[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Notices]
[Pages 65720-65723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30906]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 21602; 812-9648]
State Street Bank and Trust Company, et al.; Notice of
Application
December 14, 1995.
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: State Street Bank and Trust Company (``State Street'') and
Global Lending Trust (``Trust''), on behalf of themselves and any
registered management investment company or series thereof that may
participate from time to time as lenders (``Lending Funds'') in the
securities lending program administered by State Street (``Program'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) to grant an
exemption from section 12(d)(1), under sections 6(c) and 17(b) to grant
an exemption from section 17(a), and under rule 17d-1 to permit certain
transactions in accordance with section 17(d) and rule 17d-1.
SUMMARY OF APPLICATION: Applicants seek an order that would permit
State Street, as agent for the Lending Funds, to invest cash collateral
derived from securities lending transactions in shares of one or more
series of the Trust (``Investment Funds'').
FILING DATES: The application was filed on June 23, 1995, and amended
on October 24 and December 14, 1995.
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 January 8, 1996,
and should be accompanied by proof of service on applicant, 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: State Street, Two International Place, Boston,
Massachusetts 02110; Global Lending Trust, c/o Raymond P. Boulanger,
Exchange Place, 25th Floor, Boston, Massachusetts 02109.
FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Attorney, at (202) 942-0583, or C. David
Messman, 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
State Street, a wholly-owned subsidiary of State Street Boston
Corporation, is a Massachusetts chartered trust company and a member of
the Federal Reserve System. State Street provides institutional custody
services and asset management services for pension plans, foundations,
governmental plans, individuals, and registered management investment
companies. State Street also administers the Program, which involved
securities loan transactions in excess of $50 billion on average during
the first three quarters of 1995.
2. The Trust is a Massachusetts business trust organized pursuant
to a master trust agreement dated June 15, 1995. The Trust proposes
initially to establish three separate Investment Funds: The U.S.
Government Securities Money Market Fund (``Government Securities
Fund''), the General Money Market Fund (``Money Market Fund''), and the
Short-Term Fund.\1\ Shares of each Investment Fund will be sold on a
private placement basis in accordance with Regulation D under the
Securities Act of 1933 only to Lending Funds and other institutional
investors participating in the Program. Shares of the Investment Funds
will be sold directly by the Trust without a distributor and will not
be subject to a sales load or a redemption fee. Assets of the Trust
will not be subject to a rule 12b-1 fee. The Trust will register as an
investment company under the Act
[[Page 65721]]
prior to the commencement of operations.
\1\ The Government Securities Fund will invest exclusively in
securities issued or backed by the U.S. Government or its agencies
or instrumentalities and in repurchase agreements collateralized
with such securities (``U.S. Government Securities''). The Money
Market Fund will invest in a variety of U.S. dollar-denominated
instruments, including U.S. Government Securities, corporate debt
obligations, commercial paper, time deposits, certificates of
deposit and bankers acceptances, obligations of foreign governments
and supranational organizations and shares of money market mutual
funds. All investments of the Government Securities Fund and the
Money Market Fund will qualify as ``eligible securities'' within the
meaning of rule 2a-7 under the Act. The Short-Term Fund will invest
in a variety of securities, the maximum effective duration of which
will not exceed five years.
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3. State Street will serve as the investment adviser, custodian,
transfer agent, and administrator of the Trust with respect to each
Investment Fund, and will be entitled to receive a fee for its
services.
4. State Street proposes to enter into a securities lending
agreement (``Lending Agreement'') with each Lending Fund.\2\ The
Lending Agreement will authorize State Street to enter into a master
borrowing agreement (``Borrowing Agreement'') with each person
designated by the Lending Fund as eligible to borrow securities
(``Borrower''). State Street will maintain a list of Borrowers that it
believes to be creditworthy and that are eligible to participate in the
Program. Each Lending Fund will be responsible for independently
evaluating and monitoring the creditworthiness of each Borrower it
selects from the pre-approved list and will have the right to add
Borrowers to the list, subject to State Street's approval.
\2\ The Lending Funds will include, but will not be limited to,
investment companies for which State Street or an affiliated person
thereof also serves as custodian, transfer agent, and/or
administrator.
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5. State Street will invest cash collateral received in the Program
on behalf of a Lending Fund in shares of one or more Investment Funds
to the extent permitted by the terms of the Lending Agreement. The
Lending Agreement will authorize and instruct State Street to invest
the cash collateral in accordance with specific guidelines provided by
the Lending Fund. Such guidelines will identify the particular
Investment Funds and other investment vehicles, instruments, and
accounts, if any, in which cash collateral may be invested, and the
maximum and minimum amounts of cash or percentages of collateral that
may be invested in each Investment Fund and other authorized
investments.\3\ Each Lending Fund will reserve at all times the right
to rescind authorization to invest in an Investment Fund. State Street
will not purchase shares of any Investment Fund unless the Lending Fund
has represented to State Street that (a) Its policies generally permit
the Lending Fund to engage in securities lending transactions; (b) 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; (c) its policies permit
the Lending Fund to purchase shares of the Investment Funds with cash
collateral; and (d) its securities lending activities will be conducted
in accordance with all applicable representation and conditions of the
application.
\3\ Applicants anticipate that one or more of the Lending Funds
participating in the Program may be investment companies that hold
themselves out as money market funds and comply with the
requirements of rule 2a-7 (''Money Market Lending Funds''). Cash
collateral in which the lender is a Money Market Lending Fund will
not be used to acquire shares of any Investment Fund that does not
comply with the requirements of rule 2a-7.
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6. The Lending Agreement and the Borrowing Agreement will
establish, with respect to each transaction, the initial and ongoing
collateralization requirements, the types of collateral that may be
accepted, and the manner in which the portion of the income earned on
the investment of cash collateral during the term of the loan to be
repaid to the Borrower (``Borrower's Rebate'') will be established. The
Lending Agreement will fix the percentage of the difference between the
Borrower's Rebate and the actual return on the investment of cash
collateral (``Net Income'') to be retained by the Lending Fund and the
percentage to be paid by the Lending Fund to State Street. The Lending
Agreement also will authorize State Street to negotiate the Borrower's
Rebate for each transaction.
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, and will have the power to terminate a loan at any time and
recall loaned portfolio securities in time to exercise voting rights.
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 State
Street or the Lending Fund's custodian, and pay to State Street or 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.
8. Applicants represent that participation in the Program will
provide the Lending Funds with economies of scale that will maximize
investment opportunities, minimize investment risk, facilitate
management of liquidity, and minimize administrative costs, thereby
increasing their net income. In addition, applicants state that
participation in the Program will permit the Lending Funds to minimize
credit risk and interest-rate risk through diversification, while
receiving the procedural and substantive protections of the Act.
Applicants' Legal Analysis
1. Section 12(d)(1)(A) prohibits an investment company from
acquiring shares of another investment company if, immediately after
such acquisition, the acquiring company would own more than three
percent of the total outstanding voting stock of the acquired company,
securities of the acquired company with an aggregate value in excess of
five percent of the value of the total assets of the acquiring company,
or securities of any investment companies (including the acquired
company) with an aggregate value in excess of ten percent of the value
of the total assets of the acquiring company. Section 12(d)(1)(B)
prohibits an investment company from selling its shares to another
investment company if after such sale more than three percent of the
outstanding voting stock of the acquired company would be owned by the
acquiring company, or more than ten percent of the voting stock of the
acquired company would be owned by investment companies.
2. Section 6(c) permits the SEC to exempt any person or transaction
from any provision of the Act, or any rule or regulation thereunder, if
the 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 submit
that the investment of cash collateral in shares of the Investment
Funds will permit the Lending Funds to maximize returns with less
investment risk than would be present with other means of investment.
Applicants also believe that the administrative burdens associated with
compliance with section 12(d)(1), such as daily monitoring of total
assets and other investments of the Lending Funds, could impair State
Street's ability to provide securities lending services to Lending
Funds in an economical and administratively efficient manner, and
therefore could create competitive disadvantages for the Lending Funds
relative to other institutional investors that seek to engage in
securities lending activities. In addition, applicants submit that the
investment of cash collateral in shares of the Investment Funds do 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
[[Page 65722]]
the underlying investment companies. Accordingly, applicants believe
that the requested exemption from section 12(d)(1) is in the public
interest and consistent with the protection of investors and the
purposes intended by the Act.
3. Section 17(a) prohibits any affiliated person of a registered
investment company, or any affiliated person of such a person, acting
as principal, to sell any security to, or purchase any security from,
such investment company. From time to time, it is possible that a
Lending Fund may directly or indirectly own, control, or hold with
power to vote five percent or more of the shares of an Investment Fund,
which will result in the Lending Fund being an affiliated person of the
Investment Fund. In these circumstances, the purchase or redemption of
shares of an Investment Fund for the same Lending Fund or an affiliated
person of such Lending Fund could violate section 17(a).
4. Section 17(b) authorizes the SEC to issue an order of exemption
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 the proposed transaction is
consistent with the general policy of the Act. Applicants believe that
the proposed transaction will be reasonable and fair and consistent
with the general purposes of the Act as well as with the policies of
each Lending Fund. The Lending Funds will not be able to purchase or
redeem shares of the Investment Funds at a price lower or higher than
the per share net asset value of the Investment Funds, and there will
be no sales loads or redemption fees charged with respect to such
shares. In addition, State Street will be able to invest cash
collateral only in accordance with specific guidelines provided by the
Lending Funds, which will identify both the particular Investment Fund
and other investment vehicles, instruments, and accounts (if any) in
which cash collateral may be invested, and the maximum and minimum
amounts of cash or percentages of collateral that may be invested in
each Investment Fund and other authorized investments.
5. Section 17(b) could be interpreted to exempt only a single
transaction.\4\ Under section 6(c), however, the Commission may exempt
a series of transactions that otherwise would be prohibited by section
17(a). Applicants believe that the requested relief is appropriate
under section 6(c) for the same reasons that it is appropriate under
section 17(b).
\4\ See Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
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6. 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 the investment company
participates. The ownership by a Lending Fund of five percent or more
of the shares of an Investment Fund would cause the Lending Fund to be
an affiliated person of the Trust. State Street, as investment adviser
for each of the Investment Funds, will be an affiliated person of the
Trust. As such, State Street may, from time to time, be an affiliated
person of an affiliated person of one or more Lending Funds by virtue
of such Funds' interests in the Trust. Consequently, the proposed
purchase of shares of the Investment Funds with cash collateral, the
proposed purchase of shares of the Investment Funds with cash
collateral, the redemption of such shares, and the sharing of Net
Income between State Street and the Lending Funds may constitute a
joint transaction for which an exemptive order is required.
7. Rule 17d-1 permits the SEC to approve a proposed joint
transaction covered by the terms of section 17(d). In determining
whether to approve such a transaction, the SEC must consider whether
the proposed transaction is consistent with the provisions, policies,
and purposes of the Act, and the extent to which the participant of the
investment company is on a basis different from or less advantageous
than that of the other participants. Applicants believe that the
proposed transactions satisfy these standards. Each Lending Fund will
invest in shares of the Investment Funds on the same basis as every
other shareholder of the Trust, and all shares will be priced in the
same manner and redeemable under the same terms. The arrangements
regarding the sharing of Net Income between State Street and each
Lending Fund are the product of arm's length negotiations between the
Lending Fund and State Street as service provider. Finally, the
proposed investment of cash collateral in the Investment Funds is
consistent with the provisions and purposes of the Act because
participation in the proposed arrangement will allow the Lending Funds
to increase their investment opportunities and returns while lowering
their transaction costs in connection with securities lending
transactions.
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 Investment 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 any investment of
cash collateral in the Investment Funds is in the best interests of the
shareholders of the Lending Fund.
2. State Street 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 Investment 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 Investment Fund that does not
comply with the requirements of rule 2a-7 under the Act.
5. Shares of the Investment Funds will not be subject to a sales
load or redemption fee, and assets of the Investment Funds will not be
subject to a rule 12b-1 fee.
6. State Street will not acquire shares of any Investment Fund on
behalf of any Lending Fund if, at the time of such acquisition, (a)
State Street is an affiliated person of the Lending Fund or an
affiliated person of an affiliated person of the Lending Fund, or (b)
the Lending Fund is an affiliated person of the Investment Fund or an
affiliated person of an affiliated person of the Investment Fund, in
either case by means other than by directly or indirectly owning,
controlling, or holding with the power to vote five percent or more of
the shares of an Investment 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 an Investment Fund, State Street will pass through voting rights to
those Lending Funds that have a beneficial interest in such Investment
Fund.
[[Page 65723]]
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30906 Filed 12-19-95; 8:45 am]
BILLING CODE 8010-01-M
