[Federal Register Volume 61, Number 226 (Thursday, November 21, 1996)] [Notices] [Pages 59252-59256] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-29714] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Rel. No. 22336; 812-10182] American AAdvantage Funds, et al.; Notice of Application November 15, 1996. AGENCY: Securities and Exchange Commission (``SEC''). ACTION: Notice of application for exemption under the Investment Company Act of 1940 (``Act''). ----------------------------------------------------------------------- APPLICANTS: American AAdvantage Funds (the ``AAdvantage Trust''), American AAdvantage Mileage Funds (the ``Mileage Trust''), AMR Investment Services Trust (The ``AMR Trust,'' collectively with the AAdvantage Trust and the Mileage Trust, the ``Trusts''), AMR Investments Strategic Cash Business Trust (the ``Strategic Cash Trust''), AMR Investments Enhanced Yield Business Trust (the ``Enhanced Yield Trust,'' collectively with the Strategic Cash Trust, the ``Investment Funds''), and AMR Investment Services, Inc. (``Adviser''), on behalf of themselves and all future investment companies that are advised by the Adviser or any entity controlling, controlled by, or under common control (within the meaning of section 2(a)(9) of the Act) with the Adviser. RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the Act from section 12(d)(1), under sections 6(c) and 17(b) of the Act from section 17(a), and under section 17(d) of the Act [[Page 59253]] and rule 17d-1 thereunder for an exemption from section 17(d) and rule 17d-1. SUMMARY OF APPLICATION: Applicants seek an order that would permit the Trusts to invest cash collateral received from the borrowers of their portfolio securities in shares of the Investment Funds, private investment companies that are affiliated persons of the Trusts. FILING DATES: The application was filed on June 3, 1996, and amended on November 12, 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 December 10, 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 who wish to be notified of a hearing may request such notification by writing to the SEC's Secretary. ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Applicants, 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155. FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel, at (202) 942-0583, or Mary Kay Frech, 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. The AAdvantage Trust, which currently has eight series funds (the ``AAdvantage Funds''), and the Mileage Trust, which currently has seven series funds (the ``Mileage Funds,'' collectively with the AAdvantage Funds, the ``Funds''), are Massachusetts business trusts registered under the Act as open-end management investment companies. Each Fund is a separate investment series of the AAdvantage Trust or the Mileage Trust and has distinct investment objectives and policies. 2. The Funds implemented a ``master-feeder'' structure on November 1, 1995. Under this structure, each Fund (other than the American AAdvantage Short-Term Income Fund, which invests directly in investment securities) invests all of its investable assets in a corresponding series fund (``Portfolio'') of the AMR Trust, a New York common law trust that is registered under the Act as an open-end management investment company.\1\ Each of the seven Portfolios has investment objectives identical to those of the corresponding investing Funds. As a result of this arrangement, all investment management for the Funds takes place at the Portfolio level, rather than at the Fund level. --------------------------------------------------------------------------- \1\ Interests in the AMR Trust are offered to the AAdvantage Trust and the Mileage Trust pursuant to an exemption from registration under the private offering exemption contained in section 4(2) of the Securities Act of 1933 (the ``Securities Act''). --------------------------------------------------------------------------- 3. The Adviser, a wholly-owned subsidiary of AMR Corporation, the parent corporation of American Airlines, Inc., is registered as an investment adviser under the Investment Advisers Act of 1940. The Adviser provides the AMR Trust with administrative and asset management services, and provides administrative services to the Funds. 4. The Strategic Cash Trust, a newly formed Massachusetts business trust of which the Adviser is the sole trustee, invests exclusively in high-quality, U.S. dollar-denominated obligations eligible for purchase pursuant to rule 2a-7 under the Act. The Strategic Cash Trust will seek to achieve a stable $1.00 net asset value per share. Shares of the Strategic cash Trust, together with any other outstanding securities (other than short-term paper) will not be beneficially owned by more than 100 persons. The Strategic Cash Trust is not making and presently does not propose to make a public offering of its shares or other securities.\2\ The Enhanced Yield Trust, a Massachusetts business trust formed in 1994 of which the Adviser is the sole trustee, seeks to achieve higher current income and total returns than bank short-term investments and money market instruments while providing relative principal stability and liquidity. Shares of the Enhanced Yield Trust, together with any other outstanding securities (other than short-term paper) will not be beneficially owned by more than 100 persons. The Enhanced Yield Trust is not making and presently does not propose to make a public offering of its shares or other securities. Both the Strategic Cash Trust and the Enhanced Yield Trust offer daily redemption of their shares. --------------------------------------------------------------------------- \2\ Shares in the Investment Funds will be offered to institutional investors in reliance on the private offering exemption contained in section 4(2) of the Securities Act. --------------------------------------------------------------------------- 5. Each Investment Fund has entered into an advisory contract with the Adviser, under which the Adviser makes investment decisions with respect to the Investment Fund's assets and administers each Investment Fund in accordance with the declaration of trust and the policies of each Investment Fund. The Adviser will receive an annualized fee from each Investment Fund equal to .10% of the average daily net assets of each Investment Fund, accrued daily and paid monthly. 6. Each Fund, through its corresponding Portfolio, has the ability to increase its income by lending portfolio securities to registered broker-dealers or other institutional investors deemed by the Adviser to be of good standing (``Borrowers''). These loans may not exceed one third of a Portfolio's total assets taken at market value. The AMR Trust, the Adviser, and NationsBank of Texas, N.A. (``Agent'') have entered into a securities lending agreement (``Agreement'') to permit each Portfolio to participate in the securities lending program (``Program'') administered by the Agent. The Agent is the custodian for each Portfolio, and also acts as lending agent for each Portfolio. The Program has been approved by the independent trustees of each Trust, who will monitor the Program on an ongoing basis. 7. Under the Program, the Agent enters into agreements with Borrowers to lend them the Portfolios' securities (``Loan Agreements''). Pursuant to the Loan Agreements, the Agent delivers the Portfolios' securities to Borrowers, who agree to return such securities on demand. the Agent may enter into Loan Agreements only with Borrowers from a list approved by the Portfolios' Board of Trustees (``Board''). 8. Borrowers are required to post collateral having a market value at least equal to 100% of the market value of loaned securities plus accrued interest. The Agent may accept as collateral only cash, securities issued or backed by the U.S. Government or its agencies or instrumentalities, or letters of credit from certain banks. Cash collateral may be invested in shares of registered or unregistered investment companies, including the Investment Funds, acceptable to the Adviser that are consistent with the investment restrictions and guidelines of the participating Portfolios without limitation (except as investment in any such company or companies may be limited by section 12(d)(1) of the Act). Because one or more of the Funds and Portfolios participating in the Program [[Page 59254]] are money market funds that comply with rule 2a-7, cash collateral from transactions in which such Funds or Portfolios participate will be used only to acquire shares of the Strategic Cash Trust. In all cases, the investment of cash collateral will comply with all present and future applicable SEC staff positions regarding securities lending arrangements. Cash collateral, however, will be excluded from the Portfolio's determination of the maximum and/or minimum percentage of the Portfolio's other assets that will be invested in specific types of securities.\3\ --------------------------------------------------------------------------- \3\ Applicants acknowledge that they are not seeking relief from the Commission with respect to this issue. --------------------------------------------------------------------------- 9. The Trusts will submit a supplement to their respective investment advisory agreements with the Adviser to their shareholders and the Board of each Trust. If the supplement is approved by a majority of the outstanding voting securities and the Board of each Trust, the Adviser will provide certain services to the Portfolios that participate in the Program, including ensuring compliance with all applicable regulatory and investment guidelines, determining which securities are available for loan, and having the discretion and power to prevent any loan from being made or to terminate any loan. The Adviser also will monitor the Agent to ensure that the securities loans are effected in accordance with its instructions and the procedures adopted by the Board of the AMR Trust, and will prepare periodic reports for, and seek approval from, the Board of the AMR Trust. 10. Under each Loan Agreement, the Borrower receives a specified cash collateral fee, computed daily based on the amount of cash held as collateral at such rates as the Borrower and Agent may agree. The cash collateral fee is not based on the investment return of the cash collateral. Net annual interest income earned by a Portfolio from participation in the Program will be divided between the Portfolio, the Agent, and, if the proposed supplement is approved as described above, the Adviser.\4\ --------------------------------------------------------------------------- \4\ Net annual interest income for this purpose means the gross interest income earned by the investment of cash collateral, less the amount paid to the Borrower and related expenses such as investment management, custody and accounting or audit fees, or other costs typically incurred when investments are made. --------------------------------------------------------------------------- Applicants' Legal Analysis 1. Applicants seek an order to permit the Portfolios to purchase shares of the Investment Funds (``Shares'') with the cash collateral received from Borrowers. Section 12(d)(1)(A) of the Act provides that no registered investment company may acquire securities of another investment company representing more than 3% of the acquired company's outstanding voting stock, more than 5% of the acquiring company's total assets, or, together with the securities of other investment companies, more than 10% of the acquiring company's total assets. Section 12(d)(1)(B) provides that no registered open-end investment company may sell its securities 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. 2. Applicants believe that the Investment Funds will be excluded from the definition of an investment company under section 3(c)(1) of the Act because they will issue only non-voting securities.\5\ Applicants request relief from section 12(d)(1), however, because they are concerned that the Investment Funds' non-voting securities could be deemed to be ``voting securities'' for purposes of section 3(c)(1). Applicants believe that if interests in the Investment Funds were deemed to be voting securities, applicants then must rely on the second 10% test of section 3(c)(1) in order to avoid a look through to the shareholders of the Portfolios for purposes of determining the number of persons owning shares of the Investment Funds. Reliance on the second 10% test would cause the Investment Funds to be deemed investment companies for purposes of section 12(d)(1) of the Act pursuant to the last sentence of section 3(c)(1)(A). --------------------------------------------------------------------------- \5\ Section 3(c)(1) provides, in pertinent part, that the term ``investment company'' shall not include: Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities. For purposes of this paragraph: (A) Beneficial ownership by a company shall be deemed to be beneficial ownership by one person, except that, if such company owns 10 per centum or more of the outstanding voting securities of the issuer, the beneficial ownership shall be deemed to be that of the holders of such company's outstanding securities (other than short-term paper) unless, as of the date of the most recent acquisition by such company of securities of that issuer, the value of all securities owned by such company of all issuers which are or would, but for the exception set forth in this subparagraph, be excluded from the definition of investment company solely by this paragraph, does not exceed 10 per centum of the value of the company's total assets. Such issuer nonetheless is deemed to be an investment company for purposes of section 12(d)(1). --------------------------------------------------------------------------- 3. Section 12(d)(1) is intended, among other things, to protect an investment company's shareholders against: (a) undue influence over portfolio management through the threat of large-scale redemptions, and the disruption of orderly management of the investment company through the maintenance of large cash balances to meet potential redemptions, and (b) the layering of sales charges, advisory fees, and administrative costs. Applicants state that the Investment Funds will be managed specifically to maintain a highly liquid portfolio. Access to the Investment Funds will enhance each Portfolio's ability to manage and invest cash collateral received from Borrowers. In addition, the Investment Funds will not charge any sales charges, underwriting, or distribution fees. Applicants therefore believe that the proposed transactions create none of the abuses intended to be addressed by section 12(d)(1). 4. Section 6(c) of the Act provides that the SEC may exempt any person, security, or transaction from any provision of the Act, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the policies and purposes fairly intended by the policies and provisions of the Act. Applicants believe that the requested relief meets this standard. 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 such affiliated person, acting as principal, to sell or purchase any security to or from such investment company. As the investment adviser of the Funds, the Portfolios, and the Investment Funds, the Adviser is an affiliated person of each of these entities under section 2(a)(3) of the Act. The Funds, the Portfolios, and the Investment Funds therefore may be considered affiliated persons of each other under section 2(a)(3) by virtue of being deemed to be under common control of the Adviser. Accordingly, if the cash collateral posted by the Borrowers is considered the property of the Portfolios, the sale of Shares to the Portfolios, and the redemption of such Shares, would be prohibited under section 17(a). 6. Section 17(b) of the Act authorizes the SEC to exempt a transaction from section 17(a) if the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned, the proposed transaction is consistent with the policy of each registered investment company [[Page 59255]] concerned, and the proposed transaction is consistent with the general policy of the Act. Section 17(b) could be interpreted to exempt only a single transaction. However, the SEC, under section 6(c), may exempt a series of transactions that otherwise would be prohibited by section 17(a). 7. Applicants believe 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 policy of each Fund and Portfolio as recited in each Fund's and Portfolio's registration statement. The Portfolios will be treated like any other investors in the Investment Funds. The Portfolios will purchase and sell Shares on the same terms and on the same basis as Shares are purchased and sold by all other shareholders of the Investment Funds. Permitting the Portfolios to invest cash collateral in the Investment Funds enables the Portfolios to invest in vehicles that applicants expect will offer the Portfolios a higher return on their investment at a lower cost than the cost typically incurred when investing in a registered investment company. Specifically, applicants anticipate that the investment of cash collateral in Shares will enable the Portfolios to benefit from economies of scale that maximize investment opportunities, minimize investment risk, facilitate the management of liquidity, and minimize administrative costs. Accordingly, applicants believe that the proposed transactions are in the best interests of the Funds, the Portfolios, and their shareholders. 8. 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 Portfolios (by purchasing Shares), the Adviser (by managing the portfolio securities of the Portfolios and the Investment Funds at the same time that the Portfolios' cash collateral is invested in Shares), and the Investment Funds (by selling Shares to and redeeming them from the Portfolios) could be deemed to be participants in a joint enterprise or other joint arrangement within the meaning of section 17(d) and rule 17d-1. 9. Rule 17d-1 permits the SEC to exempt by order a joint transaction under section 17(d). 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. 10. Applicants believe that the proposal satisfies these standards. The Portfolios will invest in Shares on the same basis as any other shareholder. All investors in Shares will be subject to the same eligibility requirements imposed by the Investment Funds. In addition, all Shares will be priced in the same manner and will be redeemable under the same terms. Finally, applicants believe that participation in the Program will offer the Portfolios and Funds greater flexibility and higher returns than they could obtain by investing the cash collateral separately while still offering the benefits of investing in a pooled investment vehicle in terms of diversity and lower costs. Applicants' Condition Applicants agree that any order granting the requested relief will be subject to the following conditions: 1. Before a Portfolio may participate in the Program, a majority of the Board (including a majority of the independent trustees) will approve the Portfolio's participation in a securities lending program. Such trustees also will evaluate the securities lending arrangement and its results no less frequently than annually and determine that any investment of cash collateral in the Investment Funds is in the best interest of the shareholders of the funds and their corresponding Portfolios. 2. Investment in Shares will be in accordance with each Portfolio's respective investment restrictions regarding the types of securities in which it may invest and will be consistent with its corresponding Fund's policies as recited in such Fund's registration statement. 3. Cash collateral from loans by Portfolios that are money market 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. 4. The Adviser will adopt procedures that are designed, taking into account current market conditions and the Strategic Cash Trust investment objectives, to stabilize the Strategic Cash Trust's net asset value per share, as computed for the purpose of distribution, redemption, and repurchase, at a single value. These procedures will be reviewed annually by the Board of each Portfolio that enters into a securities lending program (``Lending Portfolio''). 5. The Investment Funds will comply with the requirements of sections 17 (a), (d), and (e), and 18 of the Act as if the Investment Funds were registered open-end investment companies. With respect to all redemption requests made by a Lending Portfolio, the Investment Funds will comply with section 22(e) of the Act. The Adviser, as sole trustee of the Investment Funds, will adopt procedures designed to ensure that the Investment Funds comply with sections 17 (a), (d), and (e), 18, and 22(e) of the Act. The Adviser will periodically review and update as appropriate such procedures and will maintain books and records describing such procedures, and maintain the records required by rules 31a-1(b)(1), 31a-1(b)(2)(ii), and 31a-1(b)(9) under the Act. All books and records required to be made pursuant to this condition will be maintained and preserved for a period of not less than six years from the end of the fiscal year in which any transaction occurred, the first two years in an easily accessible place, and will be subject to examination by the SEC and its staff. 6. The Strategic Cash Trust will value its shares at the close of business each business day using the ``amortized cost method'' as defined in rule 2a-7 to determine the net asset value per share of the Strategic Cash Trust. In this regard, the Strategic Cash Trust will comply with rule 2a-7(c)(6), except that the Adviser, subject to approval by the sole trustee of the Strategic Cash Trust, shall adopt the procedures described in that provision, and the Adviser shall monitor such procedures and take such other actions as are required to be taken by a board of directors pursuant to that provision. 7. The Shares will not be subject to a sales load, redemption fee, asset-based charge or service fee (as defined in rule 2830(b)(9) of the Rules of Conduct of the National Association of Securities Dealers). 8. Each Lending Portfolio will purchase and redeem Shares as of the same time and at the same price, and will receive dividends and bear its proportionate share of expenses on the same basis, as other shareholders of the Investment Funds. A separate account will be established in the shareholder records of each Investment Fund for the account of each Lending Portfolio. 9. Except as set forth herein, the Program 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 [[Page 59256]] distributions, and compliance with fundamental policies. For the SEC, by the Division of Investment Management, under delegated authority. Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-29714 Filed 11-20-96; 8:45 am] BILLING CODE 8010-01-M