[Federal Register Volume 59, Number 99 (Tuesday, May 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12571]


[[Page Unknown]]

[Federal Register: May 24, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20306; File No. 812-8732]

 

Applications, Hearings; Determinations, etc. 231 Funds

May 17, 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: The 231 Funds (the ``Fund''), and Continental Bank N.A. 
(the ``Adviser'').

RELEVANT ACT SECTIONS: Section 17(d) and rule 17d-1 thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to permit any of the 
Fund's existing and future money market series, and any other series 
that holds itself out as a money market fund and for which the Adviser, 
or any person directly or indirectly controlling, controlled by, or 
under common control with the Adviser, serves as investment adviser 
(each a ``Portfolio''), and the investment adviser of such Portfolio, 
jointly to enter into master repurchase agreements with non-affiliated 
financial institutions.

FILING DATE: The application was filed on December 17, 1993, and 
amended on March 29, 1994, and May 12, 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 the 
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 June 13, 1994, 
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 Fifth Street NW., Washington, DC 20549. 
Applicants: the Fund, 125 West 55th Street, New York, New York 10019; 
the Adviser, 231 South LaSalle Street, Chicago, Illinois 60697.

FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 942-0581, or C. David Messman, 
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. The Fund is a registered investment company that currently 
offers three money market series: Prime Fund, U.s. Government 
Securities Fund, and Treasury Fund. Each series may offer up to three 
classes of shares.\1\ The Adviser is the investment adviser of the 
Fund, and serves as custodian of the Fund's assets. Fund shares are 
distributed by The 231 Broker-Dealer Services, Inc. (the 
``Distributor''), and in the past were distributed by Concord Financial 
Group, Inc., a wholly-owned subsidiary of Concord Holding Corporation, 
the parent of the Distributor.
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    \1\Emerald Funds, Investment Company Act Release Nos. 20032 
(Jan. 24, 1994) (notice) and 20086 (Feb. 22, 1994) (order).
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    2. Applicants request that the order of exemption permit the 
Adviser, on behalf of each of the Portfolios it advisers, to enter into 
repurchase transactions where, as further described below, the Adviser 
in certain circumstances would co-invest with the Portfolio engaging in 
the transaction. No Portfolio would jointly enter into a repurchase 
agreement with any other Portfolio.
    3. An order to purchase Portfolio shares must be received by 
Supervised Service Company, Inc., the transfer agent, prior to the 
determination of the net asset value of the Portfolio (the 
``Determination Time'') to be executed on a given day, except that 
purchase orders effected through the Adviser's computer system may be 
received by the Adviser, in its capacity as custodian, as of the 
Determination Time. Purchase orders received after the Determination 
Time will be executed the next business day. The Determination Time, 
which is also when the net income of a Portfolio is determined and 
declared as a dividend to the shareholders of record, is 2:30 p.m. 
Eastern Time for the U.S. Government Securities Fund and the Treasury 
Fund, and 3 p.m. Eastern Time for the Prime Fund. Orders for the 
purchase of shares of the Portfolios are executed only when monies are 
available to the custodian by 4 p.m. Eastern Time for investment by the 
Portfolio.
    4. Purchasers of Portfolio shares include, without limitation, 
individuals, businesses, and customers of the Adviser or its affiliates 
that maintain customer-directed, non-discretionary accounts or 
discretionary accounts at the Adviser or its affiliates. The Adviser, 
in accordance with its customers' standing orders, automatically will 
``sweep'' excess cash balances from the customers' accounts by means of 
a computer system. The proceeds from the sweep program will be held by 
the Adviser, as custodian, and will be available immediately for 
investment in Portfolio shares. The total assets actually invested in 
the Portfolios through the sweep program, however, would not be known 
until the machine processing required to process the Adviser's 
accounting system is completed (the ``Completion Time''), which 
normally will not be later than 4 a.m. Eastern Time the following 
morning.
    5. If a Portfolio were to accept orders from the Adviser through 
the sweep program without special agreements for investment of the 
proceeds of these orders, dividends would be payable on shares 
purchased pursuant to such orders. The proceeds of such orders, 
however, would remain uninvested overnight, and dividends to other 
shareholders of the applicable Portfolio would be diluted. The 
requested relief would permit the Adviser to enter into repurchase 
transactions on behalf of the Portfolios at the applicable 
Determination Time in an amount which it considers, based upon its 
experience in administering its computer sweep program, to be 
sufficient to invest the net assets of the Portfolios attributable to 
the operation of the sweep program that day. The exact amount of the 
repurchase transaction would not be known until the Completion Time.
    6. The investment policies of the Portfolios permit each Portfolio 
to enter into repurchase agreement transactions with financial 
institutions such as banks and broker-dealers (each a ``Seller''). The 
Seller would not be the Adviser or any other affiliated person of the 
Portfolio, or any affiliated person of such an affiliated person. On 
the day the Seller and the Portfolio enter into a repurchase 
transaction, the applicable master agreement requires the Seller to 
sell to the Portfolio and on the same day transfer to the Portfolio or 
applicable custodian the particular eligible securities subject to the 
repurchase transaction against crediting the sale price of the 
securities to an account of the Seller in immediately available funds. 
The particular eligible securities would be identified in and defined 
by reference to that day's confirmation of the transaction. The 
Portfolios presently intend to use an agreement substantially similar 
to the Master Repurchase Agreement developed by the Public Securities 
Association. At the time of the Seller's transfer of securities to the 
Portfolio, the Seller is required to take action to perfect a security 
interest in favor of the Portfolio in the transferred securities. Each 
repurchase agreement transaction will be ``collateralized fully,'' as 
that term is defined in rule 2a-7.
    7. To the extent that the repurchase transaction was sufficient to 
make a Portfolio fully invested with respect to its sweep funds, the 
Portfolio's records would reflect the specific amount it had in fact 
invested in the transaction. If the repurchase transaction was not 
sufficient to make the Portfolio fully invested with respect to its 
sweep funds, the Portfolio's records would reflect its investment in 
the entire amount of the repurchase transaction, and the Adviser would 
retain an uninvested cash position with respect to funds in excess of 
the agreement. Any amounts invested by the Adviser that exceed amounts 
available for reinvestment will be deemed to have been purchased by the 
Adviser for its own account. Because of its experience and 
relationships with its customers, the Adviser normally has the ability 
to predict accurately the amount of the sweep funds and normally would 
enter into a transaction in an amount greater than its estimated 
proceeds from the sweep.
    8. Until the Completion Time, the Portfolio would have a perfected 
security interest in all of the transferred securities. However, only 
those specific securities described in the trade ticket confirming the 
amount of the transaction that the Portfolio in fact had entered into 
with its own assets, which would be prepared the next day by the 
Adviser, as custodian, would be subject to the transaction. The Adviser 
also would confirm the amount, if any, that the Adviser had purchased 
with its own funds.\2\ Apart from the different amounts of the 
repurchase transactions, the terms of the transactions and the 
confirmation of the allocation to the Portfolio and the Adviser would 
be identical.
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    \2\As a matter of practice, the Sellers issue confirmations for 
the repurchase transactions on the same day as the transaction. 
Therefore, the confirmation will not show the allocation of the 
repurchase transactions between the Adviser and the Portfolios. In 
order to create a written record of the dollar amounts allocated to 
the Portfolios and the specific securities purchased by the 
Portfolios, the Adviser would issue a trade ticket on the next 
business day, after the facts are known.
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    9. Ordinarily, each repurchase transaction effected with sweep 
funds would be secured by one issue of Treasury notes or other 
securities. To the extent that any repurchase transaction is secured by 
two or more issues of securities differing as to quality, maturity, or 
rate, each security will be apportioned between the Portfolio and the 
Adviser pro rata to the extent possible. Where such apportionment is 
not possible, securities will be apportioned in a manner that the 
Adviser believes will leave each party in a comparably secured 
position.

Applicants' Legal Analysis

    1. Section 17(d) makes it unlawful for any affiliated person of a 
registered investment company, acting as principal, to effect any 
transaction in which such registered investment company is a joint or a 
joint and several participant with such affiliated person in 
contravention of such rules and regulations as the SEC may prescribe. 
Rule 17d-1 provides that, in passing upon applications for an exemption 
from section 17(d), the SEC will consider whether the participation of 
the registered investment company in the joint enterprise, joint 
arrangement, or profit-sharing plan on the basis proposed is consistent 
with the provisions, policies and purposes of the Act, and the extent 
to which such participation is on a basis different from or less 
advantageous than that of the other participants.
    2. Applicants acknowledge that, to the extent that assets of the 
Adviser, as an affiliated person of a Portfolio, are used with those of 
a Portfolio to enter into repurchase transactions, they may be deemed 
to be participating in a joint arrangement or joint enterprise 
prohibited by the Act. Applicants contend that a Portfolio's 
participation in the proposed transactions will not be on a basis 
different from, or less advantageous than, that of the Adviser.
    3. Applicants contend that the proposed procedure for helping to 
ensure that the Portfolio is fully invested provides only benefits and 
no disadvantages to shareholders. The Portfolio's rights vis-a-vis 
Sellers under repurchase transactions will be protected by a standard 
industry agreement. In addition, the Portfolios will comply with the 
SEC's position concerning repurchase agreements set forth in Investment 
Company Act Release Nos. 13005 (Feb. 2, 1983) and with other existing 
and future positions taken by the SEC or its staff by rule, 
interpretive release, no-action letter, any release adopting any new 
rule, or any release adopting any amendments to any existing rule.
    4. Applicants submit that the proposed repurchase transactions are 
reasonable and fair to the Portfolios, do not involve overreaching on 
the part of any person, and are consistent with the provisions, 
policies, and purchases of the Act. Applicants state further that the 
requested order is appropriate in the public interest and consistent 
with the protection of investors.

    For the SEC, by the Division of Investment, Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12571 Filed 5-23-94; 8:45 am]
BILLING CODE 8010-01-M