[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Notices]
[Pages 27810-27813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13232]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22663; 812-9440]
AIM Equity Funds, Inc., et. al.; Notice of Application
May 15, 1997.
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: AIM Equity Funds, Inc., AIM Funds Group, AIM International
Funds, Inc., AIM Investment Securities Funds, AIM Summit Fund, Inc.,
AIM Tax-Exempt Funds, Inc., AIM Variable Insurance Funds, Inc., Short-
Term Investments Co., Short-Term Investments Trust, and Tax-Free
Investments Co. (the ``Funds''), AIM Advisors, Inc., and AIM Capital
Management, Inc. (the ``Advisers,'' and collectively with the Funds,
the ``Applicants'').
Relevant Act Sections: Order requested under sections 6(c) and 17(b) of
the Act for an exemption from sections 17(a) and 17(e) of the Act.
Summary of Application: Applicants request an order amending a prior
order (the ``Prior Order'') under sections 6(c) and 17(b) of the Act
granting an exemption from sections 17(a)(1), 17(a)(2) and 17(e) of the
Act.\1\ The requested order would let each Fund engage in purchase and
sale transactions limited to U.S. government securities, certain other
high quality debt securities and reverse repurchase agreements with
banks whose affiliated relationship with the Funds arises solely out of
their five percent or greater share interest in a Fund, except that no
Fund will engage in such transactions with a bank that controls or
advises that Fund. Any order also would let each Fund compensate an
affiliated bank for acting as agent in executing certain securities
transactions.
\1\ Investment Company Act Release Nos. 14220 (Oct. 31, 1984)
(notice) and 14259 (Nov. 30, 1984) (order).
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Filing Dates: The application was filed on January 19, 1995, and
amended on July 18, 1995, January 16, 1996, and April 21, 1997. Counsel
for applicants has agreed to file another amendment during the notice
period, the substance of which is incorporated herein.
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 June 9, 1997,
and should be accompanied by proof of service on the 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 reasons
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, NW., Washington, DC 20549.
Applicants, Eleven Greenway Plaza, Suite 1919, Houston, Texas 77046.
For Further Information Contact: H.R. Hallock, Jr., Special Counsel, 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.
Applicants' Representations
1. All of the Funds are registered under the Act as open-end
management investment companies. AIM Advisors, Inc., a wholly-owned
subsidiary of AIM Management Group Inc., a privately-owned corporation,
serves as investment adviser for each Fund. AIM Capital Management,
Inc., a wholly-owned subsidiary of AIM Advisors, Inc., serves as sub-
adviser to three series (``Portfolios'') of one of the Funds, AIM
Equity Inc. Both Advisers are registered investment advisers under the
Investment Advisers Act of 1940.
2. The Prior Order granted the Funds or certain of their
predecessors a conditional exemption, pursuant to sections 6(c) and
17(b) of the Act, from the provisions of section 17(a)(1), section
17(a)(2) and section 17(e) thereof. The Prior Order applies to
transactions by the Funds with a bank, bank holding company or
affiliate thereof which may be deemed to be an
[[Page 27811]]
``affiliated person'' of a Fund solely by reason of such entity's
owning, controlling, or holding with power to vote five percent or more
of the outstanding voting securities of any of the Funds (``Affiliated
Bank''). The transactions covered by the Prior Order include those for
repurchase agreements, short-term money market obligations issued by
one of the 50 largest United States banks measured by deposits, tax-
exempt obligations and general brokerage services by banks acting as
agent, subject to the limitations on compensation in section 17(e)(2).
3. Applicants request an order to amend and supersede the Prior
Order. The requested order would apply to all existing and future
Portfolios of the Funds and all existing and future investment
companies and their portfolios for which either or both of the
Advisers, or any entity controlling, controlled by or under common
control with the Advisers, serves in the future as investment adviser
or principal underwriter. The requested order would modify the Prior
Order by redefining the term ``Affiliated Bank'' and by expanding the
classes of transactions covered under the Prior Order.
4. Applicants propose to redefine the term ``Affiliated Bank'' as
(a) any bank, bank holding company or affiliate thereof that is an
affiliated person of a Fund or Portfolio solely because the bank, bank
holding company or affiliate thereof owns, controls, or holds with
power to vote five percent or more of the outstanding voting securities
of the Fund or Portfolio, and (b) any ``affiliated person,'' as defined
in section 2(a)(3) of the Act, of such bank, bank holding company or
affiliate thereof; provided, however, that the term shall not include
any person that exercises a controlling influence over that Fund or
Portfolio. ``Controlling influence'' shall be deemed to include, but is
not limited to, directly or indirectly owning, controlling, or holding
with power to vote more than 25% of the outstanding voting securities
of that Fund or Portfolio. Furthermore, an Affiliated Bank will not
include a bank or an affiliated person of a bank that is an investment
adviser to such Fund or Portfolio.
5. Applicants propose to expand the classes of transactions covered
under the Prior Order to include transactions in U.S. government
securities, reverse repurchase agreements, and ``Qualified
Securities,'' as defined in Condition B.1. below, which meet specified
credit quality standards. The term ``Qualified Securities'' will
include any ``Eligible Security,'' as defined in rule 2a-7 under the
Act, and, in addition, municipal securities, repurchase agreements,
bank obligations, synthetic municipal securities and commercial paper.
6. Applicants anticipate that a number of banks which are now or
may become Affiliated Banks will also be primary dealers or affiliates
of primary dealers, in U.S. government securities. Applicants submit
that the government securities market is highly competitive, and that
removing one or more primary dealers from the Funds' market may deprive
a Fund of the most favorable price and execution when the dealer has
the best overall offer for a transaction. In addition, applicants
represent that it is extremely important that the Funds have the
ability to obtain quotations from any primary dealer to ensure that
they are obtaining the most favorable price or to maximize the
liquidity of their portfolios.
7. Applicants submit that commercial banks are important members of
the municipal securities dealer community and are frequently involved
in providing credit support for industrial development notes and
similar municipal instruments. According to applicants, the need for
portfolio management flexibility, particularly as it relates to
liquidity and credit standards, is especially significant for municipal
securities money market Portfolios advised by the Advisers. In
addition, a Fund's inability to purchase municipal securities from an
Affiliated Bank could be materially aggravated where the Affiliated
Bank was the leading municipal securities underwriter in a particular
region of the country.
8. Applicants anticipate that Affiliated Banks will constitute an
increasingly attractive source of repurchase agreements and, therefore,
propose to enter into repurchase agreement transactions with them.
Applicants also propose to engage in transactions with Affiliated Banks
involving other bank obligations, such as certificates of deposit and
bankers' acceptances. Applicants submit that the elimination of
Affiliated Banks from the universe of banks with which transactions in
repurchase agreements and other bank obligations can be effected would
necessarily increase the risk of credit exposure of the Funds and would
likewise necessarily decrease their degree of diversification.
9. Applicants submit that many banks or their affiliates that are
now or may become Affiliated Banks are market makers for synthetic
municipal securities or may provide credit enhancements for such
instruments, such as demand features or liquidity arrangements.
According to applicants, synthetic municipal securities have been
developed in part to address the limited supply of short-term tax-
exempt securities. Applicants represent that the Funds will only
purchase synthetic municipal securities from Affiliated Banks that have
conditional puts exercisable at par value within seven days. In
addition, the Funds will know the specific long-term ``core
securities'' underlying such synthetic securities. As a result, there
will be no ambiguity in determining par value, and applicants will not
need to use matrix pricing. The credit risk on such synthetic
securities will be equivalent to the credit risks on the core
securities.
10. Applicants propose to engage in transactions involving
commercial paper with Affiliated Banks acting as issuers or principal
distributors. Applicants represent that it is often advantageous for a
Fund to purchase such commercial paper directly from the issuer or the
distributing bank rather than on the secondary market where the price
of such instrument may be higher. Furthermore, applicants believe that
an increasing number of banks, bank holding companies or their
affiliates which are now or may become Affiliated Banks will be issuers
or principal distributors of commercial paper that would be highly
suitable for many of the Funds' Portfolios.
11. Applicants also anticipate that a number of banks or their
affiliates that would be suitable counterparties for transactions in
reverse repurchase agreements (``reverse repos'') will become
Affiliated Banks. Reverse repos are primarily used for temporary
liquidity purposes, such as to obtain cash to meet redemption requests.
The Advisers will solicit quoted rates on reverse repos from potential
counterparties with which the Funds have pre-existing arrangements who
the Advisers believe will offer reverse repo rates at least as
favorable as rates on comparable reverse repos available from other
potential counterparties. At the time a Fund enters into a reverse
repo, the Fund will segregate assets with a custodian, consisting of
cash, U.S. government securities, or other appropriate high-grade debt
securities have a value not less than the value of the proceeds
received plus accrued interest. The segregated assets will be marked-
to-market daily and additional assets will be segregated on any day in
which the assets fall below the repurchase price (plus accrued
interest).
12. Applicants also propose to compensate Affiliated Banks where
they have acted as agent in transactions in U.S. government securities
and Qualified Securities. Applicants propose to compensate Affiliated
banks
[[Page 27812]]
for such services within the limits of section 17(e)(2).
Legal Analysis
1. Sections 17(a)(1) and 17(a)(2) of the Act prohibit affiliated
persons of the Funds or Portfolios, or affiliated persons of such
affiliated persons, acting as principal, knowingly to sell or purchase
any securities to or from the Funds or Portfolios. Section 2(a)(3)(A)
defines an ``affiliated person'' of another person as any person who
owns, controls, or holds with power to vote, five percent or more of
the outstanding voting securities of such other person. By virtue of
section 2(a)(3)(A), if a bank, bank holding company or an affiliate
thereof owns, controls or holds with power to vote five percent or more
of the outstanding voting shares of one of the Funds, that bank, bank
holding company or affiliate thereof is an affiliated person of the
Fund. Furthermore, any affiliated person of such bank, bank holding
company or affiliate thereof with such a five percent share interest in
a Fund may be deemed to be an affiliated person of an affiliated person
of that Fund.
2. Section 2(a)(3)(C) defines an ``affiliated person'' of another
person as any person who controls, is controlled by or is under common
control with such other person. By virtue of section 2(a)(3)(C), any
person who is an affiliated person of a registered investment company
also may be deemed to be an affiliated person of an affiliated person
of each other registered investment company having a common investment
adviser, or investment advisers which are affiliated persons of each
other, or common directors or common officers, or a combination of the
foregoing, because such investment companies may be deemed to be under
common control. Accordingly, a bank, bank holding company, or
affiliated person thereof that is deemed to be an Affiliated Bank in
respect of one Fund by virtue of its ownership of such Fund's shares
may be deemed to be an affiliated person of an affiliated person of all
the other Funds.
3. The foregoing provisions could prohibit all of the funds and
their Portfolios from engaging in any principal transaction in
securities, including reverse repos,\2\ with a wide range of banks,
bank holding companies and their affiliates. Applicants anticipate
that, as a result of accelerating marketing efforts towards
institutional investors, as well as ongoing consolidation in the
banking industry and the increasing complexity of bank holding company
capital structures, the number of such affiliations likely will
increase.
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\2\ When securities are segregated by a Fund as collateral for a
reverse repo, then arguably such securities have been sold. See
Rubin v. United States, 449 U.S. 424 (1981). Consequently, the Funds
may be prohibited by sections 17(a)(1) and 17(a)(2) from engaging in
such transactions with Affiliated Banks. Alternatively, reverse repo
transactions may be prohibited by sections 17(a)(1) and 17(a)(2)
because they consist of a sale and subsequent repurchase of
portfolio securities by a Fund.
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4. Section 17(b) provides that the SEC may exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the transaction, including the consideration to be paid, are
reasonable and fair and do not involve overreaching on the part of any
person concerned, and that the transaction is consistent with the
policy of the investment company concerned and the general purposes of
the Act. Section 6(c) provides that the SEC may exempt any person,
security, or transaction, or any class or classes of persons,
securities, or transactions, from any provisions of the Act, if such
exemption is appropriate in the public interest and consistent with the
protection of investors and the purposes of the Act.\3\
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\3\ Applicants seek relief under section 6(c) as well as section
17(b) because section 17(b) could be interpreted as giving the SEC
power to exempt only a single transaction from section 17(a), as
opposed to a class of transactions.
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5. Section 17(e)(1) generally prohibits an affiliated person of a
registered investment company, or an affiliated person thereof, from
accepting any compensation for acting as an agent for the investment
company unless it is in the course of such person's business as an
underwriter or broker. Section 17(e)(2) provides that an affiliated
person of a registered investment company, or an affiliated person
thereof, acting as a broker for the registered investment company may
accept a limited commission or fee for executing such transactions.
Because banks are specifically excluded from the definition of broker
in section 2(a)(6), however, they are unable to accept compensation
under section 17(e) for acting as an agent for an affiliated investment
company.
6. Applicants believe that the disqualification of even a few major
banks from the universe of securities issuers and dealers with whom the
Funds may do business may have a noticeable impact on portfolio
management flexibility. For synthetic municipal securities, which are
traded or sold by only a small number of banks, elimination of even one
bank could substantially impair the Funds' ability to negotiate the
most favorable terms for such transactions. Furthermore, the nature of
the affiliation of Affiliated Banks makes it highly improbable that the
proposed transactions could ever be negotiated on other than an arm's-
length basis. It is unlikely that a bank could ever influence the
transactions of a Portfolio of which it is a five percent holder, much
less the transactions of another Portfolio in which it holds no shares
whatsoever.
7. Applicants represent that there is no express or implied
understanding between the Applicants and any bank, bank holding company
or any affiliate thereof which is (or may become) an Affiliated Bank
that the Applicants will cause the Funds to enter into purchase or sale
transactions in U.S. government securities, Qualified Securities or
reverse repurchase agreements with such entity. Moreover, Applicants
will give no preference to any Affiliated Bank in effecting
transactions between a Fund and an Affiliated Bank because such bank,
bank holding company or affiliate thereof is (or may become) an
Affiliated Bank or because the customers of such Affiliated Bank
purchase shares of any of the Funds.
8. Applicants will maintain contemporaneous records, in accordance
with Condition A.2. below, with respect to the solicitation of
competitive prices and interest rates for each transaction in order to
verify that the terms and price (or the terms and interest rates with
respect to reverse repos) are at least equal to the best available
terms and price or terms and interest rates offered by other sources.
For each transaction, such records will include, among other things,
the information or material upon which the determination to engage in
the transaction was made, including: (a) The names of other sources
offering prices or interest rates; (b) the material terms and prices or
terms and interest rates, as applicable, offered by each of the
sources; and (c) the date and time the information was solicited and
received from the sources.
Applicants' Conditions
Applicants agree that any order granting the requested relief shall
be subject to the following conditions:
A. General Conditions
1. The board of directors of each of the Funds, 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 from time to time such changes
[[Page 27813]]
to the procedures as are 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 Adviser to each Fund may implement these
procedures, subject to the direction and control of the board of
directors of the relevant Fund.
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 (b) will maintain and preserve for a period
of not less than six years from the end of the fiscal year in which any
transactions occurred, the first two years in an easily accessible
place, a written record of each such 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 material upon which the determinations described
below were made.
3. No Fund or Portfolio will engage in transactions with an
Affiliated Bank if such entity exercises a controlling influence over
that Fund or Portfolio (and ``controlling influence'' shall be deemed
to include, but is not limited to, directly or indirectly owning,
controlling, or holding with power to vote more than 25% of the
outstanding voting securities of that Fund or Portfolio).
4. The transactions entered into by a Fund or Portfolio will be
consistent with the investment objectives and policies of that Fund or
Portfolio as recited in the Fund's registration statement and reports
filed under the Act.
B. U.S. Government and Qualified Securities
1. Qualified Securities means any ``Eligible Security,'' as defined
in rule 2a-7 under the Act, and, in addition, municipal securities,
repurchase agreements, bank obligations, synthetic municipal
securities, and commercial paper that meet the investment quality
requirements of paragraphs (a)(9) (i), (ii), or (iii) of rule 2a-7, as
amended from time to time. The ``minimal credit risk'' standards
imposed by paragraph (3)(c) of rule 2a-7 with respect to money market
fund investments will apply to all investments in Qualified Securities.
2. Before any transaction in U.S. government securities or
Qualified Securities may be entered into with an Affiliated Bank, the
Fund or its Adviser will obtain such information as it deems necessary
to determine that the price or rate to be paid or received for the
security is at least as favorable as that available from other sources
for the same or substantially comparable securities in terms of quality
and maturity. In this regard, the Funds or their Advisers will obtain
and document competitive quotations from at least two other dealers or
counterparties with respect to the specific proposed transaction.
Competitive quotation information will include price or yield and
settlement terms. These dealers or counterparties will be those who, in
the experience of the Funds and their Advisers, have demonstrated the
consistent ability to provide professional execution of U.S. government
security and Qualified Security transactions at competitive market
prices or yields. These dealers or counterparties also must be those
who are in a position to quote favorable prices.
3. Any repurchase agreement will be ``collateralized fully'' within
the meaning of rule 2a-7.
4. No Fund or Portfolio will purchase obligations of any Affiliated
Bank (other than repurchase agreements) if, as a result, more than 5%
of that Fund's or Portfolio's total assets would be invested in
obligations of that Affiliated Bank.
5. The fee, spread, or other remuneration to be received by the
Affiliated Bank as agent in transactions involving U.S. government and
other Qualified Securities will be reasonable and fair compared to the
fee, spread, or other remuneration received by other brokers or dealers
in connection with comparable transactions at such time, and will
comply with section 17(e)(2)(C) of the Act.
C. Reverse Repurchase Agreements
Before any transaction in reverse repurchase agreements may be
entered into with an Affiliated Bank, the Fund or its adviser will
obtain such information as it deems necessary to determine that the
rate to be paid for the agreement is at least as favorable as that
available from other sources. In this regard, the Funds or their
Advisers will obtain and document quoted rates from at least two
unaffiliated potential counterparties with which the Funds have
arrangements to engage in such transactions. Solicited terms shall
include the repurchase price, interest rates, repurchase dates,
acceleration rights, maturity, collateralization requirements, and
transaction charges.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13232 Filed 5-20-97; 8:45 am]
BILLING CODE 8010-01-M
