[Federal Register Volume 60, Number 178 (Thursday, September 14, 1995)]
[Notices]
[Pages 47786-47789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22851]



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[[Page 47787]]


SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21342; 812-9568]


Alex, Brown Cash Reserve Fund, Inc., et al.; Notice of 
Application

September 8, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'').

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

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applicants: Alex, Brown Cash Reserve Fund, Inc.; Chestnut Street 
Exchange Fund; Municipal Fund for California Investors, Inc.; Municipal 
Fund for New York Investors, Inc.; Municipal Fund for Temporary 
Investment; The PNC Fund, Inc.; Portfolios for Diversified Investment 
Inc.; Provident Institutional Funds, Inc.; The RBB Fund, Inc.; 
Temporary Investment Fund, Inc.; Trust for Federal Securities; Warburg 
Pincus Cash Reserve Fund; Warburg Pincus New York Tax-Exempt Fund (the 
``Existing Funds''); and all future registered management investment 
companies (or series thereof) for which PNC Institutional Management 
Corporation (``PIMC''), PNC Bank, N.A. (``PNC Bank'') or any entity 
controlling, controlled by, or under common control with PIMC or PNC 
Bank serves as investment adviser (the ``Future Funds'' and together 
with the Existing Funds, the ``Funds'').

relevant act sections: Order requested under sections 6(c) and 17(b) of 
the Act to exempt applicants from the provisions of sections 17(a)(1), 
17(a)(2), and 17(e)(1) of the Act.

summary of application: Applicants seek an order to permit the Funds to 
engage in transactions with banks, bank holding companies, and 
affiliated persons thereof that are ``affiliated persons'' of a Fund 
solely because they own, hold, or control five percent or more of the 
outstanding voting securities of a Fund and/or act as investment 
adviser to a Fund. No Fund will engage, however, in such transactions 
with a bank, bank holding company, or an affiliated person thereof that 
controls, advises, or sponsors that Fund. The purchase and sale 
transactions would be limited to certain types of high quality debt 
securities and repurchase agreements meeting specified standards. The 
requested order would supersede a prior order.

filing dates: The application was filed on April 13, 1995, and amended 
on July 24, 1995. Applicants have agreed to file an additional 
amendment, the substance of which is incorporated herein, during the 
notice period.

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 October 3, 1995, 
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 5th Street, N.W., Washington, D.C. 
20549. Applicants, c/o PNC Bank, N.A., Land Title Building, Broad & 
Chestnut Streets, Philadelphia, Pennsylvania 19110.

FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0572, 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 Existing Funds are, and the Future Funds will be, registered 
management investment companies, PIMC or PNC Bank serve as investment 
adviser to each Existing Fund, and will serve as investment adviser to 
each Future Fund.
    2. In 1984 the SEC issued an order granting an exemption from 
sections 17(a)(1), 17(a)(2), and 17(e)(1) of the Act to permit the 
Funds to engage in certain transactions with Affiliated Banks (the 
``1984 Order'').\1\ ``Affiliated Banks'' for purposes of the 1984 Order 
and the order requested hereby are banks, bank holding companies, and 
affiliated persons thereof that are affiliated persons of a Fund solely 
because they directly or indirectly own, control, or hold five percent 
or more of the outstanding voting securities of a Fund, and/or act as 
investment adviser to a Fund.

    \1\ The Arch Fund, Inc., Investment Company Act Release Nos. 
14016 (June 27, 1984) (notice) and 14064 (July 25, 1984) (order).
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    3. The 1984 Order permits the applicant funds to engage in 
transactions with Affiliated Banks involving the following instruments: 
(a) Money market instruments of an Affiliated Bank that is one of the 
fifty largest United States banks (measured by deposits); (b) 
repurchase agreements with no more than twelve Affiliated Banks that 
are among the fifty largest United States banks (measured by deposits); 
and (c) tax-exempt obligations (transactions with Affiliated Banks 
covered by the terms of the 1984 Order are hereinafter referred to as 
the ``Covered Transactions''). The 1984 Order also permits an 
Affiliated Bank to accept compensation from the applicant funds, 
subject to the limitations of section 17(e)(2) of the Act, if such bank 
acts as agent for one of the funds in a Covered Transaction.
    4. Applicants now request an order that would supersede the 1984 
Order and permit the Funds to engage in transactions with Affiliated 
Banks involving the following ``Qualified Securities:'' (a) Money 
market instruments and other taxable obligations issued by, or 
purchased from or sold to an Affiliated Bank; (b) tax-exempt 
obligations purchased from or sold to an Affiliated Bank; (c) U.S. 
government securities from Affiliated Banks that are primary dealers in 
these securities (``Affiliated Dealers'') and (d) repurchase 
agreements.
    5. In addition, all Qualified Securities will meet the following 
credit standards:
    a. For obligations that have a remaining maturity of 397 days or 
less, 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 the comparability of such securities to 
rated securities are also reviewed and approved at least quarterly by a 
majority of the Fund's directors who are not interested persons of the 
Fund.
    b. For obligations that have a remaining maturity of more than 397 
days, 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 an NRSRO, are determined by the 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 the Fund's directors who are not interested persons of the 
Fund.

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    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 paragraphs (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.
    6. Applicants also request relief to permit an Affiliated Bank to 
accept compensation within the limitations of section 17(e)(2) of the 
Act where it acts as agent for any Fund in connection with the purchase 
or sale of Qualified Securities.

Applicants' Legal Analysis

    1. Sections 17(a)(1) and 17(a)(2) of the Act prohibit affiliated 
persons of the Funds, or affiliated persons of such affiliated persons, 
acting as principal, knowingly to sell or purchase any securities to or 
from the Funds. Sections 2(a)(3)(A), (B), and (C) of the Act define an 
``affiliated person'' of another person as, respectively: (a) Any 
person directly or indirectly owning, controlling, or holding with 
power to vote, five percent or more of the outstanding voting 
securities of such other person; (b) any person five percent or more of 
whose outstanding voting securities are directly or indirectly owned, 
controlled, or held with power to vote, by such other person; and (c) 
any person directly or indirectly controlling, controlled by or under 
common control with, such other person.
    2. By virtue of section 2(a)(3)(A), if a bank owns, controls or 
holds with power to vote five percent or more of the outstanding voting 
shares of one of the Funds, that bank could be considered an affiliated 
person of that Fund. Furthermore, any person who is an affiliated 
person of a registered investment company also may be deemed to be 
affiliated with each other registered investment company which has a 
common investment adviser, or investment advisers which are affiliated 
persons of each other, or common directors of 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 Bank in respect of one Fund by virtue of its ownership of 
such Fund's shares may be deemed to be affiliated with all the Funds. 
The result of the operation of these provisions is to prohibit all of 
the Funds from engaging in any principal transaction in securities, 
including repurchase agreements and U.S. government securities, with a 
wide range of banks, bank holding companies, and affiliates thereof.
    3. If an Affiliated Bank is also a primary dealer or an affiliated 
person of a primary dealer, the dealer then becomes an Affiliated 
Dealer. In addition, sections 2(a)(3)(B) and (C) cause a primary dealer 
which is a subsidiary of an Affiliated Bank, or which is controlled by 
the same holding company as an Affiliated Bank (or otherwise under 
common control with the Affiliated Bank), to be an affiliated person of 
the Affiliated Bank. The primary dealer then is an affiliated person of 
an affiliated person of the Funds.
    4. The Funds believe the applicability of sections 17(a)(1) and 
17(a)(2) to transactions between the Funds and Affiliated Banks in 
Qualified Securities unreasonably reduces the range of available 
investment alternatives. The inability to effect transactions in 
Qualified Securities With Affiliated Banks unduly impairs an investment 
adviser's flexibility in portfolio management, and deprives the Funds 
of the ability to purchase and sell otherwise proper portfolio 
securities.
    5. Applicants state that the Funds will continue to apply existing 
internal control procedures that are designed to monitor securities 
transactions with Affiliated Banks by placing primary responsibility 
for the reasonableness and fairness of those transactions on the Funds' 
board of directors or trustees, or other governing bodies (``Governing 
Boards''). In addition to existing controls, applicants state that they 
will impose stringent credit quality requirements on the securities 
that a Fund may purchase from an Affiliated Bank. By limiting 
transactions with Affiliated Banks to certain Qualified Securities, 
applicants believe that focus is placed on the merits of a particular 
investment and that the Funds and their advisers will be subjected to a 
disciplined determination regarding whether a particular transaction is 
appropriate for a Fund. Finally, applicants believe that because 
Qualified Securities will be liquid, high-quality securities, an 
Affiliated Bank will be unable to exercise any improper influence 
without detection by the Funds' Governing Boards.
    6. Applicants state that no fund will engage in transactions with 
an Affiliated Bank that serves as investment adviser (including sub-
adviser) or sponsor to such Fund. Moreover, no Fund will engage in 
transactions in Qualified Securities with any Affiliated Bank that 
controls such Fund within the meaning of section 2(a)(9) of the Act.
    7. PIMC and PNC Bank represent that there is no express or implied 
understanding between PIMC and PNC Bank and any bank, bank holding 
company or affiliated person thereof that is (or may become) an 
Affiliated Bank of a Fund that applicants will cause any of the Funds 
to enter into purchase or sale transactions in Qualified Securities 
with such entity. Moreover, applicants represent that they will give no 
preference to any Affiliated Bank in effecting purchase or sale 
transactions between the Funds and an Affiliated Bank that involve 
Qualified Securities issued by or purchased from or sold to such 
Affiliated Bank or because the customers of such bank purchase shares 
of any of the funds.
    8. Section 17(e)(1) of the Act prohibits any affiliated person of a 
registered investment company, or any affiliated person of such person, 
when acting as agent from accepting from any source any compensation 
(other than a regular salary or wages from such registered company) for 
the purchase or sale of any property to or for such registered company, 
except in the course of such person's business as an underwriter or 
broker.
    9. Banks are specifically excluded from the definition of a broker 
in section 2(a)(6) of the Act. In addition, applicants state that it 
would be highly improbable for a bank to satisfy the definition of 
underwriter in section 2(a)(40) with respect to each securities 
transaction involving an investment company where the bank was asked to 
act as agent for the investment company. Thus, a bank that is an 
Affiliated Bank may be prohibited from accepting any consideration 
whatsoever in connection with a brokerage transaction where it acted as 
agent for the Fund. In addition, if an Affiliated Dealer is not a 
separate entity from the Affiliated Bank, and acts as agent for a Fund, 
section 17(e)(1) also may apply to prohibit an Affiliated Dealer from 
receiving compensation in U.S. government securities or municipal 
securities transactions.
    10. Applicants state that the transactions will comply with section 
17(e)(2).\2\ In addition, applicants state 

[[Page 47789]]
that the use of Affiliated Banks promotes investment flexibility by 
expanding the range of entities available for execution of securities 
transactions.

    \2\ Section 17(e)(2) permits an affiliated broker of a 
registered investment company to receive compensation in connection 
with the sale of securities to or from the investment company under 
certain circumstances.
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    11. Section 17(b) of the Act provides that the SEC may exempt a 
transaction from the prohibitions of section 17(a) if evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid, are reasonable and fair and do not involve 
overreaching on the part of any person concerned, and that the proposed 
transaction is consistent with the policy of the registered investment 
company concerned and with the general purposes of the Act.
    12. Section 6(c) of the Act provides that the SEC may conditionally 
or unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions, from any 
provisions of the Act, if and to the extent 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\

    \3\ Applicants seek relief under section 6(c) as well as section 
17(b) because section 17(b) could be interpreted as giving the SEC 
power to exempt only a single transaction from section 17(a), as 
opposed to a class of transactions. See Keystone Custodian Funds, 
Inc., 21 S.E.C. 295 (1945).
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    13. Applicants submit that the terms and conditions set forth 
herein are reasonable and fair and do not involve overreaching on the 
part of any person, that they are consistent with the policy of each of 
the Funds, that they are consistent with the general purposes of the 
Act, and that the requested exemption is 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' Conditions

    Applicants agree that any order will be subject to the following 
conditions:
    1. The funds will engage in transactions with Affiliated Banks only 
in Qualified Securities.
    2. 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. No Fund will 
engage in transactions in Qualified Securities 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).
    3. The Funds: (a) Will maintain and preserve permanently in an 
easily accessible place a written copy of the procedures (and any 
modifications thereto) described in paragraphs (1) and (2) of this 
section; and (b) will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which transactions in 
Qualified Securities 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 Qualified 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 Fund's registration statement, and will be consistent 
with the interests of that Fund and its shareholders. Further, the 
security to be purchased or sold by that Fund will be comparable in 
terms of quality, yield, and maturity to other similar securities that 
are appropriate for that Fund and that are being purchased or sold 
during a comparable period of time.
    5. The terms of the transaction will be reasonable and fair to the 
shareholders of that Fund and will not involve overreaching 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 Governing Board 
may rely on a matrix pricing system which it believes properly assists 
it in determining the value of securities pursuant to section 2(a)(41) 
of the Act.
    6. 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.
    7. The Governing Board of each of the Funds: (a) Will adopt 
procedures, pursuant to which transactions in Qualified Securities 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 
complied with; (b) will make and approve such changes as the Governing 
Board deems necessary; and (c) will determine no less frequently than 
quarterly that transactions in Qualified Securities made during the 
preceding quarter were effected in compliance with those procedures. 
Those procedures will also be approved by a majority of the 
disinterested Trustees or Directors of the Funds. The investment 
adviser of each Fund will implement those procedures and make decisions 
necessary to meet these conditions, subject to the direction and 
control of the Governing Board of each Fund.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22851 Filed 9-13-95; 8:45 am]
BILLING CODE 8010-01-M