[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Notices]
[Pages 14354-14357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7799]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21855; No. 812-9808]
Principal Aggressive Growth Fund., et al.
March 25, 1996.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of Application for order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Princor Management Corporation (``Princor Management''),
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation
Fund, Inc., Principal Balanced Fund, Inc., Principal Bond Fund, Inc.,
Principal Capital Accumulation Fund, Inc., Principal Emerging Growth
Fund, Inc., Principal Government Securities Fund, Inc., Principal
Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Funds, Inc., Principal
World Fund, Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund,
Inc., Princor Bond Fund, Inc., Princor Capital Accumulation Fund, Inc.,
Princor Cash Management Fund, Inc., Princor Emerging Growth Fund, Inc.,
Princor Government Securities Income Fund, Inc., Princor Growth Fund,
Inc., Princor High Yield Fund, Inc., Princor Tax-Exempt Bond Fund,
Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities
Fund, Inc., Princor World Fund, Inc. (individually a ``Fund,''
collectively, ``Funds''), and such other registered investment
companies (``Future Funds'') that in the future are advised by Princor
Management or an affiliated person thereof.
RELEVANT 1940 ACT SECTIONS: Order requested under Rule 17d-1 of the
1940 Act.
SUMMARY OF APPLICATION: Exemptions requested to the extent necessary to
permit the Funds and Future Funds to pool their daily cash balances
into a single joint trading account (``Joint Account'') for the purpose
of investing those balances in one or more short-term investment
transactions, including repurchase agreements and short-term money
market instruments, to the extent permitted by each Fund's or Future
Funds's investment objectives, policies and restrictions.
FILING DATES: The application was filed on October 5, 1995, and amended
on March 13, 1996.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the SEC by
5:30 p.m. on April 19, 1996, and should be accompanied by proof of
service on Applicants in the form of an affidavit or, for layers, by
certificate of service. Hearing requests should state the nature of the
interest, the reason for the request, and the issues contested. Persons
may request notification of the date of a hearing by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, c/o Michael D. Roughton, Esq., The Principal Financial
Group, Des Moines, Iowa 50392-0300.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Special Counsel, Office of Insurance Products
(Division of Investment Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
Public Reference Branch of the SEC.
Applicants' Representations
1. Each Fund is a Maryland corporation registered under the 1940
Act as an open-end, management investment company. Future Funds may
include management investment companies organized in Maryland or in
other states.
2. Princor Management is registered as an investment adviser under
the Investment Advisers Act of 1940 and serves as each Fund's
investment adviser. Princor Management has retained sub-advisers to
manage a number of Funds. Princor Management manages the short-term
cash assets of each of the Funds except Principal Aggressive Growth
Fund, Inc. and Principal Asset Allocation Fund, Inc. The short-term
cash assets of those Funds are managed by their sub-adviser, Morgan
Stanley Asset Management, Inc.\1\
\1\ Applicants state that Funds for which Princor Management or
an affiliate does not manage short-term cash assets (including
Principal Asset Allocation Fund, Inc. and Principal Aggressive
Growth Fund, Inc.), are not expected to participate in the proposed
joint account.
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3. Princor Management has discretion to purchase and sell
securities for each Fund in accordance with its investment objectives
policies and restrictions. Each Fund is authorized to invest in
repurchase agreements, except Principal Capital Accumulation Fund.,
Inc., which will participate in repurchase transactions if and when it
is authorized to do so. Each Fund is authorized to invest at least a
portion of its uninvested cash assets in certain short-term money
market instruments.
4. Bank of America National Trust and Savings Association
(``Custodian'') currently is the custodian for all Funds except those
Funds which will not participate in the proposed Joint Account for so
long as they do not use Custodian: (a) Principal World Fund., Inc.; (b)
Princor World Fund, Inc.; and (c) the International Portfolio of the
Principal Special Markets Fund, Inc.
5. Applicants state that at the end of each trading day, it is
expected that some or all of the Funds will have uninvested cash
balances in their custodian accounts. Currently, such cash balances are
used on an individual basis to invest in short-term instruments,
including individual issues of commercial paper or United States
Government agency paper. Applicants argue that these separate purchases
result in certain inefficiencies which limit the return each of the
Funds may
[[Page 14355]]
achieve. In addition, some Funds' assets are too small or become
available too late to be invested effectively on an individual basis.
6. Accordingly, Applicants request an order to permit the Funds to
deposit their uninvested cash balances into a single joint account (the
``Joint Account'') to be used to enter into one or more short-term
investment transactions, including repurchase agreements and short-term
money market instruments (``Joint Investment''). Applicants state that
each Fund (``Participant'') will participate in the Joint Account and
in any given Joint Investment on the same voluntary basis as every
other Participant and in conformity with that Participant's fundamental
investment objectives, policies and restrictions.
7. Applicants represent that the proposed Joint Account would
invest in one or more repurchase agreements with a bank, a non-bank
government securities dealer or major brokerage house.
8. Each of the Funds has established substantially similar systems
and standards which require that repurchase agreements always be at
least 100% collateralized. Repurchase agreements would be
collateralized by obligations issued or guaranteed as to principal and
interest by the government of the United States or by any of its
agencies or instrumentalities. Applicants represent that these systems
and standards presently are in compliance with the standards and
guidelines set forth in Investment Company Act Release No. 13005 (Feb.
2, 1983), and with other existing positions the Commission has taken
regarding repurchase transactions.\2\ Applicants will monitor the
Commission's published statements on repurchase agreements and, in the
event that the Commission sets forth different or additional
requirements, each Participant will modify its systems and standards
accordingly.
\2\ Applicants state that these systems and standards presently
are in compliance with the Division of Investment Management's
interpretations set forth in letters to the Investment Company
Institute, dated January 25, May 7 and June 19, 1985.
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9. Each Participant will invest in repurchase agreements only to
the extent such investment would be consistent with its investment
objectives, policies and restrictions. Accordingly, each such
repurchase agreement will be collateralized to the extent required by
the most restrictive collateral requirements of the Participants.
Further, each Participant will not necessarily invest in every Joint
Investment: a Participant's investment restrictions could preclude it
from participating in a repurchase agreement with a particular
counterparty or from purchasing certain short-term instruments; a
Participant's cash may not be available in time to be included in a
repurchase agreement negotiated on a given day, or its cash may be
insufficient to invest individually; and Princor Management may seek to
limit investment risk by entering into multiple investments, even if
the same return is available from each counterparty or issuer.
Nevertheless, Applicants submit that all similarly situated
Participants would benefit from the Joint Investment.
10. The proposed Joint Account also would purchase short-term money
market instruments from dealers in the open market or directly from
issuers. Investments will be in various taxable and tax exempt short-
term money market instruments with overnight, over-the-weekend or over-
the-holiday maturities. Such instruments may include: overnight
commercial paper; Treasury bills; certain U.S. government agency
certificates; Euro CDs; term bank deposits; certificates of deposit and
bankers' acceptances for investment by taxable Funds; certain tax-
exempt floating and variable rate demand notes and bonds; and such
additional short-term money market instruments with overnight, over-
the-holiday or over-the-weekend maturity as may become available.
Princor Management will invest Participant assets only in short-term
money market instruments which constitute ``eligible securities''
within the meaning of Rule 2a-7 under the 1940 Act.
11. Applicants will monitor the Commission's published statements
on short-term money market instruments and, in the event that the
Commission or its staff set forth guidelines with respect to such
instruments, each Participant will conform its investments to such
guidelines and, as necessary, will adopt appropriate systems and
standards.
12. Princor Management will have no monetary participation in the
joint account, but will be responsible for: investing assets in the
Joint Account; establishing accounting and control procedures; and
fairly allocating investment opportunities among the Funds.
13. The assets of a Participant held in the Joint Account will not
be subject to the claims of creditors of other Participants.
14. Applicants assert that the proposed Joint Account arrangement
would benefit Participants for a number of reasons, including the
following:
Participants would save significant amounts in yearly
transaction fees by reducing the total number of transactions, thereby
increasing the rate of return on their investments.\3\
\3\ Currently, the Funds pay the Custodian a processing fee of
$8.50 to $20 per transaction (based on different negotiated fee
schedules under their respective agreements), regardless of the size
of a transaction. Applicants represent that, during the twelve
months ended December 31, 1994, aggregate fees and other transaction
costs for the Funds approximated $97,000. Applicants assert that, if
the proposed Joint Account had been in effect during this same
period, such aggregate fees and costs would have approximated
$64,000, for an annual savings of approximately $33,000.
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Participants would obtain a higher investment return
through the Joint Account than through individual investment accounts.
Because the Joint Account would invest larger cash amounts than the
individual Funds, it could negotiate a higher rate of return than could
be negotiated by each individual Fund.
The Joint Account should result in an increase in the
number of dealers willing to enter into Joint Investments with some of
the Participants whose uninvested cash balances otherwise would be
insufficient or be made available too late in the day to invest in such
short-term instruments. Flexibility in the management of the
Participants' cash balances thus would be enhanced, thereby reducing
the possibility that any Participant will have a cash balance
uninvested overnight.
By reducing the number of trade tickets which would have
to be written, the proposed Joint Account arrangement will simplify
transactions and thus reduce the opportunity for errors.
The use of a single Joint Account will result in savings
of the costs of establishing and maintaining several different
accounts. Applicants represent that the Joint Account's recordkeeping
system will employ certain recordkeeping and accounting control
mechanisms and that it will be substantively identical to that which
would be used if several joint accounts were set up, with each
investing only in specific types of instruments.
Applicants' Legal Analysis
1. Rule 17d-1 under the 1940 Act provides that an ``affiliated
person'' of a registered investment company, acting as principal, shall
not participate in, or effect any transaction in connection with, any
joint enterprise or other joint arrangement in which the registered
investment company is a participant unless the Commission has issued an
order approving such arrangement.
2. Section 2(a)(3) of the 1940 Act defines the term ``affiliated
person'' of
[[Page 14356]]
another person to include ``any person under common control with such
other person'' and, ``if such other person is an investment company,
any investment adviser thereof.'' Applicants submit that Princor
Management is an affiliated person of each of the Funds, and the Funds
could be deemed to be affiliated persons of one another, within the
meaning of Section 2(a)(3) of the 1940 Act.
3. Applicants further submit that each Fund--by participating in
the proposed Joint Account arrangement--and Princor Management--by
managing the proposed Joint Account--may be deemed to be joint
participants in a transaction within the meaning of Section 17(d). In
addition, the proposed Joint Account could be deemed a joint
arrangement or joint enterprise within the meaning of Rule 17d-1 under
the 1940 Act.
4. In passing applications under Rule 17d-1, the Commission may
consider the extent to which an entity's participation in a joint
arrangement or enterprise is on a ``basis different from or less
advantageous than that of other participants.'' Each Participant's
decision to invest in the Joint Account would be solely at its option.
Participants will not be required either to invest a minimum amount or
to maintain a minimum balance in the Joint Account. Applicants assert
that because each Participant will hold a pro rata interest in, and
receive a pro rata share of, the income derived from each repurchase
agreement and short-term money market instrument held in the Joint
Account in which such Participant has an interest, no Participant will
receive fewer relative benefits from the proposed Joint Account
arrangement than any other Participant.
5. Applicants represent that the board of directors of each Fund
(each a ``Board'') has considered the proposed Joint Account
arrangement and, based on information supplied by Princor Management,
has determined that each Participant will benefit from the Joint
Account arrangement. Applicants further represent that each Board has
determined that the proposed method of operation for the Joint Account
will not result in any conflicts of interest among the Participants.
Applicants also represent that each Board also has determined that:
There appears to be no basis upon which to predicate greater benefit to
one Participant than to another; the operation of the Joint Account
will be free of any inherent bias in favor of any one Participant over
another; and the anticipated benefits flowing to each Participant
should fall within an acceptable range of fairness.
6. Applicants represent that the Boards believe that the primary
beneficiaries of this Joint Account arrangement will be the
Participants and their shareholders, as the Joint Account represents a
more efficient means of administering the Funds' daily investment
transactions.
7. Applicants represent that the Boards have determined that their
conclusions with respect to participation in the Joint Account by the
Funds would not be altered by participation in the Joint Account by
Future Funds. The Boards further have determined that it would be
desirable to permit Future Funds to participate in the Joint Account
without the necessity of applying for additional Commission
authorization. Applicants represent that Future Funds will be permitted
to participate in the Joint Account only on the same terms and
conditions as the Funds have set forth herein.
Applicants' Conditions
Applicants agree that any order issued by the Commission in
connection with this application will be subject to the following
conditions.
1. A separate Joint Account will be established with the Custodian.
Each Fund will be able to deposit its uninvested net cash balances into
the Joint Account on a daily basis.
2. Cash in the Joint Account will be invested by Princor Management
in repurchase agreements and/or short-term money market instruments
with overnight, over-the-weekend or over-the-holiday maturities. Using
the proposed Joint Account or making separate investments on behalf of
individual Funds, Princor Management is obligated to consider the same
factors, including: (a) Each Participant's investment objectives,
policies and restrictions and repurchase agreement collateral
requirements; (b) its obligation to fairly allocate investment
opportunities among the Participants; (c) the need for diversification;
and (d) the time when cash becomes available for investment on a given
day.
3. A Fund's participation in a Joint Investment will be wholly
voluntary and only to the extent permitted by its investment
objectives, policies and restrictions. To the extent that a
Participant's cash balance is applied to a particular Joint Investment,
the Participant will own a proportionate share of such Joint Investment
and the income earned or accrued thereon, based upon the percentage of
such Joint Investment purchased with such Participant's cash balance.
4. Princor Management and the Custodian will maintain records
documenting for any given day each Participant's aggregate investment
in the Joint Account and its pro rata share of each Joint Investment.
The records will be maintained in conformity with Section 31 of the
1940 Act and the rules thereunder.
5. Each repurchase agreement entered into through a Joint
Investment will be collateralized by obligations issued or guaranteed
as to principal and interest by the government of the United States or
by any of its agencies or instrumentalities to the extent required by
the most restrictive collateral requirements of the Participants, in no
event less than 100 percent. The securities subject to the repurchase
agreement will be transferred to the Joint Account and they will not be
held by the Participant's repurchase counterparty or by an affiliated
person of that counterparty. The Joint Account will invest only in
short-term money market instruments which constitute ``eligible
securities'' within the meaning of Rule 2a-7 under the 1940 Act.
6. All investments held by the Joint Account will be valued on an
amortized cost basis.
7. Each Participant valuing its net assets in reliance upon Rule
2a-7 under the 1940 Act will use the average maturity of the
instrument(s) in the Joint Account in which such Participant has an
interest for the purpose of computing that Participant's average
portfolio maturity with respect to the portion of its assets held in
the Joint Account for that day.
8. To ensure that there will be no opportunity for one Participant
to use any part of the Joint Account credited to another Participant,
no Participant will be allowed to create a negative balance in the
Joint Account. However, a Participant will be permitted to draw down
its entire balance at any time. No Fund will be obligated either to
invest in the Joint Account or to maintain any minimum balance in the
Joint Account.
9. Princor Management will manage the Joint Account as part of its
duties under its existing or any future investment advisory contracts
with the Funds. Princor Management will not collect an additional fee
from any Fund for managing the Joint Account.
10. The administration of the Joint Account will be within the
fidelity bond coverage required by Section 17(g) of the 1940 Act and
Rule 17g-1 thereunder.
11. The Board members of each Fund will evaluate the Joint Account
arrangements annually. Each Board will vote to continue a Fund's
participation in the Joint Account only if it determines that there is
a reasonable
[[Page 14357]]
likelihood that the Fund and its shareholders will benefit from the
Joint Account arrangement, and no Participant will be treated on a less
advantageous basis than another.
12. The Future Funds will be permitted to participate in the Joint
Account only on the same terms and conditions as the Funds have set
forth herein.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-7799 Filed 3-29-96; 8:45 am]
BILLING CODE 8010-01-M
