[Federal Register Volume 61, Number 173 (Thursday, September 5, 1996)]
[Notices]
[Pages 46874-46876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22578]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22181; 812-10216]


First American Investment Funds, Inc., et al.; Notice of 
Application

August 28, 1996.
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: First American Investment Funds, Inc. (``FAIF''), First 
American Funds, Inc. (``FAF'') (collectively, the ``Funds''), First 
Trust National Association (``First Trust''), and First Bank National 
Association (``First Bank'').

RELEVANT ACT SECTIONS: Order requested under rule 17d-1 under the Act 
to permit certain joint transactions.

SUMMARY OF APPLICATION: The requested order would permit the Funds to 
pay First Trust, and First Trust to accept, fees for acting as lending 
agent with respect to securities lending transactions by the Funds.

FILING DATES: The application was filed on June 21, 1996, and amended 
on August 22, 1996.

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 September 23, 
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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549. 
Applicants: the Funds, 680 East Swedesford Road, Wayne, PA 19087; First 
Trust, 180 East Fifth Street, St. Paul, MN 55101; and First Bank, 601 
Second Avenue South, Minneapolis, MN 55402.

FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at 
(202) 942-0572, or Mercer E. Bullard, 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. FAIF and FAF are registered under the Act as open-end management 
investment companies and are incorporated under the laws of the States 
of Maryland and Minnesota, respectively. FAIF has twenty separate 
series and FAF has three. First Trust serves as custodian for each Fund 
and First Bank is the investment adviser for each Fund. First Trust and 
First Bank are wholly-owned subsidiaries of First Bank System, Inc. 
(``FBS'').
    2. Each Fund and its series, with one exception, is currently 
permitted under its investment objectives, policies, and restrictions 
to lend its portfolio securities. Since the Funds currently do not have 
the internal resources necessary to lend securities efficiently or 
effectively without the services of a third-party lending agent, First 
Bank has proposed that the Funds engage First Trust, or other third-
party agents, to act

[[Page 46875]]

as lending agent for the Fund. The lending agent will be responsible 
for establishing contact with potential borrowers, monitoring daily the 
value of the loaned securities and collateral, requesting that 
borrowers add to the collateral when required, and performing other 
administrative functions. In addition, the lending agent would invest 
cash collateral in instruments pre-approved by First Bank.
    3. The duties of the lending agent, as well as procedures governing 
the securities lending, will be included in the Fund's agreement with 
the lending agent or otherwise detailed in writing. The ultimate 
responsibility for determining which securities are available to be 
loaned and to whom the securities may be loaned will reside with First 
Bank, subject to parameters set forth in procedures approved by the 
Fund's board of directors. First Bank will monitor the lending agent to 
ensure that the securities loans are effected in accordance with 
procedures adopted by the Fund's board of directors. For its services, 
the lending agent will receive a pre-negotiated percentage of the 
lending fee or portion of the return on the investment of cash 
collateral received by a Fund. Applicants represent that the duties to 
be performed by the lending agent will be consistent with and not 
exceed the parameters set forth in Norwest Bank, a no-action letter 
issued by the staff of the Division of Investment Management (pub. 
Avail. May 25, 1995).
    4. Each borrower of a Fund's securities will be required to tender 
collateral to be held by First Trust, or other custodian to the Fund, 
in the form of cash, securities issued or guaranteed by the United 
States Government, its agencies or instrumentalities, or irrevocable 
letters of credit issued by approved banks.
    5. In transactions where the collateral consists of U.S. Government 
securities or bank letters of credit, the lending agent typically will 
negotiate on behalf of the Fund a lending fee to be paid by the 
borrower to the Fund. The borrower will deliver to the Fund's custodian 
U.S. Government securities or bank letters of credit equal to at least 
100% of the securities loaned, which collateral will be supplemented to 
cover differences between the market value of the collateral and the 
market value of the loaned securities as necessary. At the termination 
of the loan, the borrower will pay to the Fund the lending fee, and the 
lending agent will receive its pre-negotiated percentage.
    6. In transactions where the collateral consists of cash, the Fund 
typically will receive a portion of the return earned on the investment 
of the cash collateral by or under the direction of First Bank. 
Depending on the arrangements negotiated with the borrower by the 
lending agent, a percentage of the return on the investment of the cash 
collateral may be remitted by the Fund to the borrower. Cash collateral 
delivered by the borrower will equal at least 100% of the portfolio 
securities loaned and will be supplemented to cover increases in the 
market value of the loaned securities, as necessary. Out of the amounts 
earned on the investment of the cash collateral, the borrower would 
first be paid the amount agreed upon, if any, and then, out of any 
remaining earnings, the lending agent would receive its pre-negotiated 
percentage. The Fund will bear the risk of loss of the collateral.
    7. Applicants request an order to permit the Funds to pay First 
Trust, and First Trust to accept, fees in connection with First Trust's 
acting as lending agent in the manner described in the application. 
Applicants request that the relief sought also apply to any other 
registered investment company or series thereof which in the future may 
be created for which First Bank, or any other entity controlling, 
controlled by, or under common control (as defined in section 2(a)(9) 
of the Act) with First Bank, serves as investment adviser.

Applicants' Legal Analysis

    1. Section 2(a)(3) of the Act defines an affiliated person of an 
investment company to include any investment adviser of the investment 
company and any person directly or indirectly controlling, or under 
common control with, such investment adviser. Under section 2(a)(3), 
First Bank, as investment adviser of each of the Funds, is an 
``affiliated person'' of each Fund. Further, because First Trust and 
First Bank are under the common control of FBS, First Trust is an 
``affiliated person'' of First Bank and, therefore, First Trust is an 
``affiliated person of an affiliated person'' of each Fund. In 
addition, First Trust may be deemed to be an affiliated person of 
certain Funds because it and its affiliates hold of record more than 5% 
of the outstanding shares of these Funds.
    2. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an 
affiliated person of an investment company, acting as principal, from 
participating in or effecting any transaction in connection with any 
joint enterprise or joint arrangement in which the investment company 
participates. The proposed lending transactions may be deemed to 
involve a joint transaction because First Trust as lending agent would 
receive a percentage of the revenue generated by a Fund's securities 
lending program.
    3. Rule 17d-1 authorizes the SEC to permit a proposed joint 
transaction. In determining whether to permit a transaction, the SEC is 
to consider whether the proposed transaction is consistent with the 
provisions, policies, and purposes of the Act, and the extent to which 
the participation of the investment companies is on a basis different 
from or less advantageous than that of the other participants. For the 
reasons discussed below, applicants believe that the requested relief 
satisfies the standards for relief set forth in rule 17d-1.
    4. Applicants believe that First Trust can provide lending agent 
services to the Funds in an efficient and profitable manner, and in a 
manner comparable to that of other potential lending agents. Applicants 
state that First Trust is experienced in securities lending services 
and has in place the personnel and systems necessary to provide 
services in an efficient and cost-effective manner. In addition, First 
Bank, as investment adviser to the Funds, will direct and monitor the 
activities of First Trust as lending agent.
    5. Individual employees of First Trust who are involved in its 
securities lending activities may be ``dual employees'' of First Trust 
and First Bank. As employees of First Bank, such individuals also may 
be involved in the portfolio lending activities of First Bank, as 
investment adviser to the Funds. However, the individuals within First 
Bank, as investment adviser to the Funds, who will direct and monitor 
the activities of First Trust, as securities lending agent for the 
Funds, will not have operating or supervisory responsibility with 
respect to First Trust's securities lending activities.
    6. Applicants propose that each Fund will adopt the following 
procedures to ensure that the fee arrangement and other terms governing 
the relationship between the Fund and First Trust will be fair:
    a. In connection with the initial approval of First Trust as 
lending agent to the Fund, the board of directors of a Fund, including 
a majority of the directors who are not ``interested persons'' of the 
Fund within the meaning of the Act, will determine that (i) the 
contract with First Trust is in the best interests of the Fund and its 
shareholders; (ii) the services to be performed by First Trust are 
required by the Fund; (iii) the nature and quality of the services 
provided by First Trust are at least equal to those provided by others 
offering the same or similar

[[Page 46876]]

services; and (iv) the fees for First Trust's services are fair and 
reasonable in light of the usual and customary charges imposed by 
others for services of the same nature and quality.
    b. Each Fund's contract with First Trust for lending agent services 
will be reviewed annually and will be approved for continuation only if 
a majority of the board of directors of each Fund, including a majority 
of the directors who are not ``interested persons'' of the Fund within 
the meaning of the Act, makes the findings referred to in paragraph (a) 
above.
    c. In connection with the initial approval of First Trust as 
lending agent to a Fund, the board of directors will obtain competing 
quotes with respect to lending agent fees from at least three 
independent lending agents to assist the board of directors in making 
the findings referred to in paragraph (a) above.
    d. The board of directors of each Fund, including a majority of the 
directors who are not ``interested persons'' of the Fund within the 
meaning of the Act, (i) will determine at each quarterly meeting that 
the loan transactions during the prior quarter were effected in 
compliance with the conditions and procedures set forth in the 
application and (ii) will review no less frequently than annually the 
conditions and procedures for continuing appropriateness.
    e. Each Fund will (i) maintain and preserve permanently in an 
easily accessible place a written copy of the procedures and conditions 
(and modifications thereto) described in the application or otherwise 
followed in connection with lending securities and (ii) maintain and 
preserve for a period of not less than six years from the end of the 
fiscal year in which any loan transaction occurred, the first two years 
in an easily accessible place, a written record of each such loan 
transaction setting forth a description of the security loaned, the 
identity of the person on the other side of the loan transaction, the 
terms of the loan transaction, and the information or materials upon 
which the determination was made that each loan was made in accordance 
with the procedures set forth above and the conditions to the 
application.

Applicants' Conditions

    Applicants will adhere to the following conditions:
    1. No Fund may lend its portfolio securities to a borrower that is 
an affiliated person of the Fund, any adviser of the Fund, or First 
Trust, or to an affiliated person of any such person.
    2. Except as set forth herein, the securities lending program of 
each Fund will comply with all present and future applicable SEC staff 
positions regarding securities lending arrangements, i.e., with respect 
to the type and amount of collateral, voting of loaned securities, 
limitations on the percentage of portfolio securities on loan, 
prospectus disclosure, termination of loans, receipt of dividends or 
other distributions, and compliance with fundamental policies.\1\
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    \1\ See, e.g., SIFE Trust Fund (pub. avail. Feb. 17, 1982).
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    3. The approval of the board of directors of a Fund, including a 
majority of the directors who are not ``interested persons'' within the 
meaning of the Act, shall be required for the initial and subsequent 
approvals of First Trust's service as lending agent for the Funds, for 
the institution of all procedures relating to the securities lending 
programs of the Funds, and for any periodic review of loan transactions 
for which First Trust acted as lending agent.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22578 Filed 9-4-96; 8:45 am]
BILLING CODE 8010-01-M