[Federal Register Volume 61, Number 74 (Tuesday, April 16, 1996)]
[Notices]
[Pages 16658-16660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9301]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 21878; 812-9516]
The Asia Tigers Fund, Inc., et al.; Notice of Application
April 9, 1996.
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: The Asia Tigers Fund, Inc.; The Czech Republic Fund, Inc.
(``Czech Fund''); The India Fund, Inc.; The Mexico Equity and Income
Fund, Inc. (``Mexico Fund''); The Emerging Markets Floating Rate Fund
Inc.; The Emerging Markets Income Fund Inc; The Emerging Markets Income
Fund II Inc; Global Partners Income Fund Inc. (collectively, the
``Funds''); and Oppenheimer & Co., Inc. (``OpCo''), on behalf of
themselves and any other future investment companies for which
Advantage Advisers, Inc. (``Advantage''), a wholly owned subsidiary of
OpCo, or any other entity controlling, controlled by, or under common
control (as defined in section 2(a)(9) of the Act) with OpCo, serves as
investment adviser.
RELEVANT ACT SECTIONS: Order requested 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 to permit OpCo to
receive a fee from the Funds for its services as lending agent in
connection with the loan of portfolio securities owned by the Funds.
The proposed fee would be based upon a share of the proceeds derived by
the Funds from the securities lending program.
FILING DATES: The application was filed on March 9, 1995, and amended
on October 30, 1995, and March 29, 1996.
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 May 6, 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: The Asia Tigers Fund, Inc., Czech Fund, The India
Fund, Inc., Mexico Fund, and OpCo, Oppenheimer Tower, 200 Liberty
Street, One World Financial Center, New York, New York 10281; The
Emerging Markets Floating Rate Fund Inc., Emerging Markets Income Fund
Inc., The Emerging Markets Income Fund II Inc., and Global Partners
Income Fund Inc., 7 World Trade Center, New York, New York 10048.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel,
at (202) 942-0583, 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 from
the SEC's Public Reference Branch.
Applicant's Representations
1. Each of the Funds is a Maryland corporation registered under the
Act as a closed-end management investment company. The Funds invest in
a range of equity and fixed-income securities. Advantage, an investment
adviser registered under the Investment Advisers Act of 1940
(``Advisers Act''), serves as investment adviser to each of the Funds.
Advantage advises and consults with each Fund's day-to-day investment
adviser regarding the Fund's overall investment strategy and its use of
leveraging techniques, and monitors the performance of the Fund's
outside service providers. Advantage is not currently responsible for
making specific investment decisions for the Funds, except for the
Mexico Fund. With respect to the Mexico Fund, Advantage and the Fund's
day-to-day investment adviser are jointly responsible for making the
Fund's investment decisions.
2. OpCo, a Delaware corporation that is an indirect, wholly owned
subsidiary of Oppenheimer Group, Inc., is a privately-owned securities
brokerage, investment banking, and asset management firm that offers a
broad range of services to corporations, institutions, and private
investors. OpCo serves as administrator to The Asia Tigers Fund, Inc.,
The India Fund, Inc., the Czech Fund, and the Mexico Fund. OpCo is
registered as a broker-dealer under the Securities Exchange Act of
1934, and as an investment adviser under the Advisers Act.
3. Each of the Funds is permitted under its investment objectives,
policies, and restrictions to lend its portfolio securities. Advantage
has proposed that each Fund establish a securities lending program to
increase the income earned by the Fund and the total return to
shareholders. In connection with the establishment of such a program,
the board of directors of the Fund, including a majority of the
directors who are not ``interested persons'' as defined in section
2(a)(19) of the Act, would institute procedures to govern the program.
These procedures, which would comply with the previous policies set
forth by the Commission and its staff in no-action letters, would
include specific guidelines relating to the creditworthiness of
borrowers, the amount of securities that may be loaned
[[Page 16659]]
at any one time and to any one borrower, and the creditworthiness of
issuers from whom a Fund may accept irrevocable letters of credit as
collateral.
4. Each Fund's day-to-day investment adviser, subject to the
supervision of the board of directors, would be responsible for
negotiating the terms of loans, selecting borrowers, investing cash
collateral, and determining which specific securities are available to
be loaned, subject to the parameters set forth in the procedures
approved by the board of directors of each Fund. In addition, the day-
to-day investment adviser would retain full discretion and power to
prevent any loan from being made or to terminate any loan.
5. Since each Fund currently does not have the internal resources
necessary to lend securities efficiently or effectively without the
services of a third-party lending agent, Advantage has proposed that
each Fund engage one or more third parties to act as lending agent. The
lending agent would be responsible for soliciting borrowers and
confirming their creditworthiness, monitoring daily the value of the
loaned securities and collateral, requesting that borrowers add to the
collateral when required by the loan arrangements, and performing other
administrative functions in connection with the Fund's securities
lending program. In addition, the lending agent, under the supervision
of the day-to-day investment adviser of a Fund may enter into loans
with pre-approved borrowers on terms, the parameters of which would be
pre-approved by the investment adviser, and invest cash collateral for
the loans in instruments pre-approved by the investment adviser. All
such duties of the lending agent, as well as procedures governing the
determination of borrowers, loan terms, and investment instruments,
will be included in a Fund's agreement with the lending agent or
otherwise detailed in writing. The day-to-day investment adviser will
monitor the lending agent to ensure that the securities loans are
effected in accordance with its instructions and within the procedures
adopted by the Fund's board of directors. Applicants represent that the
day-to-day investment adviser's delegation of authority to the lending
agent will be consistent with (and will not exceed) the parameters set
forth in Norwest Bank (pub. avail. May 25, 1995).
6. Each borrower of a Fund's securities will be required to tender
collateral equal to at least 100% of the value of the securities loaned
to be held by the Fund's custodian or sub-custodian in the form of
cash, securities issued or guaranteed by the United States Government,
its agencies, or instrumentalities (``U.S. Government securities''), or
irrevocable letters of credit issued by certain approved banks. If
necessary, the collateral will be supplemented to cover differences
between the value of the collateral and the market value of the loaned
securities.
7. In transactions where the collateral consists of U.S. Government
securities or letters of credit, the lending agent will negotiate on
behalf of the Fund a lending fee to be paid by the borrower to the
Fund. Where the collateral consists of U.S. Government securities, the
beneficial ownership of the collateral and the right to the income
earned will remain with the borrower. At the termination of a loan, the
borrower will pay the lending fee to the Fund, and the lending agent
will receive its pre-negotiated percentage of the fee.
8. In transactions where the collateral consists of cash, the Fund,
instead of receiving a separate lending fee from the borrower, will
receive a portion of the return earned on the investment of the cash
collateral by or under the direction of the Fund's day-to-day
investment adviser. Depending on the arrangements negotiated with the
borrower by the lending agent, a percentage of the return on the
investment of the cash collateral may be remitted by the Fund to the
borrower. Out of the amounts earned on the investment of the cash
collateral, the Fund first will pay the borrower the amount agreed
upon, if any, and then, out of any remaining earnings, will pay the
lending agent its pre-negotiated percentage.
9. OpCo currently operates a ``match-book'' securities lending
practice in which it borrows securities from one client and immediately
lends those securities to another client. Advantage may, subject to
obtaining the requested relief, recommend to a Fund's board of
directors that OpCo serve as lending agent to the Fund. OpCo believes
that it can provide lending agent services to each Fund in an efficient
and profitable manner, and in a manner comparable to that of other
potential lending agents.
10. Applicants believe that, absent exemptive relief, OpCo may be
prohibited by section 17(d) of the Act and rule 17d-1 thereunder from
receiving lending agent fees based upon a share of the profits derived
from the Fund's securities lending program. Applicants propose that, if
the board of directors of a Fund determines that OpCo should act as the
Fund's lending agent, the fund will adopt the following procedures to
ensure that the fee arrangement and other terms governing the
relationship between the Fund and OpCo will be fair:
a. In connection with the initial approval of OpCo as lending agent
to the Fund, a majority of the board of directors of the Fund
(including a majority of the directors who are not ``interested
persons'' as defined in section 2(a)(19) of the Act) will determine
that (1) the contract with OpCo is in the best interests of the Fund
and its shareholders; (2) the services to be performed by OpCo are
required by the Fund; (3) the nature and quality of the services
provided by OpCo are at least equal to those provided by others
offering the same or similar services; and (4) the fees for OpCo's
services are fair and reasonable in light of the usual and customary
charges imposed by others for services of the same nature and quality.
b. Each Fund's contract with OpCo for lending agent services will
be reviewed annually and will be approved for continuation only if a
majority of the board of directors of each Fund (including a majority
of the directors who are not interested persons) makes the
determinations referred to above.
c. In connection with the initial approval of OpCo as lending agent
to a Fund, the board of directors of the Fund will obtain competing
quotes regarding lending agent fees from at least three independent
lending agents to assist the board of directors in making the
determinations referred to above.
d. The board of directors of each Fund, including a majority of the
directors who are not interested persons, will (1) determine at each
quarterly meeting that the loan transactions during the prior quarter
were effected in compliance with the conditions and procedures set
forth herein, and (2) review no less frequently than annually the
conditions and procedures set forth herein for continuing
appropriateness.
e. Each Fund will (1) maintain and preserve permanently in an
easily accessible place a written copy of the conditions and procedures
(and modifications thereto) described in the application or otherwise
followed in connection with lending securities, and (2) maintain and
preserve for a period not less than six years from the end of the
fiscal year in which any loan transaction occurred, the first two years
in an easily accessible place, a written record of each such loan
transaction setting forth a description of the security loaned, the
identity of the person on the other side of the loan transaction, the
terms of the loan transaction, and the information or materials upon
which the determination was made that each
[[Page 16660]]
loan was in accordance with the procedures set forth above and the
conditions to the application.
Applicants' Legal Analysis
1. 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, such investment adviser. Under section 2(a)(3),
OpCo, which owns all of the outstanding stock of Advantage, is an
affiliated person of Advantage. Since Advantage is an affiliated person
of each Fund by virtue of its position as an investment adviser of each
Fund, OpCo may thereby be deemed an affiliated person of an affiliated
person of each Fund. OpCo also may be deemed an affiliated person of
the Czech Fund, for which OpCo Advisors (``OpCap'') serves as day-to-
day investment adviser, by virtue of the fact that OpCo and OPCap are
under common control.
2. Section 17(d) of the Act and rule 17d-1 thereunder make it
unlawful for any affiliated person of a registered investment company,
or any affiliated person of such person, acting as principal, to
participate in or effect any transaction in connection with any joint
enterprise or other joint arrangement or profit-sharing plan in which
such investment company is a joint participant, unless an application
regarding such joint enterprise or other joint arrangement or profit-
sharing plan has been filed with the SEC and has been granted by an
order of the SEC. Rule 17d-1 provides that, in passing upon any such
application, the SEC will consider whether the participation of such
registered investment company in such joint enterprise or joint
arrangement or profit-sharing plan 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 the other participants. To the extent that OpCo's proposed
activities as lending agent for the Funds in return for a share of the
revenue generated thereby may be deemed a joint enterprise or profit
sharing plan, applicants believe that such activities would be
prohibited by section 17(d) and rule 17d-1.
3. Applicants believe that the procedures to be adopted by each
Fund with respect to the Fund's employment of OpCo as lending agent
will ensure the fairness of the fee arrangement and other terms
governing this relationship. Applicants state that the proposed
conditions and procedures place reliance on the directors who are not
interested persons of a Fund to determine that the lending arrangements
are fair and reasonable and in the best interests of the Fund and its
shareholders. Accordingly, applicants believe that the application
satisfies the standards for relief set forth in rule 17d-1.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. No Fund may lend its portfolio securities to a borrower that is
an affiliated person of the Fund, any adviser of the Fund, or OpCo, or
to an affiliated person of any such person.
2. Except as set forth herein, the securities lending program of
each Fund will comply with all present and future applicable SEC staff
positions regarding securities lending arrangements, i.e., with respect
to the type and amount of collateral, voting of loaned securities,
limitations on the percentage of portfolio securities on loan,
prospectus disclosure, termination of loans, receipt of dividends or
other distributions, and compliance with fundamental policies.\1\
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\1\ See, e.g., SIFE Trust Fund (pub. avail. Feb. 17, 1982).
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3. Approval of the board of directors of a Fund, including a
majority of directors who are not ``interested persons'' under the Act,
shall be required for the initial and subsequent approvals of OpCo's
service as lending agent for the Fund, for the institution of all
procedures relating to the securities lending program of the Fund, and
for any periodic review of loan transactions for which OpCo acted as
lending agent.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9301 Filed 4-15-96; 8:45 am]
BILLING CODE 8010-01-M
