[Federal Register Volume 61, Number 219 (Tuesday, November 12, 1996)]
[Notices]
[Pages 58088-58091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28843]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22313; 812-10130]


Federated Investors, et al.; Notice of Application

November 4, 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: Arrow Funds; Automated Government Money Trust; Bayfunds; 
The Biltmore Funds; The Biltmore Municipal Funds; Blanchard Funds; 
Blanchard Precious Metals Fund, Inc.; Cash Trust Series, Inc.; Cash 
Trust Series II; DG Investor Series; Edward D. Jones & Co. Daily 
Passport Cash Trust; Excelsior Funds; Excelsior Funds, Inc.; Excelsior 
Institutional Trust; Excelsior Tax-Exempt Funds, Inc.; Federated 
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders 
Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated 
Equity Income Fund, Inc.; Federated Fund for U.S. Government 
Securities, Inc.; Federated GNMA Trust; Federated Government Income 
Securities, Inc.; Federated Government Trust; Federated High Income 
Bond Fund, Inc.; Federated High Yield Trust; Federated Income 
Securities Trust; Federated Income Trust; Federated Index Trust; 
Federated Institutional Trust; Federated Insurance Series; Federated 
Investment Portfolios; Federated Investment Trust; Federated Master 
Trust; Federated Municipal Opportunities Fund, Inc.; Federated 
Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated 
Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust; 
Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated 
Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. 
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 
Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated 
U.S. Government Securities Fund: 5-10 Years; Federated Utility Fund, 
Inc.; First Priority Funds; Fixed Income Securities, Inc.; Fortress 
Utility Fund, Inc.; FTI Funds; Independence One Mutual Funds; 
Intermediate Municipal Trust; International Series, Inc.; Investment 
Series Funds, Inc.; Liberty U.S. Government Money Market Trust; Liquid 
Cash Trust; Managed Series Trust; Marketvest Funds; Marketvest Funds, 
Inc.; Marshall Funds, Inc.; Money Market Management, Inc.; Money Market 
Obligations Trust; Money Market Trust; Municipal Securities Income 
Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds; The 
Planters Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star 
Funds; The Starburst Funds; Tax-Free Instruments Trust; Tower Mutual 
Funds; Trust for Government Cash Reserves; Trust for Short-Term U.S. 
Government Securities; Trust for U.S. Treasury Obligations; Virtus 
Funds; Vision Group of Funds, Inc.; Wesmark Funds; World Investment 
Series, Inc. (collectively, the foregoing are the ``Funds''); Federated 
Investors (``Federated''); Federated Securities Corp.; Federated 
Administrative Services; Federated Services Company; and Edgewood 
Services, Inc.

RELEVANT ACT SECTIONS: Order of exemption requested pursuant to section 
6(c) of the Act from sections 12(d)(1)(A) (ii) and (iii) of the Act, 
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 the Funds to 
purchase shares of affiliated Funds that are money market funds for 
cash management purposes.

FILING DATES: The application was filed on April 16, 1996, and amended 
on August 1, 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 person 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 November 29, 
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, N.W., Washington, D.C. 
20549. Applicants, Federated Investors Tower, Pittsburgh, Pennsylvania 
15222-3779.

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 Fund is a registered open-end management investment 
company. Some Funds consist of multiple series. Certain of the Funds 
are money market funds (the ``Money Market Funds'') that seek to 
maintain a net asset value of

[[Page 58089]]

$1.00 per share in reliance on rule 2a-7 under the Act. Funds other 
than the Money Market Funds are ``Fluctuating Funds.'' Applicants 
request that relief be extended to the Funds and all future registered 
investment companies for which any person controlling, controlled by, 
or under common control (as defined by section 2(a)(9) of the Act) (the 
``Federated Control Group'') with Federated serves as investment 
adviser (the ``Federated Funds'') and all future registered investment 
companies that have the same investment adviser or investment advisers 
that are under common control for which any member of the Federated 
Control Group serves as principal underwriter or distributor and/or 
administrator (the ``Proprietary Funds'') \1\ (the Federated and 
Proprietary Funds are also the ``Funds'').
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    \1\ In the Proprietary Funds, a third party not otherwise 
affiliated with Federated (such as a bank) typically serves as 
investment adviser while a member of the Federated Control Group 
serves as principal underwriter/distributor and administrator.
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    2. Each Fund has, or may be expected to have, uninvested cash by 
the end of the trading day. Such cash may result from a variety of 
sources, including dividends or interest received from portfolio 
securities, securities transactions, liquidation of investment 
securities to meet anticipated redemptions and dividend payments, and 
new monies received from investors.
    3. Applicants propose that the Funds, including the Money Market 
Funds, (the ``Investing Funds'') be able to invest their uninvested 
cash in Federated and/or Proprietary Money Market Funds (the 
``Underlying Money Market Funds''), as appropriate. Specifically, (a) 
each Federated Fluctuating and Money Market Fund could purchase and 
sell shares of Federated Underlying Money Market Funds; (b) each 
Proprietary Fluctuating and Money Market Fund could purchase and sell 
shares of Federated Underlying Money Market Funds; (c) each Proprietary 
Fluctuating and Money Market Fund could purchase and sell shares of an 
Underlying Proprietary Money Market Fund within the same Proprietary 
Fund family or complex; and (d) each Federated and proprietary 
Underlying Money Market Fund could sell their shares to, and purchase 
their shares from, the Federated and Proprietary Funds.
    4. Federated is a Delaware business trust. The subsidiaries of 
affiliates of Federated which presently serve as an investment adviser 
or subadviser to one or more of the Federated Funds or Proprietary 
Funds are: Federated Administrative Services, Federated Advisers, 
Federated Global Research Corp., Federated Investment Counseling, 
Federated Management, Federated Research, Federated Research Corp., and 
Passport Research Ltd. In addition, certain Proprietary Funds may have 
other investment advisers. (Collectively, the investment advisers to 
the Funds and any future investment adviser or subadviser to any of the 
funds seeking to rely on the requested order are the ``Advisers''.) 
Federated Securities Corp. (``FSC'') and Edgewood Services, Inc. 
presently serve as the principal underwriters and distributors for all 
of the Funds, except for Edward D. Jones & Co. Daily Passport Cash 
Trust, for which Edward D. Jones & Co., L.P., serves as the principal 
distributor, and FSC serves as the distributor.
    5. In calculating its advisory fees, each Investing Fund will 
exclude any assets invested in an Underlying Money Market Fund. Thus, 
the shareholders of the Investing Funds would not be subject to the 
imposition of duplicative advisory fees. No sales charge, contingent 
deferred sales charge, 12b-1 fee, or any other underwriting or 
distribution fee will be charged by the Money Market Funds or by any 
underwriter, with respect to purchases of shares of such Underlying 
Money Market Funds made with Uninvested Cash, or upon the redemption of 
shares of such Underlying Money Market Funds. To the extent that both 
the Investing Fund and the Underlying Money Market Fund may charge a 
service fee (as defined by conduct rule 2830(b)(9) of the National 
Association of Securities Dealers (``NASD'') rules), the assets 
relating to an Investing Fund's investment in an Underlying Money 
Market Fund will not be subject to duplicative service fees (i.e., 
service fees will not be charged on both levels).

Applicants' Legal Analysis

A. Sections 6(c) and 12(d)(1)

    1. Sections 12(d)(1)(A) (ii) and (iii) of the Act prohibit 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) securities issued by 
the acquired company with an aggregate value in excess of 5% of the 
acquiring company's total assets or (b) 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. Under the proposed transactions, the number or value of the 
shares of the Underlying Money Market Funds held by an Investing Fund 
may exceed the percentage restrictions set forth in sections 
12(d)(1)(A) (ii) and (iii) within the following limitations: (a) each 
Investing Fund will be permitted to invest uninvested cash in, and hold 
shares of, an Underlying Money Market Fund only to the extent that such 
Investing Fund's aggregate investment in such Underlying Money Market 
Fund does not exceed the greater of 5% of such Investing Fund's total 
assets, or $2.5 million or (b) under certain circumstances, described 
below, an Investing Fund may invest and hold up to 25% of its total net 
assets in such Underlying Money Market Fund(s).\2\ Accordingly, 
applicants seek an exemption from the provisions of section 12(d)(1) to 
the extent necessary to implement the proposed transactions.
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    \2\ Applicants state that they recognize that rule 2a-7 imposes 
special diversification requirements on money market funds but are 
not requesting relief from this rule.
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    3. 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.
    4. Applicants state that by investing in high quality, short-term 
instruments in compliance with rule 2a-7 under the Act, the Underlying 
Money Market Funds provide highly liquid and safe investments for the 
Investing Funds. Further, the Investing Funds will be able to further 
diversify their holdings and will be afforded increased investment 
opportunities. Applicants state that shareholders of the Underlying 
Money Market Funds would benefit by the absence of variable costs 
associated with shares purchased by the Investing Funds since the 
additional cash received by the Uninvested Money Market Funds will 
generally result in the Underlying Money Market Funds purchasing larger 
denominated instruments, rather than separate money market instruments. 
Furthermore, applicants state that without the requested relief, 
applicants would be disadvantaged by increased administrative burdens 
resulting from the fragmentation of assets for cash

[[Page 58090]]

investments and the resulting potential for error.
    5. Applicants believe that there are situations in which the Funds 
might have as much as 25% of assets in uninvested cash. For example, 
new Funds may have large amounts of uninvested cash until an asset base 
has been established. Applicants state that the convenience of 
investing assets in a single Underlying Money Market Fund would save 
the Investing Fund the administrative burden and expense of selecting 
multiple Underlying Money Market Funds during periods when Uninvested 
Cash would exceed the limitation of the greater of $2.5 million or 5% 
of total net assets.
    6. In addition, certain of the Money Market Funds seek to provide 
their shareholders with income exempt from regular federal income tax 
and state taxes (``State Funds''). In the case of the State Funds, the 
supply of potential acceptable investments can vary greatly depending 
on various market conditions. Seasonal fluctuations in the demand for 
and supply of municipal securities in particular states can, at times, 
create difficulties for the State Funds seeking to be fully invested in 
the municipal securities of particular states. As a result, the State 
Funds may be forced to hold large amounts of uninvested cash in 
unaffiliated State Funds. Applicants state that allowing the State 
Funds to invest uninvested cash in affiliated State Funds would provide 
yield or fee advantages over making such investments in unaffiliated 
funds.
    7. 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, 
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 each of 
the Underlying Money Market Funds will be managed specifically to 
maintain a highly liquid portfolio and that, accordingly, there will be 
no need to maintain any special reserves or balances to meet 
redemptions by Investing Funds. Further, since the proposed 
transactions will be in compliance with sections 12(d)(1)(A)(i) and 
12(d)(1)(B) of the Act (which will serve to limit any single Investing 
Fund's ownership of shares in a specific Underlying Money Market Fund 
to 3% of such Underlying Money Market Fund's total outstanding voting 
stock), no Investing Fund will be a position to exercise voting control 
over any of the Underlying Money Market Funds. Finally, there will be 
no sales charges, rule 12b-1 fees, or other distribution fees charged 
in connection with the purchase and sale of shares of the Underlying 
Money Market Funds. In addition, applicants state that there will be no 
duplicative service or advisory fees. For these reasons, applicants 
believe none of the perceived abuses meant to be addressed by section 
12(d)(1) is created by the proposed transactions.

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 investment adviser of the investment 
company and any person directly or indirectly controlling, or under 
common control with, such investment company. Under section 2(a)(3), 
the Advisers, as investment adviser of each of the Funds, is an 
affiliated person of each Fund. Further, because the Federated Funds 
share a common investment adviser and board of directors, the Federated 
Funds may be deemed to be an affiliated person of each other Federated 
Fund. In addition, Proprietary Funds within the same investment complex 
(where the Funds have the same or affiliated investment advisers and 
identical board of directors/trustees) may be deemed to be affiliated 
persons of each other. Furthermore, certain of the Proprietary Funds 
have boards of directors/trustees and officers that are composed of the 
same individuals (or very nearly so) that comprise the boards of 
directors/trustees of and serve as officers to the Federated Funds. As 
such, these Proprietary Funds may be deemed to be affiliated persons of 
the Federated Funds.
    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 Underlying Money 
Market Funds of their shares to the Investing 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 Underlying Money Market Funds to sell their shares to the 
Investing Funds.
    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 
involve 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 reasons stated below, applicants believe that the terms of the 
proposed transactions meet the standards of section 6(c) and 17(b).
    4. Applicants state that the terms of the proposed transactions are 
fair because the consideration paid and received for the sale and 
redemption of shares of the Underlying Money Market will be based on 
the net asset value per share of such Funds. In addition, the purchase 
of shares of the Underlying Money Market Funds by the Investing Funds 
will be effected in accordance with each Investing Fund's investment 
restrictions and policies as set forth in its registration statement.

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 each Investing Fund may 
be purchasing shares of the Underlying Money Market Funds, each Adviser 
may manage the assets of both an Investing Fund and an underlying Money 
Market Fund, and/or each Underlying Money Market Fund may be selling 
its shares to another Fund, the proposed transactions 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 believe that the proposed transactions would be 
beneficial to each participant and that there is no basis on which to 
believe that any participant would benefit to a greater extent than any 
other. Moreover, applicants state that the Advisers will not receive 
any increased advisory fees under the proposed transactions and

[[Page 58091]]

instead will receive less advisory fees than they would otherwise have 
earned if the uninvested cash of the Investing Funds were invested 
directly in money market instruments rather than in the Underlying 
Money Market Funds. Further, applicants submit that each Investing Fund 
will participate on a basis that is not different from nor less 
advantageous than any other Investing 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 Underlying Money Market Funds sold to and 
redeemed from the Investing Funds will not be subject to a sales load, 
redemption fee, or a distribution fee under a plan adopted in 
accordance with rule 12b-1. To the extent that both the Investing Fund 
and the Underlying Money Market Fund may charge a service fee (as 
defined by conduct rule 2830(b)(9) of the NASD rules), the assets 
relating to the Investing Fund's investment will not be subject to 
duplicative service fees.
    2. In calculating its advisory fees, an Investing Fund will exclude 
any assets invested in an Underlying Money Market Fund.
    3. The Underlying Money Market Funds shall not acquire securities 
of any other investment company in excess of the limits contained in 
section 12(d)(1)(A) of the Act.
    4. Investment in shares of the Underlying Money Market Fund will be 
in accordance with each Investing Fund's respective investment 
restrictions and will be consistent with each Investing Fund's policies 
as set forth in its prospectuses and statements of additional 
information.
    5. Unless an Investing Fund complies with conditions 6 and 7, each 
Investing Fund will be permitted to invest Uninvested Cash in, and hold 
shares of, a single Underlying Money Market Fund so long as such 
Investing Fund's aggregated investment in such Underlying Money Market 
Fund does not exceed the greater of 5% of such Investing Fund's total 
net assets or $2.5 million.
    6. An Investing Fund may exceed the limitation described in 
condition 5 and be subject to the limitation described in condition 8 
only if a majority of the directors or trustees of the Investing Fund 
are not ``interested persons,'' as defined in section 2(a)(19) of the 
Act.
    7. An Investing Fund may exceed the limitation described in 
condition 5 and be subject to the limitation described in condition 8 
only if the Investing Fund, the Underlying Money Market Funds, and any 
future fund that may rely on the order are advised by the same Adviser, 
or a person controlling, controlled by, or under common control with 
the Investing Fund's Adviser.
    8. To the extent that an Investing Fund meets all conditions, 
including conditions 6 and 7, an Investing Fund will be permitted to 
invest uninvested cash in, and hold shares of, the Underlying Money 
Market Funds so long as the Investing Fund's aggregate investment in 
the Underlying Money Market Funds does not exceed 25% of the Investing 
Fund's total net assets.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28843 Filed 11-8-96; 8:45 am]
BILLING CODE 8010-01-M