such 
foreign subsidiaries of Citibank to serve as custodian for U.S. 
Investment Companies, or subcustodian of MIC Securities and MIC Cash 
for MIC Custodians, pursuant to direct

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contractual arrangements between such Citibank subsidiary and a U.S. 
Investment Company of an MIC Custodian (``Direct Custody 
Arrangements'').
    4. The 1995 Order also provides that with the exception of Citibank 
T/O or any other Citibank subsidiary or affiliate operating in the 
Russian Federation, (a) the relief granted therein with respect to 
Agency Custody Arrangements apply to all additional foreign 
subsidiaries of Citibank which do not meet the shareholders' equity 
requirements of Rule 17f-5 (collectively, the ``Additional Citibank 
Subsidiaries'') and all foreign affiliates of Citibank which are 
subsidiaries of Citicorp which do not meet the shareholders' equity 
requirement of Rule 17f-5 (collectively, the ``Citibank Affiliates'') 
when such Additional Citibank Subsidiaries and such Citibank Affiliates 
meet the terms and conditions applicable to the provision of such 
services set forth in the 1995 Order and (b) the relief granted therein 
with respect to Direct Custody Arrangements apply to all Additional 
Citibank Subsidiaries and, at such time as direct custody services are 
to be offered by them in accordance with applicable law, the Citibank 
Affiliates, when such Additional Citibank Subsidiaries and such 
Citibank Affiliates meet the terms and conditions applicable to the 
provision of services set forth in the 1995 Order.

B. Relief Requested

    1. Applicants seek an order under Section 6(c) of the Act granting 
exemptive relief from Section 17(f) of the Act to allow Citibank T/O in 
the Russian Federation to provide foreign custody services in 
connection with the holding of MIC Securities and MIC Cash of any U.S. 
Investment Company pursuant to (1) Agency Custody Arrangements and (2) 
Direct Custody Arrangements.\3\
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    \3\ Clearing and custody procedures in the Russian Federation 
differ substantially from the procedures generally employed in other 
jurisdictions. Other than the exemption requested from section 17(f) 
and rule 17f-5 so that the Direct Custody Arrangements and Agency 
Custody Arrangements may apply to Citibank T/O in the Russian 
Federation, applicants are not requesting an exemption from section 
17(f) or rule 17f-5 for any aspect of the custody or clearing 
procedures employed in the Russian Federation. Furthermore, 
applicants acknowledge that any order granting the application may 
not be deemed a determination by the SEC that the Russian clearing 
and custody procedures comply with section 17(f) or any rule 
thereunder.
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    2. The Citibank Subsidiaries, the Additional Citibank Subsidiaries 
and the Citibank Affiliates, from time to time providing custodial 
services pursuant to the terms of the 1995 Order, and Citibank T/O, at 
such time as it provides custodial services pursuant to the requested 
order, will hereinafter collectively be referred to as the ``Exemptive 
Order Network Members''.
    3. Under the Agency Custody Arrangements, MIC Securities and MIC 
Cash are maintained in the custody of an Exemptive Order Network Member 
in accordance with a custody agreement among (a) the U.S. Investment 
Company or MIC Custodian for which Citibank acts as custodian or 
subcustodian, (b) Citibank, and (c) Citicorp (the ``Agency Custody 
Agreement''). Citibank acts as the custodian or subcustodian of the MIC 
Securities and MIC Cash and is authorized to delegate its 
responsibilities to the Exemptive Order Network Member in accordance 
with the terms of a subcustodian agreement (the ``Subcustodian 
Agreement'').
    4. The Agency Custody Agreement provides that the delegation by 
Citibank to an Exemptive Order Network Member does not relieve Citibank 
of any responsibility to the U.S. Investment Company or MIC Custodian 
for any loss due to the negligent acts or omissions of the Exemptive 
Order Network Member except such loss as may result from political risk 
(e.g., exchange control restrictions, confiscation, expropriation, 
nationalization, insurrection, civil strife or armed hostilities), and 
other risk of loss for which neither Citibank nor the Exemptive Order 
Network Member would be liable under rule 17f-5 (e.g., despite the 
exercise of reasonable care, loss due to Act of God, nuclear incident 
and the like). The Agency Custody Agreement also provides that Citicorp 
is liable, in accordance with the terms of the guarantee described 
below, for losses of MIC Securities and/or MIC Cash resulting from the 
bankruptcy or insolvency of the Exemptive Order Network Member.
    5. The Direct Custody Arrangements will enable the Exemptive Order 
Network Members to act as direct custodians in accordance with either a 
master custody agreement under which a U.S. Investment Company or MIC 
Custodian enters into a direct custodial relationship with a number of 
Exemptive Order Network Members or an individual custody agreement 
under which a U.S. Investment Company or MIC Custodian enters into a 
direct custodial relationship with a particular Exemptive Order Network 
Member (either, a ``Direct Custody Agreement''). The Direct Custody 
Agreement would be among (i) The U.S. Investment Company or MIC 
Custodian for which the Exemptive Order Network Member acts as 
custodian or subcustodian, (ii) the Exemptive Order Network Member, 
(iii) Citicorp, and (iv) Citibank. The terms of each Direct Custody 
Agreement would include a confirmation by the Exemptive Order Network 
Member that it will act as the custodian or subcustodian, as the case 
may be, of the MIC Securities and MIC Cash under the requested order, 
an agreement by Citicorp that it is liable, in accordance with the 
terms of its guarantee, for losses of MIC Securities and MIC Cash 
resulting from the bankruptcy or insolvency of the Exemptive Order 
Network Member, and an agreement by Citibank to be liable for any loss 
resulting from the performance of the Exemptive Order Network Member, 
except such loss as may result from political risk (e.g., exchange 
control restrictions, confiscation, expropriation, nationalization, 
insurrection, civil strife or armed hostilities), and other risk of 
loss for which neither Citibank nor the Exemptive Order Network Member 
would be liable under rule 17f-5 (e.g., despite the exercise of 
reasonable care, loss due to Act of God, nuclear incident and the 
like).
    6. The extent of Citibank's liability for losses attributable to 
Citibank T/O under the Direct Custody Arrangements would be the same as 
that provided for under the Agency Custody Arrangements. Under both the 
Agency Custody Arrangements and the Direct Custody Arrangements, 
Citibank would be liable for the negligent acts or omissions of 
Citibank T/O.
    7. Both the Agency and Direct Custody Agreements would provide that 
Citicorp will be liable in accordance with the terms of a guarantee for 
losses of MIC Securities and MIC Cash resulting from bankruptcy or 
insolvency of Citibank T/O. Under the 1995 Order, Citicorp has issued a 
guarantee for losses of MIC Securities and MIC Cash held by the 
Exemptive Order Network Member under the Agency and Direct Custody 
Agreements resulting from the bankruptcy or insolvency of each 
Exemptive Order Network Member (the ``Guarantee''). If the requested 
order is issued and Citibank T/O becomes an Exemptive Order Network 
Member, the Guarantee will be amended to cover all MIC Securities and 
MIC Cash held by Citibank T/O. The dollar amount of the Guarantee 
applicable to all Exemptive Order Network Members will equal or exceed 
the aggregate market value of MIC Securities and MIC Cash held in the 
custody of the Exemptive Order Network Members.
    8. The value of MIC Securities and amount of MIC Cash held under 
Agency Custody Agreements will be calculated by Citibank based on 
records maintained by Citibank, as custodian,

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and reports by the Exemptive Order Network Members. The total amount 
also will be reported to Citicorp. In addition, each Exemptive Order 
Network Member will submit to Citibank, as agent for Citicorp, the 
Exemptive Order Network Member's calculation, and the basis on which it 
was made, of the value of MIC Securities and amount of MIC Cash held by 
it under Direct Custody Agreements. After review of the results of the 
monthly monitoring, Citicorp will take the necessary steps to adjust 
the amount of the Guarantee to cover the aggregate value of the MIC 
Securities and the aggregate amount of MIC Cash.
    9. In the event that at the time of a bankruptcy or insolvency an 
Exemptive Order Network Member holds MIC Securities and MIC Cash having 
an aggregate value in excess of the aggregate value of MIC Securities 
and MIC Cash which such Exemptive Order Network Member held at the time 
of the previous adjustment of the Guarantee, Citicorp will immediately 
take such steps as may be necessary to increase the size of the 
Guarantee to cover the amount of such excess. This coverage will remain 
in place until such time as the Exemptive Order Network Member's 
bankruptcy estate is settled, the amount of any loss to the U.S. 
Investment Company or MIC Custodian attributable to the bankruptcy or 
insolvency is calculated, and payment under the Guarantee, if 
necessary, is made.

Applicants' Legal Analysis

    1. Applicants seek the requested exemptive relief because Citibank 
T/O does not qualify to serve as custodian for MIC Securities and MIC 
Cash under the terms of section 17(f) of the 1940 Act or rule 17f-5 
thereunder. Section 17(f) provides, in relevant part, that a registered 
management investment company may place and maintain its securities and 
similar assets in the custody of a bank or banks meeting the 
requirements of section 26(a) of the 1940 Act. Citibank T/O, however, 
does not fall within the definition of a ``bank'' as that term is 
defined in section 2(a)(5) of the 1940 Act.
    2. Rule 17f-5 would permit a U.S. Investment Company to deposit 
securities, cash and cash equivalents with an ``eligible foreign 
custodian,'' a term that is defined to include, as here relevant, a 
majority-owned direct or indirect subsidiary of a qualified U.S. bank 
or bank holding company that is incorporated or organized under the 
laws of a country other than the United States and that has 
shareholders' equity in excess of $100,000,000 (U.S.$ or equivalent). 
The rule defines the term ``Qualified U.S. Bank'' to include a banking 
institution organized under the laws of the United States that has an 
aggregate capital, surplus, and undivided profit of not less than 
$500,000. Citibank is a Qualified U.S. Bank as defined in the rule. 
Citibank T/O, however, currently does not meet the minimum 
shareholders' equity requirement of rule 17f-5.
    3. Although Citibank will not be in an agency relationship with 
Citibank T/O under the Direct Custody Arrangements, it nonetheless will 
provide the necessary review and independent oversight of the 
performance and capabilities of Citibank T/O. Applicants submit that 
Citibank's review will insure that adequate safeguards are in place and 
that service standards for custodial administration and operations are 
in place. Because Citibank will agree to be responsible for negligent 
acts or omissions of Citibank T/O under the Agency Custody Arrangements 
and the Direct Custody Arrangements, Citibank will have a vested 
interest in verifying that Citibank T/O maintains adequate standards.
    4. Under the Direct Custody Arrangements, Citibank will be in 
privity of contract with the U.S. Investment Company or MIC Custodian. 
While it would be necessary for a U.S. Investment Company or MIC 
Custodian to establish the negligence of Citibank T/O in the action 
against Citibank, the U.S. Investment Company or MIC Custodian would be 
entitled to seek recovery from Citibank in the first instance.
    5. Pursuant to the Agency Custody Agreement, Citibank acts as the 
custodian or subcustodian of MIC Securities and MIC Cash and is 
authorized to delegate its responsibilities to the Exemptive Order 
Network Member in accordance with the terms of the Subcustodian 
Agreement. The Subcustodian Agreement explicitly provides that U.S. 
Investment Companies or MIC Custodians, as the case may be, that have 
entered into an Agency Custody Agreement with Citibank are third party 
beneficiaries of the Subcustodian Agreement, are entitled to enforce 
the terms of the Subcustodian Agreement, and are entitled to seek 
relief directly against the Exemptive Order Network Member or against 
Citibank.
    6. Applicants believe that provision of the Guarantee by Citicorp 
(rather than by Citibank) under the Agency and Direct Custody 
Arrangements does not negatively affect the level of protection 
afforded the U.S. Investment Companies and MIC Custodians. Since the 
Guarantee will be at least equal to the aggregate value of all MIC 
Securities and MIC Cash held by all Exemptive Order Network Members at 
the end of the previous calendar month and the total Guarantee amount 
is available to cover one or more Exemptive Order Network Members, the 
Guarantee should be more than sufficient to cover losses attributable 
to the bankruptcy or insolvency of any one particular Exemptive Order 
Network Member.

Applicants' Conditions

    If the requested order is granted, applicants agree to the 
following conditions:
    1. The foreign custody arrangements proposed with respect to 
Citibank T/O will satisfy the requirements of rule 17f-5 in all 
respects other than with regard to shareholders' equity.
    2. MIC Securities and MIC Cash custodied pursuant to Agency Custody 
Arrangements will be maintained with Citibank T/O only in accordance 
with an Agency Custody Agreement, required to remain in effect at all 
times during which Citibank T/O fails to satisfy the requirements of 
rule 17f-5 relating to shareholders' equity.
    3. The Agency Custody Agreement will be among (i) the U.S. 
Investment Companies or MIC Custodians for which Citibank serves as 
custodians or subcustodian, (ii) Citibank, and (iii) Citicorp. The 
Agency Custody Agreement will provide the following:

    (a) Citibank will act as the custodian or subcustodian, as the 
case may be, of the MIC Securities and MIC Cash and will be able to 
delegate its responsibilities to Citibank T/O;
    (b) Citibank's delegation of duties to Citibank T/O will not 
relieve Citibank of any responsibility to the U.S. Investment 
Company or MIC Custodian for any loss due to the negligent 
performance by Citibank T/O, except such loss as may result from (i) 
political risk (e.g., exchange control restrictions, confiscation, 
expropriation, nationalization, insurrection, civil strife or armed 
hostilities) and (ii) other risks of loss for which neither Citibank 
nor Citibank T/O would be liable under rule 17f-5; and
    (c) Citicorp will be liable, in accordance with the terms of the 
Guarantee, for losses of MIC Securities and/or MIC Cash resulting 
from the bankruptcy or insolvency of Citibank T/O.

    4. With respect to the Agency Custody Arrangements, Citibank will 
enter into a Subcustodian Agreement with Citibank T/O pursuant to which 
Citibank will delegate to Citibank T/O such of its duties and 
obligations as would be necessary to permit Citibank T/O to hold in 
custody, in the Russian Federation, MIC Securities and MIC Cash. The 
Subcustodian Agreement will provide an acknowledgement by Citibank T/O 
that it is acting as a foreign

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custodian for U.S. Investment Companies and MIC Custodians pursuant to 
the terms of the exemptive order requested by the application. The 
Subcustodian Agreement will explicitly provide that U.S. Investment 
Companies or MIC Custodians that have entered into an Agency Custody 
Agreement with Citibank will be third party, beneficiaries of the 
Subcustodian Agreement, will be entitled to enforce the terms thereof, 
and will be entitled to seek relief directly against Citibank T/O or 
against Citibank.
    5. The Subcustodian Agreement between Citibank and Citibank T/O 
will be governed by New York law; or, if it were governed by the local 
law of the Russian Federation, Citibank shall obtain an opinion of 
counsel form Russian counsel opining as to the enforceability of the 
rights of a third party beneficiary under the laws of such foreign 
jurisdiction.
    6. MIC Securities and MIC Cash of U.S. Investment Companies and MIC 
Custodians entering into Direct Custody Arrangements with Citibank T/O 
will be maintained with Citibank T/O only in accordance with a Direct 
Custody Agreement, required to remain in effect at all times during 
which Citibank T/O fails to satisfy the requirements of rule 17f-5 
relating to shareholders' equity.
    7. The Direct Custody Agreement will be among (i) each U.S. 
Investment Company or MIC Custodian for which Citibank T/O serves as 
custodian or subcustodian, (ii) Citibank T/O, (iii) Citibank, and (iv) 
Citicorp. The Direct Custody Agreement will provide the following:

    (a) confirmation by Citibank T/O that it will act as the 
custodian or subcustodian, as the case may be, of the MIC Securities 
and MIC Cash pursuant to the requested order;
    (b) Citicorp will be liable, in accordance with the terms of the 
Guarantee, for losses of MIC Securities and/or MIC Cash resulting 
from the bankruptcy or insolvency of Citibank T/O; and
    (c) Citibank will be liable for any loss resulting from the 
performance of Citibank T/O, except such loss as may result from (i) 
political risk (e.g., exchange control restrictions, confiscation, 
expropriation, nationalization, insurrection, civil strife, or armed 
hostilities) and (ii) other risks of loss for which Citibank T/O 
would not be liable under rule 17f-5.

    8. Under the Direct Custody Arrangements, U.S. Investment Companies 
or MIC Custodians, as the case may be, will be entitled to seek relief 
directly against Citibank or Citibank T/O.
    9. The dollar value of the Guarantee applicable to the Exemptive 
Order Network Members shall be at least equal to the aggregate value of 
the MIC Securities and MIC Cash held in the custody of such Exemptive 
Order Network Members pursuant to the Direct Custody Agreements and the 
Agency Custody Agreements, calculated at the close of the previous 
calendar month. The value of MIC Securities and MIC Cash held in the 
custody of the Exemptive Order Network Members, as Citibank's 
subcustodians, will be calculated by Citibank based on records 
maintained by Citibank and reports by such Exemptive Order Network 
Members as at the end of each calendar month, and such amount will be 
reported to Citicorp. In addition, each Exemptive Order Network Member 
will submit to Citibank, as agent for Citicorp, monthly its 
calculation, and the basis on which it was made, of the market value of 
MIC Securities and MIC Cash held in custody by it under Direct Custody 
Agreements. After reviewing the results of the monthly monitoring, 
Citicorp will take such steps as may be necessary to adjust the amount 
of the Guarantee to cover the aggregate value of the MIC Securities and 
MIC Cash held by Exemptive Order Network Members, under Agency and 
Direct Custody Agreements. In the event of the insolvency of an 
Exemptive Order Network Member at a time when the aggregate value of 
MIC Securities and MIC Cash held by such Exemptive Order Network Member 
is in excess of the amount of MIC Securities and MIC Cash which such 
Exemptive Order Network Member held at the prior calendar month's end, 
Citicorp will immediately take such steps (if any) as may be necessary 
to increase the size of the Guarantee to cover the amount of such 
excess.
    10. Citibank currently satisfies and will continue to satisfy the 
Qualified U.S. Bank requirement set forth in rule 17f-5(c)(3).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-7647 Filed 3-25-97; 8:45 am]
BILLING CODE 8010-01-M