[Federal Register Volume 62, Number 47 (Tuesday, March 11, 1997)]
[Notices]
[Pages 11232-11234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5916]
[[Page 11232]]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 22541; 812-10200]
PaineWebber America Fund, et al.; Notice of Application
March 4, 1997.
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: PaineWebber America Fund; PaineWebber Cashfund, Inc.,
PaineWebber Investment Series; PaineWebber Managed Assets Trust;
PaineWebber Managed Investments Trust; PaineWebber Managed Municipal
Trust; PaineWebber Master Series, Inc.; PaineWebber Municipal Series;
PaineWebber Mutual Fund Trust; PaineWebber Olympus Fund; PaineWebber
Financial Services Growth Fund Inc.; PaineWebber RMA Money Fund, Inc.;
PaineWebber RMA Tax-Free Fund, Inc.; PaineWebber Securities Trust,
PaineWebber Series Trust; Strategic Global Income Fund, Inc.; Triple A
and Government Series--1997, Inc.; 2002 Target Term Trust Inc.; All-
American Term Trust Inc.; Global High Income Dollar Fund Inc.; Global
Small Cap Fund Inc.; Investment Grade Municipal Income Fund Inc.;
Insured Municipal Income Fund Inc.; Managed High Yield Fund Inc.;
PaineWebber Municipal Money Market Series; PaineWebber Investment
Trust; PaineWebber Investment Trust II; PaineWebber Investment Trust
III; Liquid Institutional Reserves; Managed Accounts Services Portfolio
Trust (collectively, ``Affiliated Funds''); PaineWebber Incorporated
(``PaineWebber''), and Mitchell Hutchins Asset Management Inc.
(``Mitchell Hutchins''), on behalf of themselves and any other
registered investment companies, or series thereof, which currently or
in the future may be advised by Mitchell Hutchins or PaineWebber, or
any entity controlling, controlled by, or under common control (as
defined in section 2(a)(9) of the Act) with PaineWebber or Mitchell
Hutchins.\1\
\1\ All existing Affiliated Funds that currently intend to rely
on the requested relief have been named as parties to the
application. Certain other funds, or series thereof, for which
Mitchell Hutchins or PaineWebber, or any entity controlling,
controlled by, or under common control with Mitchell Hutchins or
PaineWebber, acts as investment adviser do not presently intend to
rely on the requested order. Any such Affiliated Fund, or series
thereof, however, would be covered by the order if it later proposed
to enter into a lending arrangement with PaineWebber on the terms
described in the application.
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RELEVANT ACT SECTIONS: Order requested under rule 17d-1 to permit
certain transactions in accordance with section 17(d) and rule 17d-1.
SUMMARY OF APPLICATION: Applicants seek an order to permit the
Affiliated Funds to pay, and PaineWebber as lending agent to accept,
fees based on a share of the revenue generated from securities lending
transactions, as described in the application.
FILING DATES: The application was filed on June 14, 1996 and amended on
December 4, 1996, and February 26, 1997.
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 31, 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 such notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 1285 Avenue of the Americas, New York, New York
10019.
FOR FURTHER INFORMATION CONTACT: Shirley A. Bodden, Paralegal
Specialist, at (202) 942-0575, or Mercer E. Bullard, Branch Chief, at
(202) 942-0564 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. Each of the following Affiliated Funds is registered under the
Act as a closed-end management investment company: Strategic Global
Income Fund, Inc.; Triple A and Government Series--1997, Inc.; 2002
Target Term Trust Inc; All-American Term Trust Inc.; Global High Income
Dollar Fund Inc.; Global Small Cap Fund Inc.; Investment Grade
Municipal Income Fund Inc.; Insured Municipal Income Fund Inc.; and
Managed High Yield Fund Inc. All of the other Affiliated Funds are
registered under the Act as open-end management investment companies.
All of the closed-end companies and PaineWebber Cashfund, Inc.,
PaineWebber Master Series, Inc., PaineWebber Financial Services Growth
Inc., PaineWebber RMA Money Fund, Inc., and PaineWebber RMA Tax-Free
Fund, Inc. are organized as Maryland corporations; Managed Accounts
Services Portfolio Trust is organized as a Delaware business trust; and
the remaining Affiliated Funds are organized as Massachusetts business
trusts. The Affiliated Funds invest in a range of equity and fixed-
income securities.
2. PaineWebber, an investment adviser registered under the
Investment Advisers Act of 1940 (``Advisers Act''), serves as
investment adviser and Mitchell Hutchins, a registered investment
adviser under the Advisers Act and a wholly-owned subsidiary of
PaineWebber, serves as sub-adviser to PaineWebber Cashfund, Inc.,
PaineWebber RMA Money Fund, Inc., PaineWebber RMA Tax-Free Fund, Inc.,
PaineWebber Managed Municipal Trust, PaineWebber Municipal Money Market
Series, and Liquid Institutional Reserves. Mitchell Hutchins serves as
investment adviser to the remaining Affiliated Funds, although it has
delegated certain of its responsibilities with respect to certain Funds
to sub-advisers.
3. PaineWebber is a publicly owned securities brokerage, investment
banking, and asset management firm offering a broad range of services
to corporations, institutions, and substantial private investors
worldwide. PaineWebber and Mitchell Hutchins are registered as
investment advisers under the Investment Advisers Act of 1940 and as
broker-dealers under the Securities Exchange Act of 1934. PaineWebber
is also a member of the National Association of Securities Dealers,
Inc., and the New York Stock Exchange.
4. Each of the Affiliated Funds is permitted under its investment
objectives, policies, and restrictions to lend its portfolio
securities. Mitchell Hutchins and PaineWebber previously proposed that
each Affiliated Fund lend its securities to increase the income earned
by such Fund, thus increasing total return to shareholders. The boards
of directors/trustees (``Board'') of certain Affiliated Funds approved
that proposal and authorized commencement of securities lending
activities with respect to such Funds. Pursuant to such approval,
PaineWebber's compensation for acting as lending agent is limited,
pending receipt of the exemptive relief
[[Page 11233]]
requested in the application and further action by the Boards, to
reimbursement for specific expenses that it incurs as lending agent for
Affiliated Funds.\2\
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\2\ Applicants have not sought and are not seeking exemptive
relief with respect to the specific lending activities to be
undertaken by PaineWebber or with respect to the expense
reimbursement arrangement recently approved by the Boards.
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5. In connection with the establishment of a securities lending
program, the Board of a Fund, including a majority of the directors who
are not ``interested persons'' as defined in section 2(a)(19) of the
Act, has established or, for Affiliated Funds that have not yet
commenced securities lending, will establish procedures to govern the
program. These procedures do or will comply with the positions set
forth by the Commission and its staff in no-action letters and require
specific guidelines relating to the creditworthiness of borrowers and
of issuers from whom an Affiliated Fund may accept irrevocable letters
of credit as collateral.
6. Mitchell Hutchins and PaineWebber proposed that each Affiliated
Fund engage a lending agent for the Fund, and the Boards approved the
retention of PaineWebber as lending agent. PaineWebber, as lending
agent, is responsible for soliciting borrowers, monitoring daily the
value of the loaned securities and collateral, requesting that
borrowers add to the collateral when required by the loan arrangements
and performing other administrative functions in connection with each
Affiliated Fund's securities lending program. PaineWebber enters into
loans with pre-approved borrowers on terms the parameters of which are
pre-approved by the Fund's investment adviser or sub-adviser. Although
not currently contemplated, PaineWebber may invest cash collateral for
the loans in instruments pre-approved by such investment adviser or
sub-adviser.
7. The duties of PaineWebber as lending agent for an Affiliated
Fund are included in a lending agency agreement. Procedures governing
determination of the borrowers and acceptable investment instruments
have been adopted by the Boards and the relevant investment advisers
and sub-advisers. The investment adviser or sub-adviser monitors
PaineWebber's activities as lending agent to ensure that securities
loans are effected in accordance with the adviser's or sub-adviser's
instructions and within the procedures adopted by the relevant Board.
8. Although PaineWebber acts as both investment adviser and lending
agent to certain Affiliated Funds, the personnel providing day-to-day
lending agency services to the Funds do not provide investment advisory
services to the Funds and are completely separate and distinct from
those PaineWebber personnel who provide investment advisory services to
the Funds. PaineWebber's activities as lending agent are conducted
under the supervision of investment management personnel as each Fund's
investment adviser or sub-adviser, who are not in any way involved in
PaineWebber's lending agency operations. None of the lending
representatives in PaineWebber's securities lending department
participates in any way in the selection of portfolio securities or any
other aspects of the management of the Affiliated Funds.
9. Ultimate responsibility for determining which specific
securities are available to be loaned and to whom the securities may be
loaned resides with the investment adviser or sub-adviser for each
Affiliated Fund, subject to the parameters set forth in the procedures
approved by each Affiliated Fund's Board. Each Affiliated Fund's
investment adviser or sub-adviser notifies the lending agent as to
which securities are or are not available to be loaned and approves a
list of approved borrowers to whom each Affiliated Fund may lend its
securities. PaineWebber provides the investment adviser or sub-adviser
with a list of lending transactions for each Fund on a periodic basis.
In addition, under the lending agency agreement, each Fund retains full
discretion and power to prevent any loan from being made or to
terminate any loan once made. The investment adviser or sub-adviser are
required to terminate loans as necessary in order to vote proxies with
respect to material matters affecting the issuer of the securities on
loan. The duties to be performed by PaineWebber as lending agent for
each Affiliated Fund are consistent with and do not exceed the
parameters set forth in Norwest Bank, Minnesota, N.A. (May 25, 1995),
except to the extent that the SEC staff should later modify such
parameters.
10. Each borrower of an Affiliated Fund's securities is required to
tender collateral to be held by the Fund's custodian or sub-custodian
in the form of cash, securities issued or guaranteed by the United
States Government, its agencies, or instrumentalities (``U.S.
Government securities''), or irrevocable letters of credit issued by
certain approved banks or such other collateral that may be acceptable
collateral for the Fund in accordance with present and future
applicable positions of the SEC staff. The borrower delivers collateral
to the Fund's custodian or sub-custodian equal to at least 100% of the
securities loan which collateral is supplemented to cover differences
between the value of the collateral and the market value of the loaned
securities as necessary.
11. When the collateral consists of U.S. Government securities or
letters of credit, PaineWebber typically negotiates on behalf of the
Affiliated Fund a lending fee to be paid by the borrower to the Fund.
The beneficial ownership of the collateral remains with the borrower,
as does the right to the income earned where the collateral consists of
U.S. Government securities. At the termination of a loan, the borrower
pays the lending fee to the Fund, and PaineWebber will receive a pre-
negotiated percentage of the fee.
12. When the collateral consists of cash, the Affiliated Fund,
instead of receiving a separate lending fee, typically receives a
portion of the return earned on the investment of the cash collateral
by or under the direction of the Fund's investment adviser or sub-
adviser. Depending on the arrangements negotiated with the borrower by
PaineWebber, a percentage of the return on the investment of the cash
collateral may be remitted by the Fund to the borrower. Out of amounts
earned on the investment of the cash collateral, the borrower is first
paid the amount agreed upon, if any, and then, out of any remaining
earnings, PaineWebber receives a pre-negotiated percentage. In the cash
collateral scenario, the Affiliated Fund bears the risk of loss of the
collateral.
13. Applicants propose that each Fund adopt the following
procedures to ensure that the fee arrangement and other terms governing
the relationship with PaineWebber, as lending agent, will be fair:
a. In connection with the approval of PaineWebber as lending agent
for an Affiliated Fund and implementation of the proposed fee
arrangement, a majority of the Board (including a majority of the
directors/trustees who are not ``interested persons'' within the
meaning of the Act) will determine that: (i) the contract with
PaineWebber is in the best interests of the Affiliated Fund and its
shareholders; (ii) the services to be performed by PaineWebber are
required by the Affiliated Fund; (iii) the nature and quality of the
services provided by PaineWebber are at least equal to those provided
by others offering the same or similar services; and (iv) the fees for
PaineWebber's services are fair and reasonable in light of the usual
and customary charges imposed by others for services of the same nature
and quality.
[[Page 11234]]
b. Each Affiliated Fund's contract with PaineWebber for lending
agency services will be reviewed annually and will be approved for
continuation only if a majority of the Board of each Fund (including a
majority of the directors who are not interested persons) makes the
findings referred to in paragraph a. above.
c. In connection with the approval of PaineWebber as lending agent
for an Affiliated Fund and initial implementation of the proposed fee
arrangement, the Board will obtain competing quotes regarding lending
agency fees from at least three independent lending agents to assist
the Board in making the findings referred to in paragraph a. above.
d. The Board, including a majority of the directors who are not
interested persons, will (i) determine at each quarterly meeting that
the loan transactions during the prior quarter were effected in
compliance with the conditions and procedures set forth herein, and
(ii) review no less frequently than annually the conditions and
procedures set forth herein for continuing appropriateness.
e. Each Affiliated Fund Portfolio will (i) maintain and preserve
permanently in an easily accessible place a written copy of the
conditions and procedures (and modifications thereto) described in the
application or otherwise followed in connection with lending
securities, and (ii) maintain and preserve for a period not less than
six years from the end of the fiscal year in which any loan transaction
occurred, the first two years in an easily accessible place, a written
record of each such loan transaction setting forth a description of the
security loaned, the identity of the person on the other side of the
loan transaction, the terms of the loan transaction, and the
information or materials upon which the determination was made that
each loan was in accordance with the procedures set forth above and the
conditions to the application.
14. Applicants request an order, pursuant to section 17(d) of the
Act and rule 17d-1 thereunder, to the extent necessary to permit an
Affiliated Fund to pay, and PaineWebber to accept, fees in connection
with PaineWebber's acting as lending agent in the manner and subject to
the conditions and procedures described in the application.
Applicants' Legal Analysis
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 adviser. Under section 2(a)(3),
PaineWebber, as an investment adviser to certain Affiliated Funds, is
an affiliated person of such Funds. In addition, PaineWebber, which
owns all of the outstanding stock of Mitchell Hutchins, is an
affiliated person of Mitchell Hutchins. Since Mitchell Hutchins is an
affiliated person of certain Affiliated Funds by virtue of its position
as an investment adviser of such Portfolios, PaineWebber may thereby be
deemed an affiliated person of an affiliated person of such Funds.
2. Section 17(d) of the Act and rule 17d-1 thereunder make it
unlawful for an affiliated person of a registered investment company,
or any affiliated person of such person, acting as principal, to
participate in or effect any transaction in connection with any joint
enterprise or other joint arrangement or profit-sharing plan in which
such investment company is a joint participant, unless an application
regarding such joint enterprise or other joint arrangement or profit-
sharing plan has been filed with the SEC and has been granted by an
order of the SEC. Rule 17d-1 provides that, in passing upon any such
application, the SEC will consider whether the participant of such
registered investment company in such joint enterprise or joint
arrangement or profit-sharing plan is consistent with the provisions,
policies and purposes of the Act, and the extent to which such
participation is on a basis different from or less advantageous than
that of the other participants. To the extent that PaineWebber's
proposed activities as lending agent for the Funds in return for a
share of the revenue generated thereby may be deemed a joint enterprise
or profit sharing plan, applicants believe that such activities would
be prohibited by section 17(d) and rule 17d-1.
3. Applicants believe that the basic policy underlying section
17(d) is to prevent affiliates of investment companies from taking
advantage of their relationship and to otherwise regulate potential
conflicts of interest between an investment company and its affiliates.
Applicants submit that the potential for conflict arises in connection
with negotiating the percentage split of the lending fee between the
lending agent and an Affiliated Fund. Applicants believe that the
procedures to be adopted by each Fund with respect to the Fund's
employment of PaineWebber as lending agent will ensure the fairness of
the fee arrangement and other terms governing this relationship.
Applicants note that the proposed conditions and procedure place
reliance on the directors who are not interested persons of each
Affiliated Fund to determine that the lending arrangements are fair and
reasonable and in the best interests of each Fund and it shareholders.
Applicants believe that such conditions and procedures will fully
protect each Affiliated Fund's shareholders from the conflicts
contemplated by section 17(d) and rule 17d-1.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. No Affiliated Fund may lend its portfolio securities to a
borrower that is an affiliated person of the Fund or an affiliated
person of an affiliated person of such Fund.
2. Except as set forth in the application, the securities lending
program of each Affiliated Fund will comply with all present and future
applicable SEC staff positions regarding securities lending
arrangements, e.g., 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 distributions, and compliance with
fundamental policies.\3\
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\3\ See, e.g., SIFE Trust Fund (pub. avail. Feb. 17, 1982).
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3. The approval of each Affiliated Fund's Board, including a
majority of directors who are not ``interested persons'' under the Act,
shall be required for the initial and subsequent approvals of
PaineWebber's service as lending agent for each Affiliated Fund, for
the institution of all procedures relating to the securities lending
program of the Affiliated Fund, and for any periodic review of loan
transactions for which PaineWebber acted as lending agent.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5916 Filed 3-10-97; 8:45 am]
BILLING CODE 8110-01-M