[Federal Register Volume 61, Number 173 (Thursday, September 5, 1996)]
[Notices]
[Pages 46874-46876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22578]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22181; 812-10216]
First American Investment Funds, Inc., et al.; Notice of
Application
August 28, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: First American Investment Funds, Inc. (``FAIF''), First
American Funds, Inc. (``FAF'') (collectively, the ``Funds''), First
Trust National Association (``First Trust''), and First Bank National
Association (``First Bank'').
RELEVANT ACT SECTIONS: Order requested under rule 17d-1 under the Act
to permit certain joint transactions.
SUMMARY OF APPLICATION: The requested order would permit the Funds to
pay First Trust, and First Trust to accept, fees for acting as lending
agent with respect to securities lending transactions by the Funds.
FILING DATES: The application was filed on June 21, 1996, and amended
on August 22, 1996.
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 23,
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 5th Street NW., Washington, DC 20549.
Applicants: the Funds, 680 East Swedesford Road, Wayne, PA 19087; First
Trust, 180 East Fifth Street, St. Paul, MN 55101; and First Bank, 601
Second Avenue South, Minneapolis, MN 55402.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at
(202) 942-0572, or Mercer E. Bullard, 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. FAIF and FAF are registered under the Act as open-end management
investment companies and are incorporated under the laws of the States
of Maryland and Minnesota, respectively. FAIF has twenty separate
series and FAF has three. First Trust serves as custodian for each Fund
and First Bank is the investment adviser for each Fund. First Trust and
First Bank are wholly-owned subsidiaries of First Bank System, Inc.
(``FBS'').
2. Each Fund and its series, with one exception, is currently
permitted under its investment objectives, policies, and restrictions
to lend its portfolio securities. Since the Funds currently do not have
the internal resources necessary to lend securities efficiently or
effectively without the services of a third-party lending agent, First
Bank has proposed that the Funds engage First Trust, or other third-
party agents, to act
[[Page 46875]]
as lending agent for the Fund. The lending agent will be responsible
for establishing contact with potential borrowers, monitoring daily the
value of the loaned securities and collateral, requesting that
borrowers add to the collateral when required, and performing other
administrative functions. In addition, the lending agent would invest
cash collateral in instruments pre-approved by First Bank.
3. The duties of the lending agent, as well as procedures governing
the securities lending, will be included in the Fund's agreement with
the lending agent or otherwise detailed in writing. The ultimate
responsibility for determining which securities are available to be
loaned and to whom the securities may be loaned will reside with First
Bank, subject to parameters set forth in procedures approved by the
Fund's board of directors. First Bank will monitor the lending agent to
ensure that the securities loans are effected in accordance with
procedures adopted by the Fund's board of directors. For its services,
the lending agent will receive a pre-negotiated percentage of the
lending fee or portion of the return on the investment of cash
collateral received by a Fund. Applicants represent that the duties to
be performed by the lending agent will be consistent with and not
exceed the parameters set forth in Norwest Bank, a no-action letter
issued by the staff of the Division of Investment Management (pub.
Avail. May 25, 1995).
4. Each borrower of a Fund's securities will be required to tender
collateral to be held by First Trust, or other custodian to the Fund,
in the form of cash, securities issued or guaranteed by the United
States Government, its agencies or instrumentalities, or irrevocable
letters of credit issued by approved banks.
5. In transactions where the collateral consists of U.S. Government
securities or bank letters of credit, the lending agent typically will
negotiate on behalf of the Fund a lending fee to be paid by the
borrower to the Fund. The borrower will deliver to the Fund's custodian
U.S. Government securities or bank letters of credit equal to at least
100% of the securities loaned, which collateral will be supplemented to
cover differences between the market value of the collateral and the
market value of the loaned securities as necessary. At the termination
of the loan, the borrower will pay to the Fund the lending fee, and the
lending agent will receive its pre-negotiated percentage.
6. In transactions where the collateral consists of cash, the Fund
typically will receive a portion of the return earned on the investment
of the cash collateral by or under the direction of First Bank.
Depending on the arrangements negotiated with the borrower by the
lending agent, a percentage of the return on the investment of the cash
collateral may be remitted by the Fund to the borrower. Cash collateral
delivered by the borrower will equal at least 100% of the portfolio
securities loaned and will be supplemented to cover increases in the
market value of the loaned securities, as necessary. Out of the amounts
earned on the investment of the cash collateral, the borrower would
first be paid the amount agreed upon, if any, and then, out of any
remaining earnings, the lending agent would receive its pre-negotiated
percentage. The Fund will bear the risk of loss of the collateral.
7. Applicants request an order to permit the Funds to pay First
Trust, and First Trust to accept, fees in connection with First Trust's
acting as lending agent in the manner described in the application.
Applicants request that the relief sought also apply to any other
registered investment company or series thereof which in the future may
be created for which First Bank, or any other entity controlling,
controlled by, or under common control (as defined in section 2(a)(9)
of the Act) with First Bank, serves as investment adviser.
Applicants' Legal Analysis
1. Section 2(a)(3) of the Act defines an affiliated person of an
investment company to include 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),
First Bank, as investment adviser of each of the Funds, is an
``affiliated person'' of each Fund. Further, because First Trust and
First Bank are under the common control of FBS, First Trust is an
``affiliated person'' of First Bank and, therefore, First Trust is an
``affiliated person of an affiliated person'' of each Fund. In
addition, First Trust may be deemed to be an affiliated person of
certain Funds because it and its affiliates hold of record more than 5%
of the outstanding shares of these Funds.
2. 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. The proposed lending transactions may be deemed to
involve a joint transaction because First Trust as lending agent would
receive a percentage of the revenue generated by a Fund's securities
lending program.
3. Rule 17d-1 authorizes the SEC to permit a proposed joint
transaction. In determining whether to permit 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 discussed below, applicants believe that the requested relief
satisfies the standards for relief set forth in rule 17d-1.
4. Applicants believe that First Trust can provide lending agent
services to the Funds in an efficient and profitable manner, and in a
manner comparable to that of other potential lending agents. Applicants
state that First Trust is experienced in securities lending services
and has in place the personnel and systems necessary to provide
services in an efficient and cost-effective manner. In addition, First
Bank, as investment adviser to the Funds, will direct and monitor the
activities of First Trust as lending agent.
5. Individual employees of First Trust who are involved in its
securities lending activities may be ``dual employees'' of First Trust
and First Bank. As employees of First Bank, such individuals also may
be involved in the portfolio lending activities of First Bank, as
investment adviser to the Funds. However, the individuals within First
Bank, as investment adviser to the Funds, who will direct and monitor
the activities of First Trust, as securities lending agent for the
Funds, will not have operating or supervisory responsibility with
respect to First Trust's securities lending activities.
6. Applicants propose that each Fund will adopt the following
procedures to ensure that the fee arrangement and other terms governing
the relationship between the Fund and First Trust will be fair:
a. In connection with the initial approval of First Trust as
lending agent to the Fund, the board of directors of a Fund, including
a majority of the directors who are not ``interested persons'' of the
Fund within the meaning of the Act, will determine that (i) the
contract with First Trust is in the best interests of the Fund and its
shareholders; (ii) the services to be performed by First Trust are
required by the Fund; (iii) the nature and quality of the services
provided by First Trust are at least equal to those provided by others
offering the same or similar
[[Page 46876]]
services; and (iv) the fees for First Trust'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 Fund's contract with First Trust for lending agent services
will be reviewed annually and will be approved for continuation only if
a majority of the board of directors of each Fund, including a majority
of the directors who are not ``interested persons'' of the Fund within
the meaning of the Act, makes the findings referred to in paragraph (a)
above.
c. In connection with the initial approval of First Trust as
lending agent to a Fund, the board of directors will obtain competing
quotes with respect to lending agent fees from at least three
independent lending agents to assist the board of directors in making
the findings referred to in paragraph (a) above.
d. The board of directors of each Fund, including a majority of the
directors who are not ``interested persons'' of the Fund within the
meaning of the Act, (i) will determine at each 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) will review no less frequently than annually the
conditions and procedures for continuing appropriateness.
e. Each Fund will (i) maintain and preserve permanently in an
easily accessible place a written copy of the procedures and conditions
(and modifications thereto) described in the application or otherwise
followed in connection with lending securities and (ii) maintain and
preserve for a period of not less than six years from the end of the
fiscal year in which any loan transaction occurred, the first two years
in an easily accessible place, a written record of each such 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.
Applicants' Conditions
Applicants will adhere to the following conditions:
1. No Fund may lend its portfolio securities to a borrower that is
an affiliated person of the Fund, any adviser of the Fund, or First
Trust, or to an affiliated person of any such person.
2. Except as set forth herein, the securities lending program of
each Fund will comply with all present and future applicable SEC staff
positions regarding securities lending arrangements, i.e., with respect
to the type and amount of collateral, voting of loaned securities,
limitations on the percentage of portfolio securities on loan,
prospectus disclosure, termination of loans, receipt of dividends or
other distributions, and compliance with fundamental policies.\1\
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\1\ See, e.g., SIFE Trust Fund (pub. avail. Feb. 17, 1982).
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3. The approval of the board of directors of a Fund, including a
majority of the directors who are not ``interested persons'' within the
meaning of the Act, shall be required for the initial and subsequent
approvals of First Trust's service as lending agent for the Funds, for
the institution of all procedures relating to the securities lending
programs of the Funds, and for any periodic review of loan transactions
for which First Trust acted as lending agent.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22578 Filed 9-4-96; 8:45 am]
BILLING CODE 8010-01-M