[Federal Register Volume 61, Number 226 (Thursday, November 21, 1996)]
[Notices]
[Pages 59252-59256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29714]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 22336; 812-10182]
American AAdvantage Funds, et al.; Notice of Application
November 15, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``Act'').
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APPLICANTS: American AAdvantage Funds (the ``AAdvantage Trust''),
American AAdvantage Mileage Funds (the ``Mileage Trust''), AMR
Investment Services Trust (The ``AMR Trust,'' collectively with the
AAdvantage Trust and the Mileage Trust, the ``Trusts''), AMR
Investments Strategic Cash Business Trust (the ``Strategic Cash
Trust''), AMR Investments Enhanced Yield Business Trust (the ``Enhanced
Yield Trust,'' collectively with the Strategic Cash Trust, the
``Investment Funds''), and AMR Investment Services, Inc. (``Adviser''),
on behalf of themselves and all future investment companies that are
advised by the Adviser or any entity controlling, controlled by, or
under common control (within the meaning of section 2(a)(9) of the Act)
with the Adviser.
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
Act from section 12(d)(1), under sections 6(c) and 17(b) of the Act
from section 17(a), and under section 17(d) of the Act
[[Page 59253]]
and rule 17d-1 thereunder for an exemption from section 17(d) and rule
17d-1.
SUMMARY OF APPLICATION: Applicants seek an order that would permit the
Trusts to invest cash collateral received from the borrowers of their
portfolio securities in shares of the Investment Funds, private
investment companies that are affiliated persons of the Trusts.
FILING DATES: The application was filed on June 3, 1996, and amended on
November 12, 1996.
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 December 10,
1996, 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 such notification by writing to
the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 4333 Amon Carter Boulevard, MD 5645, Fort Worth,
Texas 76155.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel,
at (202) 942-0583, 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.
Applicants' Representations
1. The AAdvantage Trust, which currently has eight series funds
(the ``AAdvantage Funds''), and the Mileage Trust, which currently has
seven series funds (the ``Mileage Funds,'' collectively with the
AAdvantage Funds, the ``Funds''), are Massachusetts business trusts
registered under the Act as open-end management investment companies.
Each Fund is a separate investment series of the AAdvantage Trust or
the Mileage Trust and has distinct investment objectives and policies.
2. The Funds implemented a ``master-feeder'' structure on November
1, 1995. Under this structure, each Fund (other than the American
AAdvantage Short-Term Income Fund, which invests directly in investment
securities) invests all of its investable assets in a corresponding
series fund (``Portfolio'') of the AMR Trust, a New York common law
trust that is registered under the Act as an open-end management
investment company.\1\ Each of the seven Portfolios has investment
objectives identical to those of the corresponding investing Funds. As
a result of this arrangement, all investment management for the Funds
takes place at the Portfolio level, rather than at the Fund level.
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\1\ Interests in the AMR Trust are offered to the AAdvantage
Trust and the Mileage Trust pursuant to an exemption from
registration under the private offering exemption contained in
section 4(2) of the Securities Act of 1933 (the ``Securities Act'').
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3. The Adviser, a wholly-owned subsidiary of AMR Corporation, the
parent corporation of American Airlines, Inc., is registered as an
investment adviser under the Investment Advisers Act of 1940. The
Adviser provides the AMR Trust with administrative and asset management
services, and provides administrative services to the Funds.
4. The Strategic Cash Trust, a newly formed Massachusetts business
trust of which the Adviser is the sole trustee, invests exclusively in
high-quality, U.S. dollar-denominated obligations eligible for purchase
pursuant to rule 2a-7 under the Act. The Strategic Cash Trust will seek
to achieve a stable $1.00 net asset value per share. Shares of the
Strategic cash Trust, together with any other outstanding securities
(other than short-term paper) will not be beneficially owned by more
than 100 persons. The Strategic Cash Trust is not making and presently
does not propose to make a public offering of its shares or other
securities.\2\ The Enhanced Yield Trust, a Massachusetts business trust
formed in 1994 of which the Adviser is the sole trustee, seeks to
achieve higher current income and total returns than bank short-term
investments and money market instruments while providing relative
principal stability and liquidity. Shares of the Enhanced Yield Trust,
together with any other outstanding securities (other than short-term
paper) will not be beneficially owned by more than 100 persons. The
Enhanced Yield Trust is not making and presently does not propose to
make a public offering of its shares or other securities. Both the
Strategic Cash Trust and the Enhanced Yield Trust offer daily
redemption of their shares.
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\2\ Shares in the Investment Funds will be offered to
institutional investors in reliance on the private offering
exemption contained in section 4(2) of the Securities Act.
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5. Each Investment Fund has entered into an advisory contract with
the Adviser, under which the Adviser makes investment decisions with
respect to the Investment Fund's assets and administers each Investment
Fund in accordance with the declaration of trust and the policies of
each Investment Fund. The Adviser will receive an annualized fee from
each Investment Fund equal to .10% of the average daily net assets of
each Investment Fund, accrued daily and paid monthly.
6. Each Fund, through its corresponding Portfolio, has the ability
to increase its income by lending portfolio securities to registered
broker-dealers or other institutional investors deemed by the Adviser
to be of good standing (``Borrowers''). These loans may not exceed one
third of a Portfolio's total assets taken at market value. The AMR
Trust, the Adviser, and NationsBank of Texas, N.A. (``Agent'') have
entered into a securities lending agreement (``Agreement'') to permit
each Portfolio to participate in the securities lending program
(``Program'') administered by the Agent. The Agent is the custodian for
each Portfolio, and also acts as lending agent for each Portfolio. The
Program has been approved by the independent trustees of each Trust,
who will monitor the Program on an ongoing basis.
7. Under the Program, the Agent enters into agreements with
Borrowers to lend them the Portfolios' securities (``Loan
Agreements''). Pursuant to the Loan Agreements, the Agent delivers the
Portfolios' securities to Borrowers, who agree to return such
securities on demand. the Agent may enter into Loan Agreements only
with Borrowers from a list approved by the Portfolios' Board of
Trustees (``Board'').
8. Borrowers are required to post collateral having a market value
at least equal to 100% of the market value of loaned securities plus
accrued interest. The Agent may accept as collateral only cash,
securities issued or backed by the U.S. Government or its agencies or
instrumentalities, or letters of credit from certain banks. Cash
collateral may be invested in shares of registered or unregistered
investment companies, including the Investment Funds, acceptable to the
Adviser that are consistent with the investment restrictions and
guidelines of the participating Portfolios without limitation (except
as investment in any such company or companies may be limited by
section 12(d)(1) of the Act). Because one or more of the Funds and
Portfolios participating in the Program
[[Page 59254]]
are money market funds that comply with rule 2a-7, cash collateral from
transactions in which such Funds or Portfolios participate will be used
only to acquire shares of the Strategic Cash Trust. In all cases, the
investment of cash collateral will comply with all present and future
applicable SEC staff positions regarding securities lending
arrangements. Cash collateral, however, will be excluded from the
Portfolio's determination of the maximum and/or minimum percentage of
the Portfolio's other assets that will be invested in specific types of
securities.\3\
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\3\ Applicants acknowledge that they are not seeking relief from
the Commission with respect to this issue.
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9. The Trusts will submit a supplement to their respective
investment advisory agreements with the Adviser to their shareholders
and the Board of each Trust. If the supplement is approved by a
majority of the outstanding voting securities and the Board of each
Trust, the Adviser will provide certain services to the Portfolios that
participate in the Program, including ensuring compliance with all
applicable regulatory and investment guidelines, determining which
securities are available for loan, and having the discretion and power
to prevent any loan from being made or to terminate any loan. The
Adviser also will monitor the Agent to ensure that the securities loans
are effected in accordance with its instructions and the procedures
adopted by the Board of the AMR Trust, and will prepare periodic
reports for, and seek approval from, the Board of the AMR Trust.
10. Under each Loan Agreement, the Borrower receives a specified
cash collateral fee, computed daily based on the amount of cash held as
collateral at such rates as the Borrower and Agent may agree. The cash
collateral fee is not based on the investment return of the cash
collateral. Net annual interest income earned by a Portfolio from
participation in the Program will be divided between the Portfolio, the
Agent, and, if the proposed supplement is approved as described above,
the Adviser.\4\
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\4\ Net annual interest income for this purpose means the gross
interest income earned by the investment of cash collateral, less
the amount paid to the Borrower and related expenses such as
investment management, custody and accounting or audit fees, or
other costs typically incurred when investments are made.
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Applicants' Legal Analysis
1. Applicants seek an order to permit the Portfolios to purchase
shares of the Investment Funds (``Shares'') with the cash collateral
received from Borrowers. 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. Applicants believe that the Investment Funds will be excluded
from the definition of an investment company under section 3(c)(1) of
the Act because they will issue only non-voting securities.\5\
Applicants request relief from section 12(d)(1), however, because they
are concerned that the Investment Funds' non-voting securities could be
deemed to be ``voting securities'' for purposes of section 3(c)(1).
Applicants believe that if interests in the Investment Funds were
deemed to be voting securities, applicants then must rely on the second
10% test of section 3(c)(1) in order to avoid a look through to the
shareholders of the Portfolios for purposes of determining the number
of persons owning shares of the Investment Funds. Reliance on the
second 10% test would cause the Investment Funds to be deemed
investment companies for purposes of section 12(d)(1) of the Act
pursuant to the last sentence of section 3(c)(1)(A).
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\5\ Section 3(c)(1) provides, in pertinent part, that the term
``investment company'' shall not include:
Any issuer whose outstanding securities (other than short-term
paper) are beneficially owned by not more than one hundred persons
and which is not making and does not presently propose to make a
public offering of its securities. For purposes of this paragraph:
(A) Beneficial ownership by a company shall be deemed to be
beneficial ownership by one person, except that, if such company
owns 10 per centum or more of the outstanding voting securities of
the issuer, the beneficial ownership shall be deemed to be that of
the holders of such company's outstanding securities (other than
short-term paper) unless, as of the date of the most recent
acquisition by such company of securities of that issuer, the value
of all securities owned by such company of all issuers which are or
would, but for the exception set forth in this subparagraph, be
excluded from the definition of investment company solely by this
paragraph, does not exceed 10 per centum of the value of the
company's total assets. Such issuer nonetheless is deemed to be an
investment company for purposes of section 12(d)(1).
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3. Section 12(d)(1) is intended, among other things, to protect an
investment company's shareholders against: (a) undue influence over
portfolio management through the threat of large-scale redemptions, and
the disruption of orderly management of the investment company through
the maintenance of large cash balances to meet potential redemptions,
and (b) the layering of sales charges, advisory fees, and
administrative costs. Applicants state that the Investment Funds will
be managed specifically to maintain a highly liquid portfolio. Access
to the Investment Funds will enhance each Portfolio's ability to manage
and invest cash collateral received from Borrowers. In addition, the
Investment Funds will not charge any sales charges, underwriting, or
distribution fees. Applicants therefore believe that the proposed
transactions create none of the abuses intended to be addressed by
section 12(d)(1).
4. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction from any provision of the Act, 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
policies and purposes fairly intended by the policies and provisions of
the Act. Applicants believe that the requested relief meets this
standard.
5. 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 such affiliated person, acting as principal, to sell or
purchase any security to or from such investment company. As the
investment adviser of the Funds, the Portfolios, and the Investment
Funds, the Adviser is an affiliated person of each of these entities
under section 2(a)(3) of the Act. The Funds, the Portfolios, and the
Investment Funds therefore may be considered affiliated persons of each
other under section 2(a)(3) by virtue of being deemed to be under
common control of the Adviser. Accordingly, if the cash collateral
posted by the Borrowers is considered the property of the Portfolios,
the sale of Shares to the Portfolios, and the redemption of such
Shares, would be prohibited under section 17(a).
6. 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
[[Page 59255]]
concerned, and the proposed transaction is consistent with the general
policy of the Act. Section 17(b) could be interpreted to exempt only a
single transaction. However, the SEC, under section 6(c), may exempt a
series of transactions that otherwise would be prohibited by section
17(a).
7. Applicants believe that the terms of the proposed transactions
are reasonable and fair and consistent with the general purposes of the
Act as well as with the policy of each Fund and Portfolio as recited in
each Fund's and Portfolio's registration statement. The Portfolios will
be treated like any other investors in the Investment Funds. The
Portfolios will purchase and sell Shares on the same terms and on the
same basis as Shares are purchased and sold by all other shareholders
of the Investment Funds. Permitting the Portfolios to invest cash
collateral in the Investment Funds enables the Portfolios to invest in
vehicles that applicants expect will offer the Portfolios a higher
return on their investment at a lower cost than the cost typically
incurred when investing in a registered investment company.
Specifically, applicants anticipate that the investment of cash
collateral in Shares will enable the Portfolios to benefit from
economies of scale that maximize investment opportunities, minimize
investment risk, facilitate the management of liquidity, and minimize
administrative costs. Accordingly, applicants believe that the proposed
transactions are in the best interests of the Funds, the Portfolios,
and their shareholders.
8. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an
affiliated person of an investment company, acting as principal, from
participating in or effecting any transaction in connection with any
joint enterprise or joint arrangement in which the investment company
participates. The Portfolios (by purchasing Shares), the Adviser (by
managing the portfolio securities of the Portfolios and the Investment
Funds at the same time that the Portfolios' cash collateral is invested
in Shares), and the Investment Funds (by selling Shares to and
redeeming them from the Portfolios) could be deemed to be participants
in a joint enterprise or other joint arrangement within the meaning of
section 17(d) and rule 17d-1.
9. Rule 17d-1 permits the SEC to exempt by order a joint
transaction under section 17(d). In determining whether to approve a
transaction, 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 the participation of the investment companies is on
a basis different from or less advantageous than that of the other
participants.
10. Applicants believe that the proposal satisfies these standards.
The Portfolios will invest in Shares on the same basis as any other
shareholder. All investors in Shares will be subject to the same
eligibility requirements imposed by the Investment Funds. In addition,
all Shares will be priced in the same manner and will be redeemable
under the same terms. Finally, applicants believe that participation in
the Program will offer the Portfolios and Funds greater flexibility and
higher returns than they could obtain by investing the cash collateral
separately while still offering the benefits of investing in a pooled
investment vehicle in terms of diversity and lower costs.
Applicants' Condition
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Before a Portfolio may participate in the Program, a majority of
the Board (including a majority of the independent trustees) will
approve the Portfolio's participation in a securities lending program.
Such trustees also will evaluate the securities lending arrangement and
its results no less frequently than annually and determine that any
investment of cash collateral in the Investment Funds is in the best
interest of the shareholders of the funds and their corresponding
Portfolios.
2. Investment in Shares will be in accordance with each Portfolio's
respective investment restrictions regarding the types of securities in
which it may invest and will be consistent with its corresponding
Fund's policies as recited in such Fund's registration statement.
3. Cash collateral from loans by Portfolios that are money market
funds will not be used to acquire Shares of any Investment Fund that
does not comply with the requirements of rule 2a-7 under the Act.
4. The Adviser will adopt procedures that are designed, taking into
account current market conditions and the Strategic Cash Trust
investment objectives, to stabilize the Strategic Cash Trust's net
asset value per share, as computed for the purpose of distribution,
redemption, and repurchase, at a single value. These procedures will be
reviewed annually by the Board of each Portfolio that enters into a
securities lending program (``Lending Portfolio'').
5. The Investment Funds will comply with the requirements of
sections 17 (a), (d), and (e), and 18 of the Act as if the Investment
Funds were registered open-end investment companies. With respect to
all redemption requests made by a Lending Portfolio, the Investment
Funds will comply with section 22(e) of the Act. The Adviser, as sole
trustee of the Investment Funds, will adopt procedures designed to
ensure that the Investment Funds comply with sections 17 (a), (d), and
(e), 18, and 22(e) of the Act. The Adviser will periodically review and
update as appropriate such procedures and will maintain books and
records describing such procedures, and maintain the records required
by rules 31a-1(b)(1), 31a-1(b)(2)(ii), and 31a-1(b)(9) under the Act.
All books and records required to be made pursuant to this condition
will be maintained and preserved for a period of not less than six
years from the end of the fiscal year in which any transaction
occurred, the first two years in an easily accessible place, and will
be subject to examination by the SEC and its staff.
6. The Strategic Cash Trust will value its shares at the close of
business each business day using the ``amortized cost method'' as
defined in rule 2a-7 to determine the net asset value per share of the
Strategic Cash Trust. In this regard, the Strategic Cash Trust will
comply with rule 2a-7(c)(6), except that the Adviser, subject to
approval by the sole trustee of the Strategic Cash Trust, shall adopt
the procedures described in that provision, and the Adviser shall
monitor such procedures and take such other actions as are required to
be taken by a board of directors pursuant to that provision.
7. The Shares will not be subject to a sales load, redemption fee,
asset-based charge or service fee (as defined in rule 2830(b)(9) of the
Rules of Conduct of the National Association of Securities Dealers).
8. Each Lending Portfolio will purchase and redeem Shares as of the
same time and at the same price, and will receive dividends and bear
its proportionate share of expenses on the same basis, as other
shareholders of the Investment Funds. A separate account will be
established in the shareholder records of each Investment Fund for the
account of each Lending Portfolio.
9. Except as set forth herein, the Program will comply with all
present and future applicable SEC staff positions regarding securities
lending arrangements, i.e., with respect to the type and amount of
collateral, voting of loaned securities, limitations on the percentage
of portfolio securities on loan, prospectus disclosure, termination of
loans, receipt of dividends or other
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distributions, and compliance with fundamental policies.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-29714 Filed 11-20-96; 8:45 am]
BILLING CODE 8010-01-M
