[Federal Register Volume 60, Number 178 (Thursday, September 14, 1995)]
[Notices]
[Pages 47786-47789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22851]
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[[Page 47787]]
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21342; 812-9568]
Alex, Brown Cash Reserve Fund, Inc., et al.; Notice of
Application
September 8, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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applicants: Alex, Brown Cash Reserve Fund, Inc.; Chestnut Street
Exchange Fund; Municipal Fund for California Investors, Inc.; Municipal
Fund for New York Investors, Inc.; Municipal Fund for Temporary
Investment; The PNC Fund, Inc.; Portfolios for Diversified Investment
Inc.; Provident Institutional Funds, Inc.; The RBB Fund, Inc.;
Temporary Investment Fund, Inc.; Trust for Federal Securities; Warburg
Pincus Cash Reserve Fund; Warburg Pincus New York Tax-Exempt Fund (the
``Existing Funds''); and all future registered management investment
companies (or series thereof) for which PNC Institutional Management
Corporation (``PIMC''), PNC Bank, N.A. (``PNC Bank'') or any entity
controlling, controlled by, or under common control with PIMC or PNC
Bank serves as investment adviser (the ``Future Funds'' and together
with the Existing Funds, the ``Funds'').
relevant act sections: Order requested under sections 6(c) and 17(b) of
the Act to exempt applicants from the provisions of sections 17(a)(1),
17(a)(2), and 17(e)(1) of the Act.
summary of application: Applicants seek an order to permit the Funds to
engage in transactions with banks, bank holding companies, and
affiliated persons thereof that are ``affiliated persons'' of a Fund
solely because they own, hold, or control five percent or more of the
outstanding voting securities of a Fund and/or act as investment
adviser to a Fund. No Fund will engage, however, in such transactions
with a bank, bank holding company, or an affiliated person thereof that
controls, advises, or sponsors that Fund. The purchase and sale
transactions would be limited to certain types of high quality debt
securities and repurchase agreements meeting specified standards. The
requested order would supersede a prior order.
filing dates: The application was filed on April 13, 1995, and amended
on July 24, 1995. Applicants have agreed to file an additional
amendment, the substance of which is incorporated herein, during the
notice period.
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 October 3, 1995,
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 to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants, c/o PNC Bank, N.A., Land Title Building, Broad &
Chestnut Streets, Philadelphia, Pennsylvania 19110.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0572, or C. David
Messman, 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 at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Existing Funds are, and the Future Funds will be, registered
management investment companies, PIMC or PNC Bank serve as investment
adviser to each Existing Fund, and will serve as investment adviser to
each Future Fund.
2. In 1984 the SEC issued an order granting an exemption from
sections 17(a)(1), 17(a)(2), and 17(e)(1) of the Act to permit the
Funds to engage in certain transactions with Affiliated Banks (the
``1984 Order'').\1\ ``Affiliated Banks'' for purposes of the 1984 Order
and the order requested hereby are banks, bank holding companies, and
affiliated persons thereof that are affiliated persons of a Fund solely
because they directly or indirectly own, control, or hold five percent
or more of the outstanding voting securities of a Fund, and/or act as
investment adviser to a Fund.
\1\ The Arch Fund, Inc., Investment Company Act Release Nos.
14016 (June 27, 1984) (notice) and 14064 (July 25, 1984) (order).
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3. The 1984 Order permits the applicant funds to engage in
transactions with Affiliated Banks involving the following instruments:
(a) Money market instruments of an Affiliated Bank that is one of the
fifty largest United States banks (measured by deposits); (b)
repurchase agreements with no more than twelve Affiliated Banks that
are among the fifty largest United States banks (measured by deposits);
and (c) tax-exempt obligations (transactions with Affiliated Banks
covered by the terms of the 1984 Order are hereinafter referred to as
the ``Covered Transactions''). The 1984 Order also permits an
Affiliated Bank to accept compensation from the applicant funds,
subject to the limitations of section 17(e)(2) of the Act, if such bank
acts as agent for one of the funds in a Covered Transaction.
4. Applicants now request an order that would supersede the 1984
Order and permit the Funds to engage in transactions with Affiliated
Banks involving the following ``Qualified Securities:'' (a) Money
market instruments and other taxable obligations issued by, or
purchased from or sold to an Affiliated Bank; (b) tax-exempt
obligations purchased from or sold to an Affiliated Bank; (c) U.S.
government securities from Affiliated Banks that are primary dealers in
these securities (``Affiliated Dealers'') and (d) repurchase
agreements.
5. In addition, all Qualified Securities will meet the following
credit standards:
a. For obligations that have a remaining maturity of 397 days or
less, each such 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)(20)), in addition to the
requirements of rule 2a-7 applicable to such Unrated Securities, all
determinations with respect to the comparability of such securities to
rated securities are also reviewed and approved at least quarterly by a
majority of the Fund's directors who are not interested persons of the
Fund.
b. For obligations that have a remaining maturity of more than 397
days, each such 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 an NRSRO, are determined by the Fund's investment adviser to
be comparable in credit quality to a security carrying a long-term
rating in one of such four highest rating categories of a NRSRO, and
such determination is reviewed and approved at least quarterly by a
majority of the Fund's directors who are not interested persons of the
Fund.
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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 Funds may rely upon the NRSRO ratings of the
provider of such 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 such credit enhancement.
6. Applicants also request relief to permit an Affiliated Bank to
accept compensation within the limitations of section 17(e)(2) of the
Act where it acts as agent for any Fund in connection with the purchase
or sale of Qualified Securities.
Applicants' Legal Analysis
1. Sections 17(a)(1) and 17(a)(2) of the Act prohibit affiliated
persons of the Funds, or affiliated persons of such affiliated persons,
acting as principal, knowingly to sell or purchase any securities to or
from the Funds. Sections 2(a)(3)(A), (B), and (C) of the Act define an
``affiliated person'' of another person as, respectively: (a) Any
person directly or indirectly owning, controlling, or holding with
power to vote, five percent or more of the outstanding voting
securities of such other person; (b) any person five percent or more of
whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other person; and (c)
any person directly or indirectly controlling, controlled by or under
common control with, such other person.
2. By virtue of section 2(a)(3)(A), if a bank owns, controls or
holds with power to vote five percent or more of the outstanding voting
shares of one of the Funds, that bank could be considered an affiliated
person of that Fund. Furthermore, any person who is an affiliated
person of a registered investment company also may be deemed to be
affiliated with each other registered investment company which has a
common investment adviser, or investment advisers which are affiliated
persons of each other, or common directors of common officers, or a
combination of the foregoing, because such investment companies may be
deemed to be under common control. Accordingly, a bank, bank holding
company, or affiliated person thereof that is deemed to be an
Affiliated Bank in respect of one Fund by virtue of its ownership of
such Fund's shares may be deemed to be affiliated with all the Funds.
The result of the operation of these provisions is to prohibit all of
the Funds from engaging in any principal transaction in securities,
including repurchase agreements and U.S. government securities, with a
wide range of banks, bank holding companies, and affiliates thereof.
3. If an Affiliated Bank is also a primary dealer or an affiliated
person of a primary dealer, the dealer then becomes an Affiliated
Dealer. In addition, sections 2(a)(3)(B) and (C) cause a primary dealer
which is a subsidiary of an Affiliated Bank, or which is controlled by
the same holding company as an Affiliated Bank (or otherwise under
common control with the Affiliated Bank), to be an affiliated person of
the Affiliated Bank. The primary dealer then is an affiliated person of
an affiliated person of the Funds.
4. The Funds believe the applicability of sections 17(a)(1) and
17(a)(2) to transactions between the Funds and Affiliated Banks in
Qualified Securities unreasonably reduces the range of available
investment alternatives. The inability to effect transactions in
Qualified Securities With Affiliated Banks unduly impairs an investment
adviser's flexibility in portfolio management, and deprives the Funds
of the ability to purchase and sell otherwise proper portfolio
securities.
5. Applicants state that the Funds will continue to apply existing
internal control procedures that are designed to monitor securities
transactions with Affiliated Banks by placing primary responsibility
for the reasonableness and fairness of those transactions on the Funds'
board of directors or trustees, or other governing bodies (``Governing
Boards''). In addition to existing controls, applicants state that they
will impose stringent credit quality requirements on the securities
that a Fund may purchase from an Affiliated Bank. By limiting
transactions with Affiliated Banks to certain Qualified Securities,
applicants believe that focus is placed on the merits of a particular
investment and that the Funds and their advisers will be subjected to a
disciplined determination regarding whether a particular transaction is
appropriate for a Fund. Finally, applicants believe that because
Qualified Securities will be liquid, high-quality securities, an
Affiliated Bank will be unable to exercise any improper influence
without detection by the Funds' Governing Boards.
6. Applicants state that no fund will engage in transactions with
an Affiliated Bank that serves as investment adviser (including sub-
adviser) or sponsor to such Fund. Moreover, no Fund will engage in
transactions in Qualified Securities with any Affiliated Bank that
controls such Fund within the meaning of section 2(a)(9) of the Act.
7. PIMC and PNC Bank represent that there is no express or implied
understanding between PIMC and PNC Bank and any bank, bank holding
company or affiliated person thereof that is (or may become) an
Affiliated Bank of a Fund that applicants will cause any of the Funds
to enter into purchase or sale transactions in Qualified Securities
with such entity. Moreover, applicants represent that they will give no
preference to any Affiliated Bank in effecting purchase or sale
transactions between the Funds and an Affiliated Bank that involve
Qualified Securities issued by or purchased from or sold to such
Affiliated Bank or because the customers of such bank purchase shares
of any of the funds.
8. 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 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.
9. Banks are specifically excluded from the definition of a broker
in section 2(a)(6) of the Act. In addition, applicants state that it
would be highly improbable for a bank to satisfy the definition of
underwriter in section 2(a)(40) with respect to each securities
transaction involving an investment company where the bank was asked to
act as agent for the investment company. Thus, a bank that is an
Affiliated Bank may be prohibited from accepting any consideration
whatsoever in connection with a brokerage transaction where it acted as
agent for the Fund. In addition, if an Affiliated Dealer is not a
separate entity from the Affiliated Bank, and acts as agent for a Fund,
section 17(e)(1) also may apply to prohibit an Affiliated Dealer from
receiving compensation in U.S. government securities or municipal
securities transactions.
10. Applicants state that the transactions will comply with section
17(e)(2).\2\ In addition, applicants state
[[Page 47789]]
that the use of Affiliated Banks promotes investment flexibility by
expanding the range of entities available for execution of securities
transactions.
\2\ Section 17(e)(2) permits an affiliated broker of a
registered investment company to receive compensation in connection
with the sale of securities to or from the investment company under
certain circumstances.
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11. 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.
12. 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 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.\3\
\3\ Applicants seek relief under section 6(c) as well as section
17(b) because section 17(b) could be interpreted as giving the SEC
power to exempt only a single transaction from section 17(a), as
opposed to a class of transactions. See Keystone Custodian Funds,
Inc., 21 S.E.C. 295 (1945).
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13. Applicants submit that the terms and conditions set forth
herein are reasonable and fair and do not involve overreaching on the
part of any person, that they are consistent with the policy of each of
the Funds, that they are consistent with the general purposes of the
Act, and that the requested exemption 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 any order will be subject to the following
conditions:
1. The funds will engage in transactions with Affiliated Banks only
in Qualified Securities.
2. No Fund will engage in a transaction in Qualified Securities
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 such investment adviser or sponsor. 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. No Fund will
engage in transactions in Qualified Securities with an Affiliated Bank
that 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
more than 25% of the outstanding voting securities of the Fund).
3. The Funds: (a) Will maintain and preserve permanently in an
easily accessible place a written copy of the procedures (and any
modifications thereto) described in paragraphs (1) and (2) of this
section; and (b) will maintain and preserve for a period of not less
than six years from the end of the fiscal year in which transactions in
Qualified Securities occurred, the first two years in an easily
accessible place, a written record of each such transaction setting
forth a description of the security purchased or sold, the identity of
the person on the other side of the transaction, the terms of the
purchase or sale transaction, and the information or material upon
which the determinations described below were made.
4. The Qualified Security to be purchased or sold by a Fund will be
consistent with the investment objectives and policies of that Fund as
recited in the Fund's registration statement, and will be consistent
with the interests of that Fund and its shareholders. 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 terms of the transaction will be reasonable and fair to the
shareholders of that Fund and will not involve overreaching on the part
of any person concerned. In considering whether the price to be paid or
received for the security is 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. In making this analysis, the Governing Board
may rely on a matrix pricing system which it believes properly assists
it in determining the value of securities pursuant to section 2(a)(41)
of the Act.
6. The commission, fee, spread, or other remuneration to be
received by the Affiliated Bank as dealer 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 fee, commission,
spread or other remuneration exceed that which is stated in section
17(e)(2) of the Act.
7. The Governing Board of each of the Funds: (a) Will adopt
procedures, pursuant to which transactions in Qualified Securities may
be effected for the Funds, which are reasonably designed to provide
that the conditions in the foregoing paragraphs and the requirements of
Investment Company Act Release No. 13005 (Feb. 2, 1983) have been
complied with; (b) will make and approve such changes as the Governing
Board deems necessary; and (c) will determine no less frequently than
quarterly that transactions in Qualified Securities made during the
preceding quarter were effected in compliance with those procedures.
Those procedures will also be approved by a majority of the
disinterested Trustees or Directors of the Funds. The investment
adviser of each Fund will implement those procedures and make decisions
necessary to meet these conditions, subject to the direction and
control of the Governing Board of each Fund.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22851 Filed 9-13-95; 8:45 am]
BILLING CODE 8010-01-M
