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Office AleWOfanduM TO FROM • Mr. : SUBJECT: Martin \SEC As a result of our conversations of last week with WEC, we are proposing to send the attached letter. The entire subject is sufficiently important to warrant your careful consideration of our proposal UNITED STATES GOVERNMENT DATE: September 20, 194b Mr. Edward h, Cashion. Chief Counsel, Corporation Finance £d vision Securities oa4fiBoib&ngeCommission Philadelphia, Pa. Dear Mr. Cashiont Bepresentativee of t h i s Bank recently discussed with Mr. Caffrey t] you our i at ttio i oi aff r i s to rt i b to > lit id St I _•..->: rci b a t r t i c j • te I f l M -.. Lo as bo foreij ;o» ram i t s . I t was than decided t h a t we should present the e s s e n t i a l f , c t s to you for formal consideration. Export-Import Bank of Washington was created as a hurting corporation unaer the lMM of the D i s t r i c t of H a M l on February 12« 1934, pursuant to P r e s i d e n t i a l Executive fcder. In J inu.'jy 1935 -uid from time to time t h e r e a f t e r the CoagreM eontinn • AM M M '.gsncy of the J a i t a d St, t e g . By the Export-Import Bank Act of 1945, aporoved July 3 1 , 1M5, rasaa^wient of Mn i ted in a Bo,.rd of Directors consisting of the Secretary of State ex officio and four full—time members appointed by the President by :md with the CTICS \-na consent of the Stent t e . The ig% increased the lending authority of the Bank t o $3,500,000,POO; the funus therefor to be obtained through the s a l e by t i n Iwjfc to the I M M 6 U 9 of the h m$ of #1,000,000,CXX) of t a p l t a l stock r.nd of o J j p t i o n s up to two and one-htlf .-.lorized c a p i t a l . As expressed i n "the Export-Import Bank r,.ct of 1945, which i s v i r t u a l l y the i d e n t i c a l language employed i n the Bcnk' s o r i g i n ; ! c h a r t e r , the purpose of the IjMfe la ta i.id "-in .cing and f a c i l i t a t i n g of exports and imports end the exch age of commodities between the United S t ? t e s or any o.l' i t s T e r r i t o r i e s or i n s u l a r possessions and uty foreign country or the m • t i o n s l s t h e r e o f , in ^ranting the Bank lending ;>na other authority to carry out t h i ressed purpose, D M Congreee included the folio-sing rovision in the Act* • I t i s the policy of the Congress t h a t the Bank in the exercise of i t s functions should supplement and encourage and not compete *ith p r i v a t e capit;.!.". The Bank i s ewer mindful oi" t h i s expression of policy of the Congress — 2 — So loan is made by the Bank unless it is satisfied that private capital is unable or unwillin,; to make the loan. Failing this, the Bank attempts to | ve private capital participate with it in the first instance in the I loan, in example of such partaci action on & large scie in the coking of | lo- n may be found in the recent creuit of #200,000,000 granted by the Bcnk to the Kingdom of the Netherlands and in which fortythree United St?, tes commercial banks participated to the extent of approxiI tely #100,000,000. The nature of foreign lending, and particularly the necessarily long-term of such loons, has precluded private capital from engaging therein, either entirely on its own or in participation with this Bank, on any appreciable scale. To i'urtner partieiptions by privets capital, the Bank has concei? 4 I e plan of offering United States commercial bunks the opportunity to purchase rel tively short-tena participations in loans e by the Bank in the first instance v.ithout o rticipation by private c pit 1. A specific example may better serve to illustrate our aropos i. In December 1945, the Bank established a credit of #550,000,000 to the Republic of France. E ch dvance against the credit is evidenced by the general obligation of Fr. nee in the form of a negotiable promissory note bearing interest at 2-3/8$ oer annum and the principal of rhich is payable in sixty (60) appro?:im- tely equal semiannual installraenta. To dcte we h?.ve advanced approximately $450,000,000 of tha credit tmt holo. notes in such ••mini. Whe . the entire credit -aihtoe, we will hold v number of promissory notesj e ch of which will be payable in sixty (6o) seiaiannu: 1 installments over a period of thirty (30) years, beginning on July 1, 194& in the case of notes issued rior to such . te nd on January 1, 1947 for notes issued subsequent to such dote. It is our proposal to offer United States assiaercil banks the o ortunity to participate in this as well s other loans by purchasing from us all or part of one or more priaaipal maturities of a loan. We will sell without any guaranty of payment on our part. Presumably the banks vaill only be interested, for the present at least, in maturities of six (6) months to two (2) years* although maturities up to five (5) years may be of interest to some bunks, we will continue to hold the unpurchased maturities over the >sriod of tae i o n , nd, to afford purchasing banks the advantage of government' 1 b:. eking, it may be that we will igree with them to pursue joint action to protect the interests: of all in the event of default. While ae are not being uotiv ted by • desire for profit, ve ; jrapt to sell the narticip tions on • basis which will t least coiapens te a r our efforts. — I— To enable us to give the purchasing bamcs suitable evidence of •air participations, we will call upon the foreign obligor to issue separate notes lor ft ch principal installment or part thereof of the notes tvhich we hold. Such new notes night be issued to our order and endorsed over by us without recourse to the purchasers or possibly raaght be issued in the name of the respective purchasers or to bearer and deliv reel by us to the purchasers. It is our opinion that securities so sola would not be required to be registered under the Securities Act of 1935, ended, by virtue of the exemption provided for in Section A (l) of the Act to the effect t I the registration provisions are not applicable to "Transactions by any person other than an issuer, underwriter or dealer***" Clearly not sn issuer or a dealer, eoula the Bank be deemed an underwriter in the tr nsactions described? We believe not. Section 2 (ll) of the Act defines an underwriter s one "***who has purchased from an issuer with r view to, or sells for an issuer in connection with, ahe distribution of any security*-**". The Bank proposes to sell for its own account securities which it acquires as a result of loans acde by it as an gency of the Government of the United States to finance and facilitate exports sad imports and the exchange of caaaodities between the United States and foreign counxries. In making the loans, the Bank is in no way motivated by a desire to require the obligations to be given in evidence thereof for the purpose of disposing of the obli ^-^onz. Consiuerations entirely apart from the ultimate disposition of the obligetions govern the .king of the loans. Inaeed, to dopt such a criterion >. I • f actor in the making of a loan, might well be incompatible with the charge imposed upon the Bank by the Congress. The Congress has directed the Bank to fin-nee and facilitate exports and imports and for such purpose voted the Bonk $3,500,000,000, the aaxiaua. amount which may be on loan. The very nature of the Bank's functions a, Jces it clear that its obligations are acquired as an incident to transactions which bear no relation to the ultimate disposition of the obligations. Tills is not to say that the Bank, in acquiring obligations in evidence of a loan, is unaware of the possibility of the sale thereof. Aa a govem-Da at., on to oa rlook ,.at 1 .. tti lax- | Ml lag • M - -i'i if t U B*t an the possibility that circumstances may call for disposal of obligations acquired by it. accordingly, in the past, after determining that • loan was to be made, the Bank attempted to obviate possible technical obstructions to a possible future sale of the oblig; tions by providing in the agreement - i establishing the loan th-.t, upon request of the Bank, the obligations slight be exeh nged for others of acceptable denorain tions and form snd that the obligations aight be required to be registered unaer the Securities Act of 1933, M amended, if it should prove necessary so to do. But in aerely envisaging the possibility o_ the sale of the obligations, the Bunk did not thereby necessarily acquire them "with viev; to" their sale. Even assuming, hoTrever, there was such ;.n implication, one element was still lacking to make the Bank an unaervrriter. There v&§ no interest <^^ to accuire the obligations with a view to B#-&*ai;lt»il tj.on***H. The Bunk enris.-g-: t" e possibility of •:. priv te sale of t.:e obligations just as auch aa it envisaged a public sale or cUstrib-ition thereof. Indeed, what the B;;nk now proposes %| | o ^s, in our opinion, notning more than ;. priv te sole of the obligations. The s:les will be limited to ooamerci 1 bank*. These banks will be o airing for their own portfolio parti ci -v tions in loans in which tills Bank will continue to hold the £re. ter and the longer term interest. While the securities to be given to evidence this participation will necess rily be negotiable in form, they will be of such denomin*tions as will generally preclude Banks from disposing of them to private investors. It If expect t the partici "•• tions may v ry from say |100,000 to possibly $25,000,000 depending on the resources of :.' r involved. We me^y st::te end indeed represent th t our purpose is to h;ve the commercial banks p.rticip te for their own ccount only. Ve believe th. t it is the intent of such commercial banks as may be tat rested in c uiring the tacurities to acquire them for their own .ccount. The foregoing is respectfully submitted to you in order thrt you may determine whether you concur in our opinion thst the Bank, in acquiring obligations through its lending ctivities, does not acquire them "with v. ' to*** Li kri] t:;.on" • d La ;~t, :. a."....--, m a r i tar ( M a Section U (l) of the Securities Act of 1933, as amended. It h.v. been suggested th: t this Bank might issue.^and sell certificates of interest or p rticip: tions in the obligations which/ c aires rather than call upon the foreign obligors to issue their securities in exchange for their or -in 1 obligations as e h-ve proposed rbove. Although such certificates would in no way obligate the Bank to pay principal or interest, it ap:er.\ r:: ;o bly cl1 t t they would be exempt from registration under Section 3(a) (2) of the Securities Act in view of the fact that they would be securities "issued***" by a person "controlled or supervised by end acting el an instrumentality of the Government of the United States pursuant to »uthorty granted by the Congress of the United States***". Furthermore, if the sale of the cert..f-c t-;s ere confined to the transactions proposed above, the transactions involved V M M appear to be exempt under Section U (l) »<* « of the Act since t e; >ul be "***transactions by an issuer not involving any public offering***". We should appreci te your advising us whether you concur with these views. To enable you to have all the f; cts for cons A V tion, we are enclosing a copy of our agreement -rith the Republic of Fr ;.nco est blishing the $550,000,000 loan. With variations depending upon the circa.stances in e ch particular a se, the otr r loans which we h ve made and in which we aay attempt to :ell rticip-tions re ee .e\tiaAly the same as this French loan* A list of &ach ho us is contained in the enclosed copy of our Gecond SeaiMMMl Report to the Con • nopy of the Export-Iaport Baafc ,-.ct of 194-5. We also refer you to the correspondence of April 23, 194-6 and April ,15, 194-6 which we I Ml •*« Baldwin Bane with respect to t • lo n of $200,000,000 which we made to the Kingdom of the Netherlands. Tery truly yours, Hawthorne Arey General Counsel "V: .. Enclosures CCi Hr. Baldwin B. Bane Director, Corporation Finnnce Division Securities & Exchange Commission Phil- .eiphia, Pn. Mr. Walter Loucheim, Jr. Sec ar 1 ties &. Exchange Coiiiuission Tower Builcing Washington 25, D. C.
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