TRANSIT INVESTMENT CORPORATION and
ALBERT M. GREENFIELD & CO.

File No. 812-510. Promulgated May 5, 1948

Investment Company Act of 1940--Section 6 (c) and 17 (e) (1)

TRANSACTIONS BETWEEN AFFILIATED PERSONS

Affiliated Real Estate Brokers

In the absence of an order of exemption pursuant to Section 6 (c), Section 17 (e) (1) prohibits an affiliated real estate broker of a registered investment company from receiving a sales commission for the sale of the company's real estate, the exception in Section 17 (e) (1) with respect to a person acting in the regular course of his business as a broker being limited to a securities broker and not including a real estate broker.

EXEMPTIONS

Exemptive Powers Under Section 6 (c)

The general exemptive power conferred upon the Commission by Section 6 (c) is not limited to transactions which are covered by some other specific exemption provision and gives the Commission jurisdiction to exempt from Section 17 (e) (1) the acceptance of compensation by an affiliated real estate agent of a registered investment company, notwithstanding the absence of a specific exemption provision in Section 17 (e) (1) covering such situation.

Acceptance of Compensation by Affiliated Person Acting as Agent

Where brokerage commission for sale of real estate of registered investment company by real estate broker who is affiliated person of affiliated person of such company represents compensation for services actually rendered in connection with a bona fide sale and is fair and reasonable in amount, and satisfies generally standards of Section 17 (b) which control exception of transactions involving affiliates acting as principals, exemption from Section 17 (e) (1) granted, pursuant to Section 6 (c), to permit acceptance of such commission by real estate broker.

APPEARANCES:

Stanley Folz, of Sundheim, Folz, Kamsler & Goodis, and Maxwell P. Bralow, for Albert M. Greenfield & Co.

George H. Huft, and Antony H. Whitaker and Thomas B. K. Ringe, of Morgan, Lewis & Bockius, for Transit Investment Corporation.

Morris L. Forer and Samuel L. Sperling, of Wolf, Block, Schorr and Solis-Cohen, for Frank G. Binswanger, Inc.

Joseph S. Lord, III, for certain intervening shareholders of Transit Investment Corporation.

James P. Goode and John E. Downs, for Division of Corporation Finance of the Commission.

FINDINGS AND OPINION OF THE COMMISSION

Transit Investment Corporation (“TIC"), a registered investment company, and Albert M. Greenfield & Co. ("Greenfield Co."), a real real estate broker, have filed a joint application pursuant to Section 6 (c) of the Investment Company Act of 1940 (the Act") for an order exempting from the provisions of Section 17 (e) (1) of the Act the acceptance by Greenfield Co. of a real estate sales commission for negotiating the sale by TIC of certain real estate known as the Mitten Building.

28 S. E. C.--40----1171

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After appropriate notice a hearing was held. Requests for findings, briefs and a reply brief were submitted to the hearing examiner, and the hearing examiner has filed a recommended decision recommending that the application be granted. Exceptions to this recommended decision and a brief in support of such exceptions have been filed by the Division of Corporation Finance, and reply briefs have been filed by applicants and by Frank G. Binswanger, Inc. ("Binswanger, Inc.''), a Philadelphia real estate broker in cooperation with whom Greenfield Co. negotiated the real estate sale. We heard oral argument. Upon the basis of the entire record, the briefs and oral argument, we make the findings and reach the conclusions set forth below.

PARTIES AND TRANSACTIONS INVOLVED

TIC is a closed-end non-diversified management investment company registered under the Act since January 1, 1944. TIC is in the process of liquidation and dissolution pursuant to an order of the Court of Common Pleas in Philadelphia issued in December 1946.1

Greenfield Co. is a real estate brokerage and management business in Philadelphia and is also active in other parts of the country, with offices in New York City, Pittsburgh, Pennsylvania, and Newark and Atlantic City, New Jersey. Albert M. Greenfield is president of Greenfield Co. and one of three trustees who hold a majority of the voting stock of Greenfield Co. under a voting trust agreement. Greenfield is also a director of TIC' Under Section 2 (a) (3) of the Act, Greenfield Co. is an affiliated person of Greenfield, and Greenfield in turn is an affiliated person of TIC.

In the fall of 1946, TIC authorized Greenfield Co. to arrange for a public auction of the Mitten Building, located at Broad and Locust Streets in Philadelphia, which was TIC's principal remaining asset. A public auction was held in November 1946 but no satisfactory bid was received and the building was withdrawn from public sale.

After the failure of the auction, Greenfield Co. was requested by TIC to attempt to secure a purchaser for the Mitten Building at private sale as agent for TIC, and carried on negotiations with various prospective buyers and other brokers. In August 1947, an agreement was negotiated by Greenfield Co. in cooperation with Binswanger, Inc. for the sale of the Mitten Building to the Broad-Locust Realty Co. at a price of $1,875,000. Neither the purchaser nor Binswanger, Inc. is affiliated with

1 In re Cooperative Wage Fund, Court of Common Pleas No. 4, Philadelphia County, Pa., June Term 1942, No. 3252.

'Greenfield has been a director of TIC since 1943. For several years ending early in 1943, TIC was in receivership under the jurisdiction of the United States District Court for the Eastern District of Pennsylvania. Upon termination of the receivership in 1943, stockbolders elected a new board of directors among whom, at the suggestion of the District Court, were Edward Hopkinson, Jr., a partner of Drexel and Co., and Greenfield, who became chairman and vice-chairman of the board of directors respectively. Greenfield is also a member of the executive and finance committees.

TIC, Greenfield, or Greenfield Co. TIC has agreed to pay Greenfield Co. a commission of 5 percent of the sales price, or $93,750, and Greenfield Co. has agreed to pay half of the sales commission to Binswanger, Inc. as cooperating broker. ' After hearings in September 1947, the Court of Common Pleas, which had in May 1947 directed that a private sale be effected subject to its approval, issued an order approving the agreement of sale entered into between Greenfield Co. as agent for TIC and the Broad-Locust Realty Co., and authorized TIC to consummate the sale. The question whether a sales commission could be paid to Greenfield Co. under the provisions of the Investment Company Act was in no way involved in the proceedings before the Court; the Court was advised and understood that such question was the subject of an application to this Commission in the instant proceedings. TIC has consummated the sale and has set aside $93,750, representing 5 percent of the sale price, pending our determination of the present application for exemption.

ISSUES

Since Greenfield Co. is an affiliated person of Greenfield, who in turn is an affiliated person of TIC, it may not accept compensation for acting as an agent in connection with the sale of TIC's property, if the transaction is prohibited by Section 17 (e) (1) of the Act unless such transaction may be and is exempted from the operation of that section by action of this Commission pursuant to Section 6 (c). In accordance with the various contentions that have been made in the present case we shall consider in turn (1) whether the transaction is prohibited by Section 17 (e) (1); (2) if so, whether the Commission has authority under Section 6 (c) to exempt the transaction; and (3) if an exemption can be authorized pursuant to Section 6 (c), whether the facts in this case justify such exemption.

APPLICATION OF SECTION 17, (e) (1)

Section 17 (e) (1) prohibits an affiliated person of an affiliated person of a registered investment company from receiving any compensation for acting as agent in connection with the sale of property for such registered investment company, except where the transaction is in the course of such person's business as an underwriter or broker." Applicants, though

Binswanger, Inc. in turn has agreed to divide its share of the commission with Albert B. Ashforth and Co., unaffiliated New York brokers who cooperated with Binswanger, Inc. in obtaining the purchaser.

4 Section 17 (e) (1) reads as follows:

"(e) It shall be unlawful for any affiliated person of a registered investment company, or any affiliated person of such person-

"(1) acting as agent, to accept from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property to or for such registered company or any controlled company thereof, except in the course of such person's business as an underwriter or broker;"'

they have applied to us for exemptive relief, have also contended that, as used in Section 17 (e) (1), the word "broker" includes a real estate broker, thereby specifically exempting compensation for agency transactions in the course of a person's business as a real estate broker and making it unnecessary for the Commission to issue an order of exemption. They argue that an intention that "broker" should be given its broad colloquial meaning is indicated by the fact that in Section 17 (e) (2), which deals with the receipt of compensation for the sale of securities, the word "broker" is qualified by the phrase "in connection with the sale of securities," a qualification not contained in Section 17 (e) (1). Counsel for the Division of Corporation Finance, on the other hand, contend that the exception in Section 17 (e) (1) does not apply to real estate brokers since Section 2 (a) (6), which defines "broker," states that "broker means any person engaged in the business of effecting transactions in securities for the account of others."

Section 2 (a) provides that the definitions set forth therein shall apply "unless the context otherwise requires." As noted, the definition contained in the Act itself limits the term "broker" to a person engaged in effecting transactions in securities. While some ambiguity as to the meaning of "broker" as used in Section 17 (e) (1) may be raised by the qualified use of the term in Section 17 (e) (2), we cannot find that this ambiguity is such as to require a different meaning than that set forth in Section 2. It does not appear that the application of the definition in Section 2 would make Section 17 (e) (1) meaningless or frustrate the evident intent of that section. On the contrary, the more limited definition, in restricting what otherwise be a broad automatic exemption is consistent with the legislative purpose to bring transactions between affiliated persons and registered investment companies within the scrutiny of the Commission. Moreover, the legislative history of the Act clearly indicates that the prohibition in Section 17 (e) (1) was intended to apply to real estate brokers.'

See Hearings Before a Subcommittee of the Committee on Interstate and Foreign Commerce, House of Representatives, 76th Cong., 3d Sess., on H. R. 10065, page 98 (memorandum embodying suggestions resulting from conferences between this Commission and representatives of investment companies):

"The prohibition [in Section 17] on self-dealing is approved and there should be prohibited any sales to or purchases from insiders whether of portfolio securities or other property and also any loans to insiders. Specified agency fees, such as brokerage (other than real estate), fiscal and transfer agencies and similar payments and such others as the Commission may prescribe, are to be exempt. The Commission is also to have power to grant by general rules and regulations exemptions under certain circumstances to the flat prohibition on self-dealing as principal."'

Also see. Hearings Before a Subcommittee of the Committee on Banking and Currency, U. S. Senate, 76th Cong., 3d Sess., on S. 3580, page 262 (testimony of David Schenker, who was one of the draftsmen of the legislation):

"You might say, why did the Commission write that? [the prohibition in Section 17 (e) (1)] That is because we found cases where although the controlling person did not sell any property to the investment trust, he was a real estate agent in the transactions in which real estate was sold to the investment trust, and we feel under those circumstances that he has this conflict of interests. But he can act as the broker for the trust and he can act as the underwriter or the distributor of securities."

And we have previously held that the exemption for brokers in Section 17 (e) (1) does not apply to real estate brokers. Since application of the definition in Section 2 (a) (6) to Section 17 (e) (1) is consonant with the policy of the latter section to require scrutiny of transactions between affiliated persons and registered investment companies, we see no reason for reversing our consistent administrative construction of the Act. 7

We accordingly find that Section 17 (e) (1) prohibits the acceptance by Greenfield Co. of any compensation for acting as agent for TIC in connection with the sale of the Mitten Building. We turn then to a consideration of whether the Commission has power pursuant to Section 6 (c), to issue order of exemption from the prohibition of Section 17 (e) (1).

an

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APPLICATION OF SECTION 6 (C)

Section 6 (c) gives the Commission broad discretionary power to exempt any person, security, or transaction from any provision or provisions of the Act whenever the standards of that section are fulfilled.' Acting pursuant to Section 6 (c), we have in the past exempted from the prohibition of Section 17 (e) (1) the acceptance of real estate commissions by affiliated persons. Counsel for the Division of Corporation Finance, however, now contend that we have no power to grant such exemption and have asked us to reconsider our prior decisions asserting and exercising such power. The argument of the staff is that Section 17 as a whole sets forth the powers of this Commission with respect to dealings between affiliated persons and registered investment companies; that Section 17 contains within itself certain exceptions; and that these selfcontained exceptions exclude the possibility of other exceptions under Section 6 (c).

Section (6) (c) contains no qualification or limitation as to the sections of the Act from which an exemption may be granted,

6 Bankers Securities Corporation, et al., 24 S. E. C. 398 (1946); Bánkers Securities Corporation, et al., 25 S. E. C. 364 (1947); Bankers Securities Corporation, et al., Investment Company Act Release No. 1078. Also Cf. Axe-Houghton Fund, Inc., et al., 25 S. E. C. 133 (1947).

7 Applicants have argued that this interpretation of "broker" would work an unreasonable discrimination against an affiliated real estate broker in relation to an affiliated securities broker, and would make the Act unconstitutional. We find no merit in this contention, particularly in view of our decision, discussed infra, that a Section 6 (c) exemption is available, on an appropriate showing, to relieve affiliated real estate brokers from the prohibition of Section 17 (e) (1).

8 Section 6 (c) provides:

"(c) That Commission, by rules and regulations upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this title or of any rule or regulation thereunder, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title."' 9 Bankers Securities Corporation, et al., 24 S. E. C. 398 (1946); Bankers Securities Corporation, et al., 25 S. E. C. 364 (1947), Investment Company Act Release No. 1038; Bankers Securities Corporation, et al., Investment Company Act Release No. 1078.