[Federal Register Volume 62, Number 108 (Thursday, June 5, 1997)]
[Notices]
[Pages 30902-30907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14617]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22693; 812-10444]
Compass Capital Funds et al.; Notice of Application
May 29, 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: Compass Capital Funds, on behalf of its existing and future
portfolio series (the ``Compass Funds''); Securities Lending Trust (the
``Trust''), on behalf of its General Money Market Fund (the ``Money
Fund''), and U.S. Government Securities Money Market Fund (the
``Government Money Fund''), and each future portfolio series of the
Trust (collectively, the ``Investment Funds''); PNC Asset Management
Group, Inc. (the ``Adviser''); PFPC Inc. (the ``Trustee''); PNC Bank,
National Association (``PNC Bank,'' and collectively with the Trust,
the Adviser, and the Trustee, the ``Trust Applicants''); any entity
which may be controlled by or under common control with PNC Bank (the
``PNC Entities''); any other registered investment company or portfolio
series thereof which currently is or in the future may be advised by
the Adviser or PNC Bank, or any other entity controlling, controlled
by, or under common control (as defined in section 2(a)(9) of the Act)
with the Adviser or PNC Bank, that may participate from time to time as
a lender in the securities lending program (the ``Program'')
administered by PNC Bank (together with the Compass Funds, the
``Affiliated Lending Funds''); and each other registered investment
company or portfolio series thereof that may participate from time to
time as a lender in the Program (the ``Other Lending Funds,'' and
together with the Affiliated Lending Funds, the ``Lending Funds'').\1\
\1\ From time to time, it is possible that the Adviser, PNC Bank
or an entity controlling, controlled by, or under common control
with the Adviser or PNC Bank may serve as the investment adviser for
certain portfolio series of a particular registered investment
company, and that other portfolio series of that investment company
could be advised by other entities. In such a circumstance, if the
portfolio series at issue is advised by the Adviser, PNC Bank, or an
entity controlling, controlled by, or under common control with the
Adviser or PNC Bank, the portfolio series (and the investment
company) will be considered an Affiliated Lending Fund, whereas, if
the portfolio series at issue is not advised by the Adviser, PNC
Bank, or an entity controlling, controlled by, or under common
control with the Adviser or PNC Bank, the portfolio series (and the
investment company) will be considered an Other Lending Fund.
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RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b)
granting an exemption from section 17(a), under rule 17d-1 to permit
certain transactions in accordance with section 17(d) and rule 17d-1,
and under section 6(c) granting an exemption from section 17(e).
SUMMARY OF APPLICATION: Trust Applicants request an order to permit (a)
The Lending Funds to use cash collateral received from the borrowers of
their portfolio securities to purchase shares of the Trust, an
affiliated private investment company, pursuant to the Program; (b) the
Lending Funds to pay PNC Bank, and PNC Bank to accept, fees for acting
as lending agent with respect to securities lending transactions by the
Lending Funds; and (c) certain joint transactions incident to the
Program. In addition, PNC Bank requests an order to permit PNC Bank or
any PNC Entity (a) To engage in principal transactions in securities
with the Other Lending Funds that are affiliated persons of PNC Bank or
any PNC Entity solely because they hold 5% or more of the securities of
an Investment Fund; and (b) to receive fees or commissions from such
Other Lending Funds for acting as broker or agent in connection with
the purchase or sale of securities for the Other Lending Funds.
FILING DATES: The application was filed on November 21, 1996, and
amended on April 2, 1997, and May 27, 1997.
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 23, 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 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, NW., Washington, DC 20549.
Applicants, c/o PNC Bank, National Association, 1600 Market Street,
Philadelphia, Pennsylvania 19103.
FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at
(202) 942-0526, or Mary Kay Frech, 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.
Applicants' Representations
1. Compass Funds, a registered investment company organized as a
Massachusetts business trust, is composed of various equity, fixed
income, and money market portfolio series. It is the only Affiliated
Lending Fund that currently intends to lend portfolio securities.\2\
The Adviser, a wholly-owned indirect subsidiary of PNC Bank Corp., is
an investment adviser registered under the Investment Advisers Act of
1940. The Adviser (or a control affiliate thereof) serves or will serve
as the investment adviser to the Affiliated Lending Funds.
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\2\ All existing Affiliated Lending Funds that currently intend
to rely on the requested relief to permit the Lending Funds to pay
and PNC Bank to accept fees based on a share of the revenue
generated from securities lending transactions pursuant to the
Program have been named as parties to the application. Certain other
Affiliated Lending Funds, or portfolio series thereof, for which the
Adviser or PNC Bank, or any entity controlling, controlled by, or
under common controls with the Adviser or PNC Bank, acts as
investment adviser do not presently intend to rely on that portion
of the requested relief. Any such Affiliated Leading Fund, or
portfolio series thereof, however, may do so in the future, but only
in accordance with the terms and conditions described in the
application. In addition, any Affiliated Lending Fund that
authorizes investment in shares of the Trust in the future and
intends to rely on the requested relief will do so only in
accordance with the terms and conditions described in this
application.
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2. The Trust is organized as a Delaware business trust and will
initially consist of two portfolio series: the Money Fund and the
Government Money Fund.\3\ It intends to operate as a
[[Page 30903]]
private investment company excepted from the definition of investment
company under section 3(c)(1) or section 3(c)(7) of the Act.
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\3\ The Money Fund's investments may include a variety of short-
term instruments that are available in the money markets, and the
Government Money Fund's investments may include securities that are
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, and repurchase agreements related thereto. Both
the Money Fund and the Government Money Fund intend to use the
amortized cost method of valuation as defined in rule 2a-7 of the
Act and to comply with the maturity, quality and diversification
requirements set forth in paragraphs (c)(2), (c)(3), and (c)(4),
paragraph (d) of the rule. None of the Investment Funds will
purchase shares of any registered investment company.
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3. The Trustee, a Delaware corporation, is a wholly-owned indirect
subsidiary of PNC Bank Corp., that will serve as the sole trustee of
the Trust and oversee its operations. The Trustee will receive
compensation for the Trust for providing accounting and other
administrative services to the Trust. The Adviser will, subject to the
supervision of the Trustee, act as the investment adviser to the Trust.
The Adviser will, among other things, determine the securities to be
purchased, retained, or sold by the Investment Funds, and place orders
for the purchase and sale of such securities. Neither the Adviser nor
any affiliated person thereof, as defined in section 2(a)(3) of the
Act, will receive any advisory fee from the Trust for the investment
advisory services provided by the Adviser to the Trust.
4. PNC Bank, a wholly-owned indirect subsidiary of PNC Bank Corp.,
is a member bank of the Federal Reserve system and is regulated by the
Office of the Comptroller of the Currency. PNC Bank serves as custodian
or sub-custodian for each of the Lending Funds. PNC Bank also will
serve as custodian of the Trust's assets, but will not receive a
custodial fee from the Trust for those services.
5. PNC Bank administers the Program and, pursuant to securities
lending customer agreements (the ``Customer Agreements'') covering the
respective Lending Funds, act as the securities lending agent for each
of the Lending Funds. Each Lending Fund will be authorized to seek
additional income by lending portfolio securities. In addition, each
Lending Fund's board of directors, including a majority of the
directors who are not ``interested persons,'' within section 2(a)(19)
of the Act, will initially approve the Program and will monitor it on
an ongoing basis. The Customer Agreements will make clear that the
Lending Funds (and their investment advisers) retain the ultimate
authority regarding the lending of portfolio securities, and that PNC
is subject to their direction in carrying out its responsibilities
under the Program.\4\
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\4\ The duties to be performed by PNC Bank as lending agent with
respect to any Affiliated Lending Fund will not exceed the
parameters set forth in Norwest Bank Minnesota, N.A. (pub. avail.
May 25, 1995), except to the extent that the staff of the Division
of Investment Management should later modify such parameters.
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6. Under the Program, PNC Bank will enter into agreements (the
``Securities Loan Agreements'') with certain entities (the
``Borrowers'') that wish to borrow portfolio securities owned by the
respective Lending Funds. PNC Bank may enter into Securities Loan
Agreements on behalf of a particular Lending Fund only with Borrowers
set forth in a list approved by that Lending Fund. PNC Bank has the
discretion to refuse to lend securities to any Borrower on the list.
Pursuant to the Securities Loan Agreements, PNC Bank delivers portfolio
securities to the Borrowers, who agree to return such securities on
demand within three business days. The Lending Funds (a) remain the
owner of securities that are loaned to a Borrower, (b) retain the right
to receive from the Borrower the economic equivalent of any
distributions made with respect to those securities, and (c) have the
power to terminate a loan at any time. PNC Bank will monitor corporate
actions with respect to securities loaned by the Lending Funds and will
reallocate or terminate loans as necessary and to the extent possible
to enable a Lending Fund to vote its portfolio securities.
7. As collateral for the securities loaned, PNC Bank is authorized
to accept cash, and may also upon consent of a Lending Fund accept
other types of instruments such as U.S. Government securities or
irrevocable letters of credit. With respect to securities loans that
are collateralized by assets other than cash, the Lending Fund involved
receives a loan fee paid by the Borrower equal to a percentage of the
market value of the loaned securities as specified in the Securities
Loan Agreement. Alternatively, with respect to securities loans
collateralized by cash, the Borrower is entitled to receive a fixed
cash collateral fee based on the amount of cash collateral, and the
Lending Fund will be compensated on the spread between the net amount
earned on the investment of the cash collateral and the Borrower's cash
collateral fee. With respect to Affiliated Lending Funds, PNC Bank
currently is compensated on a transaction fee basis depending upon the
number and type of transactions it performs and the type of securities
loaned, plus a flat fee for accounting and recordkeeping. With respect
to the Other Lending Funds and other participants in the Program, PNC
Bank currently may be compensated based on a portion of the loan or fee
spread.
8. Subject to receipt of the requested relief, PNC Bank intends to
propose to the boards of directors of the Affiliated Lending Funds that
its compensation for its lending agent services be based upon a pre-
negotiated percentage of the loan fee or portion of the return on the
investment of cash collateral received by an Affiliated Lending Fund
with respect to each loan. The extent to which PNC Bank will be
compensated for acting as lending agent will be set forth in the
Customer Agreement.
9. Applicants anticipate that in most instances collateral will
consist of cash. In order to enhance the return on the securities
lending arrangements for the respective Lending Funds, the Customer
Agreements authorize and instruct PNC Bank to invest the cash
collateral on behalf of the Lending Funds. Each Customer Agreement sets
forth specific written investment parameters, including a listing of
eligible types of investments, which may include shares of both
affiliated and unaffiliated private investment companies. PNC Bank is
required to adhere to the parameters established by a Lending Fund in
investing cash collateral on behalf of the Lending Fund.
10. Trust Applicants request an order to permit the Lending Funds
to use the cash collateral received from the Borrowers to purchase and
redeem shares of the Trust (``Shares''). By investing cash collateral
in Shares, Trust Applicants anticipate that the Lending Funds will be
able to reduce transaction costs, create more liquidity, enjoy greater
returns on their cash collateral, and achieve greater diversification
with respect to investment of cash collateral.
11. Shares of the Trust may be offered to the Lending Funds and
other participants in the Program in reliance on the exemption provided
by Regulation D under the Securities Act of 1933. The Trust does not
presently propose to make a public offering of Shares or other
securities. Shares will have no voting rights, and may not be
transferred without the consent of the Trustee. The Trust will offer
daily redemption of Shares at the current net asset value per Share.
Shares will not be subject to any sales load, redemption fee, asset-
based sales charge or service fee.
12. At the present time, the Other Lending Funds may engage in
principal transactions with PNC Bank or a PNC Entity, or PNC Bank or a
PNC Entity may act as a broker or agent for the Other Lending Funds.
However, to the extent that an Other Lending Fund
[[Page 30904]]
acquires 5% or more of the securities of an Investment Fund, sections
17(a) and 17(e) of the Act could operate to limit or prohibit trading
relationships that currently exist or in the future may exist between
PNC Bank or a PNC Entity and the Other Lending Funds. Accordingly, PNC
Bank requests an order to permit PNC Bank or any PNC Entity to (a)
engage in principal transactions in securities with the Other Lending
Funds, and (b) receive fees or commissions from the Other Lending Funds
for acting as agent or broker in connection with the purchase or sale
of securities for the Other Lending Funds, in each case irrespective of
any affiliation that may arise because of investment by the Other
Lending Funds in Shares.
Applicants' Legal Analysis
A. Sections 17(a) and 17(b)
1. Sections 17(a) (1) and (2) of the Act make it unlawful for any
affiliated person of a registered investment company, or any affiliated
person of such an affiliated person, acting as a principal, to sell any
security to, or purchase any security from, such registered investment
company. Section 2(a)(3) of the Act defines an ``affiliated person'' of
another person to include any person directly or indirectly controlling
or controlled by, or under common control with, such other person, and
an ``affiliated person'' of an investment company to include any
investment adviser thereof. Section 2(a)(9) of the Act states that
``control'' means the power to exercise a controlling influence over
the management or policies of a company, and that control is presumed
to exist in situations in which an entity, directly or indirectly
through another controlled company, beneficially owns more than 25% of
a company's voting securities. By virtue of serving as the investment
adviser for the Affiliated Lending Funds, the Adviser is an
``affiliated person'' of such funds. In addition, the Adviser and the
Trustee may be considered affiliated persons of each other because, as
indirect wholly-owned subsidiaries of PNC Bank Corp., they are under
common control. The Trustee in turn may be deemed to control the Trust
by virtue of its position as sole trustee of the Trust. Therefore, the
Trust may be considered to be an affiliated person of an affiliated
person of the Affiliated Lending Funds and the sale of Shares to the
Affiliated Lending Funds, and the redemption of such Shares, could be
prohibited under section 17(a) unless the requirements of section 17(b)
are satisfied. Moreover, to the extent that the Trust's securities are
deemed to be ``voting securities'' for purposes of the Act, and to the
extent that a particular Other Lending Fund acquires 5% or more of an
Investment Fund's securities, the Other Lending Fund could be deemed an
affiliated person of such Investment Fund, and thus prohibited from
engaging in further purchases or redemptions from the Investment Fund.
2. Because PNC Bank Corp. could be deemed to control PNC Bank, the
PNC Entities, and the Trust, each such entity could be deemed to be
under common control, and thereby an affiliated person of each other
entity. In addition, PNC Bank and the PNC Entities could be deemed
affiliated persons of affiliated persons of an Other Lending Fund that
becomes an affiliated person of an Investment Fund through the
acquisition of 5% or more of the securities of the Investment Fund.
Therefore, once the Trust is established, the provisions of sections
17(a)(1) and 17(a)(2) technically could prohibit PNC Bank or a PNC
Entity from selling securities to or purchasing securities from certain
Other Lending Funds on a principal basis.
3. Section 17(b) of the Act authorizes the SEC to exempt a
transaction from section 17(a) if the terms of the proposed
transaction, including the consideration to be paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned, the proposed transaction is consistent with the
policy of each registered investment company concerned, and the general
purposes of the Act. Because section 17(b) could be interpreted to
exempt only a single transaction, applicants also are seeking relief
pursuant to section 6(c) of the Act to the extent necessary to permit
the investment of cash collateral in Shares, and the principal
transactions in securities between PNC Bank or the PNC Entities, and
the Other Lending Funds.\5\
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\5\ See Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
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4. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction from any provision of the Act 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. Trust
Applicants believe that the requested relief is appropriate under
section 6(c) for the same reasons that it is appropriate under 17(b).
5. Trust Applicants submit that the terms of the proposed
transactions regarding the purchase of Shares, as they relate to the
respective Lending Funds, are reasonable and fair and consistent with
the general purpose of the Act as well as with the policies of the
respective Lending Funds. For the same reasons, Trust Applicants
believe that the proposed transactions are in the best interests of the
Lending Funds and their shareholders.
6. The Lending Funds will be treated like any other shareholders in
the Trust and will purchase and redeem Shares on the same terms and on
the same basis, including price, as Shares are purchased and redeemed
by all other shareholders of the Trust. Shareholders of the Lending
Funds will not be required to absorb a second tier investment advisory
fee as a result of an investment in the Trust, because the Adviser will
not charge the Trust for providing investment advisory services.
Permitting the Lending Funds to invest cash collateral in the Trust
enables them to invest in a vehicle that is designed to be similar to a
registered investment company in terms of the liquidity,
diversification, and quality of its investments at a cost that is
expected to be significantly lower than the cost that is typically
incurred when investing in a registered investment company. In
addition, applicants state that cash collateral from loans by Lending
Funds that are money market funds will not be used to acquire shares of
any Investment Fund that does not comply with the requirements of rule
2a-7 under the Act. Finally, applicants state that because the Trust
will comply with certain provisions and interpretations of the Act
relating to the diversification, liquidity, and quality of portfolio
securities, as well as major substantive provisions of the Act relating
to prohibitions on affiliated transactions, leveraging and senior
securities, and rights of redemption, shareholders of the Lending Funds
will not be disadvantaged or subject to potential overreaching.
7. PNC Bank believes that, as discussed below, it is in the best
interests of the public and consistent with the protection of investors
and the purposes intended by the policies and provisions of the Act to
permit the continuation of existing or future trading relationships
between PNC Bank or the PNC Entities, and the Other Lending Funds.
8. Applicants submit that no element of self-dealing would be
involved in the principal transactions between PNC Bank or a PNC Entity
and an Other Lending Fund that acquires 5% or more of an Investment
Fund. Applicants believe that each transaction between an
[[Page 30905]]
Other Lending Fund and PNC Bank or a PNC Entity will be the product of
arms-length bargaining, because each Other Lending Fund has its own
investment adviser or sub-adviser that is not controlled by or under
common control with PNC Bank and that, in economic reality, may be a
competitor of PNC Bank or the PNC Entity involved. In addition,
applicants believe that because the interests of the Other Lending
Fund's investment advisers and sub-advisers are solely and directly
aligned with those of the Other Lending Funds (to which the advisers
have fiduciary responsibilities), it would be reasonable to conclude
that the consideration to be paid to or received by the Other Lending
Funds in connection with a principal transaction with PNC Bank or a PNC
Entity will be reasonable and fair.
B. Section 17(d) and Rule 17d-1
1. Section 17(d) of the Act and rule 17d-1 thereunder prohibit any
affiliated person of or principal underwriter for a registered
investment company or any affiliated person of such person or principal
underwriter, acting as principal, from effecting any transaction in
connection with any joint enterprise or other joint arrangement or
profit sharing plan, in which such investment company participates.
2. The Adviser, as investment adviser to the Affiliated Lending
Funds, is an affiliated person of such funds. Moreover, because PNC
Bank and the Adviser are each indirect wholly-owned subsidiaries of PNC
Bank Corp., they may be deemed to be under common control and therefore
affiliated persons, and PNC Bank may be deemed an affiliated person of
an affiliated person of each such Affiliated Lending Fund. A lending
agent agreement between an investment company and an affiliated person
of such investment company under which compensation is based on a share
of the revenue generated by the lending agent's efforts may be a
``joint enterprise or other joint arrangement or profit sharing plan.''
Consequently, applicants seek exemptive relief to permit PNC Bank, as
lending agent, to receive a percentage of the revenue generated by an
Affiliated Lending Fund's participation in the Program.
3. As noted above, Other Lending funds that acquire 5% or more of
an Investment Fund's securities may be deemed affiliated persons of the
Investment Fund. PNC Bank Corp. indirectly owns all of the voting
securities of PNC Bank and of the Trustee, and, therefore, could be
deemed to control both entities. Moreover, because the Trustee may be
deemed to control the Trust, PNC Bank and the Trust could be deemed to
be affiliated persons, and PNC Bank could be deemed to be an affiliated
person of an affiliated person of the Other Lending Fund. Thus, section
17(d) and rule 17d-1 could operate to prohibit PNC Bank from receiving
a percentage of the revenue generated through the participation of the
Other Lending Funds in the Program.
4. Applicants also state that it is possible that the Adviser, PNC
Bank, or an affiliate thereof may serve as the investment adviser or
sub-adviser for certain portfolio series of a particular investment
company, while other portfolio series of that investment company could
be advised by entities that are not affiliated with the Adviser, PNC
Bank, or an affiliate thereof. Applicants note that one or more of the
portfolio series may participate in the Program, including portfolio
series advised by entities that are not affiliated with the Adviser,
PNC Bank or an affiliate thereof. Each portfolio series of the
investment company could be deemed to be under common control and thus
an affiliated person of each other portfolio series because the
investment company's board of directors governs each portfolio series.
PNC Bank would be an affiliated person of any portfolio series for
which it acted as investment adviser, and an affiliated person of an
affiliated person (or a second-tier affiliate) of those portfolio
series for which it did not act as investment adviser. As a result, the
prohibitions of section 17(d) and rule 17d-1 thereunder may apply to
the activities involving such portfolio series and PNC Bank, including
PNC Bank's activities as lending agent and its receipt of a share of
the revenue from lending activities.
5. Rule 17d-1 permits the SEC to issue an order with respect to a
joint transaction. In passing on applications for such orders, the SEC
is to consider whether the company's participation in the proposed
transaction 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 other participants.
6. Applicants propose that each Affiliated Lending Fund will adopt
the following procedures to ensure that the proposed fee arrangement
and the other terms governing the relationship with PNC Bank, as
lending agent, will be fair:
(a) In connection with the approval of PNC Bank as lending agent
for an Affiliated Lending Fund and implementation of the proposed fee
arrangement, a majority of the board of directors (including a majority
of the directors who are not ``interested persons'' within the meaning
of the Act) will determine (i) the contract with PNC Bank is in the
Best interests of the Affiliated Lending Fund and its shareholders;
(ii) the services to be performed by PNC Bank are required for the
Affiliated Lending Fund; (iii) the nature and quality of the services
provided by PNC Bank are at least equal to those provided by others
offering the same or similar services; and (iv) the fees for PNC Bank'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 Affiliated Lending Fund's contract with PNC Bank for
lending agent services will be reviewed annually and will be approved
for continuation only if a majority of the board of directors
(including a majority of the board of directors who are not
``interested persons'' within the meaning of the Act) makes the
findings referred to in paragraph (a) above.
(c) In connection with the initial implementation of the proposed
fee arrangement whereby PNC Bank will be compensated as lending agent
based on a percentage of the revenue generated by an Affiliated Lending
Fund's participation in the Program, the board of directors will obtain
competing quotes with respect to lending agent fees from at least three
independent lending agents to assist the board of directors in making
the findings referred to in paragraph (a) above.
(d) The board of directors, including a majority of the directors
who are not ``interested persons'' within the meaning of the Act, will
(i) determine at each regular quarterly meeting that the loan
transactions during the prior quarter were effected in compliance with
the conditions and procedures set forth in the application, and (ii)
review no less frequently than annually the conditions and procedures
set forth in the application for continuing appropriateness.
(e) Each Affiliated Lending Fund will (i) maintain and preserve
permanently in an easily accessible place a written copy of the
procedures and conditions (and modifications thereto) described in the
application or otherwise followed in connection with lending securities
pursuant to the Program, and (ii) maintain and preserve for a period
not less than six years from the end of the fiscal year in which any
loan transaction pursuant to the Program occurred, the first two years
in an easily accessible place, a written record of each such loan
transaction setting forth a description of
[[Page 30906]]
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 loan was made in accordance with the procedures set forth above
and the conditions to the application.
7. The Affiliated Lending Funds and potentially the Other Lending
Funds (by purchasing and redeeming Shares), the Adviser (by managing
the portfolio securities of the Affiliated Lending Funds and the Trust
at the same time that the Affiliated Lending Funds' cash collateral is
invested in Shares), PNC Bank (by acting as lending agent, investing
cash collateral in Shares and receiving a portion of the revenue
generated by securities lending transactions), the Trust (by selling
Shares to and redeeming them for the Lending Funds) and the Trustee (by
serving as trustee of and providing other services to the Trust at the
same time that the Trust sells Shares to and redeems them from the
Lending Funds), also could be deemed to be participants in a joint
enterprise or arrangement within the meaning of section 17(d) of the
Act and rule 17d-1 thereunder. Applicants state that the Lending Funds
will invest in Shares on the same basis as any other shareholder.
Applicants argue that all investors in Shares will be subject to the
same eligibility requirements imposed by the Trust and that all Shares
will be priced in the same manner and will be redeemable under the same
terms. Additionally, applicants argue that due to the lower expenses
incurred by the Trust, investing cash collateral in the Trust is
expected to offer returns to the Lending Funds superior to those that
could be attained by investing in a registered investment company,
whether affiliated or unaffiliated, while still offering the benefits
of investing in a registered investment company in terms of liquidity,
diversity, and quality of investments.
C. Sections 6(c) and 17(e)
1. Section 17(e)(1) of the Act makes it unlawful for any affiliated
person of a registered investment company, or any affiliated person of
such person, when acting as agent, to accept from any source any
compensation (other than a regular salary or wages from such registered
company) for the purchase or sale of any property to or for such
registered company, except in the course of such person's business as
an underwriter or broker. Section 17(e)(2) of the Act makes it unlawful
for any affiliated person of a registered investment company, or any
affiliated person of such person, acting as broker in connection with
the sale of securities to or by such registered investment company, to
receive from any source a commission for effecting such transaction
which exceeds (a) the usual and customary broker's commission if the
sale is effected on a securities exchange, or (b) 2 per centum of the
sales price if the sale is effected in connection with a secondary
distribution of such securities, or (c) 1 per centum of the purchase or
sale price of such securities if the sale is otherwise effected.
2. Banks are specifically excluded from the definition of
``broker'' in section 2(a)(6) of the Act, and thus not covered by the
exception contained in section 17(e)(1) to the extent they are acting
in a brokerage capacity. Therefore, PNC Bank or any PNC Entity which
becomes affiliated with an Other Lending Fund through the Trust, but
which is a bank, could be prohibited from acting in a brokerage or
similar capacity for the Other Lending Fund.
3. Rule 17e-1 provides a safe harbor from the prohibition contained
in section 17(e). Rule 17e-1 provides that, for purposes of section
17(e)(2)(A) of the Act, a commission shall be deemed as not exceeding
the usual and customary broker's commission, if certain procedures are
followed. These procedures include the requirement in rule 17e-1(b)(3)
that a registered investment company's board of directors, including a
majority of directors who are not ``interested persons'' under the Act,
determines, no less frequently than quarterly, that all transactions
effected pursuant to the rule comply with procedures which are
reasonably designed to provide that the brokerage commission is
consistent with the standards set forth in the rule. Applicants submit
that while PNC Entities that qualify as ``brokers'' under the Act could
rely on rule 17e-1 in effecting transactions for Other Lending Funds,
compliance by those funds with the rule's provisions is unnecessary and
unduly burdensome, given that the affiliation between the Other Lending
Funds and PNC Bank or the PNC Entities is a technical one, arising
solely through the mechanism of the Trust.
4. Applicants submit that section 17(e) was designed to address the
concern raised in section 1(b)(2) of the Act, where Congress determined
that the national public interest and the interests of investors are
adversely affected when investment companies are organized, operated,
managed, or their portfolio securities are selected, in the interests
of their affiliates, or of brokers, dealers or underwriters. Applicants
argue that Congress, in fashioning section 17(e), intended that a
broker affiliated with a registered investment company receive no more
than the ordinary stock exchange brokerage commission, and sought to
eliminate any risk of self-dealing.
5. Applicants assert that brokerage or similar transactions by PNC
Bank or a PNC Entity for the Other Lending Funds that may acquire 5% or
more of the securities of an Investment Fund raise no possibility of
self-dealing or any concern that these Other Lending Funds would be
managed in the interest of PNC Bank or the PNC Entity. In each
instance, PNC Bank or the PNC Entity would not have influence over the
decisions made by the Other Lending Funds. Applicants submit that each
transaction between an Other Lending Fund and PNC Bank or a PNC Entity
would be the product of arms-length bargaining, because each Other
Lending Fund has its own investment adviser or sub-adviser that is not
controlled by or under common control with PNC Bank or a PNC Entity and
that, in economic reality, may be a competitor of PNC Bank or the PNC
Entity involved.
6. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction from any provision of the Act 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. For
the reasons discussed above, applicants submit that the proposed
transactions meet the section 6(c) standard.
Applicants' Conditions
Affiliated Lending Funds agree that any order of the SEC granting
the requested relief will be subject to the following conditions:
1. Except as set forth in the application, the securities lending
program of each Affiliated Lending 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.\6\
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\6\ See, e.g., SIFE Trust Fund (pub. avail. Feb. 17, 1982).
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2. The approval of an Affiliated Lending Fund's board of directors,
[[Page 30907]]
including a majority of directors who are not ``interested persons''
under the Act, shall be required for the initial and subsequent
approvals of PNC Bank's service as lending agent for the Affiliated
Lending Fund pursuant to the Program, for the institution of all
procedures relating to the Program as it relates to the Affiliated
Lending Fund, and for any periodic review of loan transactions for
which PNC Bank acted as lending agent pursuant to the Program.
In addition, Trust Applicants agree that any order of the SEC
granting the requested relief will be subject to the following
conditions:
3. A majority of the board of directors of a Lending Fund
(including a majority of the directors who are not ``interested
persons'' within the meaning of the Act of such Lending Fund), will
initially and at least annually thereafter determine that the
investment of securities lending cash collateral in Shares of the Trust
is in the best interests of the shareholders of the Lending Fund.
4. Investment in Shares of the Trust by a particular Lending Fund
will be consistent with such Lending Fund's investment objectives and
policies.
5. Investment in Shares of the Trust by a particular Lending Fund
will be in accordance with the guidelines regarding the investment of
securities lending cash collateral specified by the Lending Fund in the
Customer Agreement. A Lending Fund's cash collateral will be invested
in a particular Investment Fund only if that Investment Fund invests in
the types of instruments that the Lending Fund has authorized for the
investment of its cash collateral.
6. Each Investment Fund that uses the amortized cost method of
valuation as defined in rule 2a-7 under the Act will maintain a
portfolio that complies with the maturity, quality, and diversification
requirements of rule 2a-7 (c)(2), (c)(3), (c)(4), and (d). A Lending
Fund may only purchase Shares of an Investment Fund using the amortized
cost method of valuation if the Adviser determines on an ongoing basis
that such Investment Fund is in compliance with paragraphs (c)(2),
(c)(3), (c)(4), (c)(6), and (d) of rule 2a-7. The Adviser shall
preserve for a period not less than six years from the date of
determination, the first two years in an easily accessible place, a
record of such determination and the basis upon which such
determination was made. This record will be subject to examination by
the SEC and the staff.
7. The Trust will comply as to each Investment Fund with the
requirements of sections 17 (a), (d), and (e) and 18 of the Act as if
the Trust were a registered open-end investment company. With respect
to all redemption requests made by a Lending Fund, the Trust will
comply with section 22(e) of the Act. The Adviser shall, subject to
approval by the Trustee, adopt procedures designed to ensure that the
Trust complies with section 17 (a), (d), and (e), 18, and 22(e) of the
Act. The Adviser will also periodically review and periodically update
as appropriate such procedures and will maintain books and records
describing such procedures, and maintain the records required by rules
31a-1(b)(1), 31a-1(b)(2)(ii), and 31a-1(b)(9) under the Act. All books
and records required to be made pursuant to this condition will be
maintained and preserved 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, and will be subject to
examination by the SEC and the staff.
8. The net asset value per share with respect to Shares of the
Trust will be determined separately for each Investment Fund by
dividing the value of the assets belonging to the Investment Fund, less
the liabilities of that Investment Fund, by the number of Shares
outstanding with respect to the Investment Fund. Each Investment Fund
that uses the amortized cost method of valuation as defined in rule 2a-
7 under the Act will comply with rule 2a-7(c)(6), except that the
Adviser, subject to the approval by the Trustee, shall adopt the
procedures described in that provision and the Adviser shall monitor
such procedures and take such other actions as are required to be or
may be taken by a board of directors pursuant to that provision.
9. The Shares of the Trust will not be subject to a sales load,
redemption fee, any asset-based sales charge, or service fee (as
defined in rule 2830(b)(9) of the Conduct Rules of the National
Association of Securities Dealers).
10. Each leaning Fund will purchase and redeem Shares of the Trust
as of the same time and at the same price, and will receive dividends
and bear its proportionate share of expenses on the same basis, as
other shareholders of the Trust. A separate account will be established
in the shareholder records of the Trust for the account of each
applicable Lending Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14617 Filed 6-4-97; 8:45 am]
BILLING CODE 8010-01-M
