[Federal Register Volume 61, Number 22 (Thursday, February 1, 1996)]
[Notices]
[Pages 3753-3755]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2061]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21709; International Series Release No. 922; File No. 812-
9656]
PNC Bank, N.A. and PFPC Trustee & Custodial Services Ltd; Notice
of Application
January 26, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: PNC Bank, N.A. (``PNC'') and PFPC Trustee & Custodial
Services (``PFPC'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from section 17(f) of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would permit
PFPC, a subsidiary of PNC, to act as custodian for certain investment
companies' foreign assets in Ireland. The order further would permit
PFPC to act as primary custodian for all assets of such investment
companies and to delegate to PNC all duties and obligations relating to
the custody of the investment companies' U.S. assets.
FILING DATE: The application was filed on July 7, 1995 and amended on
November 29, 1995. Applicants have agreed to file an amendment, the
substance of which is incorporated herein, during the notice period.
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 February 20,
1996 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. Applicants, PNC Bank, N.A., Land Title Building, Broad &
Chestnut Streets, Philadelphia, Pennsylvania 19110, Attn: Gary M.
Gardner, Esq.
FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 942-0574, or Alison E. Baur,
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 at the
SEC's Public Reference Branch.
Applicants' Representations
1. PNC is a national banking association organized and existing
under the laws of the United States, and is regulated by the
Comptroller of the Currency under the National Bank Act. As of December
31, 1994, PNC had aggregate capital, surplus and undivided profits
exceeding $3.2 billion. PNC is a wholly-owned indirect subsidiary of
PNC Bank Corp., a bank holding company organized under the laws of
Pennsylvania and regulated under the Bank Holding Company Act of 1956.
PNC provides custodial and other services to registered investment
companies, offshore funds, investment advisers, pension funds, other
financial institutions, and individuals.
2. PFPC is a wholly-owned indirect subsidiary of PNC. PFPC is a
limited purpose corporation supervised by the Central Bank of Ireland
under several Irish laws, including the Companies Act 1990, the Unit
Trust Act 1990, and the Investment Limited Partnership Act. PFPC was
organized in Ireland to provide custody services for PNC's U.S.
investment company customers.
3. Applicants request an order exempting PNC, PFPC, any management
investment company registered under the Act other than an investment
company registered under section 7(d) of the Act (a ``U.S. Investment
Company''), and any custodian for a U.S. Investment Company, from the
provisions of section 17(f) of the Act to the extent necessary to
permit: (a) PNC (as custodian or subcustodian for U.S. Investment
Companies) or a U.S. Investment Company to deposit, or cause or permit
the U.S. Investment Company to deposit, its Foreign Securities, cash,
and cash equivalents (``Foreign Assets'') with PFPC, as delegate for
PNC; (b) PFPC (as custodian or subcustodian) to receive and hold the
Foreign Assets of a U.S. Investment Company directly from such U.S.
Investment Company, its custodian or subcustodian (other than PNC); or
(c) PFPC, upon request by a U.S. Investment Company, to act as primary
custodian for all assets of investment companies and to delegate to PNC
all duties and obligations relating to the custody of the U.S.
Investment Company's U.S. Assets. As used herein, the term ``Foreign
Securities'' includes (i) securities issued and sold primarily outside
the U.S. by a foreign government, a national or any foreign country, or
a corporation or other organization incorporated or organized under the
laws of any foreign country; and (ii) securities issued or guaranteed
by the U.S. Government or by any state or any political subdivision or
any agency thereof or by any entity organized under the law of the U.S.
or any state thereof which have been issued and sold primarily outside
the U.S. The term ``U.S. Assets'' includes securities, cash and cash
equivalents other than Foreign Assets.
4. PFPC would provide custody services required in Ireland as
delegate for PNC, when PNC acts as custodian or subcustodian for a U.S.
Investment Company, or directly, as custodian or subcustodian for a
U.S. Investment Company for the investment company's Foreign Assets. In
addition, if requested by a U.S. Investment Company, PFPC would act as
primary custodian for that company's assets and delegate to PNC all
custody services to be provided to the company with respect to the U.S.
Assets. In each case, PNC will assume liability for any loss caused by
PFPC. Thus, there will be no difference in the nature or extent of
PNC's liability based on whether such services are provided by PFPC
directly or as PNC's delegate.
5. PFPC proposes to act as primary custodian for assets of a U.S.
Investment Company to accommodate certain
[[Page 3754]]
master/feeder arrangements. Applicants state that, under the master/
feeder investment structure, investment management and custodial
activities are performed at the master portfolio level, and marketing,
distribution, and shareholder servicing functions are performed at the
feeder fund level. Under these master/feeder arrangements, the master
portfolio is a registered investment company, and feeder funds may
consist of registered and unregistered foreign and domestic entities.
6. Applicants represent that the Central Bank of Ireland has stated
that it may be more willing to grant regulatory approval of Irish
feeder fund investments in U.S. master funds if primary custody of the
master fund's assets is maintained in Ireland so that the Central Bank
can monitor the safekeeping of the master fund's assets. Applicants
contend that, by utilizing PFPC to maintain primary custody of a master
fund's assets, the fund's sponsor can provide Irish regulators with the
ability to monitor custodial procedures affecting the interest of Irish
feeder funds. Applicants assert that, because PNC will (a) supervise
all aspects of PFPC's custody arrangements with U.S. Investment
Companies; (b) assume direct responsibility for maintaining custody of
U.S. Assets in the U.S.; and (c) be liable for any loss arising out of
or in connection with PFPC's performance or custodial responsibilities,
there is greater assurance that custodial services will be provided in
accordance with U.S. standards, and U.S. regulators will have
jurisdiction over the custodial arrangements.
Applicants' Legal Conclusions
1. Section 17(f) of the Act requires every registered management
investment company to place and maintain its securities and similar
investments in the custody of certain entities, including ``banks''
having aggregate capital, surplus and undivided profits of at least
$500,000. A ``bank,'' as defined in section 2(a)(5) of the Act includes
(a) a banking institution organized under the laws of the U.S.; (b) a
member of the Federal Reserve System; and (c) any other banking
institution or trust company doing business under the laws of any state
or of the U.S., and meeting certain requirements. Therefore, the only
entities located outside the U.S. which section 17(f) authorizes to
serve as custodians for registered management investment companies are
the overseas branches of U.S. banks.
2. Rule 17f-5 under the Act expands the group of entities that are
permitted to serve as foreign custodians. Rule 17f-5(c)(2)(ii) defines
the term `` Eligible Foreign Custodian'' to include a majority-owned
direct or indirect subsidiary of a qualified U.S. bank or bank-holding
company that is incorporated or organized under the laws of a country
other than the U.S. and that has shareholders' equity in excess of $100
million. Rule 17f-5(c)(3) defines the term ``Qualified U.S. Bank'' to
include a banking institution organized under the laws of the U.S. that
has an aggregate capital, surplus and undivided profit of not less than
$500,000. PNC meets the definition of a Qualified U.S. Bank.
3. While PFPC satisfies the requirements of rule 17f-5 insofar as
it is a wholly-owned indirect subsidiary of PNC Bank Corp. and is
incorporated under the laws of Ireland, it does not meet the rule's
$100 million minimum shareholders' equity requirement. Accordingly,
PFPC does not qualify as an Eligible Foreign Custodian under rule 17f-5
and, absent exemptive relief, could not serve as custodian for the
Foreign Assets of U.S. Investment Companies.
4. Applicants assert that PNC's U.S. Investment Company customers
currently must incur the inconvenience of using the services of a
custodian other than PNC to maintain custody of their Foreign Assets in
Ireland. Applicants contend that those customers who keep a single
custody account with PNC suffer the inconvenience and expense
associated with moving Foreign Securities away from their primary
market or foregoing effecting transactions in the particular securities
market. However, PNC's U.S. Investment Company customers would not be
forced to choose between such inconveniences if they and PNC were
permitted access to PFPC's custody services.
5. Applicants also assert that the requested order would facilitate
Irish feeder fund investments in U.S. master funds. Applicants believe
that certain U.S. Investment Companies that invest in Irish Foreign
Securities may wish to obtain the benefit of PNC's consolidated custody
services while using PFPC's services as primary custodian. Such an
arrangement would allow customers whose holdings are principally
Foreign Securities the advantage of having one custodian handle all
custody issues and of having a single custody account and account
statement. Under a custody arrangement in which PFPC is primary
custodian for a U.S. Investment Company's Assets and PNC acts as
subcustodian for the U.S. Assets, the U.S. Assets would have the same
protection as if held directly by PNC, and PNC would remain fully
liable to the U.S. Investment Companies to the same extent as if it
provided custody services to such companies directly.
6. Applicants represent that the protection afforded the assets of
U.S. Investment Companies held by PFPC would not be diminished from the
protection afforded by rule 17f-5. PNC will maintain records reflecting
the ownership of the assets held by PFPC as primary or subcustodian for
U.S. Investment Companies, and these records will identify each
security held by each U.S. Investment Company. PFPC will also maintain
its own records. All movements of money effected through PFPC and all
assets held by PFPC will be monitored, recorded, and tested by PNC.
Accordingly, when PFPC, in its capacity as primary custodian, receives
instructions relating to the disposition of the assets of a U.S.
Investment Company, PNC will be provided the same information
contemporaneously. Moreover, all transactions effected through PFPC as
primary or sub-custodian will be done on a payment versus delivery
basis.
7. Internal compliance personnel presently employed by PNC or its
affiliates will advise PFPC on establishing procedures and controls.
Thus, applicants represent that safeguards substantially equal to those
provided by PNC's U.S. operations will be in place and that PFPC will
provide uniform procedures for custody administration.
8. Applicants assert that PNC's role as supervisor addresses the
custodian specific risks to U.S. Investment Company Assets identified
by rule 17f-5. PNC will assure that safeguards consistent with U.S.
standards will be employed to maintain the safety of U.S. Investment
Company Assets held by PFPC. Moreover, because a U.S. Investment
Company may pursue a claim for recovery against PNC in the event of a
loss caused by PFPC, regardless of whether PFPC acts as PNC's delegate
or as direct custodian or primary custodian, U.S. jurisdiction over
claims of U.S. Investment Companies is assured.
9. Applicants believe that permitting U.S. Investment Companies
access to PFPC's custody services as subcustodian, direct custodian, or
primary custodian will allow those companies to obtain the same quality
of services for both their Foreign Securities and their U.S.
securities, and at the same time will give PFPC's U.S.
[[Page 3755]]
Investment Company customers the greatest flexibility and convenience
in custody arrangements.
10. Section 6(c) of the Act provides, in relevant part, that the
SEC may 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. Applicants believe the requested
order satisfies this standard.
Conditions
Applicants agree that any order of the SEC granting the requested
relief may be conditioned upon the following:
1. The foreign custody arrangement proposed regarding PFPC will
satisfy the requirements of rule 17f-5 in all respects other than
PFPC's level of shareholders' equity, except to the extent that relief
may be needed for PFPC to act as primary custodian for U.S. Investment
Companies under the specific terms provided in the application.
2. PNC, any U.S. Investment Company, and any custodian for a U.S.
Investment Company, will deposit Foreign Assets with PFPC only in
accordance with an agreement (the ``Agreement'') required to remain in
effect at all times during which PFPC fails to satisfy the requirements
of rule 17f-5 (and during which such Foreign Assets remain deposited
with PFPC). Each Agreement will be a three-party agreement among PNC,
PFPC and the U.S. Investment Company or the custodian for a U.S.
Investment Company pursuant to which PNC or PFPC, as the case may be,
will undertake to provide specified custody services. If PNC is acting
as a custodian for the U.S. Investment Company, the Agreement will
authorize PNC to delegate to PFPC such of the duties and obligations of
PNC as will be necessary to permit PFPC to hold in custody the U.S.
Investment Company's Foreign Assets. If PNC is not acting as a
custodian for the U.S. Investment Company, the Agreement will authorize
PFPC to provide custody services directly, and no delegation from PNC
to PFPC will be necessary. In each case, the Agreement will provide
that PNC will be liable fore any loss, damage, cost, expense,
liability, or claim arising out of or in connection with the
performance by PFPC of its responsibilities under the Agreement to the
same extent as if PNC had itself been required to provide custody
services under the Agreement. Further, the Agreement will specifically
provide that, in the event of loss, a U.S. Investment Company may
pursue a claim for recovery against PNC, regardless of whether PFPC
acted as PNC's delegate or as direct custodian or subcustodian.
3. PFPC will act as primary custodian for a U.S. Investment
Company's Assets only in accordance with a supplement or addendum to
the Agreement (the ``Supplemental Agreement''), which would be required
to remain in effect at all times, regardless of whether PFPC satisfies
the requirements of rule 17f-5. PFPC will act as primary custodian for
a U.S. Investment Company's Assets only if PFPC is also custodian for
the Company's Foreign Assets. The Supplemental Agreement will provide
that PFPC will delegate to PNC all of the duties and obligations of
PFPC necessary to permit PNC to provide full and complete custody
services with respect to the U.S. Investment Company's U.S. Assets. PNC
will remain directly liable to the U.S. Investment Company under the
Agreement, for any loss, damage, cost, expense, liability or claim
arising out of or in connection with the performance of PFPC of its
responsibilities under the Agreement, including the Supplemental
Agreement.
4. PNC currently satisfies and will continue to satisfy the
Qualified U.S. Bank requirement set forth in rule 17f-5(c)(3).
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2061 Filed 1-31-96; 8:45 am]
BILLING CODE 8010-01-M
