[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Notices]
[Pages 67011-67014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31265]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21609; 812-9686]


Stein Roe Income Trust, et al.; Notice of Application

December 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

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

APPLICANTS: Stein Roe Income Trust, Stein Roe Investment Trust, Stein 
Roe Municipal Trust, and SR&F Base Trust (collectively, the 
``Trusts''), and Stein Roe & Farnhman Incorporated (the ``Adviser'').

RELEVANT ACT SECTIONS: Order under section 6(c) of the Act for an 
exemption from sections 12(d)(1), 18(f), and 21(b) of the Act, under 
sections 6(c) and 17(b) for an exemption from sections 17(a)(1) and 
17(a)(3) of the Act, and under section 17(d) of the Act and rule 17d-1 
thereunder to permit certain joint arrangements.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
the Trusts to borrow money from each other through a credit facility.

FILING DATES: The application was filed on July 25, 1995 and amended on 
November 8, 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 
applicant 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 16, 
1996, and should be accompanied by proof of service on the 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants: One South Wacker Drive, Chicago, IL 60606.

FOR FURTHER INFORMATION CONTACT: Marianne H. Khawly, Staff Attorney, at 
(202) 942-0562, or Robert A. Robertson, 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. Stein Roe Income Trust, Stein Roe Investment Trust, and Stein 
Roe Municipal Trust are organized as Massachusetts business trusts. 
SR&F Base Trust is organized as a Massachusetts common law trust. Each 
Trust has multiple series. Each Trust has entered into an investment 
advisory agreement with the Adviser with respect to each existing 
series. The Adviser is a wholly-owned indirect subsidiary of Liberty 
Financial Companies, Inc., which is a majority owned indirect 
subsidiary of Liberty Mutual Insurance Company. Applicants request that 
any relief also apply to any registered open-end investment companies 
established or acquired in the future, for which the Adviser or a 
company controlling, controlled by, or under common control with the 
Adviser, acts as investment adviser, (the ``Future Funds,'' and 
together with the existing series, the ``Funds'').
    2. The Trusts have entered into a loan agreement with their 
custodian, State Street Bank and Trust Company (``State Street'') under 
which State Street may, but is not obligated to, lend money to the 
Trusts for temporary or emergency purposes. The maximum aggregate 
credit available under the agreement is $75 million. The Trusts seek to 
reduce the middleman function of banks by entering into a master loan 
agreement with each other (the ``Credit Facility'') that would permit 
the Funds to lend money directly to, and to borrow from, each other to 
meet the temporary borrowing needs of the borrowing Funds (the 
``Interfund Loans''). The form of master loan agreement attached to the 
application is referred to as the ``Interfund Loan Agreement.''
    3. The Credit Facility is intended to reduce substantially the 
Funds' borrowing costs and to enhance the ability of the Funds to earn 
higher rates of interest on their short-term lendings. Although the 
Credit Facility would substantially reduce the Funds' reliance on bank 
credit arrangements, the Trusts would continue to maintain existing 
loan agreements and to borrow money from banks. The terms and 
conditions of the loan agreement with State Street would serve as a 
guideline for making Interfund Loans.
    4. The Credit Facility is likely to provide the Funds with 
significant savings at times when the cash position of a Fund is 
insufficient to meet temporary cash requirements. This situation 
generally arises when shareholder redemptions exceed anticipated 
volumes and the Funds have insufficient cash on hand to satisfy such 
redemptions. When the Funds liquidate portfolio securities to meet 
redemption requests, they often do not receive payment in settlement 
for up to seven days. However, shareholder redemption requests are 
normally effected immediately. Therefore, the Funds need a source of 
immediate, short-term liquidity pending settlement of the sale of 
portfolio securities.
    5. While bank borrowings will continue to be available to supply 
such liquidity, the rates charged under the Credit Facility would be 
below those offered by State Street on short-terms loans. Likewise, 
Funds making cash loans to other Funds would earn interest at a rate 
higher than they otherwise could obtain from investing their cash in 
short-term repurchase agreements. Thus, the Credit Facility would 
benefit both those Funds that are borrowers and those Funds that are 
lenders.
    6. The interest rate to be charged on Interfund Loans (the 
``Interfund Rate'') would be determined daily and would be the mean of 
(a) the ``Repro Rate,'' as defined below, and (b) the ``Bank Loan 
Rate,'' as defined below. The Repro Rate on any day would be the 
highest interest 

[[Page 67012]]
rate available to the Funds from investment in overnight repurchase 
agreements. The Bank Loan Rate for any day would be calculated 
according to a formula established by the board of each Trust to 
approximate the lowest interest rate at which bank loans are available 
to the Funds. The formula would be based upon a publicly available rate 
(e.g., Federal Funds plus 75 basis points) and would vary with this 
rate so as to reflect changing bank loan rates. The Adviser would 
administer the Credit Facility as part of its duties under its 
agreement with each Fund and would receive no additional compensation 
for its services. The Adviser will make cash available to borrowing 
Funds only if the Interfund Loan Rate is more favorable to the lending 
Fund than the Repo Rate and more favorable to the borrowing Fund than 
the Bank Loan Rate.
    7. No Fund would be permitted to participate in the Credit Facility 
unless: (a) the Fund had fully disclosed all material information 
concerning the Credit Facility in its prospectus and/or statement of 
additional information; and (b) the Fund's participation in the Credit 
Facility was consistent with its investment objective, fundamental 
limitations and the Trust's declaration of trust.

Applicant's Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for an 
exemption from sections 12(d)(1), 18(f), and 21(b) of the Act, under 
sections 6(c) and 17(b) of the Act for an exemption from sections 
17(a)(1) and 17(a)(3) of the Act, and under section 17(d) of the Act 
and rule 17d-1 thereunder to permit certain joint arrangements. The 
requested order would permit the Funds to borrow from and lend to each 
other through the Credit Facility.
    2. Applicants believe that, for the reasons discussed below, the 
requested order meets the standards set forth in sections 6(c) and 
17(b) and rule 17d-1. Section 6(c) provides, in relevant part, that the 
SEC may 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. 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 polices of the registered investment 
company, and the general purposes of the Act. Rule 17d-1 provides that 
in passing upon applications for exemptive relief from section 17(d), 
the SEC will consider whether the participation of a registered or 
controlled company in a joint enterprise or joint arrangement is 
consistent with the provisions, policies, and purposes of the Act and 
to the extent to which such participation is on a basis different from 
or less advantageous than that of other participants.
    3. Section 17(a)(3) generally prohibits an affiliated person of a 
registered investment company from borrowing money or other property 
from such investment company. Section 2(a)(3)(C) defines ``affiliated 
person'' of another person to be any person directly or indirectly 
controlling, controlled by, or under common control with, such other 
person. Section 21(b) generally prohibits any registered investment 
company from lending money or other property to any person if that 
person controls or is under common control with that company. The 
Adviser is the investment adviser of each Fund and the trustees and 
principal officers of each Trust are substantially identical. In view 
of the overlap of trustees and officers among the Trusts, the Trusts 
might be deemed to be under common control and thus affiliated persons 
of each other.
    4. Sections 17(a)(3) and 21(b) were intended to prevent a party 
with strong potential adverse interests and influence over the 
investment decisions of a registered investment company from causing or 
inducing the investment company to engage in lending transactions that 
are detrimental to the best interests of the investment company and its 
shareholders. Applicants believe that proposed transactions do not 
raise such concerns because: (a) The Adviser would administer the 
program as a disinterested fiduciary; (b) all Interfund Loans would 
consist only of uninvested cash reserves that the Fund otherwise would 
invest in short-term repurchase agreements or comparable short-term 
instruments; (c) the Interfund Loans would not involve a significantly 
greater risk than such other investments; (d) the lending Fund would 
receive interest at a higher rate than it could obtain through such 
other investments; and (e) the borrowing Fund would pay interest at a 
rate lower than would otherwise the available to it under its bank loan 
agreements. Moreover, the proposed conditions would effectively 
preclude the possibility of any undue advantage.
    5. Section 17(a)(1) generally prohibits and affiliated person of a 
registered investment company from selling any security to such 
registered investment company. Section 12(d)(1) prohibits registered 
investment companies from purchasing or otherwise acquiring any 
security issued by any other investment company except in accordance 
with certain limitations. The Credit Facility may be deemed to involve 
the sale of a ``security'' by a borrowing Fund to a Lending Fund. 
Applicants believe that the Credit Facility would not involve the type 
of abuses at which these sections were directed. In this case, the 
purpose of the Credit Facility is to provide economic benefits for all 
participating Funds. In addition, there would be no duplicative costs 
to the Funds or their shareholders. Accordingly, applicants submit 
that, for the reasons discussed above, the requested order meets the 
standards set forth in sections 6(c) and 17(b).
    6. Section 17(d) generally prohibits any affiliated person of a 
registered investment company, or affiliated person of such a person, 
when acting as principal, from effecting any transaction in which the 
investment company is a joint or a joint and several participant. The 
Credit Facility may be deemed to involve a joint enterprise between or 
among affiliated persons. Applicants believe, however, that the 
interfund lending program meets the standards of rule 17d-1 because it 
does not involve any potential that one Fund might receive a 
preferential rate to the disadvantage of another Fund. Under the Credit 
Facility, the Funds would neither negotiate interest rates between 
themselves, nor would the Adviser set the rates in its discretion. 
Rather, rates would be set pursuant to a pre-established formula, 
approved by the trustees, which would be the function of the current 
rates quoted by an independent third-party for short-term borrowings 
and for short-term repurchase agreements. All Funds participating in 
the Credit Facility on any given day would receive the same rate.
    7. Section 18(f)(1) prohibits registers open-end investment 
companies from issuing senior securities except that any such 
registered investment company shall be permitted to borrow from any 
bank, provided that, immediately after such borrowing there is an asset 
coverage of at least 300% for all borrowings of such registered 
company. Applicants request relief from the section to allow a fund to 
borrow from other Funds in amounts, as measured on the day when the 
most recent loan was made, not to exceed 125% of the 

[[Page 67013]]
borrowing Fund's net cash redemptions for the preceding seven calendar 
days. Because applicants would be subject to all of the proposed 
conditions, including the percentage and collateral limitations on 
interfund borrowings, they believe that the Credit Facility would not 
involve the type of abuses that the section was intended to prevent. 
Applicants, therefore, believe that the requested exemption from 
section 18(f)(1) meets the standards of section 6(c).

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. The interest rates to be charged to the Funds under the Credit 
Facility will be the average of the Repo Rate and the Bank Loan Rate.
    2. The Adviser on each business day will compare the Bank Loan Rate 
with the Repo Rate and will make cash available for Interfund Loans 
only if the interfund rate is (a) more favorable to the lending Fund 
than the Repo Rate and (b) more favorable to the borrowing Fund than 
the Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any Interfund Loans to the 
Fund: (a) will be at an interest rate equal to or lower than any 
outstanding bank loan; (b) will be secured at least on an equal 
priority basis with at least an equivalent percentage of collateral to 
loan value as any outstanding bank loan that requires collateral; (c) 
will have a maturity no longer than any outstanding bank loan (and in 
no event over seven days); and (d) will provide that, if an event of 
default by the Fund occurs under any agreement evidencing an 
outstanding bank loan to the Fund, that event of default will 
automatically (without need for action or notice by the lending Fund) 
constitute an immediate event of default under the Interfund Loan 
Agreement entitling the lending Fund to call the Interfund Loan (and 
exercise all rights with respect to any collateral) and that such call 
will be made if the lending bank exercises its right to call its loan 
under its agreement with the Fund.
    4. A Fund may make an unsecured borrowing through the Credit 
Facility if its outstanding borrowings from all sources immediately 
after the borrowing total less than 10% of its total assets, provided 
that if a Fund has a secured loan outstanding from any lender, 
including but not limited to another fund, the Fund's interfund 
borrowing will be secured on at least an equal priority basis with at 
least an equivalent percentage of collateral to loan value as any 
outstanding loan that requires collateral. If a Fund's total 
outstanding borrowings immediately after an interfund borrowing would 
be greater than 10% of its total assets, the Fund may borrow through 
the Credit Facility only on a secured basis. A Fund could not borrow 
through the Credit Facility if its total outstanding borrowings 
immediately after the interfund borrowing would be more than 33\1/3\% 
of its total assets.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its outstanding borrowings from 
all sources to exceed 10% of its total assets, the Fund must first 
secure each outstanding Interfund Loan by the pledge of segregated 
collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding Interfund Loans exceeds 10% of 
its total assets for any other reason (such as decline in net asset 
value or because of shareholder redemptions), the Fund will within one 
business day thereafter: (a) Repay all its outstanding interfund loans; 
(b) reduce its outstanding indebtedness to 10% or less of its total 
assets; or (c) secure each outstanding Interfund Loan by the pledge of 
segregated collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan until the Fund's total 
outstanding borrowings cease to exceed 10% of its total assets, at 
which time the collateral called for by this condition 5 shall no 
longer be required. Until each Interfund Loan that is outstanding at 
any time that a Fund's total outstanding borrowings exceeds 10% is 
repaid or the Fund's total outstanding borrowings cease to exceed 10% 
of its total assets, the Fund will mark the value of the collateral to 
market each day and will pledge such additional collateral as is 
necessary to maintain the market value of the collateral that secures 
each outstanding Interfund Loan at least equal to 102% of the 
outstanding principal value of the interfund loan.
    6. No equity, taxable bond, or money market Fund may loan funds 
through the Credit Facility if the loan would cause its aggregate 
outstanding loans through the Credit Facility to exceed 5%, 7.5%, or 
10%, respectively, of its net assets at the time of the loan.
    7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. A Fund's borrowings through the Credit Facility, as measured on 
the day the most recent Interfund Loan was made to the Fund, will not 
exceed 125% of the Fund's total net cash redemptions for the preceding 
seven calendar days.
    10. Each Interfund Loan may be called on one business days' notice 
by the lending Fund and may be repaid on any day by the borrowing Fund.
    11. A Fund's participation in the Credit Facility must be 
consistent with its investment policies and limitations in the Trust's 
Declaration of trust.
    12. The Adviser will calculate total Fund borrowing and lending 
demand through the Credit Facility, and allocate Interfund Loans on an 
equitable basis among Funds, without the intervention of the portfolio 
manager of any Fund. The Adviser will not solicit cash for the Credit 
Facility from any Fund or prospectively publish or disseminate loan 
demand data to portfolio managers. The Adviser will invest amounts 
remaining after satisfaction of borrowing demand in accordance with 
standing instructions from portfolio managers or return remaining 
amounts for investment directly by the portfolio managers of the money 
market Funds.
    13. The Adviser will monitor the interest rates charged and the 
other terms and conditions of the Interfund Loans and will make a 
quarterly report to the boards of trustees of the Trusts concerning 
their participation in the Credit Facility and the terms and other 
conditions of any extensions of credit thereunder.
    14. Each Fund's board of trustees, including a majority of the 
independent trustees: (a) Will review no less frequently than quarterly 
the Fund's participation in the Credit Facility during the preceding 
quarter for compliance with the conditions of any order permitting such 
transactions; (b) will establish the Bank Loan Rate formula used to 
determine the interest rate on interfund loans, and review no less 
frequently than annually the continuing appropriateness of such Bank 
Loan Rate formula; and (c) will review no less frequently than annually 
the continuing appropriateness of the Fund's participation in the 
Credit Facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and such default is not cured within two business days from its 
maturity or from the time the lending Fund makes a demand for payment 
under the provisions of the Interfund Loan agreement, the Adviser will 
promptly refer such loan for arbitration to an independent arbitrator 

[[Page 67014]]
selected by the board of any Trust involved in the loan who will serve 
as arbitrator of disputes concerning Interfund Loans. The arbitrator 
will resolve any problem promptly, and the arbitrator's decision will 
be binding on both Funds. The arbitrator will submit, at least 
annually, a written report to the boards setting forth a description of 
the nature of any dispute and the actions taken by the Funds to resolve 
the dispute.
    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
of it under the Credit Facility occurred, the first two years in an 
easily accessible place, written records of all such transactions 
setting forth a description of the terms of the transaction, including 
the amount, the maturity, and the rate of interest available at the 
time on short-term repurchase agreements and commercial bank 
borrowings, and such other information presented to the Trust's board 
of trustees in connection with the review required by conditions 13 and 
14.
    17. The Adviser will prepare and submit to the boards for review an 
initial special report on the ``Design of a System'' with respect to 
the operations of the Credit Facility prior to the facility commencing 
operations, including a report thereon of its independent public 
accountants. A test program of modest duration involving actual 
transactions may be conducted prior to submission of the initial report 
to the boards. An appropriate single Trust which next files its Form N-
SAR after board review of the initial report will file the report with 
its Form N-SAR, and the other Trusts will incorporate the report by 
reference in their next N-SAR filings.
    Thereafter, an annual report on the ``Design of the System and 
Certain Compliance Tests'' with respect to the accounting control 
procedures for the Credit Facility which includes an opinion of the 
independent public accountants will be filed for two years (measured 
from the commencement of the Credit Facility subsequent to the test 
program) with the Form N-SAR of an appropriate single Trust which next 
files its Form N-SAR, and the other Trusts will incorporate each such 
annual report by reference in their next subsequent Form N-SAR filings.
    The initial ``Design'' report and the annual ``Design and 
Compliance Tests'' report will each be prepared in accordance with the 
requirements of Statement of Auditing Standards No. 70 (``SAS 70'') as 
it may be amended or pursuant to similar auditing standards as may be 
adopted by the American Institute of Certified Public Accountants from 
time to time, including reports of independent accountants thereon. 
Each SAS 70 report will include a description of the Adviser's 
principal procedures used to monitor compliance with the conditions to 
any order concerning the application. The principal procedures will 
include, at a minimum, procedures that are designed to achieve the 
following objectives: (a) The Interfund Rate being higher than the Repo 
Rate but lower than the Bank Loan Rate; (b) the Funds' compliance with 
the Interfund Loan collateral requirements; (c) the Funds' compliance 
with the percentage limitations on interfund borrowing and lending; (d) 
the Funds' allocation of interfund borrowing and lending demand in 
accordance with procedures established by the Funds' boards of 
trustees; and (e) if a Fund, at the time of its borrowing from another 
Fund, also has outstanding third-party borrowings, the interest rate on 
such interfund borrowings not exceed the interest rate on third-party 
borrowings. After the final annual SAS 70 report, compliance with the 
conditions to any order issued concerning the application will be 
considered by the external auditors as part of their internal 
accounting control procedures, performed in connection with Fund audit 
examinations, which form the basis, in part, of the auditors' report on 
internal accounting controls in Form N-SAR.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31265 Filed 12-26-95; 8:45 am]
BILLING CODE 8010-01-M