[Federal Register Volume 61, Number 22 (Thursday, February 1, 1996)]
[Notices]
[Pages 3753-3755]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2061]



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

SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21709; International Series Release No. 922; File No. 812-
9656]


PNC Bank, N.A. and PFPC Trustee & Custodial Services Ltd; Notice 
of Application

January 26, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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

APPLICANTS: PNC Bank, N.A. (``PNC'') and PFPC Trustee & Custodial 
Services (``PFPC'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from section 17(f) of the Act.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
PFPC, a subsidiary of PNC, to act as custodian for certain investment 
companies' foreign assets in Ireland. The order further would permit 
PFPC to act as primary custodian for all assets of such investment 
companies and to delegate to PNC all duties and obligations relating to 
the custody of the investment companies' U.S. assets.

FILING DATE: The application was filed on July 7, 1995 and amended on 
November 29, 1995. Applicants have agreed to file an 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 February 20, 
1996 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, PNC Bank, N.A., Land Title Building, Broad & 
Chestnut Streets, Philadelphia, Pennsylvania 19110, Attn: Gary M. 
Gardner, Esq.

FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 942-0574, or Alison E. Baur, 
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. PNC is a national banking association organized and existing 
under the laws of the United States, and is regulated by the 
Comptroller of the Currency under the National Bank Act. As of December 
31, 1994, PNC had aggregate capital, surplus and undivided profits 
exceeding $3.2 billion. PNC is a wholly-owned indirect subsidiary of 
PNC Bank Corp., a bank holding company organized under the laws of 
Pennsylvania and regulated under the Bank Holding Company Act of 1956. 
PNC provides custodial and other services to registered investment 
companies, offshore funds, investment advisers, pension funds, other 
financial institutions, and individuals.
    2. PFPC is a wholly-owned indirect subsidiary of PNC. PFPC is a 
limited purpose corporation supervised by the Central Bank of Ireland 
under several Irish laws, including the Companies Act 1990, the Unit 
Trust Act 1990, and the Investment Limited Partnership Act. PFPC was 
organized in Ireland to provide custody services for PNC's U.S. 
investment company customers.
    3. Applicants request an order exempting PNC, PFPC, any management 
investment company registered under the Act other than an investment 
company registered under section 7(d) of the Act (a ``U.S. Investment 
Company''), and any custodian for a U.S. Investment Company, from the 
provisions of section 17(f) of the Act to the extent necessary to 
permit: (a) PNC (as custodian or subcustodian for U.S. Investment 
Companies) or a U.S. Investment Company to deposit, or cause or permit 
the U.S. Investment Company to deposit, its Foreign Securities, cash, 
and cash equivalents (``Foreign Assets'') with PFPC, as delegate for 
PNC; (b) PFPC (as custodian or subcustodian) to receive and hold the 
Foreign Assets of a U.S. Investment Company directly from such U.S. 
Investment Company, its custodian or subcustodian (other than PNC); or 
(c) PFPC, upon request by a U.S. Investment Company, to act as primary 
custodian for all assets of investment companies and to delegate to PNC 
all duties and obligations relating to the custody of the U.S. 
Investment Company's U.S. Assets. As used herein, the term ``Foreign 
Securities'' includes (i) securities issued and sold primarily outside 
the U.S. by a foreign government, a national or any foreign country, or 
a corporation or other organization incorporated or organized under the 
laws of any foreign country; and (ii) securities issued or guaranteed 
by the U.S. Government or by any state or any political subdivision or 
any agency thereof or by any entity organized under the law of the U.S. 
or any state thereof which have been issued and sold primarily outside 
the U.S. The term ``U.S. Assets'' includes securities, cash and cash 
equivalents other than Foreign Assets.
    4. PFPC would provide custody services required in Ireland as 
delegate for PNC, when PNC acts as custodian or subcustodian for a U.S. 
Investment Company, or directly, as custodian or subcustodian for a 
U.S. Investment Company for the investment company's Foreign Assets. In 
addition, if requested by a U.S. Investment Company, PFPC would act as 
primary custodian for that company's assets and delegate to PNC all 
custody services to be provided to the company with respect to the U.S. 
Assets. In each case, PNC will assume liability for any loss caused by 
PFPC. Thus, there will be no difference in the nature or extent of 
PNC's liability based on whether such services are provided by PFPC 
directly or as PNC's delegate.
    5. PFPC proposes to act as primary custodian for assets of a U.S. 
Investment Company to accommodate certain 

[[Page 3754]]
master/feeder arrangements. Applicants state that, under the master/
feeder investment structure, investment management and custodial 
activities are performed at the master portfolio level, and marketing, 
distribution, and shareholder servicing functions are performed at the 
feeder fund level. Under these master/feeder arrangements, the master 
portfolio is a registered investment company, and feeder funds may 
consist of registered and unregistered foreign and domestic entities.
    6. Applicants represent that the Central Bank of Ireland has stated 
that it may be more willing to grant regulatory approval of Irish 
feeder fund investments in U.S. master funds if primary custody of the 
master fund's assets is maintained in Ireland so that the Central Bank 
can monitor the safekeeping of the master fund's assets. Applicants 
contend that, by utilizing PFPC to maintain primary custody of a master 
fund's assets, the fund's sponsor can provide Irish regulators with the 
ability to monitor custodial procedures affecting the interest of Irish 
feeder funds. Applicants assert that, because PNC will (a) supervise 
all aspects of PFPC's custody arrangements with U.S. Investment 
Companies; (b) assume direct responsibility for maintaining custody of 
U.S. Assets in the U.S.; and (c) be liable for any loss arising out of 
or in connection with PFPC's performance or custodial responsibilities, 
there is greater assurance that custodial services will be provided in 
accordance with U.S. standards, and U.S. regulators will have 
jurisdiction over the custodial arrangements.

Applicants' Legal Conclusions

    1. Section 17(f) of the Act requires every registered management 
investment company to place and maintain its securities and similar 
investments in the custody of certain entities, including ``banks'' 
having aggregate capital, surplus and undivided profits of at least 
$500,000. A ``bank,'' as defined in section 2(a)(5) of the Act includes 
(a) a banking institution organized under the laws of the U.S.; (b) a 
member of the Federal Reserve System; and (c) any other banking 
institution or trust company doing business under the laws of any state 
or of the U.S., and meeting certain requirements. Therefore, the only 
entities located outside the U.S. which section 17(f) authorizes to 
serve as custodians for registered management investment companies are 
the overseas branches of U.S. banks.
    2. Rule 17f-5 under the Act expands the group of entities that are 
permitted to serve as foreign custodians. Rule 17f-5(c)(2)(ii) defines 
the term `` Eligible Foreign Custodian'' to include a majority-owned 
direct or indirect subsidiary of a qualified U.S. bank or bank-holding 
company that is incorporated or organized under the laws of a country 
other than the U.S. and that has shareholders' equity in excess of $100 
million. Rule 17f-5(c)(3) defines the term ``Qualified U.S. Bank'' to 
include a banking institution organized under the laws of the U.S. that 
has an aggregate capital, surplus and undivided profit of not less than 
$500,000. PNC meets the definition of a Qualified U.S. Bank.
    3. While PFPC satisfies the requirements of rule 17f-5 insofar as 
it is a wholly-owned indirect subsidiary of PNC Bank Corp. and is 
incorporated under the laws of Ireland, it does not meet the rule's 
$100 million minimum shareholders' equity requirement. Accordingly, 
PFPC does not qualify as an Eligible Foreign Custodian under rule 17f-5 
and, absent exemptive relief, could not serve as custodian for the 
Foreign Assets of U.S. Investment Companies.
    4. Applicants assert that PNC's U.S. Investment Company customers 
currently must incur the inconvenience of using the services of a 
custodian other than PNC to maintain custody of their Foreign Assets in 
Ireland. Applicants contend that those customers who keep a single 
custody account with PNC suffer the inconvenience and expense 
associated with moving Foreign Securities away from their primary 
market or foregoing effecting transactions in the particular securities 
market. However, PNC's U.S. Investment Company customers would not be 
forced to choose between such inconveniences if they and PNC were 
permitted access to PFPC's custody services.
    5. Applicants also assert that the requested order would facilitate 
Irish feeder fund investments in U.S. master funds. Applicants believe 
that certain U.S. Investment Companies that invest in Irish Foreign 
Securities may wish to obtain the benefit of PNC's consolidated custody 
services while using PFPC's services as primary custodian. Such an 
arrangement would allow customers whose holdings are principally 
Foreign Securities the advantage of having one custodian handle all 
custody issues and of having a single custody account and account 
statement. Under a custody arrangement in which PFPC is primary 
custodian for a U.S. Investment Company's Assets and PNC acts as 
subcustodian for the U.S. Assets, the U.S. Assets would have the same 
protection as if held directly by PNC, and PNC would remain fully 
liable to the U.S. Investment Companies to the same extent as if it 
provided custody services to such companies directly.
    6. Applicants represent that the protection afforded the assets of 
U.S. Investment Companies held by PFPC would not be diminished from the 
protection afforded by rule 17f-5. PNC will maintain records reflecting 
the ownership of the assets held by PFPC as primary or subcustodian for 
U.S. Investment Companies, and these records will identify each 
security held by each U.S. Investment Company. PFPC will also maintain 
its own records. All movements of money effected through PFPC and all 
assets held by PFPC will be monitored, recorded, and tested by PNC. 
Accordingly, when PFPC, in its capacity as primary custodian, receives 
instructions relating to the disposition of the assets of a U.S. 
Investment Company, PNC will be provided the same information 
contemporaneously. Moreover, all transactions effected through PFPC as 
primary or sub-custodian will be done on a payment versus delivery 
basis.
    7. Internal compliance personnel presently employed by PNC or its 
affiliates will advise PFPC on establishing procedures and controls. 
Thus, applicants represent that safeguards substantially equal to those 
provided by PNC's U.S. operations will be in place and that PFPC will 
provide uniform procedures for custody administration.
    8. Applicants assert that PNC's role as supervisor addresses the 
custodian specific risks to U.S. Investment Company Assets identified 
by rule 17f-5. PNC will assure that safeguards consistent with U.S. 
standards will be employed to maintain the safety of U.S. Investment 
Company Assets held by PFPC. Moreover, because a U.S. Investment 
Company may pursue a claim for recovery against PNC in the event of a 
loss caused by PFPC, regardless of whether PFPC acts as PNC's delegate 
or as direct custodian or primary custodian, U.S. jurisdiction over 
claims of U.S. Investment Companies is assured.
    9. Applicants believe that permitting U.S. Investment Companies 
access to PFPC's custody services as subcustodian, direct custodian, or 
primary custodian will allow those companies to obtain the same quality 
of services for both their Foreign Securities and their U.S. 
securities, and at the same time will give PFPC's U.S. 

[[Page 3755]]
Investment Company customers the greatest flexibility and convenience 
in custody arrangements.
    10. Section 6(c) of the Act provides, in relevant part, that the 
SEC may 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 believe the requested 
order satisfies this standard.

Conditions

    Applicants agree that any order of the SEC granting the requested 
relief may be conditioned upon the following:
    1. The foreign custody arrangement proposed regarding PFPC will 
satisfy the requirements of rule 17f-5 in all respects other than 
PFPC's level of shareholders' equity, except to the extent that relief 
may be needed for PFPC to act as primary custodian for U.S. Investment 
Companies under the specific terms provided in the application.
    2. PNC, any U.S. Investment Company, and any custodian for a U.S. 
Investment Company, will deposit Foreign Assets with PFPC only in 
accordance with an agreement (the ``Agreement'') required to remain in 
effect at all times during which PFPC fails to satisfy the requirements 
of rule 17f-5 (and during which such Foreign Assets remain deposited 
with PFPC). Each Agreement will be a three-party agreement among PNC, 
PFPC and the U.S. Investment Company or the custodian for a U.S. 
Investment Company pursuant to which PNC or PFPC, as the case may be, 
will undertake to provide specified custody services. If PNC is acting 
as a custodian for the U.S. Investment Company, the Agreement will 
authorize PNC to delegate to PFPC such of the duties and obligations of 
PNC as will be necessary to permit PFPC to hold in custody the U.S. 
Investment Company's Foreign Assets. If PNC is not acting as a 
custodian for the U.S. Investment Company, the Agreement will authorize 
PFPC to provide custody services directly, and no delegation from PNC 
to PFPC will be necessary. In each case, the Agreement will provide 
that PNC will be liable fore any loss, damage, cost, expense, 
liability, or claim arising out of or in connection with the 
performance by PFPC of its responsibilities under the Agreement to the 
same extent as if PNC had itself been required to provide custody 
services under the Agreement. Further, the Agreement will specifically 
provide that, in the event of loss, a U.S. Investment Company may 
pursue a claim for recovery against PNC, regardless of whether PFPC 
acted as PNC's delegate or as direct custodian or subcustodian.
    3. PFPC will act as primary custodian for a U.S. Investment 
Company's Assets only in accordance with a supplement or addendum to 
the Agreement (the ``Supplemental Agreement''), which would be required 
to remain in effect at all times, regardless of whether PFPC satisfies 
the requirements of rule 17f-5. PFPC will act as primary custodian for 
a U.S. Investment Company's Assets only if PFPC is also custodian for 
the Company's Foreign Assets. The Supplemental Agreement will provide 
that PFPC will delegate to PNC all of the duties and obligations of 
PFPC necessary to permit PNC to provide full and complete custody 
services with respect to the U.S. Investment Company's U.S. Assets. PNC 
will remain directly liable to the U.S. Investment Company under the 
Agreement, for any loss, damage, cost, expense, liability or claim 
arising out of or in connection with the performance of PFPC of its 
responsibilities under the Agreement, including the Supplemental 
Agreement.
    4. PNC currently satisfies and will continue to satisfy the 
Qualified U.S. Bank requirement set forth in rule 17f-5(c)(3).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2061 Filed 1-31-96; 8:45 am]
BILLING CODE 8010-01-M