[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