[Federal Register Volume 60, Number 238 (Tuesday, December 12, 1995)]
[Notices]
[Pages 63749-63752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30224]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21569; 812-9842]


PCS Cash Fund, Inc., et al.; Notice of Application December 5, 
1995

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: PCS Cash Fund, Inc., Morgan Stanley Fund, Inc., and Morgan 
Stanley Institutional Fund, Inc. (with their successors in interest,\1\ 
the ``Funds'').

    \1\ ``Successors in interest'' is herein limited to entities 
that result from a reorganization into another jurisdiction or a 
change in the type of business organization.
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Relevant Act Sections: Order request under section 6(c) of the Act for 
an exemption from sections 13(a)(2), 13(a)(3), 18(f)(1), 22(f), and 
22(g) and rule 2a-7 thereunder, under sections 6(c) and 17(b) of the 
Act for an exemption from section 17(a)(1), and under section 17(d) of 
the Act and rule 

[[Page 63750]]
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17d-1 thereunder to permit certain joint arrangements.

SUMMARY OF APPLICATION: Applications request an order that would permit 
each applicant investment company to enter into deferred compensation 
arrangements with its directors who are not interested persons of the 
company.

FILING DATES: The application was filed on November 13, 1995, and 
amended on December 5, 1995

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 January 2, 1996, 
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 notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 1221 Avenue of the Americas, New York, New York, 
10020.

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. Each of the Funds is a Maryland corporation registered under the 
Act as an open-end management investment company. The PCS Cash Fund, 
Inc. consist of three series, the PCS Money Market Portfolio, PCS Tax-
Free Money Market Portfolio, and PCS Government Obligations Money 
Market Portfolio. The Morgan Stanley Money Market Fund is a series of 
the Morgan Stanley Fund, Inc. The Money Market Portfolio and Municipal 
Money Market Portfolios are series of the Morgan Stanley Institutional 
Fund, Inc. (Shares of the PCS Tax-Free Money Market Portfolio and the 
Morgan Stanley Money Market Fund are not currently being offered.) 
Morgan Stanley Asset Management Inc. (``Morgan Stanley'') is the 
investment adviser to each Fund and is registered under the Investment 
Advisers Act of 1940.
    2. Each Fund has a board of directors, a majority of the members of 
which are not ``interested persons'' of such Fund within the meaning of 
section 2(a)(19) of the Act. Each of the directors who is not an 
``interested person'' of one or more of the Funds receives annual fees 
which collectively are, and are expected to continue to be, 
insignificant in comparison to the total net assets of the Funds. 
Applicants request an order to permit the directors who are not 
interested persons of any of the Funds and who receives director's fees 
from one or more of the Funds (the ``Eligible Directors'') to elect to 
defer receipt of all or a portion of their fees pursuant to a deferred 
compensation plan (the ``Plan'') and related election agreement entered 
into between each Eligible Director and the appropriate Fund. Under the 
Plan, the Eligible Directors could defer payment of directors' fees 
(the ``Deferred Compensation'') in order to defer payment of income 
taxes or for other reasons.
    3. Applicants request that relief be extended to any other 
registered open-end investment company established or acquired in the 
future, or series thereof, for which Morgan Stanley or any entity 
controlling, controlled by, or under common control (within the meaning 
of section 2(a)(9) of the Act) with Morgan Stanley, acts in the future 
as investment adviser or principal underwriter (the ``Future Funds'').
    4. Under the Plan, the deferred fees payable by a Fund to a 
participating Eligible Director will be credited to a book reserve 
account established by the Fund (an ``Deferred Fee Account''), as of 
the first business day following the date such fees would have been 
paid to the Eligible Director. Each Eligible Director may elect to have 
the return on his or her deferred fees measured as if the fees had been 
invested and reinvested in 90-day U.S. Treasury Bills or shares of one 
or more of the portfolios of the Fund of which he or she is a director 
(the ``Underlying Securities'').
    5. The initial value of Deferred Compensation credited to a 
Deferred Fee Account will be effected at the respective current net 
asset value of each such open-end Fund. In the future, the Plan may be 
modified so that an Eligible Director may select as Underlying 
Securities shares of any other Fund besides the one of which he or she 
is a director.
    6. The Funds' respective obligations to make payments of amounts 
accrued under the Plan will be general unsecured obligations, payable 
solely from their respective general assets and property. The Plan 
provides that the Funds will be under no obligation to purchase, hold 
or dispose of any investments under the Plan, but, if one or more of 
the Funds choose to purchase investments to cover their obligations 
under the Plan, then any and all such investments will continue to be a 
part of the respective general assets and property of such Funds.
    7. Any participating money market series of a Fund that values its 
assets in accordance with a method prescribed by rule 2a-7 will buy and 
hold the Underlying Securities that determine the performance of the 
Deferred Fee Accounts in order to achieve an exact match between such 
series' liability to pay deferred fees and the assets that offset such 
liability. In addition, as a matter of prudent risk management, each 
Fund that is not a money market fund may purchase and hold shares of 
the Underlying Securities in amounts equal in value to the deemed 
investments of the Deferred Fee Accounts of its Eligible Directors. 
Thus, in cases where the Funds purchase shares of the Underlying 
Securities, liabilities created by the credits to the Deferred Fee 
Accounts under the Plan are expected to be matched by an equal amount 
of assets (i.e., a direct investment in Underlying Securities), which 
assets would not be held by the Fund if directors' fees were paid on a 
current basis.
    8. Payments under the Plan will be made in generally equal annual 
installments over a five year period beginning on the first day of the 
year following the year in which the Eligible Director's termination of 
service occurred. In the event of death prior to the commencement of 
the distribution of amounts credited to a Deferred Fee Account, the 
balance of such account will be distributed to the Eligible Director's 
designated beneficiary in a lump sum as soon as practicable after such 
director's death. In the event of death after the commencement of the 
distribution of the Deferred Fee Account, the balance of such account 
will be distributed to the designated beneficiary over the remaining 
portion of the five-year period. In all other events, a Eligible 
Director's right to receive payments will be nontransferable. The Plan 
provides that the board of directors of the Fund has the right to 
accelerate or extend payment of amounts in the Deferred Fee Account at 
any time after the termination of the Eligible Director as a director. 
In the event of the liquidation, dissolution, or winding up of a Fund 
or the distribution of all or substantially all of a Fund's assets and 
property to its 

[[Page 63751]]
shareholders (unless the Fund's obligations under the Plan have been 
assumed by a financially responsible party purchasing such assets) or 
in the event of a merger or reorganization of a Fund (unless prior to 
such merger or reorganization, the Fund's board of directors determines 
that the Plan shall survive the merger or reorganization), all unpaid 
amounts in the Deferred Fee Accounts maintained by such Fund shall be 
paid in a lump sum to the Eligible Directors on the effective date 
thereof.\2\ The Plan will not obligate any participating Fund to retain 
a director in such a capacity, nor will it obligate any Fund to pay any 
(or any particular level of) directors' fees to any director.

    \2\ Applicants acknowledge that the requested order would not 
permit a party acquiring a Fund's assets to assume a Fund's 
obligations under the Plan if such obligations would constitute a 
violation of the Act by the assuming party. Accordingly, such 
assumption would be permitted only if the assuming party is (a) 
another Fund, (b) another registered investment company that has 
received exemptive relief similar to that requested by applicants, 
or (c) not a registered investment company or is otherwise exempt 
from the provisions of the Act.
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Applicants' Legal Analysis

    1. Applicants request an order which would exempt the Funds: (a) 
under section 6(c) of the Act from sections 13(a)(2), 13(a)(3), 
18(f)(1), 22(f), and 22(g) and rule 2a-7 thereunder, to the extent 
necessary to permit the Funds to adopt and implement the Plan; (b) 
under sections 6(c) and 17(b) of the Act from section 17(a)(1) to 
permit the Funds to sell securities for which they are the issuer to 
participating Funds in connection with the Plan; and (c) under section 
17(d) of the Act and rule 17d-1 thereunder to permit the Funds to 
effect certain joint transactions incident to the Plan.
    2. Section 18(f)(1) generally prohibits a registered open-end 
investment company from issuing senior securities. Section 13(a)(2) 
requires that a registered investment company obtain shareholder 
authorization before issuing any senior security not contemplated by 
the recitals of policy in its registration statement. Applicants state 
that the Plan possesses none of the characteristics of senior 
securities that led Congress to enact section 18(f)(1). The Plan would 
not: (a) induce speculative investments or provide opportunities for 
manipulative allocation of any Fund's expenses or profits; (b) affect 
control of any Fund; or (c) confuse investors or convey a false 
impression as to the safety of their investments. All liabilities 
created under the Plan would be offset by equal amounts of assets that 
would not otherwise exist if the fees were paid on a current basis.
    3. Section 22(f) prohibits undisclosed restrictions on 
transferability or negotiability of redeemable securities issued by 
open-end investment companies. The Plan would set forth all such 
restrictions, which would be included primarily to benefit the Eligible 
Directors and would not adversely affect the interests of the directors 
or of any shareholder.
    4. Section 22(g) prohibits registered open-end investment companies 
from issuing any of their securities for services or for property other 
than cash or securities. This provision prevents the dilution of equity 
and voting power that may result when securities are issued for 
consideration that is not readily valued. Applicants believe that the 
Plan would merely provide for deferral of payment of such fees and thus 
should be viewed as being issued not in return for services but in 
return for a Fund not being required to pay such fees on a current 
basis.
    5. Section 13(a)(3) provides that no registered investment company 
shall, unless authorized by the vote of a majority of its outstanding 
voting securities, deviate from any investment policy that is 
changeable only if authorized by shareholder vote. The relief requested 
from section 13(a)(3) would extend to Future Funds for which Morgan 
Stanley becomes investment adviser subsequent to such Future Fund's 
initial public offering and that have investment policies prohibiting 
the purchase of investment company shares without shareholder approval. 
Applicants believe that relief from section 13(a)(3) is appropriate to 
enable the affected Funds to invest in Underlying Securities without a 
shareholder vote. Applicants will provide notice to shareholders in the 
prospectus of each affected Fund of the Deferred Compensation under the 
Plan. The value of the Underlying Securities will be de minimis in 
relation to the total net assets of the respective Fund, and will at 
all times equal the value of the Fund's obligations to pay deferred 
fees (plus any increase in value thereof.)
    6. Rule 2a-7 imposes certain restrictions on the investments of 
``money market funds,'' as defined under the rule, that would prohibit 
a Fund that is a money market Fund from investing in the shares of any 
other Fund. Applicants believe that the requested exemption would 
permit the Funds to achieve an exact matching of Underlying Securities 
with the deemed investments of the Deferred Fee Accounts, thereby 
ensuring that the deferred fees would not affect net asset value.
    7. Section 6(c) provides, in relevant part, that the SEC may, 
conditionally or unconditionally, by order, exempt any person or class 
of persons from any provision of the Act or from any rule thereunder, 
if such exemption is necessary or appropriate in the public interest, 
consistent with the protection of investors, and consistent with the 
purposes fairly intended by the policy and provisions of the Act. 
Applicants submit that the relief requested from the above provisions 
satisfies this standard.
    8. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company from selling any security to such 
registered investment company. Funds that are advised by the same 
entity may be ``affiliated persons'' under section 2(a)(3)(C) of the 
Act.\3\ Applicants assert that section 17(a)(1) was designed to 
prevent, among other things, sponsors of investment companies from 
using investment company assets as capital for enterprises with which 
they were associated or to acquire controlling interest in such 
enterprises. Applicants submit that the sale of securities issued by 
the Funds pursuant to the Plan does not implicate the concerns of 
Congress in enacting this section, but merely would facilitate the 
matching of each Fund's liability for deferred directors' fees with the 
Underlying Securities that would determine the amount of such Fund's 
liability.

    \3\ Section 2(a)(3)(C) of the Act defines the term ``affiliated 
person'' of another person to include any person directly or 
indirectly controlling, controlled by, or under common control with 
such other person.
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    9. Section 17(b) authorizes the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the 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, the transaction is consistent with the policies 
of the registered investment company, and the general purposes of the 
Act. Applicants assert that the proposed transaction satisfies the 
criteria of section 17(b). The finding that the terms of the 
transaction are consistent with the policies of the registered 
investment company is predicated on the assumption that relief is 
granted from section 13(a)(3). Applicants also request relief from 
section 17(a)(1) under section 6(c) to the extent necessary to 
implement the Deferred Compensation under the Plan on an ongoing basis.
    10. Section 17(d) and rule 17d-1 generally prohibit a registered 

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    investment company's joint or joint and several participation with an 
affiliated person in a transaction in connection with any joint 
enterprise or other joint arrangement or profit-sharing plan ``on a 
basis different from or less advantageous than that of'' the affiliated 
person. Eligible Directors will not receive a benefit, directly or 
indirectly, that would otherwise inure to a Fund or its shareholders. 
Eligible Directors will receive tax deferral but the Plan otherwise 
will maintain the parties, viewed both separately and in their 
relationship to one another, in the same position as if the deferred 
fees were paid on a current basis. When all payments have been made to 
a Eligible Director, the Eligible Director will be no better off, 
relative to the Funds, than if he or she had received directors fees on 
a current basis and invested them in Underlying Securities.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. With respect to the relief requested from rule 2a-7, any money 
market Fund, or series thereof, that values its assets in accordance 
with a method prescribed by rule 2a-7 will buy and hold the Underlying 
Securities that determine the value of the Deferred Fee Accounts to 
achieve an exact match between such Funds' or series' liability to pay 
deferred fees and the assets that offset that liability.
    2. If a Fund purchases Underlying Securities issued by an 
affiliated Fund, the Fund will vote such shares in proportion to the 
votes of all other shareholders of such affiliated Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30224 Filed 12-11-95; 8:45 am]
BILLING CODE 8010-01-M