[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47046-47050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23761]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23418; 812-10912]
State Street Bank and Trust Company, et al.; Notice of
Application
August 27, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under section 12(d)(1)(J) of
the Investment Company Act of 1940 (``Act'') for an exemption from
section 12(d)(1) of the Act, under sections 6(c) and 17(b) of the Act
for an exemption from section 17(a) of the Act, under section 6(c) of
the Act for an exemption from section 17(e) of the Act, and under
section 17(d) of the Act and rule 17d-1 under the Act to permit certain
joint transactions.
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SUMMARY OF THE APPLICATION: Applicants request an order to permit
certain registered investment companies and private funds (``Lending
Funds'') to use cash collateral from securities lending transactions
(``Cash Collateral'') to purchase shares (``Shares'') of one or more
series of State Street Navigator Securities Lending Trust (the
``Trust'') and to pay fees based on a share of the revenue generated
from securities lending transactions to State Street Bank and Trust
Company (``State Street''). The order also would permit State Street
and certain of its affiliates (``State Street Entities'') to engage in
principal transactions with, and receive brokerage commissions from,
certain Lending Funds that are affiliated with State Street or State
Street Entities solely as a result of investing Cash Collateral in the
Trust.
APPLICANTS: State Street, the Trust, and SSgA Funds.
FILING DATES: The application was filed on December 22, 1997.
Applicants have agreed to file an amendment during the notice period,
the substance of which is described in this notice.
[[Page 47047]]
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 21,
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 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.
State Street, Two International Place, Boston, MA 02110; Trust, c/o
Raymond P. Boulanger, Exchange Place, 25th Floor, Boston, MA 02109;
SSgA Funds, 909 A Street, Tacoma, WA 98402.
FOR FURTHER INFORMATION CONTACT:
Michael W. Mundt, Staff Attorney, at (202) 942-0578, or Mary Kay Frech,
Branch Chief, at (202) 942-0564 (Office of Investment Company
Regulation, Division of Investment Management).
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 St., NW., Washington, DC
20549, (202) 942-8090.
Applicants' Representations
1. State Street, a wholly-owned subsidiary of State Street Boston
Corporation, is a Massachusetts chartered trust company and a member of
the Federal Reserve System. State Street provides institutional custody
and asset management services and serves as investment adviser or
subadviser for several registered management investment companies. SSgA
Funds, a Massachusetts business trust, is an open-end management
investment company registered under the Act that has established 19
series, each advised by State Street. State Street also administers a
securities lending program (the ``Program'').
2. The Trust is a Massachusetts business trust and an open-end
management investment company registered under the Act. The Trust has
established three series in which Cash Collateral may be invested:
State Street Navigator Securities Lending Prime Portfolio (``Prime
Portfolio''), State Street Navigator Securities Lending Government
Portfolio (``Government Portfolio''), and State Street Navigator
Securities Lending Short-Term Bond Portfolio (``Bond Portfolio'') (each
an ``Investment Fund''). The Prime Portfolio and Government Portfolio
value their securities based on the amortized cost method and comply
with rule 2a-7 under the Act. The Bond Portfolio invests in a variety
of securities whose duration will not exceed five years. None of the
Investment Funds may purchase shares of any registered investment
company.
3. Shares of the Investment Funds are offered exclusively to
Lending Funds and other institutional investors participating in the
Program and are sold directly by the Trust on a private placement basis
in accordance with Regulation D under the Securities Act of 1933.
Shares are not subject to a sales load, redemption fee or asset-based
distribution fee. State Street serves as investment adviser, custodian,
transfer agent, and administrator of the Trust with respect to each
Investment Fund and is entitled to receive a fee for these services.
4. Participants in the Program may include: (i) one or more series
of SSgA Funds and any other registered investment company or series
that is or in the future may be advised by State Street, or by any
other entity controlling, controlled by, or under common control with
State Street (each an ``Affiliated Lending Fund'');\1\ or (ii) any
other registered investment company or series (each an ``Other Lending
Fund,'' and together with the Affiliated Lending Funds, the
``Registered Lending Funds''), and (iii) any entity excluded from the
definition of ``investment company'' under section 3(c)(1) or section
3(c)(7) of the Act (each a ``Private Lending Fund'').
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\1\ All existing Affiliated Lending Funds that currently intend
to rely on the requested relief have been named as applicants. Any
future Affiliated Lending Fund may rely on the order only in
accordance with the terms and conditions in the application.
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5. With respect to Affiliated Lending Funds, State Street
represents that its personnel providing day-to-day lending agency
services to the Affiliated Lending Funds do not provide investment
advisory services to or participate in any way in the selection of
portfolio securities or other aspects of management for the Affiliated
Lending Funds.
6. Under the Program, State Street and each Lending Fund enter into
a securities lending agreement (``Lending Agreement'') that appoints
State Street to serve as securities lending agent and authorizes State
Street to enter into a master borrowing agreement (``Borrowing
Agreement'') with certain entities designated by a Lending Fund
(``Borrowers''). Under the Borrowing Agreement, State Street lends
securities to Borrowers in exchange for Cash Collateral or other types
of collateral, such as U.S. Government securities or irrevocable
letters of credit, upon the consent of the Lending Fund. Cash
Collateral is delivered in connection with most loans. State Street
invests any Cash Collateral in Shares of one or more Investment Funds
on behalf of the Lending Fund in accordance with specific guidelines
provided by the Lending Fund. These guidelines identify the particular
Investment Funds and other investments, if any, in which Cash
Collateral may be invested, as well as the amounts that may be
invested.
7. With respect to loans involving Cash Collateral, the Lending
Fund commits to pay the Borrower a fixed return on the collateral for
the term of the loan (``Borrower's Rebate''). The difference between
the Borrower's Rebate and the actual return on the investment of the
Cash Collateral is divided between the Lending Fund and State Street in
accordance with the terms of the Lending Agreement (``Shared Return'').
In the case of collateral other than cash, State Street negotiates a
loan fee to be paid by the Borrower, which is divided between the
Lending Fund and State Street in accordance with the terms of the
Lending Agreement (``Shared Lending Fee'').
8. As agent for a Registered Lending Fund, State Street may not
purchase Shares of an Investment Fund with Cash Collateral unless
participation in the Program has been approved by a majority of the
directors or trustees of the Registered Lending Fund that are not
``interested persons'' of the Registered Lending Fund within the
meaning of section 2(a)(19) of the Act (``Disinterested Directors'').
These directors or trustees are required to evaluate the Program on at
least an annual basis to determine that the investment of Cash
Collateral in an Investment Fund is in the best interests of the
shareholders of the Registered Lending Fund.
9. In addition, State Street may not purchase Shares of any
Investment Fund as agent for a Registered Lending Fund unless the
Registered Lending Fund has represented to State Street that (i) its
policies generally permit the Registered Lending Fund to engage in
securities lending transactions, (ii) the transactions are conducted in
accordance with the guidelines of the SEC and/or its staff, (iii) the
Registered Lending Fund's policies permit the
[[Page 47048]]
Registered Lending Fund to purchase Shares of the Investment Funds with
Cash Collateral, and (iv) the Registered Lending Fund's securities
lending activities are conducted in accordance with all representations
and conditions in the application applicable to a Registered Lending
Fund.
Applicants' Legal Analysis
A. Investment of Cash Collateral by the Lending Funds in the Investment
Funds
1. Section 12(d)(1)(A) of the Act prohibits an investment company
from acquiring shares of a registered investment company if the
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company from selling its shares to
another investment company if the sale will cause the acquiring company
to own more than 3% of the acquired company's voting stock, or if the
sale will cause more than 10% of the acquired company's voting stock to
be owned by investment companies generally. Any entity that is excluded
from the definition of ``investment company'' under sections 3(c)(1) or
3(c)(7) of the Act is deemed to be an investment company for the
purposes of the 3% limitations specified in sections 12(d)(1) (A) and
(B) with respect to purchases by and sales to such company.
2. Section 12(d)(1)(J) of the Act provides that the SEC may exempt
any person, security or transaction, or any class or classes of
persons, securities or transactions, from any provision of section
12(d)(1) if such exemption is consistent with the public interest and
the protection of investors.
3. Applicants seek an order under section 12(d)(1)(J) of the Act
exempting them from the provisions of section 12(d)(1) of the Act to
permit the Lending Funds to purchase, and the Investment Funds to sell,
securities in excess of the limits of sections 12(d)(1)(A) and
12(d)(1)(B) in connection with the Lending Funds' investment of Cash
Collateral.
4. Applicants state that the proposed arrangement will not give
rise to the policy concerns underlying sections 12(d)(1)(A) and (B).
Applicants note that Shares will be sold without a sales load,
redemption fee, or asset-based sales charge or service fee. Applicants
further state that, because investment advisory fees paid by Lending
Funds will not be affected by the value of the collateral received by
the Lending Funds in connection with the loaned securities, the fees
that would be paid to State Street by an Investment Fund, including
investment advisory fees, should not be viewed as duplicative of the
advisory fees paid by the Lending Funds. Because each Investment Fund
will be operated for the purpose of providing the necessary liquidity
to satisfy the demands of the Program, applicants argue that the
Investment Funds will not be susceptible to control through the threat
of large redemptions. Applicants assert that there is no concern that
Shares will be purchased by an inappropriate investor because Shares
will be offered exclusively to participants in the Program, who are
knowledgeable and sophisticated investors. Applicants also note that an
Investment Fund will not invest in shares of any investment company.
5. 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 the affiliated person (``Second-tier Affiliate''), acting as
principal, to sell any security to, or purchase any security from, the
registered investment company. Section 2(a)(3) of the Act defines an
``affiliated person'' of another person to include 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; any
person directly or indirectly controlling, controlled by, or under
common control with the other person; and, in the case of an investment
company, its investment adviser.
6. An investment adviser to each of the Affiliated Lending Funds
and the Investment Funds, State Street could be deemed to control both
the Affiliated Lending Funds and the Investment Funds. Accordingly, the
Affiliated Lending Funds and Investment Funds could be deemed to be
under common control and affiliated persons of each other. In addition,
if an Other Lending Fund acquires 5% or more of an Investment Fund's
Shares, the Investment Fund could be deemed an affiliated person of the
Other Lending Fund. Moreover, because series of a registered investment
company could be considered to be under common control, an Other
Lending Fund that is a series could be considered an affiliate of
another series of the registered investment company. If the other
series is affiliated with an Investment Fund (by virtue of a common
investment adviser or a 5% or more ownership interest in the Investment
Fund), the Investment Fund could be deemed to be a Second-tier
Affiliate of the Other Lending Fund. In light of these possible
affiliations, section 17(a) could prevent an Investment Fund from
selling Shares to and redeeming Shares from certain Registered Lending
Funds.
7. Section 17(b) of the Act authorizes the SEC to exempt a
transaction from section 17(a) if the terms of the proposed transaction
are reasonable and fair and do not involve overreaching on the part of
any person concerned, and if the proposed transaction is consistent
with the policy of each registered investment company concerned and
with the general purposes of the Act. Section 6(c) of the Act provides
that the SEC may exempt any person, security, or transaction from any
provision of the Act if the exemption is necessary or appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the Act.
8. Applicants request an order under sections 6(c) and 17(b) of the
Act to permit the Registered Lending Funds to purchase Shares of the
Investment Funds. Applicants submit that the terms of the proposed
transactions are reasonable and fair and consistent with the general
purposes of the Act, as well as with the policies of the respective
Registered Lending Funds. Applicants assert that Registered Lending
Funds will be treated like any other shareholders of the Trust and will
purchase and redeem Shares on the same terms and basis, including
price, as other shareholders. Applicants note that a Registered Lending
Fund will only be permitted to invest Cash Collateral in an Investment
Fund that invests in instruments that the Registered Lending Fund has
previously determined to be acceptable for the investment of Cash
Collateral. Cash Collateral from loans by Registered Lending Funds that
are money market funds (``Money Market Lending 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. For these reasons,
applicants believe that their requested relief meets the standards of
sections 6(c) and 17(b) of the Act.
9. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
any affiliated person of a registered investment company or any Second-
tier Affiliate, acting as principal, from effecting any transaction in
connection with any joint enterprise or joint arrangement in which the
investment company participates, unless and
[[Page 47049]]
application regarding the joint arrangement has been filed with the SEC
and granted by order.
10. State Street, as investment adviser to the Affiliated Lending
Funds, is an affiliated person of the Affiliated Lending Funds. State
Street may also be a Second-tier Affiliate of Other Lending Funds that
purchase more than 5% of an Investment Fund. Applicants state that the
Affiliated Lending Funds and potentially the Other Lending Funds by
purchasing and redeeming Shares, the Investment Funds by selling Shares
to and redeeming Shares for the Lending Funds, and State Street by
acting as investment adviser to the Affiliated Lending Funds and the
Investment Funds and by acting as lending agent, investing Cash
Collateral, and sharing revenue generated by the securities lending
transactions, could be considered participants in a joint enterprise or
arrangement. Applicants request an order in accordance with section
17(d) and rule 17d-1 to permit certain transactions incident to
investments in Shares.
11. Under rule 17d-1, in passing on applications for orders under
section 17(d), the SEC must consider whether the investment company's
participation in the joint enterprise or joint arrangement 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.
12. Applicants assert that the Registered Lending Funds will invest
in the Investment Funds on the same basis as other participants in the
Program. Accordingly, applicants believe that the proposed investment
in Shares meets the standards of section 17(d) and rule 17d-1.
B. Payment of Fees by the Registered Lending Funds to State Street
1. Applicants also believe that a lending agent arrangement between
Registered Lending Funds and State Street under which compensation is
based on a share of the revenue generated by State Street's efforts as
lending agent may be a joint enterprise or other joint arrangement
requiring as order under section 17(d) of the Act and rule 17d-1 under
the Act. Consequently, applicants request an order to permit State
Street, as lending agent, to receive either a portion of the Shared
Return or Shared Lending Fee from the Registered Lending Funds.
2. Applicants submit that to safeguard each Affiliated Lending Fund
and its shareholders, applicants will adopt the following procedures to
ensure that the proposed fee arrangement and other terms governing the
relationship with State Street, as lending agent, will meet the
standards of rule 17d-1:
(a) In connection with the approval of State Street as lending
agent for an Affiliated Lending Fund and implementation of the proposed
fee arrangement, a majority of the board of directors or trustees of
the Affiliated Lending Fund (the ``Board''), including a majority of
the Disinterested Directors, will determine that: (i) The contract with
State Street is in the best interests of the Affiliated Lending Fund
and its shareholders, (ii) the services to be performed by State Street
are appropriate for the Affiliated Lending Fund, (iii) the nature and
quality of the services provided by State Street are at least equal to
those services offered and provided by others, and (iv) the fees for
State Street'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 State Street for
lending agent services will be reviewed annually and will be approved
for continuation only if a majority of the Board (including a majority
of the Disinterested Directors) makes the findings referred to in
paragraph (a) above.
(c) In connection with the initial implementation of the proposed
fee arrangement whereby State Street 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 will obtain
competing quotes with respect to lending agent fees from at least three
independent lending agents to assist the Board in making the findings
referred to in paragraph (a) above.
(d) The Board, including a majority of the Disinterested Directors,
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
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 any modifications) described in the
application of 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 loan
transaction setting forth a description of 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.
3. With respect to Other Lending Funds, applicants assert that the
nature of the affiliation between the Other Lending Funds and State
Street is only technical. Applicants assert that State Street would not
have any influence over the decisions made by any Other Lending Fund
and that any fee arrangements between the Other Lending Funds and State
Street will be the product of arms-length bargaining. Accordingly,
applicants believe that the proposed arrangement between Other Lending
Funds and State Street would meet the standards of rule 17d-1.
C. Transactions by Other Lending Funds With State Street and State
Street Entities
1. As noted above, sections 17(a)(1) and (2) prohibit certain
principal transactions between a registered investment company and its
affiliates. Applicants assert that State Street could be deemed a
Second-tier Affiliate of an Other Lending Fund that owns 5% of an
Investment Fund. In addition, to the extent that State Street, State
Street Entities, and the Investment Funds are deemed to be under common
control, applicants believe that a State Street Entity could be
considered an affiliate of an Investment Fund and a Second-tier
Affiliate of an Other Lending Fund.
2. Applicants request relief under sections 6(c) and 17(b) from
section 17(a) to permit principal transactions between Other Lending
Funds and State Street or State Street Entities where the affiliation
between the parties arises solely as a result of an investment by an
Other Lending Fund in Shares. Applicants state that there will be no
element of self-dealing because neither State Street nor any State
Street Entity has any influence over the decisions made by any Other
Lending Fund. Applicants assert that each transaction will be the
product of arms-length bargaining. Because the interests of the Other
Lending Funds' investment advisers and sub-advisers are solely aligned
with those of the Other Lending Funds (to which the advisers have
fiduciary responsibilities), applicants
[[Page 47050]]
believe it is reasonable to conclude that the consideration paid to or
received by Other Lending Funds in connection with a principal
transaction with State Street or a State Street Entity will be
reasonable and fair.
3. Section 17(e) of the Act makes it unlawful for any affiliated
person of a registered investment company, or any Second-tier
Affiliate, acting as broker in connection with the sale of securities
to or by that registered investment company, to receive from any source
a commission for effecting the transaction that exceeds specified
limits. Rule 17e-1 provides that a commission shall be deemed a usual
and customary broker's commission if certain procedures are followed by
the registered investment company.
4. Applicants request relief under section 6(c) from section 17(e)
to the extent necessary to permit State Street and the State Street
Entities to receive fees or commissions for acting as broker or agent
in connection with the purchase or sale of securities for any Other
Lending Fund for which State Street or a State Street Entity becomes a
Second-tier Affiliate solely because of the investment by the Other
Lending Fund in Shares.
5. Applicants submit that brokerage or similar transactions by
State Street or a State Street Entity for the Other Lending Funds raise
no possibility of self-dealing or any concern that these Other Lending
Funds would be managed in the interest of State Street or a State
Street Entity. Applicants believe that each transaction between an
Other Lending Fund and State Street or a State Street Entity would be
the product of arms-length bargaining because each adviser or sub-
adviser to an Other Lending Fund would have no interest in benefiting
State Street or a State Street Entity at the expense of the Other
Lending Fund.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. The securities lending program of each Registered Lending Fund
will comply with all present and future applicable guidelines of the
SEC and its staff regarding securities lending arrangements.
2. The approval of an Affiliated Lending Fund's Board, including a
majority of the Disinterested Directors, shall be required for the
initial and subsequent approvals of State Street'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 State Street acted as lending agent pursuant to
the Program.
3. No Registered Lending Fund will purchase Shares of any
Investment Fund unless participation in the Program has been approved
by a majority of the Disinterested Directors of the Registered Lending
Fund. Such directors and trustees also will evaluate the Program no
less frequently than annually and determine that investing Cash
Collateral in the Investment Funds is in the best interests of the
shareholders of the Registered Lending Fund.
4. Investment in Shares of an Investment Fund by a particular
Registered Lending Fund will be consistent with the Registered Lending
Fund's investment objectives and policies. A Money Market Lending Fund
that complies with rule 2a-7 under the Act will not invest its Cash
Collateral in an Investment Fund that does not comply with the
requirements of rule 2a-7.
5. Investment in Shares of an Investment Fund by a particular
Registered Lending Fund will be in accordance with the guidelines
regarding the investment of Cash Collateral specified by the Registered
Lending Fund in the Lending Agreement. A Registered Lending Fund's Cash
Collateral will be invested in a particular Investment fund only if
that Investment Fund has been approved for investment by the Registered
Lending Fund and if that Investment Fund invests in the types of
instruments that the Registered Lending Fund has authorized for the
investment of its Cash Collateral.
6. Shares of an Investment Fund will not be subject to a sales
load, redemption fee or 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, Inc.).
7. None of the Investment Funds may purchase shares of any
investment company.
For the SEC, by the Division of Investment Management, under
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-23761 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M
