[Federal Register Volume 59, Number 37 (Thursday, February 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4142]
[[Page Unknown]]
[Federal Register: February 24, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20079; 812-8678]
First Prairie Cash Management et al.; Notice of Application
February 16, 1994.
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 Prairie Cash Management (``Cash Management''), First
Prairie Money Market Fund (``Money Market''), First Prairie U.S.
Treasury Securities Cash Management (``Treasury Cash Management'') and
such other registered investment companies that in the future (i) are
advised by FNBC or any entity under common control with or controlled
by FNBC, (ii) are taxable money market funds, (iii) are permitted to
invest in repurchase agreements, and (iv) effect purchase and sales
through FNBC's ``sweep'' program (the ``Funds''), and The First
National Bank of Chicago (``FNBC'').
RELEVANT ACT SECTIONS: Exemption requested pursuant to sections 6(c)
and 17(b) from section 17(a).
SUMMARY OF APPLICATION: Applicants seek an amendment to a prior order
that permits Money Market to enter into repurchase agreements with
FNBC. The prior order limits the collateral for the repurchase
agreements to U.S. Treasury Bills, Notes, or Bonds, with remaining
maturities of one year or less, and valued at least equal to 102% of
the maximum amount of a Fund's net assets that could be invested in
such repurchase agreements. The order will not limit the maturity of
the collateral and, with respect to the amount of the collateral, will
provide only that the repurchase agreements must be fully
collateralized within the meaning of rule 2a-7.
FILING DATE: The application was filed November 12, 1993 and amended on
January 19, 1994 and February 7, 1994.
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 March 14, 1994
and should be accompanied by proof of service on the 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
Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549.
Applicants: First Prairie Funds, 144 Glenn Curtiss Boulevard,
Uniondale, New York 11556-0144; The First National Bank of Chicago, One
First National Plaza, Chicago, Illinois 60670-0120.
FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Special Counsel, at
(202) 504-2259, or Barry Miller, Senior Special Counsel, at (202) 272-
3018 (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. The Funds are open-end, diversified management investment
companies. Each Fund is a money market fund that maintains a net asset
value of $1.00 per share for purchases and redemptions and, pursuant to
rule 2a-7 under the Act, uses the amortized cost method of valuing its
securities.
2. FNBC is the investment adviser for each of the Funds. FNBC, a
wholly-owned subsidiary of First Chicago Corporation, a registered bank
holding company, is a commercial bank offering a range of banking and
investment services. The Bank of New York acts as the custodian for
each of the Funds.
3. Cash Management invests in short-term money market obligations,
including repurchase agreements with respect to such securities with
registered or unregistered securities dealers or banks that have total
assets in excess of $1 billion. Money Market is divided into two
separate portfolios, the Money Market Series and the Government Series
(each of which is referred to as a ``Fund''). The Money Market Series
invests in short-term money market obligations, including repurchase
agreements with banks or primary government securities dealers
reporting to the Federal Reserve Bank of New York. The Government
Series invests only in short-term securities issued or guaranteed as to
principal and interest by the U.S. Government, and repurchase
agreements with respect to such securities with selected registered or
unregistered securities dealers or banks that have total assets in
excess of $1 billion. Treasury Cash Management invests at least 65% of
the value of its net assets in U.S. Treasury securities and repurchase
agreements in respect thereof and the remainder of its net assets in
other securities guaranteed as to principal and interest by the U.S.
Government and repurchase agreements in respect thereof with registered
or unregistered securities dealers or banks that have total assets in
excess of $1 billion.
4. Each Fund's shares are purchased primarily by clients of FNBC
and its affiliates, including qualified custody, agency, and trust
accounts, through their accounts with FNBC and its affiliates. Each
Fund's shares may be purchased through automatic investment
transactions. In these transactions, FNBC, as agent, follows the
standing instructions of such clients and automatically invests excess
cash balances in the clients' accounts in shares of one or more of the
Funds.\1\ Currently, these ``sweep'' transactions are effected
automatically by computer each Fund business day as the next determined
net asset value. The machine processing required to tabulate the day's
transactions in such clients' accounts and other shareholder accounts,
however, is completed later in the day (normally no earlier than 11
p.m., New York time) when the daily processing for FNBC's accounting
system is completed (the ``Completion Time''). Therefore, total assets
to be invested in each Fund through the ``sweep'' program each day are
not known until that evening and are invested in each Fund at the
respective net asset values determined on the following day.
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\1\In accordance with the standing instructions of FNBC's
clients, the computer program also provides for the automatic
redemption of Fund shares held in an account as of the next
determined net asset value if the cash balance in the account is
less than the minimum balance specified by the client.
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5. The current operation of the ``sweep'' program makes the Funds
materially less attractive to FNBC's clients because they lose a day's
income on funds invested through the program and, for ``sweeps''
accomplished on a Friday, lose a weekend's income.
6. To correct this problem, Money Market and FNBC (the ``original
Applicants'') applied for and received an order (the ``Order'') of the
SEC under section 6(c) and 17(b) of the Act on January 26, 1993,
exempting them from section 17(a) of the Act to permit Money Market to
enter into repurchase agreements with FNBC or an affiliate subject to
certain conditions.\2\ To date, however, Money Market has not entered
into repurchase agreements with FNBC and therefore is not relying on
the Order. The application seeks to amend the Order to: (1) Add
additional Funds with investment policies and procedures similar to
those of Money Market as applicants; and (2) amend condition seven to
the Order.\3\
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\2\Investment Company Act Release Nos. 19185 (Dec. 29, 1992)
(notice) and 19240 (Jan. 26, 1993) (order).
\3\The application restates the prior application in its
entirety except for changes relating to the requested amendments and
minor wording changes.
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7. Condition seven to the Order provides that, during the operation
of the ``sweep'' program, collateral maintained in a subcustodian
account in the name of each Fund shall be ``comprised only of U.S.
Treasury Bills, Notes or Bonds, with remaining maturities of one year
or less, and valued at least equal to 102% of the Maximum Purchase
Amount'' (emphasis added). The ``Maximum Purchase Amount'' is the
amount of a Fund's net assets that may be invested pursuant to the
Order. This amount is based on a percentage that may change from time
to time, subject to the agreement of the applicants, but may not exceed
15% of a Fund's net assets.
8. Applicants propose to amend condition seven to eliminate the
requirement that the securities comprising the collateral have
``remaining maturities of one year or less.'' Applicants believe that
the provisions of rule 2a-7 relating to remaining maturity are not
applicable to securities underlying fully collateralized repurchase
agreements.\4\ FNBC's experience is that the Funds will be able to
obtain a higher yield on repurchase agreements using collateral with
remaining maturities of greater than one year than otherwise would be
the case.
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\4\See Investment Company Act Release No. 18005 n.32 (Feb. 20,
1991).
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9. Applicants also propose to amend condition seven to eliminate
the requirement that the securities comprising the collateral be valued
at least equal to ``102% of the Maximum Purchase Amount.'' Applicants
believe that neither rule 2a-7 nor relevant regulatory pronouncements
require the collateral for the repurchase agreements to be valued at
102% of the Maximum Purchase Amount. Applicants propose to substitute
the requirement that the collateral be at least equal to the amount
(the ``Required Collateral Amount'') necessary to collateralize fully
(within the meaning of rule 2a-7) a repurchase agreement in an amount
equal to the Maximum Purchase Amount. Applicants believe that
maintaining additional collateral beyond that necessary to
collateralize fully a repurchase agreement reduces the relevant Fund's
yield on the repurchase agreement to the detriment of the Fund's
shareholders.
10. To permit FNBC, as each Fund's investment adviser, to invest
anticipated net assets attributable to the ``sweep'' program on the
same day that they are available for investment (despite the fact that
the exact amount thereof will not be known until after the time for
investment that day), FNBC or an affiliate proposes to enter into
overnight repurchase agreements with each Fund. Such assets would be
invested in shares of a Fund as of the time the Fund determined its net
asset value (the ``Pricing Time'') on the same day the sweep occurs.
11. Each Fund proposes to enter into a master repurchase agreement
with FNBC or one of its affiliates, which is substantially the same as
the industry standard master repurchase agreement promulgated by the
Public Securities Association, covering all repurchase agreement
transactions (the ``Master Repurchase Agreement'').
12. To facilitate the repurchase transaction where the exact amount
of the overnight repurchase agreement and, consequently, the required
collateral is not known until the following day, FNBC, at no cost to
the Funds, will maintain at all times in a segregated sub-custodian
account in the name of each Fund the Required Collateral Amount. Each
Fund will promptly notify FNBC of any increase or decrease in its net
asset value and FNBC will adjust the amount of collateral maintained in
the segregated account daily so that it at least equals the Required
Collateral Amount for each Fund. The relevant Fund will have a
perfected security interest in the repurchase agreement collateral held
in such account.
13. If the cash balances swept into a Fund equalled the Maximum
Purchase Amount, the required amount of collateral already would be
held in the Fund's segregated sub-custodian account with FNBC's Trust
Department and the Fund would have a perfected security interest in all
such collateral notwithstanding the fact that the actual amount of the
repurchase transaction would not be known until the computer records
were received the next morning. If such cash balances were less than
the Maximum Purchase Amount, the repurchase transaction would be over-
collateralized. If such cash balances swept exceeded the Maximum
Purchase Amount, the excess amount would remain uninvested. FNBC,
however, believes that its experience in operating the ``sweep''
program and its daily consultations with other departments should limit
the amount of funds being swept and thus potentially held uninvested.
14. FNBC's Trust Department will act as each Fund's sub-custodian
pursuant to a sub-custodian agreement approved by each Fund's Board of
Trustees, including a majority of the Trustees who are not '`interested
persons,'' as defined in the Act, of either FNBC or the Fund.\5\ Each
Fund's assets held by FNBC's Trust Department will be maintained in a
segregated custodial account established on its behalf in accordance
with the rules and standards of the Comptroller of the Currency and the
Act. FNBC's Trust Department would receive the eligible securities
transferred to it in its capacity as sub-custodian for each Fund and
hold them in a manner complying with the requirements of section 17(f)
of the Act. After the Completion Time that evening, for a particular
fund, the records maintained by FNBC for its clients' accounts and by
FNBC's Trust Department in its capacity as the Fund's sub-custodian
would show:
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\5\The sub-custodian account may be maintained with FNBC's Trust
Department or a nominee qualified to act as a custodian pursuant to
section 17(f) of the Act and references herein to FNBC's Trust
Department shall mean either entity.
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(i) For FNBC's client accounts, a cash entry for the amount of Fund
shares purchased or redeemed and a corresponding entry to the client
accounts for the number of Fund shares purchased or redeemed as of the
Pricing Time through operation of the computer ``sweep'' program; and
(ii) For the Fund's sub-custodian account, all purchase and sale
transactions and the net cash proceeds, if any, received by the Fund
through the operation of the ``sweep'' (or, conversely, the net
redemption proceeds paid or payable by the Fund if there were net
redemptions). In addition, the Fund's sub-custodian account would
reflect the specific amount in fact invested in the particular
transaction (including the ownership of the securities securing the
repurchase agreement). If the ``sweep'' had resulted in unanticipated
net redemptions for the Fund, the relevant sub-custodian account would
reflect this fact and show no ownership of any of such securities
transferred by FNBC or its affiliates to the account, since (contrary
to expectations) none of the Fund's assets had been used to purchase
the securities. To the extent that transferred securities exceeded the
Fund's assets that were available for investment (as shown by the
results of the day's computer processing), FNBC or the appropriate
affiliate would be shown to be owner of such securities.
15. After the Completion Time, FNBC would transmit to the Fund's
transfer agent records relating to these automatic investment
transactions. The transfer agent's records would show an entry to each
of the corresponding shareholder accounts for the number of Fund shares
automatically purchased or redeemed as of the Pricing Time through
operation of the ``sweep.''
16. Each Fund will purchase only securities in which it may invest
as described in its prospectus and statement of additional information
and as limited by rule 2a-7. The Master Repurchase Agreement into which
each Fund proposes to enter will be collateralized only by U.S.
Treasury Bills, Notes, and Bonds. The transactions will comply with the
guidelines set forth in Investment Company Act Release No. 13005
(February 2, 1983) and will be collateralized fully as that term is
defined in rule 2a-7. The Master Repurchase Agreement will be subject
to annual approval, with respect to each Fund, by the Fund's Board of
Trustees, including a majority of the Trustees who are not ``interested
persons'' (as defined in the Act) of the Fund or FNBC or its
affiliates.
17. The transactions would be ``repurchase agreements'' for
purposes of Chapter 11 of the United States Bankruptcy Code and the
Financial Institutions Reform, Recovery and Enforcement Act of 1989.
These statutes provide that, if the bankruptcy of the counterparty
occurs, the repurchase agreement can be liquidated without being
subject to the potential delay associated with the automatic stay or
similar provisions of these statutes. If the transactions were not
``repurchase agreements'' as defined under those statutes, the Fund
might encounter significant liquidity problems if a large percentage of
its assets were invested in repurchase agreements with a bankrupt
counterparty.
18. Cash Management, the Money Market Series, the Government
Series, and Treasury Cash Management currently invest approximately
33%, 33%, 25%, and 50%, respectively, of their net assets on an
overnight basis. Each Fund's average daily portfolio maturity
customarily is between 40 and 60 days. Applicants intend to limit the
Maximum Purchase Amount at a level that they believe should avoid
reducing average daily portfolio maturity and thus the yield for a
Fund.
19. FNBC will continue to solicit independent quotes from third
parties for the proposed ``sweep'' transactions, but to date FNBC has
been unable to find any unaffiliated entity willing to engage in such
transactions on a basis as favorable to the Funds as the proposed
arrangement with FNBC. The repurchase agreement counterpart will not
know until the next day the amount, if any, of such transactions. This
delay results because the daily processing for FNBC's accounting system
normally is completed well into the night of the day the order is
placed and the actual amount to be invested in the repurchase
transaction is not known and, thus, monies in respect thereof cannot be
transmitted until the next morning. Unaffiliated third parties will not
agree to operate in this ``look back'' manner with the Fund on a basis
as favorable to the Fund as the proposed arrangement with FNBC.
20. Before any repurchase agreements are entered into pursuant to
the exemption, the participating Fund or FNBC must obtain and document
competitive quotations from at least two other dealers with respect to
repurchase agreements that are comparable in terms of size, maturity,
and collateral, except that if quotations are unavailable from two such
dealers only one other competitive quotation is required. In addition,
the transactions for which quotations are sought will be conventional
overnight repurchase agreements in which the funds would be transferred
by the participating Fund on the same day that the transaction is
entered into, and then returned by the counterpart on the following
day. Before entering into a transaction pursuant to the exemption, a
determination will be required that the income to be earned from the
repurchase agreement is at least equal to that available from the other
dealers from which quotes were obtained. As set forth in the
application, applicants enter into repurchase agreements on an ongoing
basis and, therefore, believe they are capable of obtaining such
quotes.
Applicants' Legal Analysis
1. Section 17(a) of the Act, among other things, generally
prohibits certain entities affiliated with an registered investment
company, when acting as principal, from knowingly selling to or
purchasing from the investment company, any security. Among the
entities precluded from dealing as principal with a registered
investment company under section 17(a) are any affiliated person of the
investment company and any affiliated person of an affiliated person of
the investment company. Section 2(a)(3) of the Act defines the term
``affiliated person'' of an investment company to include any
investment adviser of such company. Therefore, FNBC, as each Fund's
investment adviser, and its affiliates are subject to the prohibitions
contained in section 17(a) with respect to the Fund.
2. Section 6(c) of the Act provides in relevant part that ``the
Commission, * * * by order upon application, may * * * exempt any
person, security, or transaction * * * from any provision or provisions
of [the Act] or of any rule or regulation thereunder, 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
purposes fairly intended by the policy and provisions of [the Act].''
3. Section 17(b) of the Act provides that ``notwithstanding
[section 17(a)], any person may file with the Commission an application
for an order exempting a proposed transaction * * * from one or more
provisions of that subsection. The Commission shall grant such
application and issue such order of exemption if evidence establishes
that * * * (1) 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; (2) the
proposed transaction is consistent with the policy of each registered
investment company concerned, as recited in its registration statement
and reports filed under [the Act]; and (3) the proposed transaction is
consistent with the general purposes of [the Act].''
4. Each Fund believes that the relief requested is appropriate and
in the public interest because it will permit the Fund to invest at a
favorable price net assets attributable to the ``sweep'' program on the
same day that such assets are available for investment. Applicants
believe that a more attractive ``sweep'' program will result in
increased assets for the Funds. A larger asset base for a Fund will
benefit all Fund shareholders by reducing the amount of Fund expenses
indirectly borne by each shareholder, thereby increasing investors'
returns.
5. FNBC and its affiliates are aware of the potential conflict of
interest inherent in the operation of the ``sweep'' program if the
proposed relief is granted. FNBC, therefore, has established procedures
and conditions to be followed by its employees and agents to prevent
any overreaching on the part of any person that could act to the
detriment of the Funds and to ensure that each transaction is effected
on a reasonable and fair basis.
6. A Fund's overnight position should not necessarily reduce its
yield. If the operation of the proposed ``sweep'' program shortens a
Fund's average daily portfolio maturity, the effect of such reduction
would be minimal because: (i) the Fund currently maintains a relatively
short average daily portfolio maturity; (ii) as FNBC develops more
experience operating the ``sweep'' program, FNBC will be able to manage
the maturity of that portion of the Fund's assets held outside the sub-
custodian account for the program so as to provide optimal liquidity
levels; and (iii) upon receipt of such assets currently, the Fund has
invested such assets in overnight or very short-term obligations in any
event, but such investment occurs one day later. Thus, applicant
believe that any effect on yield as a result of the proposed relief
would be negligible. In addition, operation pursuant to the independent
pricing mechanism set forth in condition 8 should provide yields from
``sweep'' investments that are no lower than similar non-sweep Fund
investments.
7. Based on the arguments set forth above, applicants believe that
the requested relief is necessary and 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.
Applicants also believe that the terms of the proposed transactions,
including the consideration to be paid or received, are reasonable and
fair and do not involve overreaching on the part of any person
concerned, that the proposed transactions are consistent with the
policy of each Fund, as set forth in the Fund's registration statement
and reports filed under the Act, and that the proposed transactions are
consistent with the general purposes of the Act.
Applicants' Conditions
Applicants agree that the order of the Commission granting the
requested relief shall be subject to the following conditions:
1. No. FNBC or affiliate ``sweep'' account client will be permitted
to affect a transaction for a Fund after the sweep has occurred and the
Fund's net assets value has been computed for that day.
2. The legal or compliance department of, and internal and outside
auditors for, FNBC or its affiliates will prepare guidelines for FNBC
and affiliate personnel to ensure that the transactions described
herein comply with the conditions set forth herein and that the
integrity of the program is maintained. Each Fund's independent public
accountants will verify assets held in each sub-custodian account in
accordance with rule 17f-2 under the Act. The legal or compliance
department and auditors will periodically monitor the activities of
FNBC and its affiliates in connection with the operation of the
``sweep'' program to ensure that the conditions set forth in the
application are adhered to.
3. The terms of the relief will be disclosed fully in each Fund's
prospectus and statement of additional information. A schedule of all
transactions with FNBC and its affiliates will be filed with each semi-
annual report filed by a Fund with the Commission pursuant to sections
30(a) and 30(b)(1) of the Act. FNBC will provide each Fund's Board of
Trustees with a full report of the transactions under the ``sweep''
program, as described herein, no less frequently than quarterly. FNBC
also will provide each Fund's Board of Trustees with a statement that,
as the Fund's investment adviser, it determined the principal
transactions to be necessary and appropriate under the circumstances.
4. The Funds and FNBC will maintain such records with respect to
those transactions conducted pursuant to the exemption as may be
necessary to confirm compliance with the conditions to the requested
relief. In this regard, each Fund will maintain an itemized daily
record of repurchase agreement transactions entered into pursuant to
the exemption, showing for each transaction: that it has entered into
the transaction; the entity with which it has entered into the
transaction; the purchase and repurchase prices; the type and amount of
collateral; the date fixed for termination of the transaction; and the
time and date of the transaction. For each transaction, such records
also shall document the quotations received from other dealers in
accordance with condition no. 8, including: The names of the dealers;
the prices quoted; and the times and dates the quotations were
received. The records required by this condition will be maintained and
preserved in the same manner as records required under rule 31a-
1(b)(1).
5. The Maximum Purchase Amount will be the percentage of each
Fund's net assets upon which the applicants from time to time may
agree, which percentage may fluctuate but shall not exceed 15%. As to a
particular Fund on a particular day, the amount invested pursuant to
the exemption will not exceed the amount swept into such Fund on such
day.
6. All records pertaining to the sweep program will be preserved
for a period of not less than six years, the first two years in an
easily accessible place, from the end of the fiscal year in which any
sweep transaction occurred.
7. In connection with overnight repurchase agreement transactions
pursuant to the Master Repurchase Agreement, FNBC will maintain at all
times during operation of the ``sweep'' program in a segregated sub-
custodian account in the name of each Fund collateral comprised only of
U.S. Treasury Bills, Notes or Bonds valued at least equal to the
Required Collateral Amount. In addition, FNBC or its affiliates will
transfer such collateral through the book entry system of the Federal
Reserve and, in connection therewith, the Fund's sub-custodian account
with FNBC's Trust Department will be designated by Fedwire as the
recipient of such securities and FNBC's internal records and written
confirmations will indicate that the collateral is being held on behalf
and in such Fund's name. The relevant Fund thereby will acquire a
security interest in the collateral.
8. Before any transaction may be conducted pursuant to the
exemption, the participating Fund or FNBC must obtain such information
as it deems necessary to determine that the price test set forth below
has been satisfied. Before any repurchase agreements are entered into
pursuant to the exemption, the participating Fund or FNBC must obtain
and document competitive quotations from at least two other dealers
with respect to repurchase agreements comparable to the type of
repurchase agreement involved (including size, which would be at least
equal to the Maximum Purchase Amount, maturity and collateral), except
that if quotations are unavailable from two such dealers only one other
competitive quotation is required. In addition, the transactions for
which quotations are sought will be conventional overnight repurchase
agreements in which the funds would be transferred by the participating
Fund on the same day that the transaction is entered into, and then
returned by the counterparty on the following day. Before entering into
a transaction pursuant to the exemption, a determination will be
required in each instance, based upon the information available to the
participating Fund and FNBC, that the income to be earned from the
repurchase agreement is at least equal to that available from the other
dealers from which quotes were obtained.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4142 Filed 2-23-94; 8:45 am]
BILLING CODE 8010-01-M