[Federal Register Volume 62, Number 232 (Wednesday, December 3, 1997)]
[Notices]
[Pages 63991-63993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31619]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22910; 812-10638]
First American Funds, Inc., et al.
November 25, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under section 12(d)(1)(J) of
the Investment Company Act of 1940 (the ``Act'') exempting applicants
from sections 12(d)(1)(A) and (B) of the Act, under sections 6(c) and
17(d) of the Act exempting applicants from section 17(a) of the Act,
and under section 17(d) of the Act and rule 17d-1 to permit certain
joint transactions.
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SUMMARY OF APPLICATION: The requested order would supersede a prior
order to permit certain registered investment companies to invest
excess cash in money market funds advised by the same adviser for cash
management purposes. The order also would amend a prior order
permitting a fund of funds to purchase shares of certain investment
companies in the same group of investment companies in excess of the
limits of section 12(d)(1).
Applicants: First American Funds, Inc. (``FAF''), First American
Strategy Funds, Inc. (``FASF''), First American Investment Funds, Inc.
(``FAIF''), including each current series and each subsequently created
series of FAF, FASF and FAIF, U.S. Bank National Association or any
other entity controlling, controlled by, or under common control with
U.S. Bank National Association (``U.S. Bank''), and other registered
investment companies or their series that are now or in the future
advised by U.S. Bank.
Filing Dates: The application was filed on April 29, 1997 and
amended on October 1, 1997. Applicants have agreed to file an
additional amendment during the notice period, the substance of which
is incorporated in this notice.
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
22, 1997, 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, N.W., Washington, D.C.
20549. FAF, FASF, and FAIF, Oaks, Pennsylvania 19456; U.S. Bank, 601
Second Avenue South, Minneapolis, Minnesota 55402.
FOR FURTHER INFORMATION CONTACT:
J. Amanda Machen, Senior Counsel, at (202) 942-7120, or Mary Kay Frech,
Branch Chief, at (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 Fifth Street, N.W., Washington, D.C.
20549 (tel. 202-942-8090).
Applicants' Representations
1. FAIF is a registered open-end management investment company that
currently offers twenty-three series, each of which is a variable net
asset value fund. FAF is a registered open-end management investment
company that currently offers three series, each of which is a money
market fund subject to the requirements of rule 2a-7 under the Act.
Each existing series of FAF and any future money market portfolio of
FAF or FAIF or of other registered investment companies advised by U.S.
Bank are referred to collectively as ``Money Market Funds.'' Each
existing series of FAIF and any future variable net asset value
portfolio of FAIF or FAF or of other registered investment companies
advised by U.S. Bank are referred to collectively as ``Non-Money Market
Funds.'' The Money Market Funds and the Non-Money Market Funds are
referred to as the ``Funds.''
2. FASF is a registered open-end management investment company that
currently offers four series, each of which is a variable net asset
value fund. Under an existing order (``Fund of Funds Order''),\1\ FASF
operates as a ``fund of funds,'' the principal investments of which are
shares of certain series of FAIF and FAF (``Underlying Portfolios'').
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\1\ First American Investment Strategy Funds, Inc., Investment
Company Act Release Nos. 22173 (Aug. 26, 1996) (notice) and 22241
(Sept. 23, 1996) (order).
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3. U.S. Bank, a wholly owned subsidiary of U.S. Bancorp (``USBC''),
a bank holding company, serves as investment adviser for each series of
FAIF, FAF and FASF. U.S. Bank has retained Marvin & Palmer Associates,
Inc. (``Marvin & Palmer'') as a sub-adviser for FAIF's International
Fund (U.S. Bank, Marvin & Palmer, and any future sub-adviser to any
Fund are referred to collectively as the ``Investment Advisers'').
First Trust National Association (the ``Custodian'') a wholly owned
subsidiary of USBC, serves as custodian for the assets of each series
of FAIF, FAF, and FASF.
4. Pursuant to an exemptive order, the Non-Money Market Funds can
invest in the money market series of FAF in excess of the limits of
section 12(d)(1) of the Act, so long as each Fund's aggregate
investment in the money market fund does not exceed the greater of 5%
of the Fund's total net assets or $2.5 million (``Cash Sweep
Order'').\2\
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\2\ First American Investment Funds, Inc., Investment Company
Act Release Nos. 21722 (Jan. 30, 1996) (notice) and 21784 (Feb. 27,
1996) (order).
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5. Applicants request an order that would (a) supersede the Cash
Sweep Order to permit (i) each of the Funds (``Investing Funds'') to
use the cash reserves that have not been invested in portfolio
securities (``Uninvested Cash'') to purchase shares of one or more of
the Money Market Funds, provided that no Investing Fund will have more
than an aggregate of 25% of its total assets invested in all Money
Market Funds at any time, and (ii) the Money Market Funds to sell their
shares to, and to redeem their shares from, the Investing Funds; and
(b) amend the Fund of Funds Order to permit FASF to invest in shares of
Underlying Portfolios that will in turn invest in shares of the Money
Market Funds to the extent permitted by the order sought in this
application (``Amended Cash Sweep Order'').\3\ Because the Amended Cash
Sweep Order will allow the Underlying Portfolios to invest greater
amounts in the Money Market Funds than is allowed under the Cash Sweep
Order, condition 2 to the Fund of Funds Order would be amended to allow
FASF to continue to invest in the Underlying Portfolios.\4\
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\3\ The Amended Cash Sweep Order also would delete conditions 3
and 6 in the Fund of Funds Order.
\4\ The fund of funds series of FASF are not ``Investing Funds''
as defined in the application, therefore any investment by them in
the Money Market Funds would be under the Fund of Funds Order and
subject to the conditions of that Order.
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6. Each of the Funds has, or may have, Uninvested Cash held by its
Custodian.
[[Page 63992]]
Uninvested Cash may result from a variety of sources, including
dividends or interest received on portfolio securities, unsettled
securities transactions, reserves held for investment strategy
purposes, scheduled maturity of investments, liquidation of investment
securities to meet anticipated redemptions, dividend payments, or new
cash received from investors.\5\ By investing Uninvested Cash in the
Money Market Funds, applicants believe that the Investing Funds will be
able to reduce their transaction costs, create more liquidity, enjoy
greater returns on the Uninvested Cash and further diversify their
holdings.
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\5\ Uninvested Cash does not include cash collateral received in
connection with the Investing Funds' securities lending activities.
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Applicants' Legal Analysis
1. Section 12(d)(1)(A) of the Act provides that no registered
investment company may acquire securities of another investment company
if the securities represent more than 3% of the acquired company's
outstanding voting stock, more than 5% of the acquiring company's total
assets, or if the securities, together with the securities of other
acquired investment companies, represent more than 10% of the acquiring
company's total assets. Section 12(d)(1)(B) of the Act 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. The perceived abuses section 12(d)(1)
sought to address include undue influence by an acquiring fund over the
management of an acquired fund, layering of fees, and complex fund
structures.
2. Applicants' request would permit the Investing Funds to use
Uninvested Cash to acquire shares of Money Market Funds in excess of
the percentage limitations set our in section 12(d)(1)(A). Applicants
propose that each Investing Fund be permitted to invest in shares of
the Money Market Funds so long as no Investing Fund will have more than
an aggregate of 25% of its total assets invested in all Money Market
Funds at any time. Applicants' request also would permit Money Market
Funds to sell their securities to Investing Funds in excess of the
percentage limitations set out in section 12(d)(1)(B). Applicants state
that relief permitting an Investing Fund to invest up to 25% of its
total net assets in shares of the Money Market Funds is appropriate
because at any given time, 25% or more of an Investing Fund's total
assets may be comprised of Uninvested Cash. Applicants also request
amendment of condition 2 to the Fund of Funds Order to permit the FASF
funds to continue to invest in shares of Underlying Portfolios, which
in turn invest in shares of the Money Market Funds, in reliance on the
Amended Cash Sweep Order.
3. Section 12(d)(1)(J) provides that the SEC can exempt any persons
or transactions from section 12(d)(1) if the exemption is consistent
with the public interest and the protection of investors. For the
following reasons, applicants believe the proposed transactions satisfy
this standard.
4. Applicants believe that none of the concerns underlying section
12(d)(1) are presented by the proposed transactions. Applicants state
that, because the Investment Advisers and their affiliates will not
derive any investment advisory or other fees in connection with the
Investing Funds' purchase or sale of shares of the Money Market Funds,
the Investment Advisers are not susceptible to undue influence in their
management of the Money Market Funds because of threatened redemptions
from the Money Market Funds or loss of fees.
5. Applicants maintain that the proposed arrangement would not
result in the inappropriate layering of either sales charges or
investment advisory fees. Shares of the Money Market Funds sold to and
redeemed by the Investing Funds will not be subject to a sales load,
redemption fee, distribution fee under rule 12b-1 under the Act, or
service fee. In addition, each Investment Adviser will credit to the
respective Investing Fund, or waive, the investment advisory fees that
it earns based on the Investing Fund's investments in the Money Market
Funds to the extent the fees are based upon the Investing Fund's assets
invested in shares of the Money Market Funds.
6. Regarding the complexity of the proposed structure, applicants
note that the net asset value of each current Money Market Fund is, and
has been since its inception, maintained at a constant $1.00 per share.
Therefore, applicants submit that the value of the Investing Funds'
investments in the Money Market Funds will be easily determinable. In
addition, applicants maintain that the Fund of Funds Order already
permits FASF to invest in Underlying Portfolios, which invest in Money
Market Funds, provided that the Underlying Portfolios comply with
certain conditions. As a result, applicants submit that no additional
complexity will be created by amending the Fund of Funds Order to
reflect the Amended Cash Sweep Order.
7. Section 17(a) of the Act makes it unlawful for any affiliated
person of a registered investment company, acting as principal, to sell
or purchase any security to or from the company. Section 2(a)(3) of the
Act defines an affiliated person of an investment company to include
any investment adviser of the investment company and any person
directly or indirectly controlling, or under common control with, the
investment adviser. Under section 2(a)(3), each series within FAIF,
FASF, and FAF may be deemed to be under common control with each of the
others, and thus an affiliated person of each of the other series of
FAIF, FASF, and FAF. As a result, section 17(a) would bar the sale of
shares of the Money Market Funds to the Investing Funds, and the
redemption of the shares by the Money Market Funds.
8. 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, and the proposed transaction is consistent with the
policy of each investment company concerned and the general purposes of
the Act. Section 6(c) of the Act permits the SEC to exempt persons or
transactions from any provision of the Act, 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, for the reasons discussed
below, that their request for relief satisfies these standards.
9. Applicants submit that the proposed transactions will not
involve overreaching because the Investing Funds retain their ability
to invest their Uninvested Cash directly in money market instruments,
as authorized by their respective investment objectives and policies,
if they believe they can obtain a higher return or for any other
reason. Similarly, each of the Money Market Funds has the right to
discontinue selling shares to any of the Investing Funds if its board
of directors determines that the sales would adversely affect its
portfolio management and operations. In addition, applicants note that
shares of the Money Market Funds will be purchased and redeemed at
their net asset value, the same consideration paid
[[Page 63993]]
and received for these shares by any other shareholder.
10. Section 17(d) and rule 17d-1 prohibit an affiliated person of a
registered investment company, acting as principal, from participating
in any joint arrangement with the investment company unless the SEC has
issued an order authorizing the arrangement. In determining whether to
grant an exemption under rule 17d-1, the SEC considers whether the
investment company's participation in the joint enterprise is
consistent with the provisions, policies and purposes of the Act, and
the extent to which such participation is on a basis different from, or
less advantageous than, that of other participants. Applicants state
that each Investment Fund, by purchasing shares of the Money Market
Funds, each Investment Adviser, by managing the assets of the Investing
Funds, and each of the Money Market Funds, by selling shares to the
Investing Funds, could be deemed to be participants in a joint
enterprise. Applicants assert that investments by the Investing Funds
in shares of the Money Market Funds will be on the same basis and will
be indistinguishable from that of any other participant or shareholder
and that the transactions will be consistent with the Act. In addition,
applicants state that the proposed transactions may result in cost
savings for the Investing Funds.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. Shares of the Money Market Funds sold to and redeemed from the
Investing Funds will not be subject to a sales load, redemption fee,
distribution fee under a plan adopted in accordance with rule 12b-1, or
service fee (as defined in rule 2830(b)(9) of the National Association
of Securities Dealer's Rules of Conduct).
2. No Money Market Fund will acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1) of the Act.
3. Each of the Investing Funds will be permitted to invest
Uninvested Cash in, and hold shares of, a Money Market Fund only to the
extent that the Investing Fund's aggregate investment in all Money
Market Funds taken as a group does not exceed 25% of the Investing
Fund's total assets.
4. Each Fund shall be advised by U.S. Bank or a person controlling,
controlled by, or under common control with U.S. Bank.
5. Investment by an Investing Fund in shares of a Money Market Fund
will be consistent with each Investing Fund's respective investment
restrictions and policies as set forth in its prospectuses and
statements of additional information.
6. The applicants will cause the Investment Advisers, in their
capacities as advisers for the Money Market Funds, to remit to the
respective Investing Fund, or waive, an amount equal to all investment
advisory fees received by them under their respective advisory
agreements with the Money Market Funds to the extent such fees are
based upon the Investing Fund's assets invested in shares of the Money
Market Funds. Any of these fees remitted or waived will not be subject
to recoupment by the Funds' Investment Advisers at a later date.
7. FASF may continue to rely on the Funds of Funds Order, subject
to compliance with the conditions it contains, except for conditions 3
and 6, which are deleted. Condition 2 to the Fund of Funds Order is
amended to read as follows: ``No Underlying Portfolio will acquire
securities of any other investment company in excess of the limits
contained in section 12(d)(1)(A) of the Act, except to the extent that
the Underlying Portfolio other than a Money Market Fund acquires
securities of another investment company under exemptive relief from
the Commission permitting the Underlying Portfolio to purchase
securities of an affiliated money market fund for short-term cash
management purposes.''
For the SEC, by the Division of Investment Management, under
delegated authority.
Margareet H. McFarland,
Deputy Secretary.
[FR Doc. 97-31619 Filed 12-2-97; 8:45 am]
BILLING CODE 8010-01-M
