SEC Division of Investment Management staff letter: Municipality Finance Ltd.

28 APR 1994

Our Ref. No. 94-121-CC

Municipality FL,lance

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Ltd.

DIVISION OF INVESTMNT MAAGEMENT File No. 132-3

Your letter of March 8, 1993 requests our concurrence with,

or no-action assurance regarding, your opinion that Municipality

Finance Ltd. ("Municipality Finance") falls within the exception to the definition of investment company in section 3 (c) (5) (B) of the Investment Company Act of 1940 ("1940 Act").

According to your letter, Municipality Finance, a Finnish

credit institution, is a wholly-owned subsidiary of the Finnish

Local Government Pensions Institution ("LGPI"). You state that

Municipality Finance's principal purpose is to meet the long-

term financing needs of Finnish municipalities, federations of

municipalities, and municipality-controlled companies. You state

that Municipality Finance raises funds by selling debt

instruments in the Euromarkets, Finland, and Asia, and that the

LGPI guarantees these debt instruments. You state that the

LGPI's more than 900 members (municipalities, federations of

municipalities, and municipality-owned companies) are jointly

responsible for the LGPI' s expenditures and payment obligations.

In addition, you state that the government of Finland does not

guarantee the LGPI's obligations, nor is it legally obligated to

assume the liability of any LGPI member that is unable to meet

its obligations to the LGPI. You have explained to us that

according to representatives from Municipality Finance, although

not legally obligated to do so, the Finnish government has in the

past assumed certain liability for pension payments to the LGPI

on behalf of municipalities unable to make their payments. 1/

You state that Municipality Finance lends the funds it raises to

municipalities for projects such as the construction and

renovation of public works, housing, ~ndtransportation. You further state that, during its last full fiscal year,

Municipality Finance made over 97% of its loans to municipalities

and the remainder to municipality-controlled companies providing

services such as power, water, and telecommunications. Finally, you state that Municipality Finance is contemplating a series of

limited private placements of debt securities in the United

States.
You state that Municipality Finance may fall within the

definition of investment company in section 3 (a) of the 1940 Act.

You believe, however, that Municipality Finance qualifies for the

exclusion in section 3 (c) (5) (B). 11 section 3 (c) (5) (B) excepts

1/ Telephone conversations on March 24 and April 5, 1994 between Nora Jordan and Monica Parry. 11 You believe that Municipality Finance would fall within Section 2 (b) of the 1940 Act if that exclusion applied to

non-U. S. governments and their agencies and

from the definition of investment company "any person who is not

engaged in the business of issuing redeemable securities, face-

amount certificates of the installment type or periodic payment

plan certificates, and who is primarily engaged in one of more of

the following businesses . . . (B) making loans to manufacturers,

wholesalers, and retailers of, and to prospective purchasers of,

specified merchandise, insurance, and services . . . ."

You believe that Municipality Finance is primarily engaged

in the business of making loans to municipalities to finance

construction and renovation proj ects. You also believe that the

municipal sponsors of these proj ects are prospective purchasers

of specified merchandise and services, i. e., the materiuls,

equipment, and labor needed for the construction and renovation

proj ects .
Without agreeing with your legal analysis, we would not

recommend enforcement action to the Commission under the 1940 Act

if Municipality Finance proceeds as described in your letter in

reliance on your opinion as counsel that it falls within the

exception in Section 3 (c) (5) (B). 1/ This position is based on the facts and representations in your letter ¡ any different facts

or representations may require a different conclusion. This

letter expresses the Division's position on enforcement action

only and does not express any legal conclusions on the issues

presented.
~~' , R

~~:i L~--a~;o

Senior Counsel

instrumental i ties.

1/ See Banco Nacional de Obras y Servicios Publicos, S.A. (pub.

avail. Nov. 24, 1977) (company primarily engaged in making

loans to finance public works projects).

1940 Act/Section 3 (c) (5) (B)
DAVIS POLK & WARDWELL

450 LEXINGTON AVENUE
1300 I STREET. N.W.
WASHINGTON. D.C. Z0005 NEW YORK, N. Y. 10017 2.1, MARU..OUCt-l I-Cl-OME ZIZ'.SO'40DO CHIYOOA-KU, TOKYO 100 A, PLACE DE L.A. CONCORDE FAX: 212-450.4800 75006 PARIS MESSETURM WRITER'S DIRECT NUMBER: 60308 F'~ANK F"URT A.M MAIN I F'REOERICK'S PL.ACE LONDON ECZR 6Aa 3A CHATER ROAD HONG KONG March 8, 1994 ACT J9 Llo i C1 Ms. Monica Parry

Office of the Chief Counsel SECTION .5 Cc )( s)C ß ')

Division of Investment Management RUL Securi ties and EXChange Commission 450 Fifth street, N.W. ';JUBtIC Washington, D. C. 20549 .~,.V AILABILIT Ll 12~ /gLj' t Re: 1940 Act: Section 3 (c) (5) (B) Dear Ms. Parry :
We represent Municipality Finance Ltd. (the

"Company"), a centralized finance vehicle for the Finnish

municipal sector. The Company has established a program to

offer and sell, from time to time, debt instruents,

guaranteed by the Local Government Pensions Institution (the

"Guarantor"), of varying maturities in the Euromarkets,

Finland and Asia. The Company currently is contemplating a

series of limited private placements of debt securities in

the United States pursuant to this program. On behalf of

the Company, we request an interpretative or no action

letter with respect to the status of the Company and the

proposed offering under the Investment Company Act of 1940

(the "1940 Act").

The Company operates as a credit institution under Finnish law, subject to inspection and supervision by the Bank of Finland and by Financial Supervision, the FinniSh governental agency with responsibility for financial supervision. The principal purpose of the Company is to meet the long-term financing needs of FinniSh

municipalities, federations of municipalities and

municipality-controlled companies whose loans are guaranteed

by a municipality through lending and other funding. All of

the Company's equity capital is owned by the Guarantor,

which is a statutory pensions institution responsible for

the pensions of municipal officials, employees and their

families. In addition, the Company's fundraising operations

are always supported by a guarantee of the Guarantor.

Securi ties and Exchange

Commission 2 March 8, 1994
The Guarantor was founded in 1964 pursuant to a

special law, the Local Government Officials' and Employees'

Pensions Act (the "LGOEP Act") . The Guarantor is a public

authority supervised by the Finnish Ministry of the Interior

serving Finnish municipalities. The supervision of the

Finnish Ministry of the Interior has the nature of legality

control ¡ it ensures that the Guarantor acts and makes its

decisions wi thin the framework of the law. The Guarantor

has over 900 members, comprised of all 455 cities and

municipalities, all federations of municipalities and

companies owned by municipalities. All Finnish cities and

municipalities and federations of municipalities ar~ obliged

by the LGOEP Act to be member bodies of the Guarantor and

all members of the Guarantor are jointly responsible for the

expenditures and payment obligations of the Guarantor.

The municipal sector in Finland and other Nordic

countries comprises a more important part of the public

sector than elsewhere in Europe. The Finnish Constitution

establishes a system of local governent based on

municipalities which are independent of the central

governent. Finnish municipalities employ approximately

445,000 persons representing one-fifth of the Finnish work

force. In 1991 total budgeted expenditure by municipalities

and federations of municipalities amounted to FIM 138.3

billion, approximately 27% of the Finnish gross domestic

product. Measured in terms of both budgets and personnel,

the local government is a substantially larger entity than

the central governent.

The Local Government Act obliges the

municipalities to ensure sufficient revenues to cover their

expenditures and to this end municipalities have unlimited

power to levy taxes on individuals and power limited by law

to levy tax on property owners and corporations, resident

within the municipality. In 1993 the municipalities

budgeted to raise FIM 48 billion from taxation, representing

approximately 40 per cent of total revenues.

As noted above, the primary purpose of the Company

is to meet the long-term financing needs of the Finnish

municipalities. Its main objective is to secure and satisfy

the funding requirements of the Finnish municipal sector at

the lowest possible costs. The funding requirements of the

Finnish municipal sector are based on financing municipal

investment projects, including municipal development

projects, educational institutions, health care facilities,

housing, transportation and utilities. Its function for the

municipal sector can be compared to that of the Treasury

Management Unit of the Ministry of Finance for the Republic

Securi ties and Exchange
Commission ~ March 8, 1994 of Finland. Funds borrowed by the Company are lent to the

municipalities at a margin above the Company's cost of funds

to cover both the expenses associated with raising funds and

other administrative expenses. In effect, the Company is a

financing arm of the municipal sector and its sole mission

is to satisfy the long-term financing needs of the local

governent, and it is not expected to maximize profits or

otherwise to carryon activities which are not related to

its r~le as a local government and public sector credit

institution. As a result of the foregoing the Company's net

profit before tax has been practically zero in each of its operating years. Al though the Company has a separate corporate

existence, it is under the full control of the Guarantor and

wholly owned by the Guarantor, which is a statutory entity

supervised by the central government, and is employed in

practice to perform financing services usually carried out

in the united states by the government i tsel f . Because the Company appears to be an

instruentality of the local governent and public sector

and is wholly owned by the Guarantor, we believe it to be beyond the scope of the 1940 Act. And, if section 2 (b) of the 1940 Act applied to non-U.S. political subdivisions and

their authorities and instruentalities and corporations

which are wholly owned directly or indirectly by them, the

Company, and its owner, the Guarantor, would not be subj ect

to the 1940 Act.

However, because it could be argued that the

Company is an "investment company" wi thin the strict terms

of the 1940 Act, we are of the opinion that the Company

falls within the exemption afforded by Section 3 (c) (5) (B) . That section exempts from the def ini tion of "investment company" :
any person who is not engaged ln the business of

issuing redeemable securities, face-amount

certificates of the installment type or periodic

payment plan certificates, and who is primarily

engaged in (the business of)... (B) making loans to

manufacturers, wholesalers, and retailers of, and

to prospective purchasers of, specified

merchandise, insurance, and services....

A review of the loan portfolio of the Company

indicates that the Company is primarily engaged in the making of loans to purchasers of "specified merchandise. . . and services" as that term is used in section 3 (c) (5) (B) of

Securities and Exchange
Commission 4 March 8, 1994 the 1940 Act. During its last full fiscal year, over 97% of

the outstanding loans of the Company were made to the

municipalities and federations of municipalities. The rest

of the loans of the Company were made to the municipality-

controlled companies, whose loans are guaranteed by a

municipality. These municipality-controlled companies provide public services such as transport, telecommunications, power J water and sewage. As more fully

described above, these loans were used, among other things,

to finance the construction and renovation of administrative

buildings, educational institutions, industrial and

commercial premises, housing and hospitals, homes for the

aged and day-care centers. The municipal sponsors of these

projects are "prospective purchasers" of "specified

merchandise and services" -- the materials, equipment and

labor associated with the construction and renovation of

public works, housing projects and transportation.

Additionally, we refer to Banco Nacional de Obras

v Servicios Publicos. S.A. (Available November 24, 1977,

Ref. No. 77-932CC), which describes similar circumstances.

In your response letter, you stated that while you would not

agree that the exclúsion from the definition of investment

company in Section 3 (c) (5) (B) of the 1940 Act was available to Banco Nacional de Obras y Servicios Pulicos, S.A.

("Banobras"),. you would not recommend any action because of the unique facts, which are substantively similar to the

si tuation described here. Banobras was controlled by, and

its bonds were to be guaranteed by, the Federal Government

of Mexico and Banobras functioned as the principal

instruentality for contracting domestic and foreign credit

sources for public works construction in Mexico. Likewise,

the Company is fully controlled by, and its debt instruents

are and will be guaranteed by, a federally created and

regulated public institution, and it functions as the local

governent's and public sector's instruentality for

providing credit for public investment projects in Finland.

Accordingly, we are of the opinion that the

Company is excluded from the definition of an investment

company under the 1940 Act, and exempt from the registration

requirements of Sections 7 and 8 of the Act, by reason of

the exemption afforded in Section 3 (c) (5) (B). We would

appreciate it if the Staff would advise us as to whether it

concurs in our opinion.

Securities and Exchange
Commission 5 March 8, 1994
Please call the undersigned at (212) 450-4525 or

Nora Jordan at (212) 450-4684 if you have any questions.

Very truly yours,

.'
PieL're de Saint Phalle