[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Notices]
[Pages 67011-67014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31265]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21609; 812-9686]
Stein Roe Income Trust, et al.; Notice of Application
December 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
APPLICANTS: Stein Roe Income Trust, Stein Roe Investment Trust, Stein
Roe Municipal Trust, and SR&F Base Trust (collectively, the
``Trusts''), and Stein Roe & Farnhman Incorporated (the ``Adviser'').
RELEVANT ACT SECTIONS: Order under section 6(c) of the Act for an
exemption from sections 12(d)(1), 18(f), and 21(b) of the Act, under
sections 6(c) and 17(b) for an exemption from sections 17(a)(1) and
17(a)(3) of the Act, and under section 17(d) of the Act and rule 17d-1
thereunder to permit certain joint arrangements.
SUMMARY OF APPLICATION: Applicants request an order that would permit
the Trusts to borrow money from each other through a credit facility.
FILING DATES: The application was filed on July 25, 1995 and amended on
November 8, 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
applicant 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 16,
1996, and should be accompanied by proof of service on the 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants: One South Wacker Drive, Chicago, IL 60606.
FOR FURTHER INFORMATION CONTACT: Marianne H. Khawly, Staff Attorney, at
(202) 942-0562, or Robert A. Robertson, 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. Stein Roe Income Trust, Stein Roe Investment Trust, and Stein
Roe Municipal Trust are organized as Massachusetts business trusts.
SR&F Base Trust is organized as a Massachusetts common law trust. Each
Trust has multiple series. Each Trust has entered into an investment
advisory agreement with the Adviser with respect to each existing
series. The Adviser is a wholly-owned indirect subsidiary of Liberty
Financial Companies, Inc., which is a majority owned indirect
subsidiary of Liberty Mutual Insurance Company. Applicants request that
any relief also apply to any registered open-end investment companies
established or acquired in the future, for which the Adviser or a
company controlling, controlled by, or under common control with the
Adviser, acts as investment adviser, (the ``Future Funds,'' and
together with the existing series, the ``Funds'').
2. The Trusts have entered into a loan agreement with their
custodian, State Street Bank and Trust Company (``State Street'') under
which State Street may, but is not obligated to, lend money to the
Trusts for temporary or emergency purposes. The maximum aggregate
credit available under the agreement is $75 million. The Trusts seek to
reduce the middleman function of banks by entering into a master loan
agreement with each other (the ``Credit Facility'') that would permit
the Funds to lend money directly to, and to borrow from, each other to
meet the temporary borrowing needs of the borrowing Funds (the
``Interfund Loans''). The form of master loan agreement attached to the
application is referred to as the ``Interfund Loan Agreement.''
3. The Credit Facility is intended to reduce substantially the
Funds' borrowing costs and to enhance the ability of the Funds to earn
higher rates of interest on their short-term lendings. Although the
Credit Facility would substantially reduce the Funds' reliance on bank
credit arrangements, the Trusts would continue to maintain existing
loan agreements and to borrow money from banks. The terms and
conditions of the loan agreement with State Street would serve as a
guideline for making Interfund Loans.
4. The Credit Facility is likely to provide the Funds with
significant savings at times when the cash position of a Fund is
insufficient to meet temporary cash requirements. This situation
generally arises when shareholder 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, they often do not receive payment in settlement
for up to seven days. However, shareholder redemption requests are
normally effected immediately. Therefore, the Funds need a source of
immediate, short-term liquidity pending settlement of the sale of
portfolio securities.
5. While bank borrowings will continue to be available to supply
such liquidity, the rates charged under the Credit Facility would be
below those offered by State Street on short-terms loans. Likewise,
Funds making cash loans to other Funds would earn interest at a rate
higher than they otherwise could obtain from investing their cash in
short-term repurchase agreements. Thus, the Credit Facility would
benefit both those Funds that are borrowers and those Funds that are
lenders.
6. The interest rate to be charged on Interfund Loans (the
``Interfund Rate'') would be determined daily and would be the mean of
(a) the ``Repro Rate,'' as defined below, and (b) the ``Bank Loan
Rate,'' as defined below. The Repro Rate on any day would be the
highest interest
[[Page 67012]]
rate available to the Funds from investment in overnight repurchase
agreements. The Bank Loan Rate for any day would be calculated
according to a formula established by the board of each Trust to
approximate the lowest interest rate at which bank loans are available
to the Funds. The formula would be based upon a publicly available rate
(e.g., Federal Funds plus 75 basis points) and would vary with this
rate so as to reflect changing bank loan rates. The Adviser would
administer the Credit Facility as part of its duties under its
agreement with each Fund and would receive no additional compensation
for its services. The Adviser will make cash available to borrowing
Funds only if the Interfund Loan Rate is more favorable to the lending
Fund than the Repo Rate and more favorable to the borrowing Fund than
the Bank Loan Rate.
7. No Fund would be permitted to participate in the Credit Facility
unless: (a) the Fund had fully disclosed all material information
concerning the Credit Facility in its prospectus and/or statement of
additional information; and (b) the Fund's participation in the Credit
Facility was consistent with its investment objective, fundamental
limitations and the Trust's declaration of trust.
Applicant's Legal Analysis
1. Applicants request an order under section 6(c) of the Act for an
exemption from sections 12(d)(1), 18(f), and 21(b) of the Act, under
sections 6(c) and 17(b) of the Act for an exemption from sections
17(a)(1) and 17(a)(3) of the Act, and under section 17(d) of the Act
and rule 17d-1 thereunder to permit certain joint arrangements. The
requested order would permit the Funds to borrow from and lend to each
other through the Credit Facility.
2. Applicants believe that, for the reasons discussed below, the
requested order meets the standards set forth in sections 6(c) and
17(b) and rule 17d-1. Section 6(c) provides, in relevant part, that the
SEC may by order exempt any person or class of persons from any
provision of the Act or from any rule thereunder, if such exemption is
necessary or appropriate in the public interest, consistent with the
protection of investors, and consistent with 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)
if evidence establishes that the terms of the 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
transaction is consistent with the polices of the registered investment
company, and the general purposes of the Act. Rule 17d-1 provides that
in passing upon applications for exemptive relief from section 17(d),
the SEC will consider whether the participation of a registered or
controlled company in a joint enterprise or joint arrangement is
consistent with the provisions, policies, and purposes of the Act and
to the extent to which such participation is on a basis different from
or less advantageous than that of other participants.
3. Section 17(a)(3) generally prohibits an affiliated person of a
registered investment company from borrowing money or other property
from such investment company. Section 2(a)(3)(C) defines ``affiliated
person'' of another person to be any person directly or indirectly
controlling, controlled by, or under common control with, such other
person. Section 21(b) generally prohibits any registered investment
company from lending money or other property to any person if that
person controls or is under common control with that company. The
Adviser is the investment adviser of each Fund and the trustees and
principal officers of each Trust are substantially identical. In view
of the overlap of trustees and officers among the Trusts, the Trusts
might be deemed to be under common control and thus affiliated persons
of each other.
4. Sections 17(a)(3) and 21(b) were intended to prevent a party
with strong potential adverse interests and influence over the
investment decisions of a registered investment company from causing or
inducing the investment company to engage in lending transactions that
are detrimental to the best interests of the investment company and its
shareholders. Applicants believe that proposed transactions do not
raise such concerns because: (a) The Adviser would administer the
program as a disinterested fiduciary; (b) all Interfund Loans would
consist only of uninvested cash reserves that the Fund otherwise would
invest in short-term repurchase agreements or comparable short-term
instruments; (c) the Interfund Loans would not involve a significantly
greater risk than such other investments; (d) the lending Fund would
receive interest at a higher rate than it could obtain through such
other investments; and (e) the borrowing Fund would pay interest at a
rate lower than would otherwise the available to it under its bank loan
agreements. Moreover, the proposed conditions would effectively
preclude the possibility of any undue advantage.
5. Section 17(a)(1) generally prohibits and affiliated person of a
registered investment company from selling any security to such
registered investment company. Section 12(d)(1) prohibits registered
investment companies from purchasing or otherwise acquiring any
security issued by any other investment company except in accordance
with certain limitations. The Credit Facility may be deemed to involve
the sale of a ``security'' by a borrowing Fund to a Lending Fund.
Applicants believe that the Credit Facility would not involve the type
of abuses at which these sections were directed. In this case, the
purpose of the Credit Facility is to provide economic benefits for all
participating Funds. In addition, there would be no duplicative costs
to the Funds or their shareholders. Accordingly, applicants submit
that, for the reasons discussed above, the requested order meets the
standards set forth in sections 6(c) and 17(b).
6. Section 17(d) generally prohibits any affiliated person of a
registered investment company, or affiliated person of such a person,
when acting as principal, from effecting any transaction in which the
investment company is a joint or a joint and several participant. The
Credit Facility may be deemed to involve a joint enterprise between or
among affiliated persons. Applicants believe, however, that the
interfund lending program meets the standards of rule 17d-1 because it
does not involve any potential that one Fund might receive a
preferential rate to the disadvantage of another Fund. Under the Credit
Facility, the Funds would neither negotiate interest rates between
themselves, nor would the Adviser set the rates in its discretion.
Rather, rates would be set pursuant to a pre-established formula,
approved by the trustees, which would be the function of the current
rates quoted by an independent third-party for short-term borrowings
and for short-term repurchase agreements. All Funds participating in
the Credit Facility on any given day would receive the same rate.
7. Section 18(f)(1) prohibits registers open-end investment
companies from issuing senior securities except that any such
registered investment company shall be permitted to borrow from any
bank, provided that, immediately after such borrowing there is an asset
coverage of at least 300% for all borrowings of such registered
company. Applicants request relief from the section to allow a fund to
borrow from other Funds in amounts, as measured on the day when the
most recent loan was made, not to exceed 125% of the
[[Page 67013]]
borrowing Fund's net cash redemptions for the preceding seven calendar
days. Because applicants would be subject to all of the proposed
conditions, including the percentage and collateral limitations on
interfund borrowings, they believe that the Credit Facility would not
involve the type of abuses that the section was intended to prevent.
Applicants, therefore, believe that the requested exemption from
section 18(f)(1) meets the standards of section 6(c).
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. The interest rates to be charged to the Funds under the Credit
Facility will be the average of the Repo Rate and the Bank Loan Rate.
2. The Adviser on each business day will compare the Bank Loan Rate
with the Repo Rate and will make cash available for Interfund Loans
only if the interfund rate is (a) more favorable to the lending Fund
than the Repo Rate and (b) more favorable to the borrowing Fund than
the Bank Loan Rate.
3. If a Fund has outstanding borrowings, any Interfund Loans to the
Fund: (a) will be at an interest rate equal to or lower than any
outstanding bank loan; (b) will be secured at least on an equal
priority basis with at least an equivalent percentage of collateral to
loan value as any outstanding bank loan that requires collateral; (c)
will have a maturity no longer than any outstanding bank loan (and in
no event over seven days); and (d) will provide that, if an event of
default by the Fund occurs under any agreement evidencing an
outstanding bank loan to the Fund, that event of default will
automatically (without need for action or notice by the lending Fund)
constitute an immediate event of default under the Interfund Loan
Agreement entitling the lending Fund to call the Interfund Loan (and
exercise all rights with respect to any collateral) and that such call
will be made if the lending bank exercises its right to call its loan
under its agreement with the Fund.
4. A Fund may make an unsecured borrowing through the Credit
Facility if its outstanding borrowings from all sources immediately
after the borrowing total less than 10% of its total assets, provided
that if a Fund has a secured loan outstanding from any lender,
including but not limited to another fund, the Fund's interfund
borrowing will be secured on at least an equal priority basis with at
least an equivalent percentage of collateral to loan value as any
outstanding loan that requires collateral. If a Fund's total
outstanding borrowings immediately after an interfund borrowing would
be greater than 10% of its total assets, the Fund may borrow through
the Credit Facility only on a secured basis. A Fund could not borrow
through the Credit Facility if its total outstanding borrowings
immediately after the interfund borrowing would be more than 33\1/3\%
of its total assets.
5. Before any Fund that has outstanding interfund borrowings may,
through additional borrowings, cause its outstanding borrowings from
all sources to exceed 10% of its total assets, the Fund must first
secure each outstanding Interfund Loan by the pledge of segregated
collateral with a market value at least equal to 102% of the
outstanding principal value of the loan. If the total outstanding
borrowings of a Fund with outstanding Interfund Loans exceeds 10% of
its total assets for any other reason (such as decline in net asset
value or because of shareholder redemptions), the Fund will within one
business day thereafter: (a) Repay all its outstanding interfund loans;
(b) reduce its outstanding indebtedness to 10% or less of its total
assets; or (c) secure each outstanding Interfund Loan by the pledge of
segregated collateral with a market value at least equal to 102% of the
outstanding principal value of the loan until the Fund's total
outstanding borrowings cease to exceed 10% of its total assets, at
which time the collateral called for by this condition 5 shall no
longer be required. Until each Interfund Loan that is outstanding at
any time that a Fund's total outstanding borrowings exceeds 10% is
repaid or the Fund's total outstanding borrowings cease to exceed 10%
of its total assets, the Fund will mark the value of the collateral to
market each day and will pledge such additional collateral as is
necessary to maintain the market value of the collateral that secures
each outstanding Interfund Loan at least equal to 102% of the
outstanding principal value of the interfund loan.
6. No equity, taxable bond, or money market Fund may loan funds
through the Credit Facility if the loan would cause its aggregate
outstanding loans through the Credit Facility to 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 the most recent Interfund Loan was made to the Fund, will not
exceed 125% of the Fund's total net cash redemptions for the preceding
seven calendar days.
10. Each Interfund Loan may be called on one business days' notice
by the lending Fund and may be repaid on any day by the borrowing Fund.
11. A Fund's participation in the Credit Facility must be
consistent with its investment policies and limitations in the Trust's
Declaration of trust.
12. The Adviser will calculate total Fund borrowing and lending
demand through the Credit Facility, and allocate Interfund Loans on an
equitable basis among Funds, without the intervention of the portfolio
manager of any Fund. The Adviser will not solicit cash for the Credit
Facility from any Fund or prospectively publish or disseminate loan
demand data to portfolio managers. The Adviser will invest amounts
remaining after satisfaction of borrowing demand in accordance with
standing instructions from portfolio managers or return remaining
amounts for investment directly by the portfolio managers of the money
market Funds.
13. The Adviser will monitor the interest rates charged and the
other terms and conditions of the Interfund Loans and will make a
quarterly report to the boards of trustees of the Trusts concerning
their participation in the Credit Facility and the terms and other
conditions of any extensions of credit thereunder.
14. Each Fund's board of trustees, 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 such
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 such 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 such 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 Loan agreement, the Adviser will
promptly refer such loan for arbitration to an independent arbitrator
[[Page 67014]]
selected by the board of any Trust involved in the loan who will serve
as arbitrator of disputes concerning Interfund Loans. 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 boards setting forth a description of
the nature of any dispute and the actions taken by the Funds to resolve
the dispute.
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
of it 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 available at the
time on short-term repurchase agreements and commercial bank
borrowings, and such other information presented to the Trust's board
of trustees in connection with the review required by conditions 13 and
14.
17. The Adviser will prepare and submit to the boards for review an
initial special report on the ``Design of a System'' with respect to
the operations of the Credit Facility prior to the facility commencing
operations, including a report thereon of its independent public
accountants. A test program of modest duration involving actual
transactions may be conducted prior to submission of the initial report
to the boards. An appropriate single Trust which next files its Form N-
SAR after board review of the initial report will file the report with
its Form N-SAR, and the other Trusts will incorporate the report by
reference in their next N-SAR filings.
Thereafter, an annual report on the ``Design of the System and
Certain Compliance Tests'' with respect to the accounting control
procedures for the Credit Facility which includes an opinion of the
independent public accountants will be filed for two years (measured
from the commencement of the Credit Facility subsequent to the test
program) with the Form N-SAR of an appropriate single Trust which next
files its Form N-SAR, and the other Trusts will incorporate each such
annual report by reference in their next subsequent Form N-SAR filings.
The initial ``Design'' report and the annual ``Design and
Compliance Tests'' report will each be prepared in accordance with the
requirements of Statement of Auditing Standards No. 70 (``SAS 70'') as
it may be amended or pursuant to similar auditing standards as may be
adopted by the American Institute of Certified Public Accountants from
time to time, including reports of independent accountants thereon.
Each SAS 70 report will include a description of the Adviser's
principal procedures used to monitor compliance with the conditions to
any order concerning the application. The principal procedures will
include, at a minimum, procedures that are designed to achieve the
following objectives: (a) The Interfund Rate being higher than the Repo
Rate but lower than the Bank Loan Rate; (b) the Funds' compliance with
the Interfund Loan collateral requirements; (c) the Funds' compliance
with the percentage limitations on interfund borrowing and lending; (d)
the Funds' allocation of interfund borrowing and lending demand in
accordance with procedures established by the Funds' boards of
trustees; and (e) if a Fund, at the time of its borrowing from another
Fund, also has outstanding third-party borrowings, the interest rate on
such interfund borrowings not exceed the interest rate on third-party
borrowings. After the final annual SAS 70 report, compliance with the
conditions to any order issued concerning the application will be
considered by the external auditors as part of their internal
accounting control procedures, performed in connection with Fund audit
examinations, which form the basis, in part, of the auditors' report on
internal accounting controls in Form N-SAR.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31265 Filed 12-26-95; 8:45 am]
BILLING CODE 8010-01-M
