[Federal Register Volume 62, Number 45 (Friday, March 7, 1997)]
[Notices]
[Pages 10599-10601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5675]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22537; 812-10428]


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

March 3, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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Applicants: First American Investment Funds, Inc. (``FAIF''), First 
American Funds, Inc. (``FAF''), First American Strategy Funds, Inc. 
(``FASF''), each existing and future series of FAIF, FAF, FASF, and 
existing and future registered investment companies or series thereof 
that, now or in the future, are advised by First Bank National 
Association (collectively, the ``Companies''); and First Bank National 
Association (``First Bank'').

RELEVANT ACT SECTION: Order requested under section 17(d) of the Act 
and rule 17d-1 thereunder.

SUMMARY OF THE APPLICATION: Applicants request an order to permit 
certain investment companies to deposit their uninvested cash balances 
and their cash collateral in one or more joint accounts to be used to 
enter into short-term investments.

FILING DATES: The application was filed on November 15, 1996 and 
amended on February 26, 1997. By letter dated February 28, 1997, 
applicants have agreed to file an additional amendment during the 
notice period, the substance of which is incorporated herein.

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 March 27, 1997, 
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 notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants c/o James D. Alt, esq., Dorsey & Whitney LLP, 220 
South Sixth Street, Minneapolis, Minnesota 55402.

FOR FURTHER INFORMATION CONTACT:
Kathleen L. Knisely, Staff Attorney, at (202) 942-0517, or Mary Kay 
Frech, Branch Chief, at (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. FAIF and FAF are registered under the Act as open-end management 
investment companies and are incorporated under the laws of the States 
of Maryland and Minnesota, respectively. FAIF currently offers twenty 
series with varying objectives and policies. FAF currently offers three 
series, each of which is a money market fund subject to the 
requirements of rule 2a-7 under the Act.
    2. FASF, organized under Minnesota law, is registered under the Act 
as an open-end management investment company. FASF is comprised of four 
series and operates as a ``fund of funds,'' the principal investments 
of which are shares of certain series of FAIF and FAF.\1\
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    \1\ See First American Strategy Funds, Inc., Investment Company 
Release Nos. 22173 (Aug. 26, 1996) (notice) and 22245 (Sept. 24, 
1996) (order).
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    3. First Bank,\2\ a national banking association, serves as 
investment adviser for each of the existing Companies, subject to 
general oversight of the boards of directors of the Companies (each a 
``Board'' and collectively, the ``Boards''). First Bank is a wholly 
owned subsidiary of First Bank System, Inc. (``FBS''), a bank holding 
company. First Bank has engaged a sub-adviser for FAIF's International 
Fund, Marvin & Palmer Associates, Inc., which is not affiliated with 
First Bank or any affiliates of First Bank.
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    \2\ The term ``First Bank'' includes any other entity 
controlling, controlled by or under common control with First Bank 
that acts in the future as investment adviser for the Companies or 
other investment companies and intends to rely on any order issued 
by the Commission in connection with the application.
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    4. All of the Funds are currently authorized by their investment 
policies and restrictions to invest at least a portion of their 
uninvested cash balances in short-term liquid assets including 
repurchase agreements, rated commercial paper, U.S. government 
securities, and other short-term debt. Each of the Funds also may 
invest cash balances in those Funds which hold themselves out as money 
market funds.\3\
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    \3\ See First American Investment Funds, Inc., Investment 
Company Act Release Nos. 21722 (Jan. 30, 1996) (notice) and 21784 
(Feb. 27, 1996) (order).
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    5. Several of the Funds are authorized to engage in securities 
lending transactions. In connection with such transactions, such Funds 
may receive collateral in the form of either cash (``Cash Collateral'') 
or securities. When Cash Collateral is received, it is expected to be 
invested in a manner consistent with customary securities lending 
practices.
    6. First Trust National Association (``First Trust''), a wholly-
owned subsidiary of FBS, serves as custodian for the assets of each of 
the Funds. First Trust also may act as securities lending agent 
(``Securities Lending Agent'') for

[[Page 10600]]

the Fund's securities lending transactions.\4\
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    \4\ See First American Investment Funds, Inc., Investment 
Company Act Release Nos. 21722 (Jan. 30, 1996) (notice) and 21784 
(Feb. 27, 1996) (order).
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    7. Applicants propose to deposit uninvested: (a) Cash balances of 
the Funds that remain at the end of the trading day, (b) cash for 
investment purposes, and/or (c) Cash Collateral into one or more joint 
accounts (the ``Joint Accounts'') established at the Funds' custodian. 
The Funds that are eligible to participate in a Joint Account and that 
elect to participate in a Joint Account are referred to herein 
collectively as ``Participants.''
    8. The daily balance of the Joint Accounts will be invested in the 
following short-term investments: (a) Repurchase agreements 
``collateralized fully'' as defined in rule 2a-7 under the Act; (b) 
interest-bearing or discounted commercial paper, including dollar 
denominated commercial paper of foreign issuers; and (c) any other 
short-term taxable and tax-exempt money market instruments, including 
variable rate demand notes, that constitute ``Eligible Securities'' (as 
defined in rule 2a-7 under the Act) (collectively, ``Short-Term 
Investments'').
    9. A Participant's decision to use a Joint Account would be based 
on the same factors as its decision to make any other short-term liquid 
investment. The sole purpose of the Joint Accounts would be to provide 
a convenient means of aggregating what otherwise would be one or more 
daily transactions for some or all Participants necessary to manage 
their respective daily account balances.
    10. First Bank would be responsible for investing funds held by the 
Joint Accounts, establishing accounting and control procedures, 
operating the Joint Accounts in accordance with the procedures 
discussed below, and ensuring fair treatment of Participants. First 
Bank would manage investments in the Joint Accounts in essentially the 
same manner as if it had invested in such instruments on an individual 
basis for each Participant. In addition, all purchases through the 
Joint Accounts will comply with all present and future SEC staff 
positions relating to the investment of cash collateral in connection 
with securities lending activities.
    11. Any repurchase agreements entered into through the Joint 
Accounts will comply with the terms of the Investment Company Act 
Release No. 13005 (February 2, 1983).\5\ Applicant's acknowledge that 
they have a continuing obligation to monitor the Commission's published 
statements on repurchase agreements, and represent that repurchase 
agreement transactions would comply with future positions of the 
Commission to the extent that such positions set forth different or 
additional requirements regarding repurchase agreements. In the event 
that the Commission sets forth guidelines with respect to other Short-
term Investments, all such investments made through the Joint Accounts 
would comply with those guidelines.
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    \5\ Repurchase agreements will be entered into on a ``hold-in-
custody'' basis (i.e., where the counterparty or one of its 
affiliated persons may have possession of, or control over, the 
collateral subject to the agreement) only if cash is received very 
late in the business day and otherwise would be unavailable for 
investment.
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Applicants' Legal Analysis

    1. Section 17(d) and rule 17d-1 thereunder prohibit an affiliated 
person of a registered investment company, or an affiliated person of 
such a person, from participating in any joint enterprise or 
arrangement in which such investment company is a participant, without 
an SEC order. Applicants believe that grating the requested order is 
consistent with the provisions, policies, and purposes of the Act, and 
that the Funds would participate in the Joint Accounts on a basis no 
different from or less advantageous than that of any other Participant.
    2. The Participants, by participating in the proposed Joint 
Accounts, and First Bank, by managing the proposed Joint Accounts, 
could be deemed to be ``joint participants'' in a transaction within 
the meaning of section 17(d) of the Act. In addition, the proposed 
Joint Accounts could be deemed to be a ``joint enterprise or other 
joint arrangement'' within the meaning of rule 17d-1 under the Act.
    3. Applicants state that the Participants may earn a higher rate of 
return on investments through the Joint Accounts relative to the 
returns they could earn individually. Under most market conditions, it 
is generally possible to negotiate a rate of return on larger 
repurchase agreements and other Short-Term Investments that is higher 
than the rate available on smaller repurchase agreements and other 
Short-Term Investments. The Joint Accounts also may increase the number 
of dealers and issuers willing to enter into Short-Term Investments 
with such Participants.
    4. Applicants assert that no Participant would be in a less 
favorable position as a result of participating in the Joint Accounts. 
Applicants believe that each Participant's investment in a Joint 
Account would not be subject to the claims of creditors, whether 
brought in bankruptcy, insolvency or other legal proceeding, or any 
other Participant. Each Participant's liability on any Short-Term 
Investment would be limited to its interest in such investment; no 
Participant would be jointly liable for the investments of any other 
Participant.
    5. Applicants state that the Joint Accounts may result in certain 
administrative efficiencies and a reduction of the potential for errors 
by reducing the number of trade tickets and cash wires that must be 
processed by the counterparties to the transactions and the 
Participant's custodian and administrator.
    6. Applicants represent that the proposed operation of the Joint 
Accounts would not result in any conflicts of interest between any of 
the Participants or First Bank. In making investments for the Joint 
Accounts, First Bank will be obligated to take into account each 
Participant's investment objective, policies, and restrictions; its 
obligation to fairly allocate investment opportunities among 
Participants; the need for diversification; and the time that cash 
becomes available for investment.
    7. The Boards will have determined, prior to participation by any 
Fund, that the procedures for operating a Joint Account are reasonably 
designed to ensure: (a) That the Joint Account is not inherently biased 
in favor of one Participant over another and should eliminate any bias 
due to size or lack thereof in any transaction; and (b) that the 
anticipated benefits to each Participant would be within an acceptable 
range of fairness.
    8. For the reasons set forth above, applicants believe that the 
Funds' participation in the proposed Joint Accounts is consistent with 
the provisions, policies and purposes of the Act, and that the granting 
of the requested order would meet the criteria set forth in rule 17d-1.

Applicants' Conditions

    Applicants would comply with the following as conditions to any 
order granted by the SEC:
    1. The Joint Accounts would not be distinguishable from any other 
accounts maintained by Participants at their custodian, except that 
monies from Participants will be deposited in the Joint Accounts on a 
commingled basis. The Joint Accounts will not have a separate existence 
and will not have indicia of a separate legal entity. The sole function 
of the Joint Accounts will be to provide a convenient way of 
aggregating individual transactions which would otherwise require daily

[[Page 10601]]

management of uninvested cash balances.
    2. Cash in the Joint Accounts would be invested in one or more of 
the following, as directed by First Bank (or, in the case of Cash 
Collateral, the Securities Lending Agent): (a) Repurchase agreements 
``collateralized fully'' as defined in Rule 2a-7 under the Act; (b) 
interest-bearing or discounted commercial paper, including dollar 
denominated commercial paper of foreign issuers; and (c) any other 
short-term taxable and tax-exempt money market instruments, including 
variable rate demand notes, that constitute ``Eligible Securities'' (as 
defined in rule 2a-7 under the Act). Short-Term Investments that are 
repurchase agreements would have a remaining maturity of 60 days or 
less and other Short-Term Investments would have a remaining maturity 
of 90 days or less, each as calculated in accordance with rule 2a-7 
under the Act. Cash Collateral in a Joint Account would be invested in 
Short-Term Investments which have a remaining maturity of 397 days or 
less, as calculated in accordance with rule 2a-7 under the Act.
    3. All assets held in the Joint Accounts would be valued on an 
amortized cost basis to the extent permitted by applicable SEC 
releases, rules, or orders.
    4. Each Participant valuing its net assets in reliance on rule 2a-7 
under the Act will use the average maturity of the instruments in the 
Joint Accounts in which such Participant has an interest (determined on 
a dollar weighted basis) for the purpose of computing its average 
portfolio maturity with respect to its portion of the assets held in a 
Joint Account on that day.
    5. In order to assure that there will be no opportunity for any 
Participant to use any part of a balance of a Joint Account credited to 
another Participant, no Participant will be allowed to create a 
negative balance in any Joint Account for any reason, although each 
Participant would be permitted to draw down its entire balance at any 
time. Each Participant's decision to invest in a Joint Account would be 
solely at its option, and no Participant will be obligated to invest in 
the Joint Account or to maintain any minimum balance in the Joint 
Account. In addition, each Participant will retain the sole rights of 
ownership to any of its assets invested in the Joint Account, including 
interest payable on such assets in the Joint Account.
    6. First Bank would administer the investment of cash balances in 
and operation of the Joint Accounts as part of its general duties under 
its existing or any future investment advisory or sub-advisory 
agreements with Participants and will not collect any additional or 
separate fees for advising any Joint Account.
    7. The administration of the Joint Accounts would be within the 
fidelity bond coverage required by section 17(g) of the Act and rule 
17g-1 thereunder.
    8. Each Board will adopt procedures pursuant to which the Joint 
Accounts will operate, which will be reasonably designed to provide 
that the requirements of the application will be met. Each Board will 
make and approve such changes as it deems necessary to ensure that such 
procedures are followed. In addition, each Board will determine, no 
less frequently than annually, that the Joint Accounts have been 
operated in accordance with the proposed procedures and will permit a 
Fund to continue to participate therein only if it determines that 
there is a reasonable likelihood that the Fund and its shareholders 
will benefit from the Fund's continued participation.
    9. Any Short-Term Investments made through the Joint Accounts will 
satisfy the investment criteria of all Participants in that investment.
    10. First Bank and the custodian of each Participant will maintain 
records documenting, for any given day, each Participant's aggregate 
investment in a Joint Account and each Participant's pro rata share of 
each investment made through such Joint Account. The records maintained 
for each Participant shall be maintained in conformity with section 31 
of the Act and the rules and regulations thereunder.
    11. Short-Term Investments held in a Joint Account generally will 
not be sold prior to maturity except if: (a) First Bank believes the 
investment no longer presents minimal credit risks; (b) the investment 
no longer satisfies the investment criteria of all Participants in the 
investment because of downgrading or otherwise; or (c) in the case of a 
repurchase agreement, the counterpart defaults. First Bank may, 
however, sell any Short-Term Investment (or any fractional portion 
thereof) on behalf of some or all Participants prior to the maturity of 
the investment if the cost of such transactions will be borne solely by 
the selling Participants and the transaction will not adversely affect 
other Participants participating in that Joint Account. In no case 
would an early termination by less than all Participants be permitted 
if it would reduce the principal amount or yield received by other 
Participants in a particular Joint Account or otherwise adversely 
affect the other Participants. Each Participant in a Joint Account will 
be deemed to have consented to such sale and partition of the 
investments in the Joint Account.
    12. Short-Term Investments held through a Joint Account with a 
remaining maturity of more than seven days, as calculated pursuant to 
rule 2a-7 under the Act, would be considered illiquid and would be 
subject to the restriction that a Fund may not invest more than 15% or, 
in the case of a money market fund, more than 10% (or, in either such 
case, such other percentage as set forth by the Commission from time to 
time) of its net assets in illiquid securities, if First Bank cannot 
sell the instrument, or the Fund's fractional interest in such 
instrument, pursuant to the preceding condition.
    13. Not every Participant participating in the Joint Accounts will 
necessarily have its cash invested in every Joint Account. However, to 
the extent a Participant's cash is applied to a particular Joint 
Account, the Participant will participate in and own a proportionate 
share of the investment in such Joint Account, and the income earned or 
accrued thereon, based upon the percentage of such investment in such 
Joint Account purchased with monies contributed by the Participant.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5675 Filed 3-6-97; 8:45 am]
BILLING CODE 8010-01-M