[Federal Register Volume 64, Number 229 (Tuesday, November 30, 1999)]
[Notices]
[Pages 66938-66941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31030]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-24173; 812-11702]
SSgA funds, et al.; Notice of Application
November 23, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``Act'') under (i) section 6(c) of the Act granting an
exemption from sections 18(f) and 21(b) of the Act; (ii) section
12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of
the Act; (iii) sections 6(c) and 17(b) of the Act granting an exemption
from sections 17(a)(1) and 17(a)(3) of the Act; and (iv) section 17(d)
of the Act and rule 17d-1 under the Act to permit certain joint
arrangements.
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SUMMARY OF APPLICATION: Applicants request an order that would permit
certain registered investment companies to participate in a joint
lending and borrowing facility.
APPLICANTS: SSgA Funds and its existing and future series; any other
existing or future registered open-end management investment company or
series thereof that is advised or subadvised by State Street Bank and
Trust Company (``SSB&T'') or a person controlling, controlled by, or
under common control with SSB&T (``State Street'') and that is part of
the same group of investment companies as SSgA Funds (together with
SSgA Funds, the ``Funds''); and State Street.
FILING DATES: The application was filed on July 22, 1999. Applicants
have agreed to file an amendment during the notice period, the
substance of which is reflected in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief 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
16, 1999, 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 notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, c/o Philip H. Newman, Esq., Goodwin, Procter & Hoar
LLP, Exchange Place, Boston, Massachusetts 02109.
FOR FURTHER INFORMATION CONTACT: Michael W. Mundt, Branch Chief, (202)
942-0564 (Office of Investment Company Regulation, Division of
Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch, 450 5th Street, NW, Washington, DC
20549-0102 (tel. 202/942-8090).
Applicants' Representations
1. SSgA Funds is registered under the Act as an open-end management
investment company and is organized as a Massachusetts business trust.
SSB&T serves as the investment adviser, custodian, and transfer agent
for each series of SSgA Funds. SSB&T is a bank within the meaning of
section 202(a)(2) of the Investment Advisers Act of 1940 (``Advisers
Act'') and currently is not required to register as an investment
adviser under the Advisers Act.
2. Some Funds may lend money to banks or other entities by entering
into repurchase agreements or purchasing other short-term instruments.
Other Funds may borrow money from the same or other banks for temporary
purposes to satisfy redemption requests
[[Page 66939]]
or to cover unanticipated cash shortfalls such as a trade ``fail'' in
which cash payment for a portfolio security sold by a Fund has been
delayed. Currently, some Funds have committed lines of credit with
unaffiliated third party banks under which the banks are obligated to
lend money to the Funds to meet the Funds' temporary cash needs.
3. If the Funds were to borrow money from any bank under their
current arrangement, the Funds would pay interest on the borrowed cash
at a rate that would be significantly higher than the rate that would
be earned by other (non-borrowing) Funds on investments in repurchase
agreements and other short-term instruments of the same maturity as the
bank loan. Applicants state that this differential represents the
bank's profit for serving as a middleman between a borrower and lender.
With respect to committed lines of credits, the Funds pay substantial
commitment fees in addition to interest.
4. Applicants request an order that would permit the Funds to enter
into lending agreements (``Interfund Lending Agreements'') under which
the Funds would lend and borrow money for temporary purposes directly
to and from each other through a credit facility (``Interfund
Loan'').\1\ Applicants state that the proposed credit facility would
substantially reduce the Funds' potential borrowing costs and enhance
Funds' ability to earn higher rates of interest on short-term lending.
Although the proposed credit facility would substantially reduce the
Funds' need to borrow from banks, the Funds would be free to continue
their committed lines of credit or other borrowing arrangements with
banks.
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\1\ All Funds that currently intend to rely on the order have
been named as applicants, and any other existing or future Fund that
subsequently may rely on the order will comply with the terms and
conditions in the application.
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5. Applicants anticipate that the credit facility would provide a
borrowing Fund with significant savings when the cash position of the
Fund is insufficient to meet temporary cash requirements. The situation
could arise when redemptions exceed anticipated volumes and the Funds
have insufficient cash on hand to satisfy such redemptions. When the
Funds liquidate portfolio securities to meet redemption requests, which
normally are effected immediately, they often do not receive payment in
settlement for up to three days (or longer for certain foreign
transactions). The credit facility would provide a source of immediate,
short-term liquidity pending settlement of the sale of portfolio
securities.
6. Applicants also propose using the credit facility when a sale of
securities fails due to circumstances such as a delay in the delivery
of cash to the Fund's custodian or improper delivery instructions by
the broker effecting the transaction. Sales fails may present a cash
shortfall if the fund has undertaken to purchase a security with the
proceeds from securities sold. Under such circumstances, the Fund could
fail on its intended purchase due to lack of funds from the previous
sale, resulting in additional cost to the Fund, or sell a security on a
same day settlement basis, earning a lower return on the investment.
Use of the credit facility would enable the Fund to have access to
immediate short-term liquidity without incurring custodian overdraft or
other charges.
7. While borrowing arrangements with banks may continue to be
available to cover unanticipated redemptions and sale fails, under the
proposed credit facility, a borrowing Fund would pay lower interest
rates than those offered by banks on short-term loans. In addition,
Funds making short-term cash loans directly to other Funds would earn
interest at a rate higher than they otherwise could obtain from
investing their cash in repurchase agreements or purchasing shares of
an SSgA Fund that is a money market fund or short-term bond fund
(``Central Fund'').\2\ Thus, applicants believe that the proposed
credit facility would benefit both borrowing and lending Funds.
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\2\ SSgA Funds and State Street have applied for an order from
the SEC to permit certain SSgA Funds to invest cash balances in
shares of Central Funds.
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8. The interest rate charged to the Funds on any Interfund Loan
(the ``Interfund Loan Rate'') would be the average of the ``Repo Rate''
and the ``Bank Loan Rate,'' both as defined below. The Repo Rate for
any day would be the highest rate available to a lending Fund from
investment in overnight repurchase agreements.\3\ The Bank Loan Rate
for any day would be calculated by State Street each day an Interfund
Loan is made according to a formula established by the Funds' trustees
(the ``Trustees'') designed to approximate the lowest interest rate at
which bank short-term loans would be available to the funds. The
formula would be based upon a publicly available rate (e.g., Federal
Funds plus 25 basis points) that would vary so as to reflect changing
bank loan rates. Each Fund's Trustees periodically would review the
continuing appropriateness of using the publicly available rate, as
well as the relationship between the Bank Loan Rate and current bank
loan rates that would be available to the Funds. The initial formula
and any subsequent modifications to the formula would be subject to the
approval of each Fund's Trustees.
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\3\ SSgA Funds and State Street may in the future apply for an
order from the SEC to permit the Funds to deposit cash balances that
remain at the end of a trading day in one or more joint trading
accounts to be used to enter into short-term investments. If such an
order is obtained, the ``Repo Rate'' would be the highest rate from
investments in overnight repurchase agreements that is available to
a lending Fund or to a joint account in which a lending fund may
participate.
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9. The credit facility would be administered by a representative of
State Street's fund accounting group and a compliance officer of the
Funds (collectively, the ``Credit Facility Team''). Under the proposed
credit facility, the portfolio managers for each participating Fund may
provide standing instructions to participate daily as a borrower or
lender. State Street on each business day would collect data on the
uninvested cash and borrowing requirements of all participating Funds
from the Funds' custodians. Once it has determined the aggregate amount
of cash available for loans and borrowing demand, the Credit Facility
Team would allocate loans among borrowing Funds without any further
communication from portfolio managers. Applicants expect far more
available uninvested cash each day than borrowing demand. After
allocating cash for Interfund Loans, the Credit Facility Team will
invest any remaining cash in accordance with the standing instructions
from portfolio managers or return remaining amounts to the Funds. The
money market Funds would not participate as borrowers.
10. The Credit Facility Team would allocate borrowing demand and
cash available for lending among the Funds on what the Team believes to
be an equitable basis, subject to certain administrative procedures
applicable to all Funds, such as the time of filing requests to
participate, minimum loan lot sizes, and the need to minimize the
number of transactions and associated administrative costs. To reduce
transaction costs, each loan normally would be allocated in a manner
intended to minimize the number of participants necessary to complete
the loan transaction.
11. State Street would (i) monitor the interest rates charged and
the other terms and conditions of the loans, (ii) limit the borrowings
and loans entered into by each Fund to ensure that they comply with the
Fund's investment policies and limitations, (iii) ensure equitable
treatment of each Fund, and (iv) make quarterly reports to the
[[Page 66940]]
Trustees concerning any transactions by the Funds under the credit
facility and the interest rates charged. The method of allocation and
related administrative procedures would be approved by each Fund's
Trustees, including a majority of Trustees who are not ``interested
persons'' of the Funds, as defined in section 2(a)(19) of the Act
(``Independent Trustees''), to ensure that both borrowing and lending
Funds participate on an equitable basis.
12. State Street would administer the credit facility as part of
its duties under its existing management or advisory and service
contract with each Fund and would receive no additional fee as
compensation for its services. State Street may collect standard
pricing, recordkeeping, bookkeeping, and accounting fees applicable to
repurchase and lending transactions generally, including transactions
effected through the credit facility. Fees would be no higher than
those applicable for comparable bank loan transactions.
13. No Fund may participate in the credit facility unless: (i) the
Fund has obtained shareholder approval for its participation or, if
such approval is not required by law, the Fund's prospectus and/or
statement of additional information have, prior to the Fund's lending
or borrowing any amounts under the credit facility, disclosed the
possibility of the Fund's participation in the credit facility; (ii)
the Fund has fully disclosed all material information concerning the
credit facility in its prospectus and/or statement of additional
information; and (iii) the Fund's participation in the credit facility
is consistent with its investment objectives, limitations, and
organizational documents.
14. In connection with the credit facility, applicants request an
order under (i) section 6(c) of the Act granting relief from sections
18(f) and 21(b) of the Act; (ii) section 12(d)(1)(J) of the Act
granting relief from section 12(d)(1) of the Act; (iii) sections 6(c)
and 17(b) of the Act granting relief from sections 17(a)(1) and
17(a)(3) of the Act; and (iv) section 17(d) of the Act and rule 17d-1
under the Act to permit certain joint arrangements.
Applicants' Legal Analysis
1. Section 17(a)(3) generally prohibits any affiliated person, or
affiliated person of an affiliated person, from borrowing money or
other property from a registered investment company. Section 21(b)
generally prohibits any registered management investment company from
lending money or other property to any person if that person controls
or is under common control with the company. Section 2(a)(3)(C) of the
Act defines an ``affiliated person'' of another person, in part, to be
any person directly or indirectly controlling, controlled by, or under
common control with, the other person. Applicants state that the Funds
may be under common control by virtue of having State Street as their
common investment adviser, and/or by reason of having common officers,
directors and/or trustees.
2. Section 6(c) provides that an exemptive order may be granted
where an 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. Section 17(b)
authorizes the SEC to exempt a proposed transaction from section 17(a)
provided that the terms of the transaction, including the consideration
to be paid or received, are fair and reasonable and do not involve
overreaching on the part of any person concerned, and the transaction
is consistent with the policy of the investment company as recited in
its registration statement and with the general purposes of the Act.
Applicants believe that the proposed arrangements satisfy these
standards for the reasons discussed below.
3. Applicants submit that sections 17(a)(3) and 21(b) of the Act
were intended to prevent a person with potential adverse interests to
and some influence over the investment decisions of a registered
investment company from causing or inducing the investment company to
engage in lending transactions that unfairly inure to the benefit of
that person and that are detrimental to the best interests of the
investment company and its shareholders. Applicants assert that the
proposed credit facility transactions do not raise these concerns
because (i) State Street would administer the program as a
disinterested fiduciary; (ii) all Interfund Loans would consist only of
uninvested cash reserves that the Fund otherwise would invest in short-
term repurchase agreements or other short-term instruments either
directly or through the Central Funds; (iii) the Interfund Loans would
not involve a greater risk than other similar investments; (iv) the
lending Fund would receive interest at a rate higher than it could
obtain through other similar investments; and (v) the borrowing Fund
would pay interest at a rate lower than otherwise available to it under
its bank loan agreements and avoid the up-front commitment fees
associated with committed lines of credit. Moreover, applicants believe
that the other conditions in the application would effectively preclude
the possibility of any Fund obtaining an undue advantage over any other
Fund.
4. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company, or an affiliated person of an affiliated
person, from selling any securities or other property to the company.
Section 12(d)(1) of the Act generally makes it unlawful for a
registered investment company to purchase or otherwise acquire any
security issued by any other investment company except in accordance
with the limitations set forth in that section. Applicants believe that
the obligation of a borrowing Fund to repay an Interfund Loan may
constitute a security. Section 12(d)(1)(J) provides that the SEC may
exempt persons or transactions from any provision of section 12(d)(1)
if and to the extent such exception is consistent with the public
interest and the protection of investors. Applicants contend that the
standards under sections 6(c), 17(b) and 12(d)(1)(J) are satisfied for
all the reasons set forth above in support of their request for relief
from sections 17(a)(3) and 21(b) and for the reasons discussed below.
5. Applicants state that section 12(d)(1) was intended to prevent
the pyramiding of investment companies in order to avoid duplicative
costs and fees attendant upon multiple layers of investment companies.
Applicants submit that the proposed credit facility does not involve
these abuses. Applicants note that there would be no duplicative costs
or fees to the Funds or shareholders, and that State Street would
receive no additional compensation for its services in administering
the credit facility. Applicants also note that the purpose of the
proposed credit facility is to provide economic benefits for all the
participating Funds.
6. Section 18(f)(1) prohibits open-end investment companies from
issuing any senior security except that a company is permitted to
borrow from any bank, if immediately after the borrowing, there is an
asset coverage of at least 300 per cent for all borrowings of the
company. Under section 18(g) of the Act, the term ``senior security''
includes any bond, debenture, note, or similar obligation or instrument
constituting a security and evidencing indebtedness. Applicants request
exemptive relief from section 18(f)(1) to the limited extent necessary
to implement the credit facility (because the lending Funds are not
banks).
6. No equity, taxable bond or money market Fund may lend to another
Fund through the credit facility if the loan would cause its aggregate
outstanding loans through the credit facility to
[[Page 66941]]
exceed 5%, 7.5% or 10%, respectively, of its net assets at the time of
the loan.
7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of
the lending Fund's net assets.
8. The duration of Interfund Loans will be limited to the time
required to receive payment for securities sold, but in no event more
than seven days. Loans effected within seven days of each other will be
treated as separate loan transactions for purposes of this condition.
9. A Fund's borrowings through the credit facility, as measured on
the day when the most recent loan was made, will not exceed the greater
of 125% of the Fund's total net cash redemptions and 102% of sales
fails for the preceding seven calendar days.
10. Each Interfund Loan may be called on one business day's notice
by a lending Fund and may be repaid on any day by a borrowing Fund.
11. A Fund's participation in the credit facility must be
consistent with its investment policies and limitations and
organizational documents.
12. The Credit Facility Team will calculate total Fund borrowing
and lending demand through the credit facility, and allocate loans on
an equitable basis among the Funds without the intervention of any
portfolio manager of the Funds. The Credit Facility Team will not
solicit cash for the credit facility from any Fund or prospectively
publish or disseminate loan demand data to portfolio managers. The
Credit Facility Team will invest any amounts remaining after
satisfaction of borrowing demand in accordance with the standing
instructions from portfolio managers or return remaining amounts to the
Funds.
13. State Street will monitor the interest rates charged and the
other terms and conditions of the Interfund Loans and will make a
quarterly report to the Trustees concerning the participation of the
Funds in the credit facility and the terms and other conditions of any
extensions of credit under the facility.
14. The Trustees of each Fund, including a majority of the
Independent Trustees: (a) Will review no less frequently than quarterly
the Fund's participation in the credit facility during the preceding
quarter for compliance with the conditions of any order permitting the
transactions; (b) will establish the Bank Loan Rate formula used to
determine the interest rate on Interfund Loans and review no less
frequently than annually the continuing appropriateness of the Bank
Loan Rate formula; and (c) will review no less frequently than annually
the continuing appropriateness of the Fund's participation in the
credit facility.
15. In the event an Interfund Loan is not paid according to its
terms and the default is not cured within two business days from its
maturity or from the time the lending Fund makes a demand for payment
under the provisions of the Interfund Lending Agreement, State Street
will promptly refer the loan for arbitration to an independent
arbitrator selected by the Trustees of any Fund involved in the loan
who will serve as arbitrator of disputes concerning Interfund Loans.\4\
The arbitrator will resolve any problem promptly, and the arbitrator's
decision will be binding on both Funds. The arbitrator will submit, at
least annually, a written report to the Trustees setting forth a
description of the nature of any dispute and the actions taken by the
Funds to resolve the dispute.
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\4\ If the dispute involves Funds with separate Boards, the
Trustees of each Fund will select an independent arbitrator that is
satisfactory to each Fund.
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16. Each Fund will maintain and preserve for a period of not less
than six years from the end of the fiscal year in which any transaction
under the credit facility occurred, the first two years in an easily
accessible place, written records of all such transactions setting
forth a description of the terms of the transaction, including the
amount, the maturity, and the rate of interest on the loan, the rate of
interest available at the time on overnight repurchase agreements and
bank borrowings, the yield of any Central Fund in which the lending
Fund could otherwise invest, and such other information presented to
the Fund's Trustees in connection with the review required by
conditions 13 and 14.
17. State Street will prepare and submit to the Trustees for review
an initial report describing the operations of the credit facility and
the procedures to be implemented to ensure that all Funds are created
fairly. After commencement of operations of the credit facility, State
Street will report on the operations of the credit facility at the
Trustees' quarterly meetings.
In addition, for two years following the commencement of the credit
facility, the independent public accountant for each Fund shall prepare
an annual report that evaluates State Street's assertion that it has
established procedures reasonably designed to achieve compliance with
the conditions of the order. The report shall be prepared in accordance
with the Statements on Standards for Attestation Engagements No. 3 and
it shall be filed pursuant to Item 77Q3 of Form N-SAR. In particular,
the report shall address procedures designed to achieve the following
objectives: (a) that the Interfund Loan Rate will be higher than the
Repo Rate, and, if applicable, the yield of the Central Funds, but
lower than the Bank Loan Rate; (b) compliance with the collateral
requirements as set forth in the application; (c) compliance with the
percentage limitations on interfund borrowing and lending; (d)
allocation of interfund borrowing and lending demand in an equitable
manner and in accordance with procedures established by the Trustees;
and (e) that the interest rate on any Interfund Loan does not exceed
the interest rate on any third party borrowings of a borrowing Fund at
the time of the Interfund Loan.
After the final report is filed, the Fund's external auditors, in
connection with their Fund audit examinations, will continue to review
the operation of the credit facility for compliance with the conditions
of the application and their review will form the basis, in part, of
the auditor's report on internal accounting controls in Form N-SAR.
18. No Fund will participate in the credit facility upon receipt of
requisite regulatory approval unless it has fully disclosed in its
statement of additional information all material facts about its
intended participation.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-31030 Filed 11-29-99; 8:45 am]
BILLING CODE 8010-01-M
