[Federal Register Volume 63, Number 74 (Friday, April 17, 1998)]
[Notices]
[Pages 19277-19280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10183]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23109; 812-9544]
State Street Bank and Trust Company; Notice of Application
April 13, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under sections 6(c) and
17(b) of the Investment Company Act of 1940 (the ``Act'') from sections
17(a)(1) and 17(a)(2) of the Act.
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SUMMARY OF APPLICATION: Applicant State Street Bank and Trust Company
requests an order that would permit it to engage in repurchase
agreements and currency transactions with certain affiliated registered
management investment companies (the ``Funds'') for which applicant
serves as custodian. Applicant will be an affiliated person, or an
affiliated person of an affiliated person, of a Fund solely by reason
of applicant's owning, controlling, or holding 5% or more (but less
than 20%) of the outstanding voting securities of the Fund. The
requested order would not extend to transactions between applicant and
a Fund when applicant or an affiliated person of applicant is the
investment adviser to the Fund.
FILING DATES: The application was filed on March 17, 1995, and amended
on December 20, 1995. Applicant has agreed to file another amendment
during the notice period, the substance of which is included in this
notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Any interested person
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 May 8, 1998 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 notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicant: 225 Franklin Street, Boston, Massachusetts 02110.
FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Nadya B. Roytblat,
Assistant Director, 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 (tel. 202-942-8090).
Applicant's Representations
1. Applicant is a wholly-owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. Applicant is
organized as a trust company under the laws of the Commonwealth of
Massachusetts and is a member of the Federal Reserve System. Applicant
is a ``bank'' as that term is defined by section 2(a)(5) of the Act and
meets the qualifications set forth in section 26(a)(1) of the Act for
an investment company custodian. Applicant offers a wide variety of
commercial and trust services, including custodian services to
registered investment companies.
2. One division of applicant, Capital Markets, is a dealer in
government securities, foreign currency, and other instruments. Another
division of applicant, Global Advisors, manages money on a
discretionary basis for registered investment companies, collective and
common trust funds, and separate accounts. Global Advisors may invest
client funds in a wide variety of investment products, including shares
of Funds. As a result of the investment activities of Global Advisors,
applicant may at times own, hold, or control with the power to vote
more than 5% of the shares of a Fund.
3. Applicant proposes to enter into repurchase agreements and
currency transactions with the Funds for which applicant serves as
custodian. As a Fund's custodian, applicant is in a unique position to
afford the Fund certain advantages, such as added investment
flexibility, advantageous prices, and accurate and efficient
settlements for these types of transactions.
Applicant's Legal Analysis
1. Sections 17(a)(1) and 17(a)(2) of the Act prohibit an affiliated
person of a Fund, or an affiliated person of an affiliated person of
the Fund, from knowingly selling to or purchasing from the Fund any
security or other property. Applicant represents that the purchase and
sale of repurchase agreements are the types of transactions covered by
section 17. Applicant also states that the proposed currency
transactions may be covered by section 17 to the extent they involve
the purchase or sale of property.
2. Section 2(a)(3) of the Act defines an ``affiliated person'' of
another person to include: (a) any person directly or indirectly
owning, controlling, or holding with power to vote 5% or more of the
outstanding voting securities of the other person; (b) any person 5% or
more of whose outstanding voting securities are directly or indirectly
[[Page 19278]]
owned, controlled, or held with power to vote, by the other person; and
(c) any person directly or indirectly controlling, controlled by, or
under common control with, the other person.
3. Applicant states that, as a result of the investment activities
of Global Advisors, as described above, applicant may at times own,
control, or hold with the power to vote 5% or more of the outstanding
shares of a Fund and therefore constitute an affiliated person of the
Fund. Furthermore, Funds may be affiliates of each other when they
share common officers, directors, or investment advisers because the
Funds may be deemed to be under common control. As a result, applicant
states that, when it owns, controls, or holds with power to vote 5% or
more of the outstanding shares of a Fund, it may be deemed to be an
affiliated person of an affiliated person of all Funds in the same
complex as the Fund.
4. Under section 17(b), the SEC may issue an order of exemption
from section 17(a) if evidence establishes that: (a) the terms of the
proposed transaction are reasonable and fair and do not involve
overreaching on the part of any person; (b) the proposed transaction is
consistent with the policy of each registered investment company
concerned; and (c) the proposed transaction is consistent with the
general purposes of the Act. Under section 6(c), the SEC may exempt any
person, security, or transaction from any provision of the Act or any
rule thereunder if and to the extent that such 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. Applicant asserts that the proposed
transactions meet the standards set forth in sections 6(c) and 17(b).
5. Applicant represents that the requested relief would be
conditioned on a Fund's adoption of certain procedures (the
``Procedures''). Applicant asserts that the Procedures require careful
monitoring by a Fund of securities transactions with applicant.
Applicant states that the Procedures provide a mechanism to determine
that: (a) the security to be purchased or sold by a Fund is consistent
with the investment policy and objectives of that Fund and with the
interests of its shareholders and is comparable to other similar
securities in which the Fund is authorized to invest and currently is
purchasing; (b) the terms of the proposed transaction are reasonable
and fair to the shareholders of that Fund and do not involve
overreaching on the part of any person concerned; and (c) the proposed
transaction is consistent with the general purposes of the Act.
6. Applicant submits that the primary purpose of section 17(a) is
to prevent persons with the power to control an investment company from
using that power to such persons' own pecuniary advantage (i.e., to
prevent self-dealing). Applicant asserts that the degree of its
affiliation with a Fund, coupled with the Procedures to be adopted by a
Fund with respect to repurchase agreements and currency transactions
with applicant, ameliorate the concerns underlying section 17. Further,
applicant represents that there is or will be no express or implied
understanding between applicant and the investment adviser of any Fund
that such investment adviser will cause any Fund to enter into the
transactions with applicant or give a preference to applicant in
effecting such transactions between the Funds and applicant.
7. Applicant states that preventing a Fund from effecting
repurchase agreement (``repo'') transactions with applicant when
applicant is the Fund's custodian would significantly limit the Fund's
opportunity to obtain operational and processing cost savings on its
repo transactions as well as impede its flexibility to invest cash
balances late in the day. Applicant asserts that repo transactions with
third parties which involve a transfer of securities through the Fed
Wire to a Fund's custodian bank cannot be effected after 3:00 p.m.
because the Fed Wire closes at that time. As a practical matter,
applicant notes that such repo transactions generally have to be
initiated well before 3:00 p.m. in order to insure consummation prior
to the close. By contrast, applicant believes that repo transactions
can be effected with applicant by Funds, for which applicant is
custodian, after the close of the Fed Wire, because a transfer of
securities can be effected through internal bookkeeping entries by
applicant.
8. Applicant states that, in circumstances in which applicant is a
Fund's custodian and is effecting repo transactions with the Fund,
applicant has adopted detailed procedures designed to give the Fund an
ownership and/or perfected security interest in the collateral (i.e.,
the securities underlying the repo transaction). Applicant believes
that these procedures ameliorate the risks associated with repo
transactions when custody is maintained by the repo counterparty and
not transferred to a third party. These risks may involve the
insolvency of, and consequent default by, the repo counterparty, an
attempt by the repo counterparty to retain assets (or offset against
assets) when a dispute arises between the parties, or losses resulting
from fraud or operational error due to the Fund's inability to
determine whether the collateral exists.
9. Applicant states that the securities underlying the repo
transaction are maintained either in the Fund's custody account or on
behalf of the specific Fund in an omnibus custodial account maintained
by applicant at the Federal Reserve Bank of Boston. Applicant states
that, in both cases, the securities are transferred to, or identified
in, the custody account against a transfer of moneys out of the Fund's
account to applicant's proprietary account. Applicant contends that the
repo transaction securities so maintained are the assets of the Fund,
not of applicant. Accordingly, applicant asserts that the risk of
insolvency and the risks associated with commingling of assets are
eliminated. Moreover, applicant states that in its capacity as
custodian for the Fund, applicant marks its books and records to
reflect the Fund's interest in the repo transaction securities. In
addition, applicant states that written confirmations specifying the
particular securities which are the subject of the repo transactions
currently are sent to the Funds at the end of each trading day. In
applicant's view, these procedures provide the Funds the same types of
protections as would be the case if the securities were transferred to
a third party.
10. Applicant states that the inability of a Fund to effect foreign
currency transactions with applicant, when applicant is custodian for
the Fund, could inhibit the ability of the Fund to obtain best price
and execution on its foreign currency transactions and deprive the Fund
of certain operational advantages and efficiencies.
11. Generally, the settlement of Fund transactions in foreign
equity and debt securities is effected in the currency of the country
of the issuer or the country in which the securities are traded. Thus,
the Funds buy foreign currency to settle purchase transactions within
foreign markets and sell foreign currency that they receive in the
settlement of transactions in foreign markets. In addition, Funds often
convert dividends or interest payments denominated in a particular
currency into U.S. dollars or another currency. Some of the Funds also
may enter into forward currency exchange contracts as a means of
managing exchange rate risks. A Fund may enter into a foreign currency
contract covering foreign securities held by the Fund in order to
reduce or eliminate foreign currency exposure. Applicant states that
the Funds will
[[Page 19279]]
represent that they will enter into foreign currency contracts in
compliance with Investment Company Act Release No. 10666 (Apr. 18,
1979).
12. Currency transactions are entered into by telephone or
computer. There is no centralized trading floor. Commercial banks act
as the core of this market, quoting bid/asked prices and acting as
principals. The spread between the bid and the asked price in the
foreign exchange markets represents the potential profit to the market
maker and the compensation for its perceived risk in quoting the price
and selling or holding the currency. Foreign exchange rates generally
are obtained through automated quotation systems. Applicant states that
the Reuters Monitor Money Rates Service (``Reuters'') is the money rate
quote service that currently is recognized in the currency markets as
the most reliable.
13. Applicant asserts that of particular importance to Funds in
many cases are ``odd lot'' currency transactions, established by
industry practice as those involving a United States dollar value of
less than $1 million. Currency dealers generally do not make an active
market in odd lot currency transactions, and indications for such
transactions are not reported on Reuters. The exchange rate that can be
obtained for an odd lot currency transaction generally varies directly
with the size of the transaction and the type of currency.
14. Applicant is a dealer in foreign currency and provides
competitive quotations twenty four hours a day five days a week on over
forty currencies. The most favorable price and execution on foreign
currency transactions are normally achieved by requesting competitive
quotations from foreign currency dealers with respect to a particular
currency. The character of the market for a particular currency may
vary widely in terms of price and availability. Therefore, applicant
believes that it is important that the Funds have the ability to obtain
quotations from as many major currency dealers as possible, including
itself, to ensure that they are obtaining the most favorable price.
Particularly when applicant is among a small number of competitive
dealers in a currency, a Fund's ability to obtain the most favorable
price or prompt execution would be directly restricted if a Fund is
denied access to applicant.
15. Applicant represents that access to applicant is particularly
significant in connection with odd lot currency transactions. When
applicant serves as a Fund's custodian, it will ordinarily accommodate
any odd lot currency transaction required for securities settlement or
related to the conversion of dividend and/or interest payments
denominated in a particular currency into U.S. dollars or another
currency. Because currency dealers do not make an active market in odd
lot transactions, a Fund could have difficulty obtaining favorable
prices and executions for these transactions absent the ability to
effect transactions with applicant.
16. Applicant states that the inability to effect foreign currency
transactions with applicant when applicant is the Fund's custodian also
would deprive the Fund of certain operational advantages and
efficiencies. Settlement procedures for transactions with applicant in
these cases are simpler and more easily coordinated than transactions
with third parties, resulting in a lower trade settlement failure rate.
In addition, applicant can execute foreign currency transactions for
the Fund after normal business hours. Moreover, applicant, in its role
as custodian, monitors the settlement process for all foreign exchange
and security transactions. As a result, if there is a trade settlement
failure, applicant is positioned to quickly identify the failure and
minimize the costs to the Fund.
17. Applicant states that its experience has been that Funds may at
times engage in foreign currency transactions representing a
significant percentage of their assets. As a result, applicant proposes
that there will be no limit on the amount of a Fund's total assets that
may be committed to foreign currency transactions with applicant.
Applicant also represents that a significant percentage of currency
transactions effected by applicant involve settlement terms that may
range from one day to six months. Accordingly, applicant proposes that
there will be no limit on the length of the currency contracts
permitted under the requested relief.
Applicant's Conditions
If the requested relief is granted, applicant agrees to comply with
the following conditions.
A. General Conditions
1. The board of directors of each Fund, including a majority of the
directors who are not interested persons of the Fund, (a) will adopt
procedures that are reasonably designed to provide that the conditions
set forth below have been complied with; (b) will make and approve such
changes to the procedures as deemed necessary; and (c) will determine
no less frequently than quarterly that the transactions made pursuant
to the order during the preceding quarter were effected in compliance
with such procedures. The investment adviser of each Fund may implement
these procedures, subject to the direction and control of the board of
directors of each Fund. Applicant will only engage in repurchase
agreements and currency transactions with Funds that agree to adhere to
the specific conditions set forth below and have furnished evidence to
applicant that they will agree to abide by the conditions.
2. Each Fund (a) will maintain and preserve permanently in an
easily accessible place a written copy of the procedures (and any
modifications thereto) and a copy of the notice and order issued on the
application; and (b) will maintain and preserve for a period of not
less than six years from the end of the fiscal year in which any
transaction occurred, the first two years in an easily accessible
place, a written record of each transaction setting forth a description
of the transaction, including the identity of the person on the other
side of the transaction, the terms of the transaction, and the
information or materials upon which the determinations described below
were made.
3. No Fund will engage in transactions with applicant if applicant
exercises a controlling influence over that Fund. Applicant will have
no affiliation with a Fund, except that applicant may directly or
indirectly own, control, or hold less than 20% of the outstanding
voting securities of the Fund.
4. The transactions entered into by a Fund will be consistent with
the investment objectives and policies of that Fund as recited in that
Fund's registration statement and reports filed under the Act.
B. Repurchase Agreements
1. Any repurchase agreement will meet the portfolio quality
requirements set forth in paragraph (c)(3) of rule 2a-7 under the Act
and be ``collateralized fully'' as defined in rule 2a-7.
2. The quality, yield, and maturity of any repurchase agreement
will be at least as favorable to a Fund as compared to other repurchase
agreements that are appropriate for that Fund and that are being
entered into during a comparable period of time.
C. Currency Transactions
1. At the time any currency transaction is consummated, applicant's
short-term debt instruments will meet the portfolio quality
requirements of a ``First-Tier Security'' set forth in rule 2a-7 under
the Act.
[[Page 19280]]
2. Before any currency transaction is entered into, the Fund or its
adviser must obtain such available market information as they deem
necessary to determine that the price to be paid or received for, and
the terms of, each transaction are at least as favorable as that
available from other sources. This shall include the following
information, without limitation:
With respect to round lot currency transactions, the Fund must
obtain and document the competitive indications with respect to the
specific proposed transaction, either from two other currency dealers
or from one currency dealer and from an automated quotation system
approved by the board of directors of the Fund, including a majority of
non-interested directors. In the case of odd lot currency transactions,
the Fund must obtain and document the competitive indications with
respect to (a) the specific proposed transaction from two other
currency dealers; and (b) a round lot transaction of the same currency
with the same settlement terms from one other currency dealer or an
automated quotation system. Competitive quotation information must
include price and settlement terms. Dealers must be those who, in the
experience of the Fund's adviser, have demonstrated the consistent
ability to provide professional execution of currency transactions at
competitive market prices in the currencies of the type desired. The
dealers also must be those who, in the experience of the Fund's
adviser, are in a position to quote favorable prices.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10183 Filed 4-16-98; 8:45 am]
BILLING CODE 8010-01-M
