[Federal Register Volume 61, Number 226 (Thursday, November 21, 1996)]
[Notices]
[Pages 59252-59256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29714]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Rel. No. 22336; 812-10182]


American AAdvantage Funds, et al.; Notice of Application

November 15, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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APPLICANTS: American AAdvantage Funds (the ``AAdvantage Trust''), 
American AAdvantage Mileage Funds (the ``Mileage Trust''), AMR 
Investment Services Trust (The ``AMR Trust,'' collectively with the 
AAdvantage Trust and the Mileage Trust, the ``Trusts''), AMR 
Investments Strategic Cash Business Trust (the ``Strategic Cash 
Trust''), AMR Investments Enhanced Yield Business Trust (the ``Enhanced 
Yield Trust,'' collectively with the Strategic Cash Trust, the 
``Investment Funds''), and AMR Investment Services, Inc. (``Adviser''), 
on behalf of themselves and all future investment companies that are 
advised by the Adviser or any entity controlling, controlled by, or 
under common control (within the meaning of section 2(a)(9) of the Act) 
with the Adviser.

RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the 
Act from section 12(d)(1), under sections 6(c) and 17(b) of the Act 
from section 17(a), and under section 17(d) of the Act

[[Page 59253]]

and rule 17d-1 thereunder for an exemption from section 17(d) and rule 
17d-1.

SUMMARY OF APPLICATION: Applicants seek an order that would permit the 
Trusts to invest cash collateral received from the borrowers of their 
portfolio securities in shares of the Investment Funds, private 
investment companies that are affiliated persons of the Trusts.

FILING DATES: The application was filed on June 3, 1996, and amended on 
November 12, 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 December 10, 
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 who wish to 
be notified of a hearing may request such notification by writing to 
the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 4333 Amon Carter Boulevard, MD 5645, Fort Worth, 
Texas 76155.

FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel, 
at (202) 942-0583, or Mary Kay Frech, 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. The AAdvantage Trust, which currently has eight series funds 
(the ``AAdvantage Funds''), and the Mileage Trust, which currently has 
seven series funds (the ``Mileage Funds,'' collectively with the 
AAdvantage Funds, the ``Funds''), are Massachusetts business trusts 
registered under the Act as open-end management investment companies. 
Each Fund is a separate investment series of the AAdvantage Trust or 
the Mileage Trust and has distinct investment objectives and policies.
    2. The Funds implemented a ``master-feeder'' structure on November 
1, 1995. Under this structure, each Fund (other than the American 
AAdvantage Short-Term Income Fund, which invests directly in investment 
securities) invests all of its investable assets in a corresponding 
series fund (``Portfolio'') of the AMR Trust, a New York common law 
trust that is registered under the Act as an open-end management 
investment company.\1\ Each of the seven Portfolios has investment 
objectives identical to those of the corresponding investing Funds. As 
a result of this arrangement, all investment management for the Funds 
takes place at the Portfolio level, rather than at the Fund level.
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    \1\ Interests in the AMR Trust are offered to the AAdvantage 
Trust and the Mileage Trust pursuant to an exemption from 
registration under the private offering exemption contained in 
section 4(2) of the Securities Act of 1933 (the ``Securities Act'').
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    3. The Adviser, a wholly-owned subsidiary of AMR Corporation, the 
parent corporation of American Airlines, Inc., is registered as an 
investment adviser under the Investment Advisers Act of 1940. The 
Adviser provides the AMR Trust with administrative and asset management 
services, and provides administrative services to the Funds.
    4. The Strategic Cash Trust, a newly formed Massachusetts business 
trust of which the Adviser is the sole trustee, invests exclusively in 
high-quality, U.S. dollar-denominated obligations eligible for purchase 
pursuant to rule 2a-7 under the Act. The Strategic Cash Trust will seek 
to achieve a stable $1.00 net asset value per share. Shares of the 
Strategic cash Trust, together with any other outstanding securities 
(other than short-term paper) will not be beneficially owned by more 
than 100 persons. The Strategic Cash Trust is not making and presently 
does not propose to make a public offering of its shares or other 
securities.\2\ The Enhanced Yield Trust, a Massachusetts business trust 
formed in 1994 of which the Adviser is the sole trustee, seeks to 
achieve higher current income and total returns than bank short-term 
investments and money market instruments while providing relative 
principal stability and liquidity. Shares of the Enhanced Yield Trust, 
together with any other outstanding securities (other than short-term 
paper) will not be beneficially owned by more than 100 persons. The 
Enhanced Yield Trust is not making and presently does not propose to 
make a public offering of its shares or other securities. Both the 
Strategic Cash Trust and the Enhanced Yield Trust offer daily 
redemption of their shares.
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    \2\ Shares in the Investment Funds will be offered to 
institutional investors in reliance on the private offering 
exemption contained in section 4(2) of the Securities Act.
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    5. Each Investment Fund has entered into an advisory contract with 
the Adviser, under which the Adviser makes investment decisions with 
respect to the Investment Fund's assets and administers each Investment 
Fund in accordance with the declaration of trust and the policies of 
each Investment Fund. The Adviser will receive an annualized fee from 
each Investment Fund equal to .10% of the average daily net assets of 
each Investment Fund, accrued daily and paid monthly.
    6. Each Fund, through its corresponding Portfolio, has the ability 
to increase its income by lending portfolio securities to registered 
broker-dealers or other institutional investors deemed by the Adviser 
to be of good standing (``Borrowers''). These loans may not exceed one 
third of a Portfolio's total assets taken at market value. The AMR 
Trust, the Adviser, and NationsBank of Texas, N.A. (``Agent'') have 
entered into a securities lending agreement (``Agreement'') to permit 
each Portfolio to participate in the securities lending program 
(``Program'') administered by the Agent. The Agent is the custodian for 
each Portfolio, and also acts as lending agent for each Portfolio. The 
Program has been approved by the independent trustees of each Trust, 
who will monitor the Program on an ongoing basis.
    7. Under the Program, the Agent enters into agreements with 
Borrowers to lend them the Portfolios' securities (``Loan 
Agreements''). Pursuant to the Loan Agreements, the Agent delivers the 
Portfolios' securities to Borrowers, who agree to return such 
securities on demand. the Agent may enter into Loan Agreements only 
with Borrowers from a list approved by the Portfolios' Board of 
Trustees (``Board'').
    8. Borrowers are required to post collateral having a market value 
at least equal to 100% of the market value of loaned securities plus 
accrued interest. The Agent may accept as collateral only cash, 
securities issued or backed by the U.S. Government or its agencies or 
instrumentalities, or letters of credit from certain banks. Cash 
collateral may be invested in shares of registered or unregistered 
investment companies, including the Investment Funds, acceptable to the 
Adviser that are consistent with the investment restrictions and 
guidelines of the participating Portfolios without limitation (except 
as investment in any such company or companies may be limited by 
section 12(d)(1) of the Act). Because one or more of the Funds and 
Portfolios participating in the Program

[[Page 59254]]

are money market funds that comply with rule 2a-7, cash collateral from 
transactions in which such Funds or Portfolios participate will be used 
only to acquire shares of the Strategic Cash Trust. In all cases, the 
investment of cash collateral will comply with all present and future 
applicable SEC staff positions regarding securities lending 
arrangements. Cash collateral, however, will be excluded from the 
Portfolio's determination of the maximum and/or minimum percentage of 
the Portfolio's other assets that will be invested in specific types of 
securities.\3\
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    \3\ Applicants acknowledge that they are not seeking relief from 
the Commission with respect to this issue.
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    9. The Trusts will submit a supplement to their respective 
investment advisory agreements with the Adviser to their shareholders 
and the Board of each Trust. If the supplement is approved by a 
majority of the outstanding voting securities and the Board of each 
Trust, the Adviser will provide certain services to the Portfolios that 
participate in the Program, including ensuring compliance with all 
applicable regulatory and investment guidelines, determining which 
securities are available for loan, and having the discretion and power 
to prevent any loan from being made or to terminate any loan. The 
Adviser also will monitor the Agent to ensure that the securities loans 
are effected in accordance with its instructions and the procedures 
adopted by the Board of the AMR Trust, and will prepare periodic 
reports for, and seek approval from, the Board of the AMR Trust.
    10. Under each Loan Agreement, the Borrower receives a specified 
cash collateral fee, computed daily based on the amount of cash held as 
collateral at such rates as the Borrower and Agent may agree. The cash 
collateral fee is not based on the investment return of the cash 
collateral. Net annual interest income earned by a Portfolio from 
participation in the Program will be divided between the Portfolio, the 
Agent, and, if the proposed supplement is approved as described above, 
the Adviser.\4\
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    \4\ Net annual interest income for this purpose means the gross 
interest income earned by the investment of cash collateral, less 
the amount paid to the Borrower and related expenses such as 
investment management, custody and accounting or audit fees, or 
other costs typically incurred when investments are made.
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Applicants' Legal Analysis

    1. Applicants seek an order to permit the Portfolios to purchase 
shares of the Investment Funds (``Shares'') with the cash collateral 
received from Borrowers. Section 12(d)(1)(A) of the Act provides that 
no registered investment company may acquire securities of another 
investment company representing more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or, together with the securities of other investment companies, 
more than 10% of the acquiring company's total assets. Section 
12(d)(1)(B) provides that no registered open-end investment company may 
sell its securities to another investment company if the sale will 
cause the acquiring company to own more than 3% of the acquired 
company's voting stock, or if the sale will cause more than 10% of the 
acquired company's voting stock to be owned by investment companies.
    2. Applicants believe that the Investment Funds will be excluded 
from the definition of an investment company under section 3(c)(1) of 
the Act because they will issue only non-voting securities.\5\ 
Applicants request relief from section 12(d)(1), however, because they 
are concerned that the Investment Funds' non-voting securities could be 
deemed to be ``voting securities'' for purposes of section 3(c)(1). 
Applicants believe that if interests in the Investment Funds were 
deemed to be voting securities, applicants then must rely on the second 
10% test of section 3(c)(1) in order to avoid a look through to the 
shareholders of the Portfolios for purposes of determining the number 
of persons owning shares of the Investment Funds. Reliance on the 
second 10% test would cause the Investment Funds to be deemed 
investment companies for purposes of section 12(d)(1) of the Act 
pursuant to the last sentence of section 3(c)(1)(A).
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    \5\ Section 3(c)(1) provides, in pertinent part, that the term 
``investment company'' shall not include:
    Any issuer whose outstanding securities (other than short-term 
paper) are beneficially owned by not more than one hundred persons 
and which is not making and does not presently propose to make a 
public offering of its securities. For purposes of this paragraph:
    (A) Beneficial ownership by a company shall be deemed to be 
beneficial ownership by one person, except that, if such company 
owns 10 per centum or more of the outstanding voting securities of 
the issuer, the beneficial ownership shall be deemed to be that of 
the holders of such company's outstanding securities (other than 
short-term paper) unless, as of the date of the most recent 
acquisition by such company of securities of that issuer, the value 
of all securities owned by such company of all issuers which are or 
would, but for the exception set forth in this subparagraph, be 
excluded from the definition of investment company solely by this 
paragraph, does not exceed 10 per centum of the value of the 
company's total assets. Such issuer nonetheless is deemed to be an 
investment company for purposes of section 12(d)(1).
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    3. Section 12(d)(1) is intended, among other things, to protect an 
investment company's shareholders against: (a) undue influence over 
portfolio management through the threat of large-scale redemptions, and 
the disruption of orderly management of the investment company through 
the maintenance of large cash balances to meet potential redemptions, 
and (b) the layering of sales charges, advisory fees, and 
administrative costs. Applicants state that the Investment Funds will 
be managed specifically to maintain a highly liquid portfolio. Access 
to the Investment Funds will enhance each Portfolio's ability to manage 
and invest cash collateral received from Borrowers. In addition, the 
Investment Funds will not charge any sales charges, underwriting, or 
distribution fees. Applicants therefore believe that the proposed 
transactions create none of the abuses intended to be addressed by 
section 12(d)(1).
    4. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the Act, if and 
to the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
policies and purposes fairly intended by the policies and provisions of 
the Act. Applicants believe that the requested relief meets this 
standard.
    5. Sections 17(a)(1) and (2) of the Act make it unlawful for any 
affiliated person of a registered investment company, or any affiliated 
person of such affiliated person, acting as principal, to sell or 
purchase any security to or from such investment company. As the 
investment adviser of the Funds, the Portfolios, and the Investment 
Funds, the Adviser is an affiliated person of each of these entities 
under section 2(a)(3) of the Act. The Funds, the Portfolios, and the 
Investment Funds therefore may be considered affiliated persons of each 
other under section 2(a)(3) by virtue of being deemed to be under 
common control of the Adviser. Accordingly, if the cash collateral 
posted by the Borrowers is considered the property of the Portfolios, 
the sale of Shares to the Portfolios, and the redemption of such 
Shares, would be prohibited under section 17(a).
    6. Section 17(b) of the Act authorizes the SEC to exempt a 
transaction from section 17(a) if the terms of the proposed 
transaction, including the consideration to be paid or received, are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned, the proposed transaction is consistent with the 
policy of each registered investment company

[[Page 59255]]

concerned, and the proposed transaction is consistent with the general 
policy of the Act. Section 17(b) could be interpreted to exempt only a 
single transaction. However, the SEC, under section 6(c), may exempt a 
series of transactions that otherwise would be prohibited by section 
17(a).
    7. Applicants believe that the terms of the proposed transactions 
are reasonable and fair and consistent with the general purposes of the 
Act as well as with the policy of each Fund and Portfolio as recited in 
each Fund's and Portfolio's registration statement. The Portfolios will 
be treated like any other investors in the Investment Funds. The 
Portfolios will purchase and sell Shares on the same terms and on the 
same basis as Shares are purchased and sold by all other shareholders 
of the Investment Funds. Permitting the Portfolios to invest cash 
collateral in the Investment Funds enables the Portfolios to invest in 
vehicles that applicants expect will offer the Portfolios a higher 
return on their investment at a lower cost than the cost typically 
incurred when investing in a registered investment company. 
Specifically, applicants anticipate that the investment of cash 
collateral in Shares will enable the Portfolios to benefit from 
economies of scale that maximize investment opportunities, minimize 
investment risk, facilitate the management of liquidity, and minimize 
administrative costs. Accordingly, applicants believe that the proposed 
transactions are in the best interests of the Funds, the Portfolios, 
and their shareholders.
    8. 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 Portfolios (by purchasing Shares), the Adviser (by 
managing the portfolio securities of the Portfolios and the Investment 
Funds at the same time that the Portfolios' cash collateral is invested 
in Shares), and the Investment Funds (by selling Shares to and 
redeeming them from the Portfolios) could be deemed to be participants 
in a joint enterprise or other joint arrangement within the meaning of 
section 17(d) and rule 17d-1.
    9. Rule 17d-1 permits the SEC to exempt by order a joint 
transaction under section 17(d). 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.
    10. Applicants believe that the proposal satisfies these standards. 
The Portfolios will invest in Shares on the same basis as any other 
shareholder. All investors in Shares will be subject to the same 
eligibility requirements imposed by the Investment Funds. In addition, 
all Shares will be priced in the same manner and will be redeemable 
under the same terms. Finally, applicants believe that participation in 
the Program will offer the Portfolios and Funds greater flexibility and 
higher returns than they could obtain by investing the cash collateral 
separately while still offering the benefits of investing in a pooled 
investment vehicle in terms of diversity and lower costs.

Applicants' Condition

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Portfolio may participate in the Program, a majority of 
the Board (including a majority of the independent trustees) will 
approve the Portfolio's participation in a securities lending program. 
Such trustees also will evaluate the securities lending arrangement and 
its results no less frequently than annually and determine that any 
investment of cash collateral in the Investment Funds is in the best 
interest of the shareholders of the funds and their corresponding 
Portfolios.
    2. Investment in Shares will be in accordance with each Portfolio's 
respective investment restrictions regarding the types of securities in 
which it may invest and will be consistent with its corresponding 
Fund's policies as recited in such Fund's registration statement.
    3. Cash collateral from loans by Portfolios that are money market 
funds will not be used to acquire Shares of any Investment Fund that 
does not comply with the requirements of rule 2a-7 under the Act.
    4. The Adviser will adopt procedures that are designed, taking into 
account current market conditions and the Strategic Cash Trust 
investment objectives, to stabilize the Strategic Cash Trust's net 
asset value per share, as computed for the purpose of distribution, 
redemption, and repurchase, at a single value. These procedures will be 
reviewed annually by the Board of each Portfolio that enters into a 
securities lending program (``Lending Portfolio'').
    5. The Investment Funds will comply with the requirements of 
sections 17 (a), (d), and (e), and 18 of the Act as if the Investment 
Funds were registered open-end investment companies. With respect to 
all redemption requests made by a Lending Portfolio, the Investment 
Funds will comply with section 22(e) of the Act. The Adviser, as sole 
trustee of the Investment Funds, will adopt procedures designed to 
ensure that the Investment Funds comply with sections 17 (a), (d), and 
(e), 18, and 22(e) of the Act. The Adviser will periodically review and 
update as appropriate such procedures and will maintain books and 
records describing such procedures, and maintain the records required 
by rules 31a-1(b)(1), 31a-1(b)(2)(ii), and 31a-1(b)(9) under the Act. 
All books and records required to be made pursuant to this condition 
will be maintained and preserved for a period of not less than six 
years from the end of the fiscal year in which any transaction 
occurred, the first two years in an easily accessible place, and will 
be subject to examination by the SEC and its staff.
    6. The Strategic Cash Trust will value its shares at the close of 
business each business day using the ``amortized cost method'' as 
defined in rule 2a-7 to determine the net asset value per share of the 
Strategic Cash Trust. In this regard, the Strategic Cash Trust will 
comply with rule 2a-7(c)(6), except that the Adviser, subject to 
approval by the sole trustee of the Strategic Cash Trust, shall adopt 
the procedures described in that provision, and the Adviser shall 
monitor such procedures and take such other actions as are required to 
be taken by a board of directors pursuant to that provision.
    7. The Shares will not be subject to a sales load, redemption fee, 
asset-based charge or service fee (as defined in rule 2830(b)(9) of the 
Rules of Conduct of the National Association of Securities Dealers).
    8. Each Lending Portfolio will purchase and redeem Shares as of the 
same time and at the same price, and will receive dividends and bear 
its proportionate share of expenses on the same basis, as other 
shareholders of the Investment Funds. A separate account will be 
established in the shareholder records of each Investment Fund for the 
account of each Lending Portfolio.
    9. Except as set forth herein, the Program 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

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distributions, and compliance with fundamental policies.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-29714 Filed 11-20-96; 8:45 am]
BILLING CODE 8010-01-M