[Federal Register Volume 61, Number 188 (Thursday, September 26, 1996)]
[Notices]
[Pages 50516-50520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24698]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22236; 812-9844]
Daily Money Fund, et al.; Notice of Application
September 20, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: Daily Money Fund, Daily Tax-Exempt Money Fund, Fidelity
Advisor Korea Fund, Inc., Fidelity Advisor Emerging Asia Fund, Inc.,
Fidelity Advisor Series I, Fidelity
[[Page 50517]]
Advisor Series II, Fidelity Advisor Series III, Fidelity Advisor Series
IV, Fidelity Advisor Series V, Fidelity Advisor Series VI, Fidelity
Advisor Series VII, Fidelity Advisor Series VIII, Fidelity Advisor
Annuity Fund, Fidelity Beacon Street Trust, Fidelity Boston Street
Trust, Fidelity California Municipal Trust, Fidelity California
Municipal Trust II, Fidelity Capital Trust, Fidelity Charles Street
Trust, Fidelity Commonwealth Trust, Fidelity Congress Street Fund,
Fidelity Contrafund, Fidelity Court Street Trust, Fidelity Court Street
Trust II, Fidelity Destiny Portfolios, Fidelity Deutsche Mark
Performance Portfolio, L.P., Fidelity Devonshire Trust, Fidelity
Exchange Fund, Fidelity Financial Trust, Fidelity Fixed-Income Trust,
Fidelity Government Securities Fund, Fidelity Hastings Street Trust,
Fidelity Hereford Street Trust, Fidelity Income Fund, Fidelity
Institutional Cash Portfolios, Fidelity Institutional Tax-Exempt Cash
Portfolios, Fidelity Institutional Investors Trust, Fidelity
Institutional Trust, Fidelity Investment Trust, Fidelity Magellan[
Fund, Fidelity Massachusetts Municipal Trust, Fidelity Money Market
Trust, Fidelity Mt. Vernon Street Trust, Fideity Municipal Trust,
Fidelity Municipal Trust II, Fidelity New York Municipal Trust Fidelity
New York Municipal Trust II, Fidelity North Carolina Capital
Management, Fidelity Phillips Street Trust, Fidelity Puritan Trust,
Fidelity School Street Trust, Fidelity Securities Fund, Fidelity Select
Portfolios, Fidelity Sterling Performance Portfolio, L.P., Fidelity
Summer Street Trust, Fidelity Trend Fund, Fidelity Union Street Trust,
Fidelity Union Street Trust II, Fidelity U.S. Investments--Bond fund,
L.P., Fidelity U.S. Investments--Government Securities Fund, L.P.,
Fidelity Yen Performance Portfolio, L.P., Variable Insurance Products
Fund, Variable Insurance Products Fund II (collectively, the
``Trust''); Fidelity Advisor World U.S. Large-Cap Stock Fund (Bermuda)
Ltd., Fidelity Advisor World Europe fund (Bermuda) Ltd., Fidelity
Advisor World Europe Fund (Bermuda) Ltd., Fidelity Advisor World
Southeast Asia Fund (Bermuda) Ltd., Fidelity World Advisory World U.S.
Limited Term Bond Fund (Bermuda) Ltd., Fidelity Advisor World U.S.
Government Investment Fund (Bermuda) Ltd., Fidelity Advisor World U.S.
Treasury Money Fund (Bermuda) Ltd. (collectively, the ``Fidelity
Advisor World Funds''); Fidelity Management and Research Company
(``FMR''); Fidelity Management Trust Company (or an affiliate trustee)
(``FMTC''); Fidelity Group Trust for Employee Benefit Plans (``Fidelity
Group Trust''); FMR Texas Inc. (``FMR Texas''); \1\ Fidelity Service
Co. ``FSC''); Fidelity Investments Institutional Operations Company
(``FIIOC''); \2\ each Trust and all other registered investment
companies and series thereof that are advised by FMR or a person
controlling, controlled by, or under common control with FMR
(collectively, the ``Adviser'') and all other registered investment
companies and series thereof for which the Adviser in the future acts
as investment adviser (collectively, the ``Registered Funds''); the
Fidelity Advisor World Funds, and other pooled investment funds advised
or in the future advised by the Adviser, or a person controlling,
controlled by, or under common control with the Adviser, offered
exclusively outside the United States to non-U.S. residents (the ``Off-
Shore Funds''); state and local entities or accounts thereof advised or
in the future advised by the Adviser that are exempt from regulation
under the Act pursuant to section 2(b) of the Act (the ``2(b)
Entities''); collective trust funds of the Fidelity Group Trust, the
trustee for which, or in the future the trustee for which, is FMTC,
that are excepted from the definition of investment company by section
3(c)(11) of the Act (the ``3(c)(11) Entities''); and individual
institutional accounts advised by the Adviser (collectively, the
Registered Funds, the Off-Shore Funds, the 2(b) Entities, the 3(c)(11)
Entities, and the individual institutional accounts are the ``Funds'').
\1\ The term ``FMR Texas'' includes any other company controlled
or under common control with FMR Texas that acts in the future as
investment adviser to the non-publicly traded Fidelity money market
or short-term bond funds that are the subject of the requested
relief.
\2\ The terms ``FSC'' and ``FIIOC'' include any other company
controlled by or under common control with FMR that acts in the
future as shareholder servicing or dividend disbursing agent for the
Trusts.
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RELEVANT ACT SECTIONS: Order of exemption requested under section 6(c)
of the Act from section 12(d)(1)(A)(ii) of the Act and rule 2a-7(c)(4)
(i) and (ii) thereunder, under sections 6(c) and 17(b) that would grant
an exemption from section 17(a), and under rule 17d-1 to permit certain
transactions in accordance with section 17(d) and rule 17d-1.
SUMMARY OF APPLICATION: The requested order would permit certain Funds,
including money market funds (the ``Participating Funds''), to purchase
shares of affiliated investment companies (the ``Central Funds'') for
cash management purposes (the ``Cash Management Transactions'') and
permit the Participating Funds and the Central Funds to engage in
certain transactions with each other.
FILING DATES: The application was filed on November 11, 1995, and
amended on March 18, and July 10, 1996. Applicants have agreed to file
an 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 15,
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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549.
Applicants, 82 Devonshire Street, Boston, MA 02109.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at
(202) 942-0572, or Alison E. Baur, 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. Each of the Registered Funds is registered under the Act and
most of the Trusts are series companies. The current Off-Shore Funds
are portfolios of mutual funds established under the laws of Bermuda.
Each of the 3(c)(11) Entities is organized as a separate pooled account
under the Fidelity Group Trust, for which FMTC acts as trustee. The
only 2(b) Entity that currently intends to rely on the requested order
is the Massachusetts Municipal Depository Trust (``Municipal Trust''),
which is established pursuant to Massachusetts law.\3\
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\3\ A 2(b) Entity (including the Municipal Trust) may
participate in the Cash Management Transactions if it determines
that the proposed investments in instruments through the proposed
transactions are consistent with state laws or administrative rules
regulating the 2(b) Entity. If not, it must seek to have those laws
or rules amended. Accordingly, the Municipal Trust is not named as
an applicant because it considers it premature to join formally.
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[[Page 50518]]
2. The Adviser, a registered investment adviser, acts as each
Fund's investment manager and provides the Funds with administrative
services. FMR Texas will provide investment management services to the
Central Funds that are money market funds. FSC is the transfer and
dividend paying agent for each of the retail Registered Funds and FIIOC
is the transfer and dividend paying agent for each of the institutional
Registered Funds. FMR Corp. is the parent holding company for FMR,
FMTC, FMR Texas, FSC, and FIIOC.
3. Each Participating Fund has, or may be expected to have,
uninvested cash held by its custodian bank. Such cash may result from a
variety of sources, including dividends or interest received from
portfolio securities, securities transactions, reserves held for
investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions
and dividend payments, and new monies received from investors.
4. The Central Funds will be open-end management investment
companies registered under the Act, but will not register their shares
under the Securities Act of 1933. Shares of the Central Funds will be
sold only to the Participating Funds. The Central Funds will be taxable
or tax-exempt money market funds or short-term bond funds with a
portfolio maturity of three years or less. The Central Funds will be
used as a cash management device for temporary investment by the
Participating Funds.
5. Certain of the Participating Funds currently engage in interfund
purchase and sale transactions involving short-term money market
instruments in reliance on rule 17a-7.\4\ These transactions are
typically between one entity that has a need to raise cash and another
that has cash to invest on a short-term basis or between a fund that
was seeking to implement portfolio strategy and another fund that was
seeking to raise or invest cash. Applicants propose that the
Participating Funds and the Central Funds also be permitted to engage
in such interfund purchase and sale transactions in securities
(``Interfund Transactions'').
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\4\ Rule 17a-7 provides for purchase or sale transactions
between registered investment companies and certain affiliated
persons provided that certain conditions are met.
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Applicants' Legal Analysis
A. Sections 6(c) and 12(d)(1) and Rule 2a-7
1. Section 12(d)(1)(A) of the Act prohibits any registered
investment company (the ``acquiring company'') or any company or
companies controlled by such acquiring company to purchase any security
issued by any other investment company (the ``acquired company'') if
such purchase will result in the acquiring company or companies it
controls owning in the aggregate (a) More than 3% of the outstanding
voting stock of the acquired company, (b) securities issued by the
acquired company with an aggregate value in excess of 5% of the
acquiring company's total assets, or (c) securities issued by the
acquired company and all other investment companies with an aggregate
value in excess of 10% of the value of the acquiring company's total
assets.
2. Since the Participating Funds will be the only shareholders of
the Central Funds, more than 3% of the shares of each Central Fund may
be owned by one or more of the Registered Funds and more than 10% of
each Central Fund's shares may be held by one or more investment
companies. In addition, applicants propose that each Registered Fund be
permitted to invest in, and hold shares of, the Central Funds to the
extent that a Registered Fund's aggregate investment in the Central
Funds at the time the investment is made does not exceed 25% of the
Registered Fund's total net assets. For these reasons, applicants seek
an exemption from the provisions of section 12(d)(1) to the extent
necessary to implement the Cash Management Transactions.
3. Rule 2a-7(c)(4) (i) and (ii) require money market funds to limit
their investment in the securities of any one issuer (other than
certain specified securities) to 5% of fund assets with respect to
either 100% or 75% of the fund's total assets. The SEC has interpreted
rule 2a-7(c)(4) (i) and (ii) as applying to a money market fund's
investment in another money market fund.\5\ Accordingly, applicants
seek relief from rule 2a-7(c)(4) (i) and (ii) to the extent necessary
to permit the Participating Registered Funds that are money market
funds to invest in a Central Fund that is a money market fund, to the
same extent, and on the same basis, as Participating Funds that are not
money market funds.
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\5\ See Investment Company Act Release No. 21837 (Mar. 21, 1996)
(release adopting amendments to rule 2a-7).
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4. Section 6(c) permits the SEC to exempt any person or transaction
from any provision of the Act, if such exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policies of the
Act. For the reasons provided below, applicants argue that the
requested order meets the section 6(c) standards.
5. Applicants state that it would be in the best interests of the
Participating Funds and their shareholders to provide the widest
possible range of investments for available cash. By adding shares of
the Central Funds as another investment option, the applicants believe
that the Participating Funds may reduce their aggregate exposure to
counterparty risk in repurchase agreements and diversify the risk
associated with direct purchases of short-term obligations while
providing high current rates of return, ready liquidity, and increased
diversity of holdings indirectly through investment in the Central
Funds. Reducing the amount of uninvested cash held at custodian banks
also would reduce the Participating Funds' credit exposure to such
banks. These benefits would be particularly pronounced for any tax-
exempt Participating Funds, which have fewer cash management options
than taxable funds.
6. With respect to section 12(d)(1), applicants state that a fund's
cash position fluctuates with shareholder and investment activity.
Applicants believe that a maximum of 25% of a Participating Fund's
assets will cover normal investment patterns and permit the majority of
a fund's cash to be invested in a Central Fund (assuming that a fund's
fundamental investment policy permits such investment).
7. In addition, applicants state that section 12(d)(1) is intended
to protect an investment company's shareholders against (a) undue
influence over portfolio management through the threat of large-scale
redemptions, the threat of loss of advisory fees to the adviser, and
the disruption of orderly management of the investment company through
the maintenance of large cash balances to meet potential redemptions,
(b) the acquisition of voting control of the company, and (c) the
layering of sales charges, advisory fees, and administrative costs.
Applicants state that because an Adviser will serve as investment
adviser to both the Participating Funds and the Central Funds, it is
not susceptible to undue influence regarding its management of the
Central Funds due to threatened redemptions or loss of fees. In
addition, applicants state that each of the Central Funds will be
managed specifically to maintain a highly liquid portfolio and
[[Page 50519]]
that access to the Central Funds will enhance each Participating Fund's
ability to manage and invest cash. Further, since no Central Fund will
be publicly offered, only the Participating Funds will exercise voting
control over the Central Funds and each Participating Fund will hold a
pro rata share of a Central Fund's outstanding voting securities based
on the amount of its investment. Additionally, since the Participating
Funds will not incur many of the expenses associated with direct
investment, these savings should significantly offset the affect of the
remaining expenses incurred by the Central Funds. Therefore, applicants
believe none of the perceived abuses meant to be addressed by section
12(d)(1) is created by the Cash Management Transactions.
8. Applicants state that rule 2a-7 is designed to minimize the risk
that a money market fund will not be able to maintain a stable net
asset value. A Central Fund that is a money market fund will seek to
maintain a constant net asset value and will be as liquid as a publicly
offered money market fund. Applicants state that the net asset value
per share of a money market Participating Fund would be made no more
volatile as a result of investing a portion of its assets in another
money market fund. In addition, investment in a Central Fund would be
as liquid as other investment alternatives.
Accordingly, applicants belief that the investment by a money
market Participating Fund in a Central Fund that is a money market fund
would be consistent with the risk-limiting objectives of rule 2a-7, as
amended.
B. Sections 17(a) and 17(b).
1. Section 2(a)(3) of the Act defines an affiliated person of an
investment company to include any person that owns more than 5% of the
outstanding voting securities of that company and any investment
adviser of the investment company and any person directly or indirectly
controlling, or under common control with, such investment adviser.
Under section 2(a)(3), FMR, as investment adviser of each of the Funds,
is an affiliated person of each Fund. Further, because the Funds either
share a common investment adviser or have an investment adviser that is
under common control with those of the other Funds, and most Registered
Funds also share a common board of trustees, or other governing body,
the Funds may be deemed to be under common control with all the other
Funds and, therefore, each is an affiliated person of those Funds. In
addition, it is likely that a Participating Fund would own more than 5%
of the outstanding voting securities of the Central Fund. Thus, each
Participating Fund and the Central Fund may be affiliated persons (or
affiliates of affiliates) of each other Fund.
2. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and any
affiliated person of that company. The sale by the Central Funds of
their shares to the Participating Registered Funds and the redemption
of such shares by the Registered Funds could be deemed to be a
principal transaction between affiliated persons that is prohibited
under section 17(a). Therefore, applicants request an order to permit
the Central Funds to sell their shares to the Registered Funds and to
permit the Registered Funds to redeem such shares from the Central
Funds. In addition, applicants request relief to permit the
Participating and the Central Funds to engage in Interfund Transactions
that otherwise would be effected in reliance on rule 17a-7 except for
the affiliation created by the Cash Management Transactions.
3. Section 17(b) permits the SEC to grant an order permitting a
transaction otherwise prohibited by section 17(a) if it finds that the
terms of the proposed transaction are fair and reasonable and do not
invoke overreaching on the part of any person concerned. Section 17(b)
could be interpreted to exempt only a single transaction. However, the
Commission, under section 6(c) of the Act, may exempt a series of
transactions that otherwise would be prohibited by section 17(a). For
the reason stated below, applicants believe that the terms of the
transactions meet the standards of section 6(c) and 17(b).
4. With respect to the relief requested from section 17(a) for the
Cash Management Transactions, applicants state that the terms of the
Cash Management Transactions are fair because the consideration paid
and received for the sale and redemption of shares of the Central Funds
will be based on the net asset value per share of the Central Funds. In
addition, the purchase of shares of the Central Funds by the
Participating Funds will be effected in accordance with each
Participating Fund's investment restrictions and policies as set forth
in its registration statement.
5. With respect to the relief requested from section 17(a) for the
Interfund Transactions, applicants state that the Funds will comply
with rule 17a-7 under the Act in all respects, other than the
requirement that the registered investment company and the affiliated
person thereof (or the affiliated person of such person) be affiliated
persons of each other solely by reason of having a common investment
adviser or investment advisers which are affiliated persons of each
other, common officers and/or common directors. Applicants state that
the additional affiliation created by the Cash Management Transactions
does not effect the other protections provided by rule 17a-7, including
oversight by the board of trustees of each Fund.
C. Section 17(d) and Rule 17d-1
1. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an
affiliated person of an investment company, acting as principal, from
participating in or effecting any transaction in connection with any
joint enterprise or joint arrangement in which the investment company
participates. Applicants contend that because they are acting together
to create the Central Funds as a private facility for their cash
management needs, the Central Funds may be deemed a joint enterprise
for the purposes of section 17(d) and rule 17d-1.
2. Rule 17d-1 permits the SEC to approve a proposed joint
transaction. In determining whether to approve a transaction, the SEC
is to consider whether the proposed transaction is consistent with the
provisions, policies, and purposes of the Act, and the extent to which
the participation of the investment companies is on a basis different
from or less advantageous than that of the other participants. For the
reasons stated below, applicants believe that the requested relief
meets these standards.
3. Applicants state the Cash Management Transactions are intended
to provide substantial benefits to all Participating Funds and that the
Central Funds will benefit from having as large an asset base as
possible. Moreover, applicants state that the arrangement is not
intended to increase the fees for the Adviser or any other non-
investment company participant. Finally, each Participating Fund may
purchase and redeem shares of each Central Fund, and would receive
dividends and bear expenses on the same basis as each other
Participating Fund that also invests in such Central Fund.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. The shares of the Central Funds sold to and redeemed from the
Registered Funds will not be subject to
[[Page 50520]]
a sales load, redemption fee, distribution fee under a plan adopted in
accordance with rule 12b-1, or service fee (as defined in rule
2830(b)(9) of the National Association of Securities Dealers' Rules of
Conduct).\6\
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\6\ The staff notes that until recently rule 2830 of the NASD's
Rules of Conduct was section 26 of Article III of the NASD Rules of
Fair Practice.
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2. If the Adviser to the Central Fund collects a fee from the
Central Fund for acting as its investment adviser, before the next
meeting of the board of trustees of a Registered Fund that invests in
the Central Fund is held for the purpose of voting on an advisory
contract under section 15, the Adviser to the Registered Funds will
provide the board of trustees with specific information regarding the
approximate cost to the Adviser for managing the assets of the
Registered Fund that can be expected to be invested in such Central
Funds. Before approving any advisory contract under section 15, the
board of trustees of such Registered Fund, including a majority of the
trustees who are not ``interested persons,'' as defined in section
2(a)(19), shall consider to what extent, if any, the advisory fees
charged to the Registered Fund by the Adviser should be reduced to
account for the fee indirectly paid by the Registered Fund because of
the advisory fee paid by the Central Fund. The minute books of the
Registered Fund will record fully the trustees' consideration in
approving the advisory contract, including the considerations relating
to fees referred to above.
3. Each Participating Fund, each Central Fund, and any future fund
that may rely on the order shall be advised by or, in the case of a
3(c)(11) Entity, shall have as its trustee, FMR or a person
controlling, controlled by, or under common control with FMR.
4. Investment in shares of the Central Funds will be in accordance
with each Registered Fund's respective investment restrictions, if any,
and will be consistent with each Registered Fund's policies as set
forth in its prospectuses and statements of additional information.
5. No Central Fund shall acquire securities of any other investment
company in excess of the limits contained in section 12(d)(1)(A) of the
Act, except as permitted by the SEC's prior interfund lending order
issued to the Fidelity family of funds.\7\
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\7\ See Daily Money Fund, Investment Company Act Release No.
17303 (Jan. 11, 1990).
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6. A majority of the trustees of each Registered Fund will not be
``interested persons,'' as defined in section 2(a)(19) of the Act.
7. Each of the Registered Funds will invest uninvested cash in, and
hold shares of, the Central Funds only to the extent that the
Registered Fund's aggregate investment in the Central Funds at the time
the investment is made does not exceed 25% of the Registered Fund's
total net assets. For purposes of this limitation, each Registered Fund
or series thereof will be treated as a separate investment company.
8. To engage in Interfund Transactions, the Funds will comply with
rule 17a-7 under the Act in all respects other than the requirement
that the parties to the transaction be affiliated persons (or
affiliated persons of affiliated persons) of each other solely by
reason of having a common investment adviser or investment advisers
which are affiliated persons of each other, common officers, and/or
common directors.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-24698 Filed 9-25-96; 8:45 am]
BILLING CODE 8010-01-M
