[Federal Register Volume 61, Number 121 (Friday, June 21, 1996)]
[Notices]
[Pages 31981-31984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15909]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22020/812-9248]
FIRST FUNDS and First Tennessee Bank National Association; Notice
of Application
June 17, 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: FIRST FUNDS (the ``Trust'') and First Tennessee Bank
National Association (the ``Bank'').
RELEVANT ACT SECTIONS: Exemption requested under sections 6(c), 10(f)
and 17(b) from sections 10(f) and 17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order to permit certain
portfolios of the Trust to purchase Tennessee tax-exempt securities
from the Bond Division of the Bank (the ``Bond Division'') when such
securities are underwritten solely by the Bond Division or when the
Bond Division is a member of an underwriting syndicate, and from a
syndicate manager when such securities are designated as group sales.
The order also would permit the portfolios to purchase Tennessee tax-
exempt securities from an underwriting syndicate of which the Bond
Division is a member in amounts up to the greater of 10% or $1,000,000,
but in no event more than 15%, of a class of an issue, and without
limiting the consideration paid by a portfolio in any one offering.
FILING DATES: The application was filed on September 19, 1994 and
amended on April 5, 1995, July 19, 1995, March 8, 1996, and May 17,
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 July 12, 1996,
and should be accompanied 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, FIRST FUNDS, 370 17th Street, Suite 2700, Denver,
Colorado 80202, and First Tennessee Bank National Association, 4990
Poplar Avenue, 3rd Floor, Memphis, Tennessee 38117.
FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 942-0574, or Elizabeth G.
Osterman, Assistant Director, at (202) 942-0654 (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. The Trust is a Massachusetts business trust registered as an
open-end, diversified, management investment company that currently
offers shares in seven series, one of which is the Tennessee Tax-Free
Portfolio (the ``Portfolio''). The Portfolio invests in Tennessee tax-
exempt securities, which are debt securities of the State of Tennessee,
its political sub-divisions, authorities, agencies, instrumentalities,
and corporations the interest on which is exempt from federal and
Tennessee personal income tax.
2. The Bank is a national banking association wholy owned by First
Tennessee National Corporation. The Trust Division of the Bank acts as
an investment adviser (``Investment Adviser'') to the existing
portfolios of the Trust and expects to serve as investment adviser to
future portfolios (together with the Portfolio, the ``Portfolios'')
established by the Trust.
3. The Bond Division participates in a substantial number of public
offerings of Tennessee tax-exempt securities and is the leading
underwriter of most types of Tennessee tax-exempt securities based on
both dollar volume and number of new issues. From 1991 through 1995,
the Bond Division served as underwriter of approximately 29% of the
total dollar amount, and approximately 30% of the total number, of new
issues of Tennessee tax-exempt securities during those years.
Applicants state that, over the past five years, the Bond Division has
underwritten as senior manager more than 3.3 times the number of issues
underwritten by its nearest competitor. Applicants contend that because
the Bond Division participates in new issues of Tennessee tax-exempt
[[Page 31982]]
securities more consistently than its competitors, the Bond Division
ranked first, over a five-year period, among senior underwriters for
Tennessee tax-exempt securities by a wide margin. Applicants also state
that the Bond Division is the largest competitive retail dealer in the
secondary market for Tennessee tax-exempt securities.
4. Applicants request relief from: (a) section 17(a) to permit the
Portfolios to purchase Tennessee tax-exempt securities from the Bond
Division when such securities are underwritten solely by the Bond
Division; (b) sections 10(f) and 17(a) to permit the Portfolios to
purchase Tennessee tax-exempt securities from the Bond Division when
the Bond Division is a member of an underwriting syndicate; (c)
sections 10(f) and 17(a) to permit the Portfolios to purchase Tennessee
tax-exempt securities from a syndicate manager of an underwriting
syndicate of which the Bond Division is a member when such sales are
designated as ``group sales;'' (d) section 10(f) to permit the
Portfolios to purchase Tennessee tax-exempt securities in reliance on
rule 10f-3 in amounts up to the greater of 10% or $1,000,000, but in no
event more than 15%, of a class of an issue (or such other amounts as
may be set forth in rule 10f-3(d), as it may be amended and/or
redesignated in accordance with the proposed amendments to rule 10f-3
released for public comment by the SEC on March 21, 1996 (the
``Proposed Amendments''));\1\ and (e) section 10(f) to permit the
Portfolios to purchase Tennessee tax-exempt securities from an
underwriting syndicate of which the Bond Division is a member without
limiting the consideration paid by a Portfolio in any one offering to
3% of the Portfolio's total assets, provided that if the SEC determines
to retain paragraph 10f-3(e) when the Proposed Amendments are adopted,
applicants will comply with the requirements of rule 10f-3(e) as it may
be retained, amended and/or redesignated.
\1\ Exemption for the Acquisition of Securities During the
Existence of an Underwriting Syndicate, Investment Company Act
Release No. 21838 (Mar. 21, 1996).
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5. Applicants request that the proposed relief apply to all current
and future portfolios of the Trust or any other investment company or
series thereof organized in the future that are advised by the Bank or
a person controlling, controlled by, or under common control with the
Bank and that invest or will invest in Tennessee tax-exempt securities.
The requested order would not permit principal transactions between the
Bond Division and the Portfolios in other securities or for Tennessee
tax-exempt securities sold in the secondary market.
6. Applicants assert that while the national demand for tax-exempt
securities has experienced substantial growth, the supply of tax-exempt
securities has decreased, and Tennessee has experienced an even greater
decline in supply of tax-exempt securities than the nation as a whole.
Moreover, the quantity and quality of Tennessee tax-exempt securities
offered for sale in the secondary market tends to fluctuate daily.
Applicants assert that, as the Portfolios increase in size the combined
effect of the lack of access to the Bond Division and the lack of
securities in the secondary market may prevent the Portfolios reliably
from meeting their investment needs by making purchases in the
secondary market. Applicants contend that, in that case, the inability
to effect transactions with the Bond Division also may increase to the
Portfolios the cost of securities in the secondary market both because
dealers other than the Bond Division may not be in a position to offer
competitive prices generally, and because those dealers do not have to
compete with the Bond Division in effecting transactions involving the
Portfolios. Consequently, applicants have an increased need to acquire
Tennessee tax-exempt securities in underwritten offerings.
7. Applicants assert that due to the shortage of Tennessee tax-
exempt securities, a significant number of new issues are
oversubscribed. In the event that an issue is oversubscribed, orders
designated as ``group orders'' are filled before ``member orders.''
Consequently, obtaining Tennessee tax-exempt securities in an
oversubscribed offering often requires that a purchaser have the
ability to place group orders, since there are not sufficient
securities to fill all member orders.
8. A group sale results from a ``group order.'' A group order is an
order submitted to an underwriting syndicate which benefits all members
of the syndicate according to their percentage participation in the
syndicate. A group order may be distinguished from a ``designated
order,'' in which the investor designates two or more members of the
syndicate to retain that portion of the commission not retained by the
syndicate managers, and from a ``member order,'' in which an investor
places an order directly with a member of the syndicate who retains
that portion of the commission not retained by the syndicate managers.
9. Applicants believe that the current restrictions of rule 10f-
3(d) unnecessarily impair the Portfolio's access to the new issue
market. Most offerings of Tennessee tax-exempt securities are not
sufficiently large to permit the Portfolios to purchase blocks of
securities in reliance on rule 10f-3 in amounts exceeding $500,000.
Applicants believe that the Proposed Amendments recognize that the
percentage limitations in rule 10f-3(d) may be outdated as a result of
the increase in the size of investment companies and concentration in
the underwriting industry. Applicants assert that over the last fifteen
years, inflation similarly has rendered the $500,000 limit under
paragraph (d) obsolete. Applicants assert that the market for odd lots
is significantly less liquid than the market for round lots, and the
dealer spread for purchasing odd lots is significantly higher.
Applicants' proposal would lower the size of a class of an offering
necessary to allow the Portfolios to purchase blocks large enough to
resell as round lots.
10. All of the transactions conducted under the requested order
will comply with the provisions of rule 10f-3, other than paragraphs
(d), (e), and (f). The Portfolios, together with all other entities for
which the Bank and persons controlling, controlled by, or under common
control with the Bank have investment discretion (``Related
Purchasers'') will not in the aggregate purchase a majority of any
class of an issue of Tennessee tax-exempt securities when the
Portfolios purchase such securities directly from the Bond Division or
when the Portfolios purchase securities designated as ``group sales''
from a syndicate manager of an underlying syndicate of which the Bond
Division is a member. This ensures that a majority of the securities of
an underwriting may not be purchased by entities controlled by the
Bank. Applicants assert that the existence of an independent market for
securities purchased by the Portfolios in reliance on the requested
order will eliminate any possible incentive to the Bank to misprice
securities intentionally in hoped of selling to a captive market.
Applicants also state that, unlike other types of debt instruments and
equity securities, municipal bonds are primarily sold on the basis of
yield. The yield on a particular municipal bond is determined by
reference to a number of relatively objective factors, including the
credit of the issuer, the maturity of the issue, the general level of
interest rates, and the value of any tax-exemption to investors.
Because issuers, underwriters, and purchasers can look to these
objective factors in determining
[[Page 31983]]
an appropriate price for an issue of municipal securities, applicants
believe that the likelihood that an issue of high quality municipal
securities would be unmarketable is minimal.
Applicants' Legal Analysis
1. Section 2(a)(3) defines the term ``affiliated person'' of
another person to include ``any person directly or indirectly
controlling, controlled by or under common control with, such other
person, '' and ``if such other person is an investment company, any
investment adviser thereof.'' Under that definition, the Bank is an
affiliated person of the Portfolios because the Bank serves (through
the Trust Division) as the Portfolios' investment adviser.
2. Section 10(f) generally prohibits an investment company from
purchasing securities from an underwriting syndicate in which the
investment company's investment adviser or an affiliate thereof is a
member. Section 10(f) therefore prohibits the Portfolios from
purchasing any securities from an underwriting syndicate of which the
Bond Division is a member. Section 10(f) also authorizes the SEC to
exempt any transaction or class of transactions from the prohibitions
of section 10(f) if the exemption is consistent with the protection of
investors.
3. Rule 10f-3 permits purchases otherwise prohibited by section
10(f) upon compliance with certain conditions, including: paragraph
(d), which provides that an investment company, or two or more
investment companies with the same investment adviser, relying on rule
10f-3 cannot purchase more than the greater of 4% or $500,000, but in
no event more than 10%, of any class of an issue; paragraph (e), which
prohibits an investment company from paying consideration greater than
3% of the investment company's assets for the securities being offered;
and paragraph (f), which provides that the investment company cannot
purchase the securities being offered directly from its affiliated
persons, and that it cannot purchase municipal securities from a
syndicate manager if the purchase is designated as a group sale or
otherwise allocated to the account of an affiliated person.
4. Section 17(a) provides, in relevant part, that it is unlawful
for any affiliated person of a registered investment company, or any
affiliated person of such person, acting as principal, knowingly to
sell any security or other property to such registered investment
company. As a result, the Bond Division is prohibited from selling
securities to the Portfolios.
5. Under section 17(b), the SEC may, upon application, exempt a
transaction from the prohibition of section 17(a) if evidence
establishes that the terms of the proposed 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 proposed
transaction is consistent with the policy of the registered investment
company and with the general purposes of the Act. Because section 17(b)
exempts only a specific transaction, applicants request relief under
sections 6(c) and 17(b) to engage in a series of future transactions.
6. Section 6(c) authorizes the SEC to exempt any person or
transaction from any provisions of the Act or any rule or regulation
thereunder if the 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.
7. The SEC has proposed amendments to rule 10f-3 that would, among
other things, raise the percentage limitation in rule 10f-3(d) to the
greater of 10% of an offering or $1,000,000 (subject to a maximum
limitation of 15% of the offering), eliminate the limitation on the
amount of an investment company's assets that may be used to make
purchases under the rule, and permit investment companies to purchase
municipal securities in group sales. Applicants contend that the
Proposed Amendments recognize the fact that (a) rule 10f-3(d) may be
too restrictive given the increased size of investment companies
relative to the size of underwritten offerings since the rule was last
amended, (b) the limitation on the amount of an investment company's
assets used to make purchases in a specific offering may be unnecessary
in light of the other provisions of rule 10f-3 and the diversification
provisions of the Investment Company Act, and (c) permitting group
sales may be necessary to ensure that investment companies that
purchase municipal bonds are able to purchase securities in
oversubscribed offerings in which group orders receive priority. Thus,
applicants believe that the Proposed Amendments generally support their
request for relief.
8. Given the role of the Bond Division in the new issue market for
Tennessee tax-exempt securities, applicants believe that as the
Portfolios increase in size they will be disadvantaged in their attempt
to obtain a sufficient quantity of Tennessee tax-exempt securities
suitable for investment by the Portfolios. Applicants believe that the
requested order will benefit the shareholders of the Portfolios by
providing the Portfolios access to the new issue market for Tennessee
Tax-exempt securities needed to insure the availability of suitable
portfolio securities. Applicants' request is based upon the
requirements of the Portfolios with respect to portfolio transactions;
anticipated shortages of Tennessee tax-exempt securities; the
significant role the Bond Division plays in the market for Tennessee
tax-exempt securities; and the advantages to the Portfolios in being
able to purchase slightly larger blocks of an underwritten issue than
currently is permitting by the limitations of rule 10f-3(d), effect
transactions with the Bond Division as principal in the new issue
market, and purchase securities in group sales from the manager of
underwriting syndicates of which the Bond Division is a member.
9. Applicants believes that the procedures to be followed with
respect to the proposed transactions are structured in such a way as to
insure that such transactions will be reasonable and fair and will not
involve overreaching on the part of any person concerned and that the
requested relief is 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.
Applicants' Conditions
Applicants agree that the following conditions may be imposed in
any order of the SEC granting the requested relief:
1. Transactions effected pursuant to the order will be effected in
accordance with all of the provisions of rule 10f-3 (other than
paragraphs (d), (e), and (f)). A Portfolio, or two or more Portfolios
and/or other investment companies with the same investment adviser as
the Portfolios, will not in the aggregate purchase more than the
greater of 10% or $1,000,000, but in no event more than 15% of any
class of an issue of Tennessee tax-exempt securities when the
Portfolios purchase such securities directly from the Bond Division,
when the Portfolios purchase such securities in ``group sales'' from a
syndicate manager of an underwriting syndicate of which the Bond
Division is a member, or when the Portfolios and/or the other
investment companies purchase such securities otherwise in reliance on
rule 10f-3. Notwithstanding the foregoing, the aggregate amount of
securities that may be purchased and the amount of the Portfolio's
assets that may be used will be limited to the percentage restrictions
set forth in rule 10f-3, as it may be amended if the Proposed
Amendments are adopted, to the extent such percentage restrictions vary
from
[[Page 31984]]
those provided in this condition. In no event will the Portfolios
purchase any such securities from the Bond Division or from the
syndicate manager of an underwriting syndicate of which the Bond
Division is a member in ``group sales'' in an underwriting where the
Related Purchasers in the aggregate purchase a majority or more of any
class of an issue of such securities.
2. Purchases of Tennessee tax-exempt securities directly from the
Bond Division or from a syndicate manager of an underwriting syndicate
of which the Bond Division is a member when the purchases are
designated as ``group sales'' be effected only in Tennessee tax-exempt
securities which at the time of purchase have one of the following
investment grade ratings from at least one nationally recognized rating
agency: (a) one of the two highest investment grade ratings in the case
of securities with remaining maturities of one year or less; and (b)
one of the top three investment grade ratings in the case of securities
with remaining maturities greater than one year.
3. Purchases of Tennessee tax-exempt securities directly from the
Bond Division or from a syndicate manager of an underwriting syndicate
of which the Bond Division is a member when the purchases are
designated as ``group sales'' will be limited so that no such
transaction will be effected if, as a result, the aggregate value of
securities held by a Portfolio acquired pursuant to such transactions
would exceed 50% of the total net assets of the Portfolio.
4. Purchases of Tennessee tax-exempt securities directly from the
Bond Division or from a syndicate manager of an underwriting syndicate
of which the Bond Division is a member when the purchases are
designated as ``group sales'' will be effected only when the Tennessee
tax-exempt securities acquired are otherwise unavailable for purchase.
If the Bond Division is the sole underwriter of the securities, this
condition is automatically fulfilled because there is no other
potential seller. When the Bond Division is a member of an underwriting
syndicate, the Investment Adviser will observe the following procedures
to determine when the securities are unavailable from other members of
the syndicate. Initially, the Investment Adviser will determine the
aggregate number of securities which the Portfolios wish to acquire.
Next, the Investment Adviser will attempt to purchase as much of this
number as possible from members of the syndicate other than the Bond
Division. After acquiring as many securities as possible from such
other members, the Investment Adviser will attempt to purchase from the
Bond Division the number of securities which the Portfolios wish to
acquire and have been unable to obtain from such other members. The
securities acquired from such other members will be allocated first to
the Portfolios to the extent of the number of securities it is entitled
to acquire, based upon the relative needs of the Related Purchasers and
the total number of securities purchased from such other members and
from the Bond Division, whichever is less.
5. When the Portfolios purchase Tennessee tax-exempt securities
from a syndicate manager of an underwriting syndicate of which the Bond
Division is a member, the Portfolios will not: (a) Submit designated
orders to a syndicate manager which are allocated to the Bond Division;
(b) submit group orders to a syndicate manager which designate the Bond
Division to receive any portion of the commission; or (c) otherwise
allocate orders to the Bond Division.
6. The exemption will be valid only so long as the Investment
Adviser and the Bond Division operate as separate and independent
profit centers within the framework of First Tennessee Bank National
Association (or become separate subsidiaries or affiliates thereof).
The Investment Adviser will maintain offices physically separate from
those of the Bond Division. Personnel assigned to the Investment
Adviser will be devoted exclusively to the business and affairs of the
Investment Adviser and will not receive compensation based on the
volume or nature of transactions effected for the Portfolios with the
Bond Division or an underwriting syndicate of which the Bond Division
is a member, except to the extent that such transactions may affect the
profits and losses of the Bank. The Bond Division will not share with
the Investment Adviser any of its profits or losses on transactions
effected by the Portfolios with the Bond Division or an underwriting
syndicate of which the Bond Division is a member, provided that general
compensation to the officers and employees of the Bank, including the
Investment Adviser and the Bond Division, will not be affected by this
undertaking. Personnel assigned to the Bond Division will not
participate in or otherwise seek to influence the Investment Adviser
other than in the normal course of sales activities of the same nature
that are being carried out simultaneously with respect to unaffiliated
institutional clients of the Bond Division. Senior executives of the
Bank and/or First Tennessee National Corporation with responsibility
for overseeing the operations of various divisions and subsidiaries are
not precluded from exercising those functions over the Investment
Adviser because they oversee the Bond Division as well, provided that
such persons shall not have any involvement with respect to
transactions effected pursuant to the exemption and will not attempt to
influence or control the purchase of securities by the Portfolios from
the Bond Division or an underwriting syndicate of which the Bond
Division is a member.
7. The Bond Division and the Investment Adviser will adopt a set of
guidelines for their respective personnel to make certain that
transactions conducted pursuant to the order comply with the conditions
set forth in the application and that the parties generally maintain
arm's length relationships. Compliance officer(s) in conjunction with
the Bank's audit division periodically will monitor the activities of
the Bond Division and the Investment Adviser to make certain that they
adhere to such guidelines and the conditions set forth in the
application.
8. The trustees, including a majority of the independent trustees
of the Trust who are not ``interested persons'' of the Trust and have
no direct or indirect financial interest in the transaction, will
review no less frequently then quarterly each purchase of Tennessee
tax-exempt securities directly from the Bond Division or from a
syndicate manager of an underwriting syndicate of which the Bond
Division is a member when the purchases are designated as ``group
sales'' since the last review and will determine that the terms of such
transactions were reasonable and fair to the shareholders of the
Portfolios and did not involve overreaching of the Portfolios or their
shareholders on the part of any person concerned. In considering
whether the price paid for the security was reasonable and fair, the
price of the security will be analyzed with respect to comparable
transactions involving similar securities being purchased or sold
during a comparable period of time.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-15909 Filed 6-20-96; 8:45 am]
BILLING CODE 8010-01-M
