[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