[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13738]


[[Page Unknown]]

[Federal Register: June 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20325; 812-8494]

 

Lehman Brothers Institutional Funds Group Trust, et al.; 
Application

May 31, 1994.
agency: Securities and Exchange Commission (``SEC'').

action: Notice of application for exemption under the Investment 
Company Act of 1940 (``Act'').

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applicants: Lehman Brothers Institutional Funds Group Trust and Lehman 
Brothers Funds, including the series thereof, on behalf of themselves 
and any other investment companies existing or created in the future 
for which the Advisers (as defined below) or persons controlling, 
controlled by, or under common control with the Advisers serves or may 
serve in the future as investment adviser (the ``Funds''); and Lehman 
Brother Global Asset Management, Ltd. and Lehman Brothers Global Asset 
Management Inc. (the ``Advisers'').\1\
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    \1\All existing investment companies that presently intend to 
rely on the requested order have been named as applicants. Other 
existing companies will be covered by the order if they later 
propose to engage in the proposed transactions, as described in the 
application.

relevant act sections: Order requested under sections 6(c) and 17(b) to 
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exempt the Funds from sections 17(a) and 17(e)(2).

summary of applications: Applicants seek an order to permit the Funds 
to engage in certain transactions in U.S. government securities, 
repurchase agreements, tax-exempt obligations, and taxable obligations 
with banks (and their affiliated persons) that are remote affiliates of 
the Funds.

filing date: The application was filed on July 19, 1993, and amended on 
January 14, 1994, April 13, 1994, and May 31, 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 June 27, 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 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, NW., Washington, DC 20549. 
Lehman Brothers Institutional Funds Group Trust, one Exchange Place, 
Boston, Massachusetts 02109. Lehman Brothers Global Asset Management, 
Ltd., Two Broadgate, London EC2M 7HA, England. Lehman Brothers Funds 
and Lehman Brothers Global Asset Management Inc., 200 Vesey Street, New 
York, New York 10285.

for further information contact: James E. Anderson, Staff Attorney, at 
(202) 942-0573, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the Funds is a registered open-end management investment 
company that is authorized to issue shares in series. The existing 
series of the Funds are money market funds. One of the Funds and the 
series thereof are designed exclusively for institutional investors, 
particularly banks seeking investment of assets on behalf of fiduciary 
or trust accounts. Lehman Brothers Global Asset Management Inc. serves 
as investment adviser to the Funds.
    2. The number of outstanding shares of each Fund can fluctuate 
significantly, even on a daily basis, particularly for those sold to 
institutions. From time to time, the number of shares held of record by 
a bank in a master account for its agency or fiduciary accounts could 
exceed 5% of a Fund's outstanding voting shares. In that case, the Fund 
would become an Affiliated person of the bank and the prohibitions of 
section 17 would apply.
    3. Applicants seek an exemption from sections 17(a) and 17(e)(1) to 
permit the Funds to engage in certain transactions with ``Affiliated 
Banks.'' For purposes of this application, ``Affiliated Banks'' are 
banks, bank holding companies, or affiliated persons thereof that are 
affiliated persons of the Funds solely because they: (a) Directly or 
indirectly own, control, or hold with the power to vote 5% of the 
outstanding voting securities of any of the Funds; or (b) act as 
investment adviser to any of the Funds.
    4. The exemption from section 17(a) would permit the Funds to 
purchase both long and short-term U.S. government securities from 
Affiliated Banks that act as primary dealers in these securities.\2\ 
The exemption from section 17(a) also would permit a Fund to enter into 
repurchase agreement transactions with, or purchase short-term 
obligations issued by, an Affiliated Bank, provided that all such 
securities meet the credit standards set forth in condition 1 below 
(``Qualified Securities''). The exemption from section 17(e)(1) would 
permit an Affiliated Bank, acting as an agent for any Fund in 
connection with the purchase or sale of U.S. government securities or 
tax-exempt obligations, to accept compensation that would be permitted 
a broker under the limitations of section 17(e)(2).
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    \2\As used in the application, the term U.S. government 
securities are securities that are guaranteed as to payment of 
principal and interest by the U.S. government or its agencies or 
instrumentalities.
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    5. Primary dealers in U.S. government securities are dealers that 
are permitted to deal directly with the Federal Reserve Bank of New 
York. In purchasing and selling U.S. government securities, it is 
critical that the Funds obtain prompt execution of their transactions 
at a competitive cost. Each primary dealer is a major factor in the 
U.S. government securities market. If the Fund cannot trade with one or 
more primary dealers, the Funds may be deprived of the most favorable 
price and execution as against other dealers.
    6. Applicants believe that the elimination of even a few major 
banks from the universe of money market instrument issuers and dealers 
with whom the Funds may do business would have a noticeable impact on 
portfolio management flexibility. Each issuer of Qualified Securities 
contributes to the depth and liquidity of the market for short-term 
obligations.
    7. Commercial banks are important factors in the municipal bond 
dealer community, particularly in the general obligation area. The 
municipal bond market is more disparate, much less structured, and 
considerably less liquid than the market for money market instruments. 
As a result, much greater reliance is placed on the dealer community to 
keep portfolio managers apprised of, and to supply the Funds with, 
suitable issues of municipal securities, as well as to assist in the 
disposition of portfolio securities.
    8. The Funds' board of directors, trustees, or managing general 
partners will be responsible for adopting and monitoring appropriate 
methods to ensure that the price and terms of transactions in U.S. 
government securities and Qualified Securities will be reasonable and 
fair to participating Funds. In evaluating the fairness and 
reasonableness of transactions in U.S. government securities, a Fund or 
its investment adviser will obtain and document competitive quotations 
from at least one other dealer. In evaluating the fairness and 
reasonableness of transactions in Qualified Securities, applicants may 
use a matrix pricing system to assess the price offered by the 
Affiliated Bank relative to market transactions involving comparable 
securities.\3\
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    \3\A matrix pricing system uses market data from transactions 
involving securities having comparable ratings, credit quality, 
maturity, collateral, amortization and other relevant terms to 
evaluate the price of a security.
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Applicants' Analysis

    1. Section 2(a)(3) defines an ``affiliated person'' of another 
person as, among other persons: (a) Any person directly or indirectly 
owning, controlling, or holding with the power to vote, 5% or more of 
the outstanding voting securities of such other person; (b) any person 
5% or more of whose outstanding voting securities are directly or 
indirectly owned, controlled, or held with power to vote, by such other 
person; (c) any person directly or indirectly controlling, controlled 
by, or under common control with, such other person; (d) any 
officer,director, partner, copartner, or employee of such other person; 
and (e) if such other person is an investment company, any investment 
adviser thereof or any member of an advisory board thereof.
    2. By virtue of section 2(a)(3), if a bank owns, controls, or holds 
with the power to vote more than 5% of the outstanding shares of a 
Fund, that bank is an affiliated person of the Fund. Any person who is 
an affiliated person of a registered investment company also may be 
deemed to be an affiliated person of an affiliated person of each other 
registered investment company which has a common investment adviser, or 
investment advisers which are affiliated persons of each other, or 
common directors or common officers, or a combination of the foregoing 
because such investment companies may be deemed to be under common 
control. Accordingly, a bank, bank holding company, or affiliated 
person thereof that is deemed to be an affiliated person of one Fund 
may be deemed to be an affiliated person of an affiliated person of all 
the other Funds.
    3. Section 17(a) provides, in relevant part, that it is unlawful 
for any affiliated person of a registered investment company, or any 
affiliated person of such person, acting as principal, knowingly to 
sell any security or other property to such registered investment 
company or to purchase from such registered investment company any 
security or other property. The operation of these provisions could 
prohibit all of the Funds from engaging in a variety of transactions 
with a wide range of banks, bank holding companies, and affiliated 
persons thereof.
    4. Applicants believe that a bank, bank holding company, or 
affiliated person thereof that is affiliated with a Fund solely because 
it owns, holds, or controls 5% or more of the Fund's outstanding voting 
securities and/or acts as investment adviser to a different Fund, 
although an ``affiliated person'' of the Fund, or an ``affiliated 
person of an affiliated person'' of the Fund, within the meaning of 
section 2(a)(3) of the Act, is unlikely to possess the power to 
influence improperly the Fund with respect to purchases or sales by the 
Fund of securities from or to an Affiliated Bank. As a condition to the 
order, no Fund will engage in transactions with any Affiliated Bank 
which serves as investment adviser or sponsor to that Fund, controls or 
is under common control with the investment adviser or sponsor, or 
otherwise controls such Fund within the meaning of section 2(a)(9). 
Applicants believe that permitting transactions only with remote 
affiliates precludes the possibility of any overreaching by an 
Affiliated Bank and thus eliminates the concerns that section 17(a) was 
designed to address.
    5. Section 17(e)(1) prohibits an affiliated person of a registered 
investment company, or an affiliated person thereof, from accepting any 
compensation for acting as an agent for the investment company unless 
it is in the course of such person's business as an underwriter or 
broker. Section 17(e)(2) provides that an affiliated person of a 
registered investment company, or an affiliated person thereof, acting 
as a broker or underwriter for the registered investment company may 
accept a limited commission or fee for conducting such transactions. 
Because banks are specifically excluded from the definition of broker 
in section 2(a)(6), however, they are unable to accept compensation 
under section 17(e) for acting as an agent for an affiliated investment 
company.
    6. Applicants believe that the execution of transactions through 
Affiliated Banks as agents is appropriate for a number of reasons. 
First, any such transactions will comply with section 17(e)(2), 
assuring that the compensation received is fair and reasonable. Second, 
granting the relief merely would put an Affiliated Bank in the same 
position as any other affiliated person of a Fund that happened to meet 
the definition of broker. Finally, the use of Affiliated Banks promotes 
investment flexibility by expanding the range of entities available for 
execution of securities transactions.

Applicants' Conditions

    1. The Funds will engage in transactions with Affiliated Banks only 
in U.S. government securities or Qualified Securities, For purposes 
hereof, the term Qualified Securities is defined to mean:
    (a) For obligations which are ``short-term'' securities within the 
meaning of rule 2a-7 under the Act, each such security shall constitute 
an ``Eligible Security'' within the meaning of rule 2a-7; provided, 
that in the case of Unrated Securities (as defined in rule 2a-
7(a)(20)), in addition to the requirements of rule 2a-7 applicable to 
such Unrated Securities, all determinations with respect to 
comparability of such securities to rated securities are also reviewed 
and approved at least quarterly by a majority of a Fund's board of 
directors/ trustees who are not interested persons of the Fund.
    (b) For obligations which are ``long-term'' securities within the 
meaning of rule 2a-7, each such security (or another long-term security 
of the same issuer having comparable priority and security to such 
obligation) shall have been rated by a nationally-recognized 
statistical rating organization (``NRSRO'') in one of the four highest 
rating categories for long-term obligations; or, if the security and 
issuer have not been rated by any NRSRO, are determined by a Fund's 
investment adviser to be comparable in credit quality to a security 
carrying a long-term rating in one of such four highest rating 
categories of a NRSRO, and such determination is reviewed and approved 
at least quarterly by a majority of such Fund's board of directors/ 
trustees who are not interested persons of the Fund. In addition, if a 
Fund proposes to invest in a security that at the time of issuance was 
a long-term security but that has a remaining maturity of 397 calendar 
days or less, then the issuer of such security shall have received a 
rating from a NRSRO, with respect to a class of short-term securities 
that is comparable in priority and security to the long-term security, 
in one of the two highest rating categories. If the issuer has not 
received such a rating with regard to comparable short-term securities, 
then a long-term security with a remaining maturity of less than 397 
calendar days is not eligible unless it has a long-term rating from a 
NRSRO within the two highest rating categories.
    (c) Any repurchase agreements will be ``collateralized fully'' 
within the meaning of rule 2a-7.
    (d) For obligations subject to unconditional, irrevocable credit 
enhancement (including, without limitation, a guarantee, letter of 
credit, or put), the Funds may rely upon the NRSRO ratings of the 
provider of such credit enhancement to determine whether the obligation 
satisfies the requirements of subparagraphs (a) and (b) above. Such 
obligations shall be treated as rated securities to the extent that the 
credit enhancement is of comparable priority and security to the rated 
obligations of the provider of such credit enhancement.
    2. No Fund will engage in transactions with an Affiliated Bank that 
exercises a controlling influence over that Fund (and ``controlling 
influence'' shall be deemed to include, but is not limited to, directly 
or indirectly, owning, controlling or holding more than 25% of the 
outstanding voting securities of the Fund). Further, no Fund will 
engage in a transaction in Qualified Securities with an Affiliated Bank 
that is an investment adviser or sponsor to that Fund, or an Affiliated 
Bank controlling, controlled by, or under common control with such 
investment adviser or sponsor. No Fund will purchase obligations of any 
Affiliated Bank (other than repurchase agreements) if, as a result, 
more than 5% of that Fund's total assets would be invested in 
obligations of that Affiliated Bank.
    3. Each Fund: (a) Will maintain and preserve permanently in an 
easily accessible place a written copy of the procedures (and any 
modifications thereto) described in condition 8; and (b) will maintain 
and preserve for a period of not less than six years from the end of 
the fiscal year in which any transactions occurred, the first two years 
in an easily accessible place, a written record of each such 
transaction setting forth a description of the security purchased or 
sold, the identity of the person on the other side of the transaction, 
the terms of the purchase or sale transaction, and the information or 
material upon which the determinations described below were made.
    4. The security to be purchased or sold by a Fund will be 
consistent with the investment objectives and policies of that Fund as 
recited in the registration statement relating to the Fund, and will be 
consistent with the interests of the Fund and its shareholders. 
Further, the security to be purchased or sold by that Fund must be 
comparable in terms of quality, yield, and maturity to other similar 
securities that are appropriate for the Fund and that are being 
purchased or sold during a comparable period of time.
    5. The terms of the transactions will be reasonable and fair to the 
shareholders of a Fund and will not involve overreaching of the Fund or 
its shareholders on the part of any person concerned. In considering 
whether the price to be paid or received for the security is reasonable 
and fair, the price of the security will be analyzed with respect to 
comparable transactions involving similar securities being purchased or 
sold during a comparable period of time. In making this analysis, the 
board of directors/trustees may rely on a matrix pricing system which 
they believe properly assists them in determining the value of the 
securities pursuant to section 2(a)(41)(ii) of the Act.
    6. Before any transaction in U.S. government securities may be 
conducted pursuant to the exemption, the Fund involved or its 
investment adviser must obtain such information as they deem necessary 
to determine that the price to be paid or received for the security is 
at least as favorable as that from other sources. The Fund or its 
investment adviser must obtain and document competitive quotations from 
at least two other dealers with respect to the specific proposed U.S. 
government securities transaction, except that if quotations are 
unavailable from two such dealers, only one other competitive quotation 
is required. With respect to prospective purchases of U.S. government 
securities, these dealers must be those who have securities of the 
categories and the type desired in their inventories and who are in a 
position to quote favorable prices with respect thereto. With respect 
to the prospective disposition of U.S. government securities, these 
dealers must be those who, in the experience of the Fund and its 
investment adviser, are in a position to quote favorable prices.
    7. The commission, fee spread, or other remuneration to be received 
by the Affiliated Bank as dealer will be reasonable and fair compared 
to the commission, fee, spread, or other remuneration received by other 
brokers or dealers in connection with comparable transactions involving 
similar securities being purchased or sold during a comparable period 
of time but in no event will such fee, commission, spread or other 
remuneration exceed that which is stated in section 17(e)(2) of the 
Act.
    8. The board of directors/trustees of each of the Funds: (a) Will 
adopt procedures, pursuant to which transactions may be effected for 
the Funds, which are reasonably designed to provide that the conditions 
in the foregoing paragraphs and the requirements of Investment Company 
Act Release No. 13005 (Feb. 2, 1983) have been compiled with; (b) will 
make and approve such changes as deemed necessary; and (c) will 
determine no less frequently than quarterly that such transactions made 
during the preceding quarter were effected in compliance with such 
procedures. These procedures will also be approved by a majority of the 
non-interested members of each board of directors/trustees. The 
investment adviser to each Fund will implement these procedures and 
make decisions necessary to meet these conditions, subject to the 
direction and control of the board of directors/trustees of the 
relevant Fund.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13738 Filed 6-6-94; 8:45 am]
BILLING CODE 8010-01-M