[Federal Register Volume 64, Number 20 (Monday, February 1, 1999)]
[Notices]
[Pages 4909-4911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2250]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23662; 812-10916]
The Victory Portfolios, et al.; Notice of Application
Janury 25, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under section 17(d) of the
Investment Company Act of 1940 (the ``Act'') and rule 17d-1 under the
Act.
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SUMMARY OF APPLICATION: Applicants request an order to permit The
Victory Portfolios to deposit uninvested cash balances in joint
accounts investing in short-term investments, and to permit Key Trust
Company of Ohio, N.A. (``Key Trust'') to accept fees for acting as
securities lending agent.
Applicants: The Victory Portfolios (consisting of Victory Balanced
Fund, Victory Convertible Securities Fund, Victory Diversified Stock
Fund, Victory Established Value Fund, Victory Federal Money Market
Fund, Victory Financial Reserves Fund, Victory Fund for Income, Victory
Government Mortgage Fund, Victory Gradison Government Reserves Fund,
Victory Growth Fund, Victory Institutional Money Market Fund, Victory
Intermediate Income Fund, Victory International Growth Fund, Victory
Investment Quality Bond Fund, Victory Lakefront Fund, Victory
LifeChoice Conservative Investor Fund, Victory LifeChoice Growth
Investor Fund, Victory LifeChoice Moderate Investor Fund, Victory
Limited Term Income Fund, Victory National Municipal Bond Fund, Victory
New York Tax-Free Fund, Victory Ohio Municipal Bond Fund, Victory Ohio
Municipal Money Market Fund, Victory Ohio Regional Stock Fund, Victory
Prime Obligations Fund, Victory Real Estate Investment Fund, Victory
Special Growth Fund, Victory Special Value Fund, Victory Stock Index
Fund, Victory Tax-Free Money Market Fund, Victory U.S. Government
Obligations Fund, Victory Value Fund (each a ``Fund'')), Key Asset
Management Inc. (``KAM''), and Key Trust.\1\
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\1\ Applicants request that the relief apply to all existing and
future series of The Victory Portfolios and any other registered
management investment companies for which KAM or any entity
controlling, controlled by, or under common control with KAM acts as
investment adviser. Each existing registered management investment
company that currently intends to rely on the requested order has
been named as an applicant. Any other existing or future registered
investment companies that subsequently rely on the order will comply
with the terms and conditions in the application.
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Filing Dates: The application was filed on December 22, 1997, and
amended on October 5, 1998, and on December 14, 1998.
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 February
18, 1999, 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.
ADDRESSSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549.
Applicants, 3435 Stelzer Road, Columbus, OH 43219.
FOR FURTHER INFORMATION CONTACT: Lisa McCrea, Attorney Adviser, at
(202) 942-0562, 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 5th Street NW, Washington, DC 20549
(tel. 202-942-8090).
Applicant's Representations
1. The Victory Portfolios is an open-end management investment
company registered under the Act, currently consisting of thirty-two
Funds. KAM is registered as an investment adviser under the Investment
Advisers Act of 1940, and serves as investment adviser to the Funds.
Both KAM and Key Trust are subsidiaries of KeyCorp.
2. All of the Funds are authorized by their investment policies to
invest in short-term liquid assets including repurchase agreements,
United States government securities, or other short-term debt
obligations. The investment objectives, policies and restrictions of
most Funds permit them to engage in securities lending transactions. No
Fund will engage in securities lending unless so permitted.
3. Applicants propose to deposit uninvested cash balances of
participating Funds (``Participants'') that remain at the end of the
trading day and/or cash for investment purposes (``Uninvested Cash'')
into one or more joint accounts (the ``Joint Investment Account'').
Applicants also propose to deposit the cash received as collateral in a
securities lending transaction (``Cash Collateral'') in a joint account
(``Joint Collateral Account'', together with the Joint Investment
Account, the ``Joint Accounts'').
4. The Joint Accounts will be established at Key Trust, the Funds'
custodian, and the daily balance of the Joint Accounts will be invested
in the following short-term investments: (a) Repurchase agreements that
are collateralized fully within the meaning of rule 2a-7 under the
Act;\2\ (b) interest-bearing or discounted commercial paper, including
dollar denominated commercial paper of foreign issuers; and (c) any
other short-term taxable and tax-exempt money market instruments,
including variable rate demand notes, that constitute ``Eligible
Securities'' within the meaning of rule 2a-7 under the Act
(collectively, ``Short-Term Investments'').
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\2\ Applicants will not invest in hold-in-custody repurchase
agreements.
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5. Applicants also propose to permit Key Trust to act as the Funds'
securities lending agent, to invest the Cash Collateral at the
direction of KAM in Short-Term Investments, and to enter into a fee
splitting arrangement with the Funds whereby Key Trust would receive a
fee based on a percentage of the net returns generated by the lending
transactions. Under the proposed arrangement, Key Trust would receive a
pre-negotiated percentage of the net earnings on the investment of the
Cash Collateral.
6. A Participant's decision to use a Joint Account would be based
on the same factors as its decision to make any other Short-Term
Investment. Key Trust, at the direction of KAM, would be responsible
for investing funds held by the Joint Accounts, establishing accounting
and control procedures, operating the Joint Accounts in accordance with
the procedures discussed below, and ensuring fair treatment of
Participants. KAM (or Key Trust at KAM's direction) would manage
investments in the Joint Accounts in essentially the same manner as if
it had invested in the instruments on an individual basis for each
Participant. All purchases through
[[Page 4910]]
the Joint Accounts will comply with all present and future SEC staff
positions relating to the investment of cash collateral in connection
with securities lending activities.
7. Any repurchase agreements entered into through the Joint
Accounts will comply with the terms of Investment Company Act Release
No. 13005 (February 2, 1983). Applicants acknowledge that they have a
continuing obligation to monitor the Commission's published statements
on repurchase agreements, and represent that repurchase agreement
transactions would comply with future positions of the Commission to
the extent that such positions set forth different or additional
requirements regarding repurchase agreements. In the event that the
Commission sets forth guidelines with respect to other Short-Term
Investments, all such investments made through the Joint Accounts would
comply with those guidelines.
Applicants' Legal Analysis
1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
an affiliated person of a registered investment company, or an
affiliated person of that person, acting as principal, from
participating in any joint arrangement or profit-sharing plan with the
investment company unless the SEC has issued an order authorizing the
arrangement. In passing on such applications, the SEC considers whether
the investment company's participation in the joint enterprise is
consistent with the provisions, policies, and purposes of the Act, and
the extent to which that participation is on a basis different from, or
less advantageous than, that of other participants.
2. 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, controlled
by, or under common control with such investment adviser. Applicants
state that the Funds may be deemed to be affiliated persons of each
other because they are under the common control of KAM. Applicants
further state that KAM and Key Trust may be deemed to be under the
common control of KeyCorp, and Key Trust therefore may be deemed an
affiliated person of an affiliated person of the Funds.
3. Applicants state that the Participants, by participating in the
proposed Joint Accounts, and Key Trust, managing the proposed Joint
Accounts, could be deemed ``joint participants'' in a transaction
within the meaning of section 17(d) of the Act. Applicants further
state that the proposed Joint Accounts also could be deemed to be a
``joint enterprise or other joint arrangement'' within the meaning of
rule 17d-1. In addition, applicants state that the Funds' securities
lending fee arrangement with Key Trust may be deemed a joint enterprise
or profit sharing plan within the meaning of rule 17d-1.
4. Applicants state that the proposed operation of the Joint
Accounts, and Key Trust's activities as securities lending agent, are
consistent with the standards of section 17(d) and rule 17d-1 under the
Act. Applicants also assert that Key Trust is the most advantageous
choice for the Funds to use as lending agent because, as the Funds'
custodian, it can administer the lending program efficiently.
5. Applicants state that Participants may earn a higher rate of
return on investments through the Joint Accounts. Applicants also state
that the Joint Accounts may increase the number of dealers and issuers
willing to enter into Short-Term Investments with Participants.
Applicants assert that no Participant would be in a less favorable
position as a result of participating in the Joint Accounts. Each
Participant's liability on any Short-Term Investment would be limited
to its interest in such investment; no Participant would be jointly
liable for the investments of any other Participant.
6. Applicants agree to implement the following procedural
safeguards to ensure that the fee arrangement and other terms governing
the Funds' relationship with Key Trust, as lending agent, will be fair:
(a) In connection with the approval of Key Trust as lending agent
to a Fund and implementation of the proposed fee arrangement, a
majority of the board of trustees (the ``Board'') (including a majority
of the trustees who are not ``interested persons'' of the Funds within
the meaning of section 2(a)(19) of the Act (the ``Disinterested
Trustees'')), will determine that (i) the contract with Key Trust is in
the best interests of the Fund and its shareholders; (ii) the services
to be performed by Key Trust are required by the Fund; (iii) the nature
and quality of the services provided by Key Trust are at least equal to
those provided by others offering the same or similar services; and
(iv) the fees for Key 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) In connection with the approval of Key Trust as lending agent
to a Fund and implementation of the proposed fee arrangement, 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.
(c) Each Fund's contract with Key Trust 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
Trustees) makes the findings referred to in paragraph (a) above.
(d) The Board (including a majority of the Disinterested Trustees),
will (i) 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)
review no less frequently than annually the conditions and procedures
set forth in the application for continuing appropriateness.
(e) The Funds will maintain and preserve permanently in an easily
accessible place a written copy of the conditions and procedures (and
any modifications thereto) described in the application or otherwise
followed in connection with lending securities and will 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 in accordance with
the procedures set forth above and the conditions to the application.
Applicants' Conditions
Applicants agree that the requested order will be subject to the
following conditions:
Joint Accounts
1. The Joint Accounts would not be distinguishable from any other
accounts maintained by Participants at their custodian, except that
monies from Participants will be deposited in the Joint Accounts on a
commingled basis. The Joint Accounts will not have a separate existence
and will not have indicia of a separate legal entity. The sole function
of the Joint Accounts will be to provide a convenient way of
aggregating individual transactions which would otherwise require daily
management of Uninvested Cash or Cash Collateral.
[[Page 4911]]
2. Cash in the Joint Accounts would be invested in Short-Term
Investments as directed by KAM (or, in the case of Cash Collateral, Key
Trust, at the direction of KAM). Short-Term Investments that are
repurchase agreements would have a remaining maturity of 60 days or
less and other Short-Term Investments would have a remaining maturity
of 90 days or less, each as calculated in accordance with rule 2a-7
under the Act. Cash Collateral in a Joint Account would be invested in
Short-Term Investments that have a remaining maturity of 397 days or
less, as calculated in accordance with rule 2a-7 under the Act.
3. All assets held in the Joint Investment Account would be valued
on an amortized cost basis to the extent permitted by applicable SEC
releases, rules or orders.
4. Each Participant valuing its net assets in reliance on rule 2a-7
under the Act will use the average maturity of the instruments in the
Joint Investment Account in which such Participant has an interest
(determined on a dollar weighted basis) for the purpose of computing
its average portfolio maturity with respect to its portion of the
assets held in a Joint Investment Account on that day.
5. In order to assure that there will be no opportunity for any
Participant to use any part of a balance of a Joint Account credited to
another Participant, no Participant will be allowed to create a
negative balance in any Joint Account for any reason, although each
Participant would be permitted to draw down its entire balance at any
time. Each Participant's decision to invest in a Joint Account would be
solely at its option, and no Participant will be obligated to invest in
the Joint Account or to maintain any minimum balance in the Joint
Account. In addition, each Participant will retain the sole rights of
ownership to any of its assets in the Joint Account.
6. KAM would administer the investment of cash balances in and
operation of the Joint Accounts as part of its general duties under its
existing or any future investment advisory or sub-advisory agreements
with Participants and will not collect any additional or separate fees
for advising any Joint Account.
7. The administration of Joint Accounts would be within the
fidelity bond coverage required by section 17(g) of the Act and rule
17g-1 under the Act.
8. The Board will adopt procedures pursuant to which the Joint
Accounts will operate, which will be reasonably designed to provide
that the requirements of the application will be met. The Board will
make and approve such changes as it deems necessary to ensure that such
procedures are followed. In addition, the Board will determine, no less
frequently than annually, that the Joint Accounts have been operated in
accordance with the proposed procedures and will permit a Fund to
continue to participate therein only if it determines that there is a
reasonable likelihood that the Fund and its shareholders will benefit
from the Fund's continued participation.
9. Any Short-Term Investments made through the Joint Accounts will
satisfy the investment criteria of all Participants in that investment.
10. KAM and/or the custodian of each Participant will maintain
records documenting, for any given day, each Participant's aggregate
investment in a Joint Account and each Participant's pro rata share of
each investment made through such Joint Account. The records maintained
for each Participant shall be maintained in conformity with section 31
of the Act and rules and regulations thereunder.
11. Short-Term Investments held in a Joint Account generally will
not be sold prior to maturity except if: (i) KAM believes the
investment no longer presents minimal credit risks; (ii) the investment
no longer satisfies the investment criteria of all Participants in the
investment because of a downgrading or otherwise; or (iii) in the case
of a repurchase agreement, the counterparty defaults. KAM may, however,
sell any Short-Term Investment (or any fractional portion thereof) on
behalf of some or all Participants prior to the maturity of the
investment if the cost of such transaction will be borne solely by the
selling Participants and the transaction will not adversely affect
other Participants in the Joint Account. In no case would an early
termination by less than all Participants be permitted if it would
reduce the principal amount or yield received by other Participants in
a particular Joint Account or otherwise adversely affect the other
Participants. Each Participant in a Joint Account will be deemed to
have consented to such sale and partition of the investments in the
Joint Account.
12. Short-Term Investments held through a Joint Account with a
remaining maturity of more than seven days, as calculated pursuant to
rule 2a-7 under the Act, would be considered illiquid and would be
subject to the restriction that a Fund may not invest more than 15% or,
in the case of a money market fund, more than 10% (or, in either such
case, such other percentage as set forth by the SEC from time to time)
of its net assets in illiquid securities, if KAM cannot sell the
instrument, or the Fund's fractional interest in such instrument,
pursuant to the preceding condition, or if such investment would
otherwise be considered illiquid if held by a money market fund.
13. Not every Participant participating in the Joint Accounts will
necessarily have its cash invested in every Joint Account. However, to
the extent a Participant's cash is applied to a particular Joint
Account, the Participant will participate in and own a proportionate
share of the investment in such Joint Account, and the income earned or
accrued thereon, based upon the percentage of such investment in such
Joint Account purchased with monies contributed by the Participant.
Securities Lending
14. The securities lending program of each Fund will comply with
all present and future applicable Commission and staff positions
regarding securities lending arrangements.
15. The approval of the Board, including a majority of the
Disinterested Trustees, shall be required for the initial and
subsequent approvals of Key Trust's service as lending agent for each
Fund, for the institution of all procedures relating to the securities
lending program of the Funds, and for any periodic review of loan
transactions for which Key Trust acted as lending agent.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2250 Filed 1-29-99; 8:45 am]
BILLING CODE 8010-01-M