[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Notices]
[Pages 65720-65723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30906]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 21602; 812-9648]


State Street Bank and Trust Company, et al.; Notice of 
Application

December 14, 1995.
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: State Street Bank and Trust Company (``State Street'') and 
Global Lending Trust (``Trust''), on behalf of themselves and any 
registered management investment company or series thereof that may 
participate from time to time as lenders (``Lending Funds'') in the 
securities lending program administered by State Street (``Program'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) to grant an 
exemption from section 12(d)(1), under sections 6(c) and 17(b) to grant 
an exemption from section 17(a), and under rule 17d-1 to permit certain 
transactions in accordance with section 17(d) and rule 17d-1.

SUMMARY OF APPLICATION: Applicants seek an order that would permit 
State Street, as agent for the Lending Funds, to invest cash collateral 
derived from securities lending transactions in shares of one or more 
series of the Trust (``Investment Funds'').

FILING DATES: The application was filed on June 23, 1995, and amended 
on October 24 and December 14, 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 8, 1996, 
and should be accompanied by proof of service on applicant, 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, N.W., Washington, D.C. 
20549. Applicants: State Street, Two International Place, Boston, 
Massachusetts 02110; Global Lending Trust, c/o Raymond P. Boulanger, 
Exchange Place, 25th Floor, Boston, Massachusetts 02109.

FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Attorney, at (202) 942-0583, 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

    State Street, a wholly-owned subsidiary of State Street Boston 
Corporation, is a Massachusetts chartered trust company and a member of 
the Federal Reserve System. State Street provides institutional custody 
services and asset management services for pension plans, foundations, 
governmental plans, individuals, and registered management investment 
companies. State Street also administers the Program, which involved 
securities loan transactions in excess of $50 billion on average during 
the first three quarters of 1995.
    2. The Trust is a Massachusetts business trust organized pursuant 
to a master trust agreement dated June 15, 1995. The Trust proposes 
initially to establish three separate Investment Funds: The U.S. 
Government Securities Money Market Fund (``Government Securities 
Fund''), the General Money Market Fund (``Money Market Fund''), and the 
Short-Term Fund.\1\ Shares of each Investment Fund will be sold on a 
private placement basis in accordance with Regulation D under the 
Securities Act of 1933 only to Lending Funds and other institutional 
investors participating in the Program. Shares of the Investment Funds 
will be sold directly by the Trust without a distributor and will not 
be subject to a sales load or a redemption fee. Assets of the Trust 
will not be subject to a rule 12b-1 fee. The Trust will register as an 
investment company under the Act 

[[Page 65721]]
prior to the commencement of operations.

    \1\ The Government Securities Fund will invest exclusively in 
securities issued or backed by the U.S. Government or its agencies 
or instrumentalities and in repurchase agreements collateralized 
with such securities (``U.S. Government Securities''). The Money 
Market Fund will invest in a variety of U.S. dollar-denominated 
instruments, including U.S. Government Securities, corporate debt 
obligations, commercial paper, time deposits, certificates of 
deposit and bankers acceptances, obligations of foreign governments 
and supranational organizations and shares of money market mutual 
funds. All investments of the Government Securities Fund and the 
Money Market Fund will qualify as ``eligible securities'' within the 
meaning of rule 2a-7 under the Act. The Short-Term Fund will invest 
in a variety of securities, the maximum effective duration of which 
will not exceed five years.
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    3. State Street will serve as the investment adviser, custodian, 
transfer agent, and administrator of the Trust with respect to each 
Investment Fund, and will be entitled to receive a fee for its 
services.
    4. State Street proposes to enter into a securities lending 
agreement (``Lending Agreement'') with each Lending Fund.\2\ The 
Lending Agreement will authorize State Street to enter into a master 
borrowing agreement (``Borrowing Agreement'') with each person 
designated by the Lending Fund as eligible to borrow securities 
(``Borrower''). State Street will maintain a list of Borrowers that it 
believes to be creditworthy and that are eligible to participate in the 
Program. Each Lending Fund will be responsible for independently 
evaluating and monitoring the creditworthiness of each Borrower it 
selects from the pre-approved list and will have the right to add 
Borrowers to the list, subject to State Street's approval.

    \2\ The Lending Funds will include, but will not be limited to, 
investment companies for which State Street or an affiliated person 
thereof also serves as custodian, transfer agent, and/or 
administrator.
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    5. State Street will invest cash collateral received in the Program 
on behalf of a Lending Fund in shares of one or more Investment Funds 
to the extent permitted by the terms of the Lending Agreement. The 
Lending Agreement will authorize and instruct State Street to invest 
the cash collateral in accordance with specific guidelines provided by 
the Lending Fund. Such guidelines will identify the particular 
Investment Funds and other investment vehicles, instruments, and 
accounts, if any, in which cash collateral may be invested, and the 
maximum and minimum amounts of cash or percentages of collateral that 
may be invested in each Investment Fund and other authorized 
investments.\3\ Each Lending Fund will reserve at all times the right 
to rescind authorization to invest in an Investment Fund. State Street 
will not purchase shares of any Investment Fund unless the Lending Fund 
has represented to State Street that (a) Its policies generally permit 
the Lending Fund to engage in securities lending transactions; (b) such 
transactions will be conducted in accordance with the securities 
lending guidelines established in a series of no-action letters issued 
by the SEC's Division of Investment Management; (c) its policies permit 
the Lending Fund to purchase shares of the Investment Funds with cash 
collateral; and (d) its securities lending activities will be conducted 
in accordance with all applicable representation and conditions of the 
application.

    \3\ Applicants anticipate that one or more of the Lending Funds 
participating in the Program may be investment companies that hold 
themselves out as money market funds and comply with the 
requirements of rule 2a-7 (''Money Market Lending Funds''). Cash 
collateral in which the lender is a Money Market Lending Fund will 
not be used to acquire shares of any Investment Fund that does not 
comply with the requirements of rule 2a-7.
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    6. The Lending Agreement and the Borrowing Agreement will 
establish, with respect to each transaction, the initial and ongoing 
collateralization requirements, the types of collateral that may be 
accepted, and the manner in which the portion of the income earned on 
the investment of cash collateral during the term of the loan to be 
repaid to the Borrower (``Borrower's Rebate'') will be established. The 
Lending Agreement will fix the percentage of the difference between the 
Borrower's Rebate and the actual return on the investment of cash 
collateral (``Net Income'') to be retained by the Lending Fund and the 
percentage to be paid by the Lending Fund to State Street. The Lending 
Agreement also will authorize State Street to negotiate the Borrower's 
Rebate for each transaction.
    7. During the term of each loan, the Lending Fund will retain the 
economic rights of an owner of the securities that are the subject of a 
loan, and will have the power to terminate a loan at any time and 
recall loaned portfolio securities in time to exercise voting rights. 
The Borrowing Agreement will provide that, within three trading days 
(or such other time period as is the customary settlement period for 
the loaned securities) of the Lending Fund giving notice of the 
termination of any loan, the Borrower is required to transfer the 
loaned securities (or certificates for identical securities) to State 
Street or the Lending Fund's custodian, and pay to State Street or the 
Lending Fund's custodian the amount of all dividends and distributions 
that would have been payable to the Lending Fund on or with respect to 
such securities if they had not been loaned, to the extent not 
previously paid.
    8. Applicants represent that participation in the Program will 
provide the Lending Funds with economies of scale that will maximize 
investment opportunities, minimize investment risk, facilitate 
management of liquidity, and minimize administrative costs, thereby 
increasing their net income. In addition, applicants state that 
participation in the Program will permit the Lending Funds to minimize 
credit risk and interest-rate risk through diversification, while 
receiving the procedural and substantive protections of the Act.

Applicants' Legal Analysis

    1. Section 12(d)(1)(A) prohibits an investment company from 
acquiring shares of another investment company if, immediately after 
such acquisition, the acquiring company would own more than three 
percent of the total outstanding voting stock of the acquired company, 
securities of the acquired company with an aggregate value in excess of 
five percent of the value of the total assets of the acquiring company, 
or securities of any investment companies (including the acquired 
company) with an aggregate value in excess of ten percent of the value 
of the total assets of the acquiring company. Section 12(d)(1)(B) 
prohibits an investment company from selling its shares to another 
investment company if after such sale more than three percent of the 
outstanding voting stock of the acquired company would be owned by the 
acquiring company, or more than ten percent of the voting stock of the 
acquired company would be owned by investment companies.
    2. Section 6(c) permits the SEC to exempt any person or transaction 
from any provision of the Act, or any rule or regulation thereunder, if 
the 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. Applicants submit 
that the investment of cash collateral in shares of the Investment 
Funds will permit the Lending Funds to maximize returns with less 
investment risk than would be present with other means of investment. 
Applicants also believe that the administrative burdens associated with 
compliance with section 12(d)(1), such as daily monitoring of total 
assets and other investments of the Lending Funds, could impair State 
Street's ability to provide securities lending services to Lending 
Funds in an economical and administratively efficient manner, and 
therefore could create competitive disadvantages for the Lending Funds 
relative to other institutional investors that seek to engage in 
securities lending activities. In addition, applicants submit that the 
investment of cash collateral in shares of the Investment Funds do not 
give rise to the policy concerns of section 12(d)(1), which include 
unnecessary duplication of costs (such as sales loads, advisory fees, 
and administrative costs) and undue influence by the fund holding 
company over its underlying funds arising from the threat of large 
scale redemptions of the securities of 

[[Page 65722]]
the underlying investment companies. Accordingly, applicants believe 
that the requested exemption from section 12(d)(1) is in the public 
interest and consistent with the protection of investors and the 
purposes intended by the Act.
    3. Section 17(a) prohibits any affiliated person of a registered 
investment company, or any affiliated person of such a person, acting 
as principal, to sell any security to, or purchase any security from, 
such investment company. From time to time, it is possible that a 
Lending Fund may directly or indirectly own, control, or hold with 
power to vote five percent or more of the shares of an Investment Fund, 
which will result in the Lending Fund being an affiliated person of the 
Investment Fund. In these circumstances, the purchase or redemption of 
shares of an Investment Fund for the same Lending Fund or an affiliated 
person of such Lending Fund could violate section 17(a).
    4. Section 17(b) authorizes the SEC to issue an order of exemption 
from section 17(a) if the terms of the proposed 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 
proposed transaction is consistent with the policy of each registered 
investment company concerned, and the proposed transaction is 
consistent with the general policy of the Act. Applicants believe that 
the proposed transaction will be reasonable and fair and consistent 
with the general purposes of the Act as well as with the policies of 
each Lending Fund. The Lending Funds will not be able to purchase or 
redeem shares of the Investment Funds at a price lower or higher than 
the per share net asset value of the Investment Funds, and there will 
be no sales loads or redemption fees charged with respect to such 
shares. In addition, State Street will be able to invest cash 
collateral only in accordance with specific guidelines provided by the 
Lending Funds, which will identify both the particular Investment Fund 
and other investment vehicles, instruments, and accounts (if any) in 
which cash collateral may be invested, and the maximum and minimum 
amounts of cash or percentages of collateral that may be invested in 
each Investment Fund and other authorized investments.
    5. Section 17(b) could be interpreted to exempt only a single 
transaction.\4\ Under section 6(c), however, the Commission may exempt 
a series of transactions that otherwise would be prohibited by section 
17(a). Applicants believe that the requested relief is appropriate 
under section 6(c) for the same reasons that it is appropriate under 
section 17(b).

    \4\ See Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
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    6. Section 17(d) of the Act and rule 17d-1 thereunder prohibit any 
affiliated person of a registered investment company, acting as 
principal, from effecting any transaction in connection with any joint 
enterprise or joint arrangement in which the investment company 
participates. The ownership by a Lending Fund of five percent or more 
of the shares of an Investment Fund would cause the Lending Fund to be 
an affiliated person of the Trust. State Street, as investment adviser 
for each of the Investment Funds, will be an affiliated person of the 
Trust. As such, State Street may, from time to time, be an affiliated 
person of an affiliated person of one or more Lending Funds by virtue 
of such Funds' interests in the Trust. Consequently, the proposed 
purchase of shares of the Investment Funds with cash collateral, the 
proposed purchase of shares of the Investment Funds with cash 
collateral, the redemption of such shares, and the sharing of Net 
Income between State Street and the Lending Funds may constitute a 
joint transaction for which an exemptive order is required.
    7. Rule 17d-1 permits the SEC to approve a proposed joint 
transaction covered by the terms of section 17(d). In determining 
whether to approve such a transaction, the SEC must consider whether 
the proposed transaction is consistent with the provisions, policies, 
and purposes of the Act, and the extent to which the participant of the 
investment company is on a basis different from or less advantageous 
than that of the other participants. Applicants believe that the 
proposed transactions satisfy these standards. Each Lending Fund will 
invest in shares of the Investment Funds on the same basis as every 
other shareholder of the Trust, and all shares will be priced in the 
same manner and redeemable under the same terms. The arrangements 
regarding the sharing of Net Income between State Street and each 
Lending Fund are the product of arm's length negotiations between the 
Lending Fund and State Street as service provider. Finally, the 
proposed investment of cash collateral in the Investment Funds is 
consistent with the provisions and purposes of the Act because 
participation in the proposed arrangement will allow the Lending Funds 
to increase their investment opportunities and returns while lowering 
their transaction costs in connection with securities lending 
transactions.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. No Lending Fund will purchase shares of any Investment Fund 
unless participation in the Program has been approved by a majority of 
the directors or trustees of the Lending Fund that are not ``interested 
persons'' of the Lending Fund within the meaning of section 2(a)(19) of 
the Act. Such directors or trustees will also evaluate the Program no 
less frequently than annually, and determine that any investment of 
cash collateral in the Investment Funds is in the best interests of the 
shareholders of the Lending Fund.
    2. State Street will lend portfolio securities of each of the 
Lending Funds only in accordance with the guidelines specified by such 
Lending Fund.
    3. Cash collateral from loans by Lending Funds will be invested in 
shares of each Investment Fund subject to such limitations and 
guidelines as are specified by the Lending Funds.
    4. Cash collateral from loans by Money Market Lending Funds will 
not be used to acquire shares of any Investment Fund that does not 
comply with the requirements of rule 2a-7 under the Act.
    5. Shares of the Investment Funds will not be subject to a sales 
load or redemption fee, and assets of the Investment Funds will not be 
subject to a rule 12b-1 fee.
    6. State Street will not acquire shares of any Investment Fund on 
behalf of any Lending Fund if, at the time of such acquisition, (a) 
State Street is an affiliated person of the Lending Fund or an 
affiliated person of an affiliated person of the Lending Fund, or (b) 
the Lending Fund is an affiliated person of the Investment Fund or an 
affiliated person of an affiliated person of the Investment Fund, in 
either case by means other than by directly or indirectly owning, 
controlling, or holding with the power to vote five percent or more of 
the shares of an Investment Fund by the Lending Fund or an affiliated 
person of the Lending Fund.
    7. In connection with all matters requiring a vote of shareholders 
of an Investment Fund, State Street will pass through voting rights to 
those Lending Funds that have a beneficial interest in such Investment 
Fund.


[[Page 65723]]

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30906 Filed 12-19-95; 8:45 am]
BILLING CODE 8010-01-M