[Federal Register Volume 62, Number 202 (Monday, October 20, 1997)]
[Notices]
[Pages 54485-54489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27657]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22851; 812-10356]
Investors Bank & Trust Company, et al.; Notice of Application
October 10, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under (i) section
12(d)(1)(J) of the Investment Company Act of 1940 (the ``Act'')
granting relief from section 12(d)(1) of the Act; (ii) sections 6(c)
and 17(b) of the Act granting relief from section 17(a) of the Act; and
(iii) section 17(d) of the Act and rule 17d-1 to permit certain joint
transactions.
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SUMMARY OF APPLICATION: Applicants request an order to permit the
lending agent for certain investment companies to invest cash
collateral derived from securities lending transactions in shares of
affiliated registered investment companies organized as a master-feeder
fund.
APPLICANTS: Investors Bank & Trust Company (the ``Bank''); Merrimac
Funds (the ``Feeder Trust''), on behalf of its Merrimac Cash Fund and
Merrimac Treasury Fund, each a series of the Feeder Trust, and each
other series of the Feeder Trust established in the future in which
cash collateral from securities lending transactions may be invested
(collectively, the ``Feeder
[[Page 54486]]
Funds''); Merrimac Master Portfolio (the ``Master Trust''), on behalf
of its Merrimac Cash Portfolio and Merrimac Treasury Portfolio, each a
series of the Master Trust, and each other series of the Master Trust
established in the future in which a Feeder Fund invests (collectively,
the ``Master Funds''); and all registered management investment
companies and series that may participate from time to time as lenders
(collectively, the ``Lending Funds'') in the securities lending program
administered by the Bank (the ``Program'').
FILING DATES: The application was filed on November 15, 1996, and
amendments to the application were filed on June 10, 1997, and
September 29, 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 November 5,
1997, and should be accompanied by proof of service on the 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 Fifth Street, N.W., Washington, D.C.
20549. Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA
02116; Merrimac Funds, 200 Clarendon Street, Boston, MA 02116; and
Merrimac Master Portfolio, P.O. Box 501, Cardinal Avenue, George Town,
Grand Cayman, Cayman Islands, BWI.
FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at
(202) 942-0526, 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 from
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington,
D.C. 20549 (tel. (202) 942-8090).
Applicants' Representations
1. The Feeder Trust is a Delaware business trust organized under a
Master Trust Agreement and registered as an investment company under
the Act. The Feeder Trust has established two series, the Merrimac Cash
Fund and the Merrimac Treasury Fund, each of which has three classes
(the ``Premium Class,'' the ``Institutional Class,'' and the
``Placement Class'') of shares. Lending Funds will acquire only Premium
Class shares.\1\ Shares of the Feeder Trust are sold without a
distributor exclusively to ``accredited investors'' in accordance with
the requirements of Regulation D under the Securities Act of 1933. Each
Feeder Fund will be a ``feeder'' in a ``master-feeder'' structure with
the Master Trust and invest all of its investable assets in a Master
Fund having the same investment objective and policies as the Feeder
Fund.
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\1\ The Premium Class shares are subject to a $10 million
minimum investment requirement.
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2. The Master Trust is a New York common law trust established
under a Declaration of Trust and registered as an investment company
under the Act. The Master Trust has established two series, the
Merrimac Cash Portfolio and the Merrimac Treasury Portfolio.\2\
Interests in each Master Fund are offered exclusively to one or more
Feeder Funds and to other ``accredited investors.'' Shares of the
Master Trust are sold without a distributor and are not subject to a
sales load, redemption fee, asset-based sales charge (as defined in
rule 2830(b)(8)(A) of the Conduct Rules of the National Association of
Securities Dealers), or shareholder servicing fee.
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\2\ The Merrimac Cash Portfolio may invest in U.S. Treasury
bills, notes and bonds, and other instruments issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (``U.S.
Government Obligations''); securities of U.S. and non-U.S. banks and
thrift organizations; corporate debt obligations; asset-backed
securities; variable rate obligations; and repurchase agreements
that the collateralized by the securities listed above. The Merrimac
Treasury Portfolio invests at least 65% of its assets in U.S.
Government Obligations. All investments of each Portfolio will
qualify as ``eligible securities'' within the meaning of rule 2a-7
under the Act. Moreover, each Feeder Fund and Master Fund will seek
to maintain a stable net asset value by valuing the portfolio using
the amortized cost method and will comply with the requirements of
rule 2a-7 under the Act.
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3. The Bank, a wholly-owned subsidiary of Investors Financial
Services Corp., is a Massachusetts chartered trust company. The Bank
provides domestic and global custody, multi-currency accounting,
institutional transfer agency, performance measurement, foreign
exchange, securities lending and mutual fund administration services to
a variety of financial asset managers, including mutual fund complexes,
investment advisers, banks and insurance companies. The Bank acts as
agent for its clients for both international and domestic securities
lending services.
4. The Bank and one or more of its affiliates will serve as
custodian, transfer agent, and administrator to each Feeder Fund and
Master Fund. The Bank also will serve as the investment adviser to each
Master Fund. Applicants anticipate that one or more entities will serve
as a sub-adviser to each Master Fund. The Bank will be responsible for
the payment of all fees for the services of any sub-adviser. The Bank
will charge each Feeder Fund and Master Fund, as applicable, fees for
services it provides as custodian, transfer agent, administrator and
investment adviser.
5. From time to time, the Bank will be appointed to serve as
lending agent for various Lending Funds.\3\ The Bank will enter into a
securities lending authorization agreement (a ``Lending Agreement'')
with each Lending Fund.\4\ The Lending Agreement will authorize the
Bank, as agent for the Lending Fund, to lend portfolio securities of
the Lending Fund to each person designated by the Lending Fund as an
eligible borrower (each, a ``Borrower''), and to enter into a master
borrowing agreement with each Borrower (each, a ``Borrowing
Agreement''). The pool of eligible Borrowers may be modified from time
to time by each Lending Fund, acting through its authorized officers.
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\3\ The Bank will not be an affiliated person of any Lending
Fund or an affiliated person of an affiliated person of any Lending
Fund within the meaning of section 2(a)(3) of the Act, except that,
if any Lending Fund directly or indirectly owns, controls, or holds
with the power to vote 5% or more of the shares of a Master Fund,
the Bank will be an affiliated person of an affiliated person of the
Lending Fund. Moreover, no Lending Fund will be an affiliated person
of any Feeder Fund or an affiliated person of an affiliated person
of any Feeder Fund, except that a Lending Fund may (i) directly or
indirectly own, control, or hold with power to vote more than 5% of
the voting securities of a Feeder Fund or a Master Fund, or (ii) be
an affiliated person of another Lending Fund that directly or
indirectly owns, controls, or holds with the power to vote more than
5% of the voting securities of a Feeder Fund or Master Fund.
\4\ Certain Lending Funds participating in the Program may be
management investment companies that hold themselves out as ``money
market funds'' and comply with the requirements of rule 2a-7 under
the Act (``Money Market Lending Funds'').
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6. The Lending Agreement and the Borrowing Agreement will
establish, for each transaction, the initial and ongoing
collateralization requirements, the types of collateral that may be
accepted, and the manner in which the Borrower's return on the
collateral (the ``Borrower's Rebate'') will be established. The Lending
Agreement will (i) fix the percentage difference between the Borrower's
Rebate and the actual return on the investment of the collateral (the
``Net Income'') to be retained by the Lending Fund and the percentage
to be
[[Page 54487]]
paid by the Lending Fund to the Bank, and (ii) authorize the Bank, as
agent for the Lending Fund, to negotiate the Borrower's Rebate for each
transaction and to commit the Lending Fund to pay the Borrower's
Rebate. The Lending Fund will be responsible for paying the Borrower's
Rebate and returning the principal amount of the collateral to the
Borrower. Each loan will be terminable, at any time, by the Borrower or
the Lending Fund.
7. During the term of each loan, the Lending Fund will retain the
economic rights of an owner of the securities that are the subject of a
loan, including the right to receive from the Borrower all dividends
and distributions made with respect to those securities. The Bank will
monitor corporate actions with respect to securities loaned by each
Lending Fund and will reallocate or terminate loans at the direction of
the Lending Fund, as necessary, to enable the Lending Funds to vote
those securities.\5\
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\5\ The Borrowing Agreement will provide that within three
trading days (or such other time period as is the customary
settlement period for the loaned securities) of the Lending Fund
giving notice of the termination of any loan, the Borrower is
required to transfer the loaned securities (or certificates for
identical securities) to the Bank, as agent for the Lending Fund, or
to the Lending Fund's custodian, and pay to the Bank or to the
Lending Fund's custodian the amount of all dividends and
distributions that would have been payable to the Lending Fund on or
with respect to such securities if they had not been loaned, to the
extent not previously paid.
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8. Applicants anticipate that the collateral delivered in
connection with most loans will consist of cash. In order to maximize
investment return on the securities lending activities, each Lending
Agreement will authorize the Bank, as agent for the Lending Fund, to
invest the cash in shares of one or more Feeder Funds, in accordance
with the terms of the Lending Agreement and instructions received from
authorized officers of the Lending Fund.\6\ The Bank, as agent for a
Lending Fund, will not purchase shares of any Feeder Fund with cash
collateral unless participation in the Program has been approved by a
majority of the directors or trustees of the Lending Fund who are not
``interested persons'' of the Lending Fund within the meaning of
section 2(a)(19) of the Act. Such directors or trustees will also
evaluate the Program no less frequently than annually, and determine
that investing cash collateral in the Feeder Fund is in the best
interests of the shareholders of the Lending Fund. Each Lending Fund
will reserve the right to rescind authorization to invest in a Feeder
Fund. Moreover, each Lending Fund that authorizes the Bank to invest
cash collateral in a Feeder Fund will be provided a copy of the
confidential offering circular for such Feeder Fund, and with such
other disclosure documents that the Bank determines may be appropriate
to ensure that each Lending Fund is fully informed with respect to the
investment considerations and risks associated with investing cash
collateral in the Feeder Funds.
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\6\ Cash collateral from transactions in which the lender is a
Money Market Lending Fund will not be used to acquire shares of any
Feeder Fund that does not comply with the requirements of rule 2a-7.
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9. Applicants request an order to permit (i) the Bank, as agent of
the Lending Funds, to invest cash collateral derived from loaned
securities in shares of the Feeder Trust; and the Lending Funds to
purchase from the Feeder Trust, and (ii) the Feeder Trust to sell to
the Lending Funds, shares issued by the Feeder Trust. Applicants also
request an order to permit the Lending Funds, the Feeder Trust, the
Master Trust, and the Bank to effect certain joint transactions
incident to the Program.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) of the Act provides that no registered
investment company may acquire securities of another investment company
representing more than 3% of the acquired company's outstanding voting
stock, more than 5% of the acquiring company's total assets, or,
together with the securities of other investment companies, more than
10% of the acquiring company's total assets. Section 12(d)(1)(B)
provides that no registered open-end investment company may sell its
securities to another investment company if the sale will cause the
acquiring company to own more than 3% of the acquired company's voting
stock, or if the sale will cause more than 10% of the acquired
company's voting stock to be owned by investment companies.
2. Section 12(d)(1)(J) provides that the SEC may exempt any person
or transaction from any provision of section 12(d)(1) if and to the
extent that such exemption is consistent with the public interest and
the protection of investors. Applicants request an exemption under
section 12(d)(1)(J) to permit the Bank, as agent of the Lending Funds,
to invest cash collateral derived from loaned securities in the Feeder
Funds in excess of the limits imposed by section 12(d)(1) of the Act.
3. Applicants believe that the investment of cash collateral by
Lending Funds in the Feeder Funds will provide Lending Funds with the
opportunity to maximize returns with less investment risk than if the
cash collateral received by each Lending Fund were segregated in a
separate account from which purchases and sales of securities would be
made. In addition, applicants believe that participation in the Program
will permit the Lending Funds to minimize credit risk and interest rate
risk through diversification. Applicants also believe that the
administrative burdens, such as the daily monitoring of total assets
and other investments of the Lending Funds associated with compliance
with section 12(d)(1) may impair the ability of the Bank to provide
securities lending services to Lending Funds in an economical and
administratively efficient manner, and, therefore, may create
competitive disadvantages for the Lending Funds relative to other
institutional investors that seek to engage in securities lending
activities.
4. Applicants submit that the investment of cash collateral
received in connection with securities loans by Lending Funds in the
Feeder Funds does not give rise to the policy concerns of section
12(d)(1), which include unnecessary duplication of costs (such as sales
loads, advisory fees, and administrative costs), and undue influence by
the fund holding company over its underlying funds arising from the
threat of large scale redemptions of the securities of the underlying
investment companies. Applicants state that there will be no layering
of sales or distribution charges because shares of the Feeder Funds
acquired by the Lending Funds will be sold without a sales charge or
redemption fee and the assets allocated to the Lending Funds will not
be subject to any asset-based sales charge. Applicants also state that
each Master Fund will be structured to accommodate the increased needs
of liquidity associated with securities lending transactions by
maintaining an appropriate average weighted maturity or effective
duration and, therefore, will not be susceptible to control through the
threat of large scale redemptions. Accordingly, applicants believe that
the requested exemption from section 12(d)(1) is consistent with the
public interest and the protection of investors.
B. Section 17(a)
1. Sections 17(a) (1) and (2) of the Act make it unlawful for any
affiliated person of a registered investment company, or any affiliated
person of an affiliated person, acting as a principal, to sell any
security to, or purchase any security from, such registered investment
company. From time to
[[Page 54488]]
time, it is possible that a Lending Fund may directly or indirectly
own, control, or hold with power to vote 5% or more of the shares of a
Feeder Fund, which will result in the Lending Fund being an
``affiliated person'' of the Feeder Fund. In these circumstances, the
purchase or redemption of shares of a Feeder Fund for the same Lending
Fund or an affiliated person of such Lending Fund could violate section
17(a) of the Act.
2. Section 17(b) of the Act authorizes the SEC to exempt a
transaction from section 17(a) 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, the proposed transaction is consistent with the
policy of each registered investment company concerned, and with the
general purposes of the Act. Because section 17(b) could be interpreted
to exempt only a single transaction, applicants are also seeking relief
pursuant to section 6(c) of the Act to permit the investment of cash
collateral in shares of the Feeder Funds as proposed in the
application.\7\
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\7\ See Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
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3. Section 6(c) provides that the SEC may exempt any person or
transaction from any provision of the Act or 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 the Act. Applicants believe that relief is appropriate
under section 6(c) of the Act for the same reasons that it is
appropriate under section 17(b), as discussed below.
4. Applicants believe that the proposed transactions will be
reasonable and fair, and consistent with the general purposes of the
Act as well as the policies of each Lending Fund. The Lending Funds
will not be able to purchase or redeem shares of the Feeder Funds at a
price lower or higher than the per share net asset value of the Feeder
Funds, and no sales load, redemption fee, or asset-based sales charge
will be charged with respect to shares of the Feeder Funds sold to
Lending Funds. Moreover, applicants note that the low fees charged by
the Bank for services provided to the Feeder Trust and Master Trust
will be subject to intense scrutiny and, therefore, will remain fair
and reasonable to the Feeder Trust and the Master Trust, the Feeder
Trust's shareholders and the Lending Funds. Finally, the Bank will not
purchase shares of any Feeder Fund, as agent for a Lending Fund, unless
the Lending Fund, or an authorized officer of the Lending Fund, has
represented to the Bank that (i) its policies generally permit the
Lending Fund to engage in securities lending transactions, (ii) such
transactions will be conducted in accordance with the securities
lending guidelines established in a series of no-action letters issued
by the SEC's Division of Investment Management,\8\ (iii) its policies
permit the Lending Fund to purchase shares of the Feeder Funds with
cash collateral, and (iv) its securities lending activities will be
conducted in accordance with all representations and conditions in the
application applicable to such Lending Fund.
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\8\ See e.g. Sife Trust Fund (pub. avail. Feb. 17, 1982).
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C. Section 17(d) and Rule 17d-1
1. Section 17(d) of the Act and rule 17d-1 thereunder prohibit any
affiliated person of a registered investment company, acting as
principal, from effecting any transaction in connection with any joint
enterprise or joint arrangement in which such registered investment
company participates. The ownership by a Lending Fund or its
affiliates, from time to time, of 5% or more of the shares of a Feeder
Fund or Master Fund, could cause such Lending Fund to be an affiliated
person of the Feeder Trust or the Master Trust, or an affiliated person
of an affiliated person of the Feeder Trust or the Master Trust. In
addition, the Bank, as investment adviser for each Master Fund, will be
an affiliated person of the Master Trust. As an affiliated person of
the Master Trust, the Bank may, from time to time, be an affiliated
person of an affiliated person of one or more Lending Funds by virtue
of such Lending Fund's interests in the Master Trust. Consequently, the
proposed purchase of shares of a Feeder Fund with cash collateral, the
redemption of such shares, the sharing of Net Income among the Bank and
the Lending Funds, and the payment of fees by the Feeder Trust and the
Master Trust to the Bank may constitute a joint transaction for which
an exemptive order is required.
2. Rule 17d-1 permits the SEC to issue an order with respect to a
joint transaction. In passing on applications for orders under rule
17d-1, the SEC is to consider whether the proposed 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 it is appropriate to grant an exemption under rule 17d-1 from the
restrictions of section 17(d) of the Act.
3. Each Lending Fund will invest in a class of shares of the Feeder
Trust on the same basis as every other shareholder of the Feeder Trust
investing in the same class of shares, and all shares within a class
will be priced in the same manner and will be redeemable under the same
terms. In addition, no class of shares of a Feeder Fund in which a
Lending Fund invests will be subject to any sales load, redemption fee,
or asset-based sales charge. The arrangements regarding the sharing of
Net Income between the Bank and each Lending Fund are the product of
arm's length negotiations between the Lending Fund and the Bank.
Finally, applicants state that the proposed investment of cash
collateral by Lending Funds in shares of the Feeder Funds is consistent
with the provisions and purposes of the Act.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. No Lending Fund will purchase shares of any Feeder Fund unless
participation in the Program has been approved by a majority of the
directors or trustees of the Lending Fund that are not ``interested
persons'' of the Lending Fund within the meaning of section 2(a)(19) of
the Act. Such directors or trustees will also evaluate the Program no
less frequently than annually, and determine that investing cash
collateral in the Feeder Fund is in the best interests of the
shareholders of the Lending Fund.
2. The Bank will lend portfolio securities of each of the Lending
Funds only in accordance with the guidelines specified by such Lending
Fund.
3. Cash collateral from loans by Lending Funds will be invested in
shares of each Feeder Fund subject to such limitations and guidelines
as are specified by the Lending Funds.
4. Cash collateral from loans by Money Market Lending Funds will
not be used to acquire shares of any Feeder Fund that does not comply
with the requirements of rule 2a-7 under the Act.
5. The shares of a Feeder Fund sold to Lending Funds will not be
subject to a sales load or redemption fee and assets of the Feeder Fund
and the Master Fund allocable to Feeder Funds will not be subject to
any asset-based sales charge (as defined in rule 2830(b)(8)(A) of the
Rules of Conduct of the National Association of Securities Dealers).
6. The Bank will not acquire shares of any Feeder Fund on behalf of
any
[[Page 54489]]
Lending Fund if, at the time of such acquisition, (i) the Bank is an
affiliated person of the Lending Fund or an affiliated person of an
affiliated person of the Lending Fund, or (ii) the Lending Fund is an
affiliated person of the Feeder Fund or an affiliated person of an
affiliated person of the Feeder Fund, in either case, by means other
than by directly or indirectly owning, controlling, or holding with the
power of vote 5% or more of the shares of a Feeder Fund or a Master
Fund by the Lending Fund or an affiliated person of the Lending Fund.
7. In connection with all matters requiring a vote of shareholders
of a Feeder Fund, the Bank will pass through voting rights to those
Lending Funds that have a beneficial interest in such Lending Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27657 Filed 10-17-97; 8:45 am]
BILLING CODE 8010-01-M
