[Federal Register Volume 61, Number 188 (Thursday, September 26, 1996)]
[Notices]
[Pages 50516-50520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24698]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 22236; 812-9844]


Daily Money Fund, et al.; Notice of Application

September 20, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'').

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APPLICANTS: Daily Money Fund, Daily Tax-Exempt Money Fund, Fidelity 
Advisor Korea Fund, Inc., Fidelity Advisor Emerging Asia Fund, Inc., 
Fidelity Advisor Series I, Fidelity

[[Page 50517]]

Advisor Series II, Fidelity Advisor Series III, Fidelity Advisor Series 
IV, Fidelity Advisor Series V, Fidelity Advisor Series VI, Fidelity 
Advisor Series VII, Fidelity Advisor Series VIII, Fidelity Advisor 
Annuity Fund, Fidelity Beacon Street Trust, Fidelity Boston Street 
Trust, Fidelity California Municipal Trust, Fidelity California 
Municipal Trust II, Fidelity Capital Trust, Fidelity Charles Street 
Trust, Fidelity Commonwealth Trust, Fidelity Congress Street Fund, 
Fidelity Contrafund, Fidelity Court Street Trust, Fidelity Court Street 
Trust II, Fidelity Destiny Portfolios, Fidelity Deutsche Mark 
Performance Portfolio, L.P., Fidelity Devonshire Trust, Fidelity 
Exchange Fund, Fidelity Financial Trust, Fidelity Fixed-Income Trust, 
Fidelity Government Securities Fund, Fidelity Hastings Street Trust, 
Fidelity Hereford Street Trust, Fidelity Income Fund, Fidelity 
Institutional Cash Portfolios, Fidelity Institutional Tax-Exempt Cash 
Portfolios, Fidelity Institutional Investors Trust, Fidelity 
Institutional Trust, Fidelity Investment Trust, Fidelity Magellan[ 
Fund, Fidelity Massachusetts Municipal Trust, Fidelity Money Market 
Trust, Fidelity Mt. Vernon Street Trust, Fideity Municipal Trust, 
Fidelity Municipal Trust II, Fidelity New York Municipal Trust Fidelity 
New York Municipal Trust II, Fidelity North Carolina Capital 
Management, Fidelity Phillips Street Trust, Fidelity Puritan Trust, 
Fidelity School Street Trust, Fidelity Securities Fund, Fidelity Select 
Portfolios, Fidelity Sterling Performance Portfolio, L.P., Fidelity 
Summer Street Trust, Fidelity Trend Fund, Fidelity Union Street Trust, 
Fidelity Union Street Trust II, Fidelity U.S. Investments--Bond fund, 
L.P., Fidelity U.S. Investments--Government Securities Fund, L.P., 
Fidelity Yen Performance Portfolio, L.P., Variable Insurance Products 
Fund, Variable Insurance Products Fund II (collectively, the 
``Trust''); Fidelity Advisor World U.S. Large-Cap Stock Fund (Bermuda) 
Ltd., Fidelity Advisor World Europe fund (Bermuda) Ltd., Fidelity 
Advisor World Europe Fund (Bermuda) Ltd., Fidelity Advisor World 
Southeast Asia Fund (Bermuda) Ltd., Fidelity World Advisory World U.S. 
Limited Term Bond Fund (Bermuda) Ltd., Fidelity Advisor World U.S. 
Government Investment Fund (Bermuda) Ltd., Fidelity Advisor World U.S. 
Treasury Money Fund (Bermuda) Ltd. (collectively, the ``Fidelity 
Advisor World Funds''); Fidelity Management and Research Company 
(``FMR''); Fidelity Management Trust Company (or an affiliate trustee) 
(``FMTC''); Fidelity Group Trust for Employee Benefit Plans (``Fidelity 
Group Trust''); FMR Texas Inc. (``FMR Texas''); \1\ Fidelity Service 
Co. ``FSC''); Fidelity Investments Institutional Operations Company 
(``FIIOC''); \2\ each Trust and all other registered investment 
companies and series thereof that are advised by FMR or a person 
controlling, controlled by, or under common control with FMR 
(collectively, the ``Adviser'') and all other registered investment 
companies and series thereof for which the Adviser in the future acts 
as investment adviser (collectively, the ``Registered Funds''); the 
Fidelity Advisor World Funds, and other pooled investment funds advised 
or in the future advised by the Adviser, or a person controlling, 
controlled by, or under common control with the Adviser, offered 
exclusively outside the United States to non-U.S. residents (the ``Off-
Shore Funds''); state and local entities or accounts thereof advised or 
in the future advised by the Adviser that are exempt from regulation 
under the Act pursuant to section 2(b) of the Act (the ``2(b) 
Entities''); collective trust funds of the Fidelity Group Trust, the 
trustee for which, or in the future the trustee for which, is FMTC, 
that are excepted from the definition of investment company by section 
3(c)(11) of the Act (the ``3(c)(11) Entities''); and individual 
institutional accounts advised by the Adviser (collectively, the 
Registered Funds, the Off-Shore Funds, the 2(b) Entities, the 3(c)(11) 
Entities, and the individual institutional accounts are the ``Funds'').

    \1\ The term ``FMR Texas'' includes any other company controlled 
or under common control with FMR Texas that acts in the future as 
investment adviser to the non-publicly traded Fidelity money market 
or short-term bond funds that are the subject of the requested 
relief.
    \2\ The terms ``FSC'' and ``FIIOC'' include any other company 
controlled by or under common control with FMR that acts in the 
future as shareholder servicing or dividend disbursing agent for the 
Trusts.
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RELEVANT ACT SECTIONS: Order of exemption requested under section 6(c) 
of the Act from section 12(d)(1)(A)(ii) of the Act and rule 2a-7(c)(4) 
(i) and (ii) thereunder, under sections 6(c) and 17(b) that would 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: The requested order would permit certain Funds, 
including money market funds (the ``Participating Funds''), to purchase 
shares of affiliated investment companies (the ``Central Funds'') for 
cash management purposes (the ``Cash Management Transactions'') and 
permit the Participating Funds and the Central Funds to engage in 
certain transactions with each other.

FILING DATES: The application was filed on November 11, 1995, and 
amended on March 18, and July 10, 1996. 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 October 15, 
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 Fifth Street NW., Washington, DC 20549. 
Applicants, 82 Devonshire Street, Boston, MA 02109.

FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at 
(202) 942-0572, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the Registered Funds is registered under the Act and 
most of the Trusts are series companies. The current Off-Shore Funds 
are portfolios of mutual funds established under the laws of Bermuda. 
Each of the 3(c)(11) Entities is organized as a separate pooled account 
under the Fidelity Group Trust, for which FMTC acts as trustee. The 
only 2(b) Entity that currently intends to rely on the requested order 
is the Massachusetts Municipal Depository Trust (``Municipal Trust''), 
which is established pursuant to Massachusetts law.\3\
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    \3\ A 2(b) Entity (including the Municipal Trust) may 
participate in the Cash Management Transactions if it determines 
that the proposed investments in instruments through the proposed 
transactions are consistent with state laws or administrative rules 
regulating the 2(b) Entity. If not, it must seek to have those laws 
or rules amended. Accordingly, the Municipal Trust is not named as 
an applicant because it considers it premature to join formally.

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    2. The Adviser, a registered investment adviser, acts as each 
Fund's investment manager and provides the Funds with administrative 
services. FMR Texas will provide investment management services to the 
Central Funds that are money market funds. FSC is the transfer and 
dividend paying agent for each of the retail Registered Funds and FIIOC 
is the transfer and dividend paying agent for each of the institutional 
Registered Funds. FMR Corp. is the parent holding company for FMR, 
FMTC, FMR Texas, FSC, and FIIOC.
    3. Each Participating Fund has, or may be expected to have, 
uninvested cash held by its custodian bank. Such cash may result from a 
variety of sources, including dividends or interest received from 
portfolio securities, securities transactions, reserves held for 
investment strategy purposes, scheduled maturity of investments, 
liquidation of investment securities to meet anticipated redemptions 
and dividend payments, and new monies received from investors.
    4. The Central Funds will be open-end management investment 
companies registered under the Act, but will not register their shares 
under the Securities Act of 1933. Shares of the Central Funds will be 
sold only to the Participating Funds. The Central Funds will be taxable 
or tax-exempt money market funds or short-term bond funds with a 
portfolio maturity of three years or less. The Central Funds will be 
used as a cash management device for temporary investment by the 
Participating Funds.
    5. Certain of the Participating Funds currently engage in interfund 
purchase and sale transactions involving short-term money market 
instruments in reliance on rule 17a-7.\4\ These transactions are 
typically between one entity that has a need to raise cash and another 
that has cash to invest on a short-term basis or between a fund that 
was seeking to implement portfolio strategy and another fund that was 
seeking to raise or invest cash. Applicants propose that the 
Participating Funds and the Central Funds also be permitted to engage 
in such interfund purchase and sale transactions in securities 
(``Interfund Transactions'').
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    \4\ Rule 17a-7 provides for purchase or sale transactions 
between registered investment companies and certain affiliated 
persons provided that certain conditions are met.
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Applicants' Legal Analysis

A. Sections 6(c) and 12(d)(1) and Rule 2a-7

    1. Section 12(d)(1)(A) of the Act prohibits any registered 
investment company (the ``acquiring company'') or any company or 
companies controlled by such acquiring company to purchase any security 
issued by any other investment company (the ``acquired company'') if 
such purchase will result in the acquiring company or companies it 
controls owning in the aggregate (a) More than 3% of the outstanding 
voting stock of the acquired company, (b) securities issued by the 
acquired company with an aggregate value in excess of 5% of the 
acquiring company's total assets, or (c) securities issued by the 
acquired company and all other investment companies with an aggregate 
value in excess of 10% of the value of the acquiring company's total 
assets.
    2. Since the Participating Funds will be the only shareholders of 
the Central Funds, more than 3% of the shares of each Central Fund may 
be owned by one or more of the Registered Funds and more than 10% of 
each Central Fund's shares may be held by one or more investment 
companies. In addition, applicants propose that each Registered Fund be 
permitted to invest in, and hold shares of, the Central Funds to the 
extent that a Registered Fund's aggregate investment in the Central 
Funds at the time the investment is made does not exceed 25% of the 
Registered Fund's total net assets. For these reasons, applicants seek 
an exemption from the provisions of section 12(d)(1) to the extent 
necessary to implement the Cash Management Transactions.
    3. Rule 2a-7(c)(4) (i) and (ii) require money market funds to limit 
their investment in the securities of any one issuer (other than 
certain specified securities) to 5% of fund assets with respect to 
either 100% or 75% of the fund's total assets. The SEC has interpreted 
rule 2a-7(c)(4) (i) and (ii) as applying to a money market fund's 
investment in another money market fund.\5\ Accordingly, applicants 
seek relief from rule 2a-7(c)(4) (i) and (ii) to the extent necessary 
to permit the Participating Registered Funds that are money market 
funds to invest in a Central Fund that is a money market fund, to the 
same extent, and on the same basis, as Participating Funds that are not 
money market funds.
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    \5\ See Investment Company Act Release No. 21837 (Mar. 21, 1996) 
(release adopting amendments to rule 2a-7).
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    4. Section 6(c) permits the SEC to exempt any person or transaction 
from any provision of the Act, if such exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policies of the 
Act. For the reasons provided below, applicants argue that the 
requested order meets the section 6(c) standards.
    5. Applicants state that it would be in the best interests of the 
Participating Funds and their shareholders to provide the widest 
possible range of investments for available cash. By adding shares of 
the Central Funds as another investment option, the applicants believe 
that the Participating Funds may reduce their aggregate exposure to 
counterparty risk in repurchase agreements and diversify the risk 
associated with direct purchases of short-term obligations while 
providing high current rates of return, ready liquidity, and increased 
diversity of holdings indirectly through investment in the Central 
Funds. Reducing the amount of uninvested cash held at custodian banks 
also would reduce the Participating Funds' credit exposure to such 
banks. These benefits would be particularly pronounced for any tax-
exempt Participating Funds, which have fewer cash management options 
than taxable funds.
    6. With respect to section 12(d)(1), applicants state that a fund's 
cash position fluctuates with shareholder and investment activity. 
Applicants believe that a maximum of 25% of a Participating Fund's 
assets will cover normal investment patterns and permit the majority of 
a fund's cash to be invested in a Central Fund (assuming that a fund's 
fundamental investment policy permits such investment).
    7. In addition, applicants state that section 12(d)(1) is intended 
to protect an investment company's shareholders against (a) undue 
influence over portfolio management through the threat of large-scale 
redemptions, the threat of loss of advisory fees to the adviser, and 
the disruption of orderly management of the investment company through 
the maintenance of large cash balances to meet potential redemptions, 
(b) the acquisition of voting control of the company, and (c) the 
layering of sales charges, advisory fees, and administrative costs. 
Applicants state that because an Adviser will serve as investment 
adviser to both the Participating Funds and the Central Funds, it is 
not susceptible to undue influence regarding its management of the 
Central Funds due to threatened redemptions or loss of fees. In 
addition, applicants state that each of the Central Funds will be 
managed specifically to maintain a highly liquid portfolio and

[[Page 50519]]

that access to the Central Funds will enhance each Participating Fund's 
ability to manage and invest cash. Further, since no Central Fund will 
be publicly offered, only the Participating Funds will exercise voting 
control over the Central Funds and each Participating Fund will hold a 
pro rata share of a Central Fund's outstanding voting securities based 
on the amount of its investment. Additionally, since the Participating 
Funds will not incur many of the expenses associated with direct 
investment, these savings should significantly offset the affect of the 
remaining expenses incurred by the Central Funds. Therefore, applicants 
believe none of the perceived abuses meant to be addressed by section 
12(d)(1) is created by the Cash Management Transactions.
    8. Applicants state that rule 2a-7 is designed to minimize the risk 
that a money market fund will not be able to maintain a stable net 
asset value. A Central Fund that is a money market fund will seek to 
maintain a constant net asset value and will be as liquid as a publicly 
offered money market fund. Applicants state that the net asset value 
per share of a money market Participating Fund would be made no more 
volatile as a result of investing a portion of its assets in another 
money market fund. In addition, investment in a Central Fund would be 
as liquid as other investment alternatives.
    Accordingly, applicants belief that the investment by a money 
market Participating Fund in a Central Fund that is a money market fund 
would be consistent with the risk-limiting objectives of rule 2a-7, as 
amended.

B. Sections 17(a) and 17(b).

    1. Section 2(a)(3) of the Act defines an affiliated person of an 
investment company to include any person that owns more than 5% of the 
outstanding voting securities of that company and 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), FMR, as investment adviser of each of the Funds, 
is an affiliated person of each Fund. Further, because the Funds either 
share a common investment adviser or have an investment adviser that is 
under common control with those of the other Funds, and most Registered 
Funds also share a common board of trustees, or other governing body, 
the Funds may be deemed to be under common control with all the other 
Funds and, therefore, each is an affiliated person of those Funds. In 
addition, it is likely that a Participating Fund would own more than 5% 
of the outstanding voting securities of the Central Fund. Thus, each 
Participating Fund and the Central Fund may be affiliated persons (or 
affiliates of affiliates) of each other Fund.
    2. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and any 
affiliated person of that company. The sale by the Central Funds of 
their shares to the Participating Registered Funds and the redemption 
of such shares by the Registered Funds could be deemed to be a 
principal transaction between affiliated persons that is prohibited 
under section 17(a). Therefore, applicants request an order to permit 
the Central Funds to sell their shares to the Registered Funds and to 
permit the Registered Funds to redeem such shares from the Central 
Funds. In addition, applicants request relief to permit the 
Participating and the Central Funds to engage in Interfund Transactions 
that otherwise would be effected in reliance on rule 17a-7 except for 
the affiliation created by the Cash Management Transactions.
    3. Section 17(b) permits the SEC to grant an order permitting a 
transaction otherwise prohibited by section 17(a) if it finds that the 
terms of the proposed transaction are fair and reasonable and do not 
invoke overreaching on the part of any person concerned. Section 17(b) 
could be interpreted to exempt only a single transaction. However, the 
Commission, under section 6(c) of the Act, may exempt a series of 
transactions that otherwise would be prohibited by section 17(a). For 
the reason stated below, applicants believe that the terms of the 
transactions meet the standards of section 6(c) and 17(b).
    4. With respect to the relief requested from section 17(a) for the 
Cash Management Transactions, applicants state that the terms of the 
Cash Management Transactions are fair because the consideration paid 
and received for the sale and redemption of shares of the Central Funds 
will be based on the net asset value per share of the Central Funds. In 
addition, the purchase of shares of the Central Funds by the 
Participating Funds will be effected in accordance with each 
Participating Fund's investment restrictions and policies as set forth 
in its registration statement.
    5. With respect to the relief requested from section 17(a) for the 
Interfund Transactions, applicants state that the Funds will comply 
with rule 17a-7 under the Act in all respects, other than the 
requirement that the registered investment company and the affiliated 
person thereof (or the affiliated person of such person) be affiliated 
persons of each other solely by reason of having a common investment 
adviser or investment advisers which are affiliated persons of each 
other, common officers and/or common directors. Applicants state that 
the additional affiliation created by the Cash Management Transactions 
does not effect the other protections provided by rule 17a-7, including 
oversight by the board of trustees of each Fund.

C. Section 17(d) and Rule 17d-1

    1. 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. Applicants contend that because they are acting together 
to create the Central Funds as a private facility for their cash 
management needs, the Central Funds may be deemed a joint enterprise 
for the purposes of section 17(d) and rule 17d-1.
    2. Rule 17d-1 permits the SEC to approve a proposed joint 
transaction. In determining whether to approve 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 stated below, applicants believe that the requested relief 
meets these standards.
    3. Applicants state the Cash Management Transactions are intended 
to provide substantial benefits to all Participating Funds and that the 
Central Funds will benefit from having as large an asset base as 
possible. Moreover, applicants state that the arrangement is not 
intended to increase the fees for the Adviser or any other non-
investment company participant. Finally, each Participating Fund may 
purchase and redeem shares of each Central Fund, and would receive 
dividends and bear expenses on the same basis as each other 
Participating Fund that also invests in such Central Fund.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. The shares of the Central Funds sold to and redeemed from the 
Registered Funds will not be subject to

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a sales load, redemption fee, distribution fee under a plan adopted in 
accordance with rule 12b-1, or service fee (as defined in rule 
2830(b)(9) of the National Association of Securities Dealers' Rules of 
Conduct).\6\
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    \6\ The staff notes that until recently rule 2830 of the NASD's 
Rules of Conduct was section 26 of Article III of the NASD Rules of 
Fair Practice.
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    2. If the Adviser to the Central Fund collects a fee from the 
Central Fund for acting as its investment adviser, before the next 
meeting of the board of trustees of a Registered Fund that invests in 
the Central Fund is held for the purpose of voting on an advisory 
contract under section 15, the Adviser to the Registered Funds will 
provide the board of trustees with specific information regarding the 
approximate cost to the Adviser for managing the assets of the 
Registered Fund that can be expected to be invested in such Central 
Funds. Before approving any advisory contract under section 15, the 
board of trustees of such Registered Fund, including a majority of the 
trustees who are not ``interested persons,'' as defined in section 
2(a)(19), shall consider to what extent, if any, the advisory fees 
charged to the Registered Fund by the Adviser should be reduced to 
account for the fee indirectly paid by the Registered Fund because of 
the advisory fee paid by the Central Fund. The minute books of the 
Registered Fund will record fully the trustees' consideration in 
approving the advisory contract, including the considerations relating 
to fees referred to above.
    3. Each Participating Fund, each Central Fund, and any future fund 
that may rely on the order shall be advised by or, in the case of a 
3(c)(11) Entity, shall have as its trustee, FMR or a person 
controlling, controlled by, or under common control with FMR.
    4. Investment in shares of the Central Funds will be in accordance 
with each Registered Fund's respective investment restrictions, if any, 
and will be consistent with each Registered Fund's policies as set 
forth in its prospectuses and statements of additional information.
    5. No Central Fund shall acquire securities of any other investment 
company in excess of the limits contained in section 12(d)(1)(A) of the 
Act, except as permitted by the SEC's prior interfund lending order 
issued to the Fidelity family of funds.\7\
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    \7\ See Daily Money Fund, Investment Company Act Release No. 
17303 (Jan. 11, 1990).
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    6. A majority of the trustees of each Registered Fund will not be 
``interested persons,'' as defined in section 2(a)(19) of the Act.
    7. Each of the Registered Funds will invest uninvested cash in, and 
hold shares of, the Central Funds only to the extent that the 
Registered Fund's aggregate investment in the Central Funds at the time 
the investment is made does not exceed 25% of the Registered Fund's 
total net assets. For purposes of this limitation, each Registered Fund 
or series thereof will be treated as a separate investment company.
    8. To engage in Interfund Transactions, the Funds will comply with 
rule 17a-7 under the Act in all respects other than the requirement 
that the parties to the transaction be affiliated persons (or 
affiliated persons of affiliated persons) of each other solely by 
reason of having a common investment adviser or investment advisers 
which are affiliated persons of each other, common officers, and/or 
common directors.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-24698 Filed 9-25-96; 8:45 am]
BILLING CODE 8010-01-M