[Federal Register Volume 63, Number 158 (Monday, August 17, 1998)]
[Notices]
[Pages 43971-43974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21959]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23383; 812-11164]
Countrywide Investment Trust, et al.; Notice of Application
August 11, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application under sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 17(a)(1) and (2) and 17(e) of the Act.
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SUMMARY OF APPLICATION: Applicants seek an order to permit Countrywide
Investment Trust, Countrywide Tax-Free Trust, and Countrywide Strategic
Trust (collectively, the ``Trusts'' and individually, a ``Trust'') to
engage in certain securities transactions with banks, bank holding
companies, and their affiliates that are ``affiliates'' of a Trust
solely because they own, hold, or
[[Page 43972]]
control 5% or more of the outstanding voting securities of the Trust,
or are an affiliated person, within the meaning of section 2(a)(3) of
the Act, of the bank, bank holding company or its affiliate
(collectively, ``Affiliated Banks'').
APPLICANTS: The Trusts and Countrywide Investments, Inc. (the
``Adviser'').
FILING DATES: The application was filed on June 1, 1998 and amended on
June 23, 1998. Applicants have agreed to file an amendment during the
notice period, the substance of which is included in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. 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 September 8,
1998, 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 may request
notification of a hearing by writing the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants: 312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202.
FOR FURTHER INFORMATION CONTACT:
J. Amanda Machen, Senior Counsel, at (202) 942-7120, or Nadya B.
Roytblat, Assistant Director, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC
20549 (tel. 202-942-8090).
Applicants' Representations
1. Each Trust is organized as a Massachusetts business trust and is
registered under the Act as an open-end management investment company.
All of the Trusts have multiple portfolios (each a ``Fund''). The
Adviser, a wholly-owned indirect subsidiary of Countrywide Credit
Industries, Inc., is an investment adviser registered under the
Investment Advisers Act of 1940 and serves as investment adviser to
each of the Funds. Applicants request that the relief apply to any
other existing or future registered open-end management investment
company for which the Adviser, or any entity controlling, controlled
by, or under common control with the Adviser, may in the future act as
investment adviser.\1\
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\1\ All existing entities that currently intend to rely on the
requested order are named as applicants. Any other entities that
subsequently rely on the order will comply with the terms and
conditions of the application.
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2. Applicants request an order that would permit the Funds to
engage in securities transactions with Affiliated Banks that involve:
(a) U.S. government securities; (b) municipal securities, repurchase
agreements, bank obligations, synthetic municipal securities, and
commercial paper (``Qualified Securities''); and (c) reverse repurchase
agreements (collectively, ``Covered Securities'').
3. All Qualified Securities will meet the following credit
standards:
a. For obligations that have a remaining maturity of 397 days or
less, each security shall constitute an ``Eligible Security'' within
the meaning of rule 2a-7; provided that, in the case of unrated
securities (as defined in rule 2a-7(a)(28)), in addition to the
requirements of rule 2a-7 applicable to the unrated securities, all
determinations with respect to the comparability of the securities to
rated securities (as defined in rule 2a-7(a)(19)) are also reviewed and
approved at least quarterly by a majority of the Trust's trustees who
are not interested persons of the Trust or Fund.
b. For obligations that have a remaining maturity of more than 397
days, each security (or another long-term security of the same issuer
having comparable priority and security to such obligation) shall have
been rated by a nationally-recognized statistical rating organization
(``NRSRO'') in one of the four highest rating categories for long-term
obligations; or, if the security and issuer have not been rated by any
NRSRO, are determined by the Trust's or Fund's investment adviser to be
comparable in credit quality to a security carrying a long-term rating
in one of the four highest rating categories of an NRSRO, and the
determination is reviewed and approved at least quarterly by a majority
of the Trust's trustees who are not interested persons of the Trust or
Fund.
c. Any repurchase agreements will be collateralized fully within
the meaning of rule 2a-7.
d. For obligations subject to unconditional, irrevocable credit
enhancement (including, without limitation, a guarantee, letter of
credit or put), the Trust or Fund may rely upon the NRSRO ratings of
the provider of the credit enhancement to determine whether the
obligation satisfies the requirements of paragraphs (a) and (b) above.
Such obligations shall be treated as rated securities to the extent
that the credit enhancement is of comparable priority and security to
the rated obligations of the provider of the credit enhancement.
4. Applicants also request relief to permit the Funds to pay
compensation to Affiliated Banks within the limits of section 17(e)(2)
of the Act when the Affiliated Bank acts as agent for the Funds in
executing transactions in Covered Securities.
Applicants' Legal Analysis
1. Sections 17(a)(1) and 17(a)(2) of the Act prohibit an affiliated
person of a registered investment company, or an affiliated person of
an affiliated person of the registered company, from knowingly selling
to or purchasing from the registered company any security or other
property.
2. Section 17(e)(1) of the Act prohibits any affiliated person of a
registered investment company, or any affiliated person of such person,
when acting as agent, from accepting from any source any compensation
(other than a regular salary or wages from the registered company) for
the purchase or sale of any property to or for the registered company,
except in the course of the person's business as an underwriter or
broker. Section 17(e)(2) of the Act provides that an affiliated person
of a registered investment company, when acting as broker in the sale
of securities to the registered company, may not receive compensation
that exceeds: (a) The usual and customary broker's commission for sales
made on a securities exchange; (b) 2% of the sales price for sales made
in a secondary distribution of the security; or (c) 1% of the purchase
or sale price of the securities sold in any other manner.
3. Section 2(a)(3) of the Act defines an ``affiliated person'' of
another person to include: (a) any person directly or indirectly
owning, controlling, or holding with power to vote 5% or more of the
outstanding voting securities of the other person; (b) any person 5% or
more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote, by the other person; and
(c) any person directly or indirectly controlling, controlled by, or
under common control with, the other person.
4. Applicants state that where an entity is a record owner of 5% or
more of the outstanding shares of a Fund, the entity may be considered
an affiliated person (``first-tier affiliate'') of the Fund. Applicants
further state that an entity
[[Page 43973]]
that is an affiliated person of a Fund may also be deemed an affiliated
person of each other Fund that is advised by the same investment
adviser. Moreover, an entity that is an affiliated person of the first-
tier affiliate, also would be an affiliated person of an affiliated
person of the Funds. Thus, applicants state that Affiliated Banks would
be prohibited by sections 17(a)(1) and (2) of the Act from engaging in
securities transactions with the Funds. Applicants further state that
banks are specifically excluded from the definition of broker in
section 2(a)(6) of the Act. Thus, an Affiliated Bank that is a bank may
be prohibited by section 17(e) from accepting any consideration in
connection with a brokerage transaction when it acts as agent for the
Funds.
5. Section 17(b) of the Act provides that the SEC may exempt a
transaction from the prohibitions 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 concerned and with the general purposes of the Act.
6. Section 6(c) of the Act provides that the SEC may conditionally
or unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities, or transactions, from any
provisions of the Act, if and to the extent 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. Applicants request an exemption under sections 17(b) and 6(c)
from sections 17(a)(1) and 17(a)(2) to permit the Funds to engage in
transactions in Covered Securities with Affiliated Banks. Applicants
also request an exemption under section 6(c) to permit Affiliated Banks
to receive brokerage commissions from the Funds within the limits of
section 17(e)(2) in connection with transactions in Covered Securities.
8. Applicants assert that their proposal does not raise the
concerns underlying sections 17(a) and 17(e) of the Act because of the
technical nature of affiliation between the Affiliated Banks and the
Funds and the types of securities that are Covered Securities.
Applicants believe the applicability of sections 17(a)(1) and (2) of
the Act to securities transactions between the Funds and Affiliated
Banks in Covered Securities unnecessarily reduces the breadth of
investment alternatives available to the Funds and would cause a
significant disadvantage to the Funds' shareholders by restricting and
inhibiting portfolio management. In addition, applicants state that the
prohibitions of section 17(e) would inhibit the Funds' discretion to
select the best agent for execution of their Covered Securities
transactions.
9. Applicants state that no Fund will engage in transactions with
an Affiliated Bank that serves as investment adviser (including sub-
adviser) or sponsor to the Fund or Trust. Moreover, no Fund will engage
in transactions in Covered Securities with any Affiliated Bank that
controls the Fund or Trust within the meaning of section 2(a)(9) of the
Act.
10. Applicants also represent that there is no express or implied
understanding between them and any Affiliated Bank that the applicants
will cause the Funds to enter into transactions with the Affiliated
Bank. Applicants further state that they will give no preference to any
Affiliated Bank in effecting transactions between a Fund and an
Affiliated Bank because the Affiliated Bank or its customers purchase
shares of any of the Funds.
11. Applicants also state that the conditions to the requested
order would assure that the proposed transactions would be reasonable
and fair, would not involve any overreaching, and would be consistent
with the policies under section 17(a) and (e) of the Act.
12. Applicants also state that in circumstances in which a Fund
enters into a hold-in-custody repurchase agreement with an Affiliated
Bank that is its custodian, they have adopted detailed procedures
designed to give the Fund an ownership and/or perfected security
interest in the collateral (i.e., the securities underlying the
repurchase agreement). Applicants believe that these procedures
ameliorate the risks associated with repurchase transactions when
custody is maintained by the counterparty and not transferred to a
third party. These risks may involve the insolvency of, and consequent
default by, the repurchase counterparty, an attempt by the counterparty
to retain assets (or offset against assets) when a dispute arises
between the parties, or losses resulting from fraud or operational
error due to the Fund's inability to determine whether the collateral
exists.
13. Applicants represent that the securities underlying a hold-in-
custody repurchase transaction are maintained either in the Fund's
custody account or on behalf of the specific Fund in an omnibus
custodial account maintained by the Fund's custodian at the Federal
Reserve Bank of Cleveland. Applicants further state that, in both
cases, the securities are transferred to, or identified in, the custody
account against a transfer of monies out of the Fund's account to the
custodian's proprietary account. Applicants contend that the repurchase
securities so maintained are the assets of the Fund, not of the
custodian. Accordingly, applicants assert that the risk of insolvency
and the risks associated with commingling of assets are eliminated.
Moreover, applicants state that the Fund's custodian, in its capacity
as such, marks its books and records to reflect the Fund's interest in
the hold-in-custody repurchase securities. In addition, applicants
state that written confirmations specifying the particular securities
which are the subject of the hold-in-custody repurchase transactions
currently are sent to the Funds at the end of each trading day. In
applicants' view, these procedures provide the Funds the same types of
protections as would be the case if the securities were transferred to
a third party.
14. Applicants also represent that, at the time a Fund enters into
a reverse repurchase agreement, the Fund will segregate assets with an
approved custodian, consisting of cash, U.S. government securities, or
other appropriate high-grade debt securities having 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). Applicants submit that the
credit standards applied to transactions with Affiliated Banks limit
the risk of counterparty insolvency and that the solicitation
procedures provide a high level of assurance that quoted rates will be
representative of the prevailing available reverse repurchase rates.
Applicants further assert that under the conditions to the application,
the terms of reverse repurchase agreements will reflect arms-length
negotiations and that the terms will be no less favorable to the Funds
than similar agreements with other parties.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
A. General Conditions
1. The board of trustees of each of the Trusts, including a
majority of the trustees who are not interested persons of the Trust:
(a) Will adopt procedures that are reasonably designed to provide that
the conditions set forth below and
[[Page 43974]]
the requirements of Investment Company Act Release No. 13005 (Feb. 2,
1983), have been complied with; (b) will make and approve from time to
time such changes 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 may implement these
procedures, subject to the direction and control of the board of
trustees of the relevant Trust.
2. Each Trust: (a) Will maintain and preserve permanently in an
easily accessible place a written copy of the procedures (and any
modifications to them); 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 will engage in a transaction with an Affiliated Bank
that is an investment adviser or sponsor to that Fund, or an Affiliated
Bank controlling, controlled by, or under common control with the
investment adviser or sponsor. No Fund will engage in transactions with
an Affiliated Bank if such entity exercises a controlling influence
over that Fund (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). No Fund will purchase
obligations of any Affiliated Bank (other than repurchase agreements)
if, as a result, more than 5% of that Fund's total assets would be
invested in obligations of that Affiliated Bank.
4. The transactions entered into by a Fund will be consistent with
the investment objectives and policies of that Fund as recited in the
Trust's registration statement and reports filed under the Act.
Further, the security to be purchased or sold by that Fund will be
comparable in terms of quality, yield, and maturity to other similar
securities that are appropriate for that Fund and that are being
purchased or sold during a comparable period of time.
5. The Funds will engage in transactions with Affiliated Banks only
in U.S. government securities, reverse repurchase agreements, or
Qualified Securities.
B. U.S. Government and Qualified Securities
1. Before any transaction in U.S. government securities or
Qualified Securities may be entered into with an Affiliated Bank, the
Fund or the 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 Fund or the Adviser 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 Fund and the Adviser, 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.
2. Any repurchase agreement will be ``collateralized fully'' within
the meaning of rule 2a-7.
3. The commission, fee, spread, or other remuneration to be
received by the Affiliated Bank as agent in transactions involving U.S.
government and Qualified Securities will be reasonable and fair
compared to the commission, fee, spread, or other remuneration received
by other brokers or dealers in connection with comparable transactions
involving similar securities being purchased or sold during a
comparable period of time, but in no event will such commission, fee,
spread or other remuneration exceed that which is stated in section
17(e)(2) 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 the 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 Fund or the Adviser
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. 98-21959 Filed 8-14-98; 8:45 am]
BILLING CODE 8010-01-M
