[Federal Register Volume 62, Number 202 (Monday, October 20, 1997)]
[Notices]
[Pages 54485-54489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27657]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22851; 812-10356]


Investors Bank & Trust Company, et al.; Notice of Application

October 10, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under (i) section 
12(d)(1)(J) of the Investment Company Act of 1940 (the ``Act'') 
granting relief from section 12(d)(1) of the Act; (ii) sections 6(c) 
and 17(b) of the Act granting relief from section 17(a) of the Act; and 
(iii) section 17(d) of the Act and rule 17d-1 to permit certain joint 
transactions.

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SUMMARY OF APPLICATION: Applicants request an order to permit the 
lending agent for certain investment companies to invest cash 
collateral derived from securities lending transactions in shares of 
affiliated registered investment companies organized as a master-feeder 
fund.

APPLICANTS: Investors Bank & Trust Company (the ``Bank''); Merrimac 
Funds (the ``Feeder Trust''), on behalf of its Merrimac Cash Fund and 
Merrimac Treasury Fund, each a series of the Feeder Trust, and each 
other series of the Feeder Trust established in the future in which 
cash collateral from securities lending transactions may be invested 
(collectively, the ``Feeder

[[Page 54486]]

Funds''); Merrimac Master Portfolio (the ``Master Trust''), on behalf 
of its Merrimac Cash Portfolio and Merrimac Treasury Portfolio, each a 
series of the Master Trust, and each other series of the Master Trust 
established in the future in which a Feeder Fund invests (collectively, 
the ``Master Funds''); and all registered management investment 
companies and series that may participate from time to time as lenders 
(collectively, the ``Lending Funds'') in the securities lending program 
administered by the Bank (the ``Program'').

FILING DATES: The application was filed on November 15, 1996, and 
amendments to the application were filed on June 10, 1997, and 
September 29, 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 November 5, 
1997, and should be accompanied by proof of service on the 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. Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 
02116; Merrimac Funds, 200 Clarendon Street, Boston, MA 02116; and 
Merrimac Master Portfolio, P.O. Box 501, Cardinal Avenue, George Town, 
Grand Cayman, Cayman Islands, BWI.

FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at 
(202) 942-0526, 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, 450 Fifth Street, N.W., Washington, 
D.C. 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. The Feeder Trust is a Delaware business trust organized under a 
Master Trust Agreement and registered as an investment company under 
the Act. The Feeder Trust has established two series, the Merrimac Cash 
Fund and the Merrimac Treasury Fund, each of which has three classes 
(the ``Premium Class,'' the ``Institutional Class,'' and the 
``Placement Class'') of shares. Lending Funds will acquire only Premium 
Class shares.\1\ Shares of the Feeder Trust are sold without a 
distributor exclusively to ``accredited investors'' in accordance with 
the requirements of Regulation D under the Securities Act of 1933. Each 
Feeder Fund will be a ``feeder'' in a ``master-feeder'' structure with 
the Master Trust and invest all of its investable assets in a Master 
Fund having the same investment objective and policies as the Feeder 
Fund.
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    \1\ The Premium Class shares are subject to a $10 million 
minimum investment requirement.
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    2. The Master Trust is a New York common law trust established 
under a Declaration of Trust and registered as an investment company 
under the Act. The Master Trust has established two series, the 
Merrimac Cash Portfolio and the Merrimac Treasury Portfolio.\2\ 
Interests in each Master Fund are offered exclusively to one or more 
Feeder Funds and to other ``accredited investors.'' Shares of the 
Master Trust are sold without a distributor and are not subject to a 
sales load, redemption fee, asset-based sales charge (as defined in 
rule 2830(b)(8)(A) of the Conduct Rules of the National Association of 
Securities Dealers), or shareholder servicing fee.
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    \2\ The Merrimac Cash Portfolio may invest in U.S. Treasury 
bills, notes and bonds, and other instruments issued or guaranteed 
by the U.S. Government or its agencies or instrumentalities (``U.S. 
Government Obligations''); securities of U.S. and non-U.S. banks and 
thrift organizations; corporate debt obligations; asset-backed 
securities; variable rate obligations; and repurchase agreements 
that the collateralized by the securities listed above. The Merrimac 
Treasury Portfolio invests at least 65% of its assets in U.S. 
Government Obligations. All investments of each Portfolio will 
qualify as ``eligible securities'' within the meaning of rule 2a-7 
under the Act. Moreover, each Feeder Fund and Master Fund will seek 
to maintain a stable net asset value by valuing the portfolio using 
the amortized cost method and will comply with the requirements of 
rule 2a-7 under the Act.
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    3. The Bank, a wholly-owned subsidiary of Investors Financial 
Services Corp., is a Massachusetts chartered trust company. The Bank 
provides domestic and global custody, multi-currency accounting, 
institutional transfer agency, performance measurement, foreign 
exchange, securities lending and mutual fund administration services to 
a variety of financial asset managers, including mutual fund complexes, 
investment advisers, banks and insurance companies. The Bank acts as 
agent for its clients for both international and domestic securities 
lending services.
    4. The Bank and one or more of its affiliates will serve as 
custodian, transfer agent, and administrator to each Feeder Fund and 
Master Fund. The Bank also will serve as the investment adviser to each 
Master Fund. Applicants anticipate that one or more entities will serve 
as a sub-adviser to each Master Fund. The Bank will be responsible for 
the payment of all fees for the services of any sub-adviser. The Bank 
will charge each Feeder Fund and Master Fund, as applicable, fees for 
services it provides as custodian, transfer agent, administrator and 
investment adviser.
    5. From time to time, the Bank will be appointed to serve as 
lending agent for various Lending Funds.\3\ The Bank will enter into a 
securities lending authorization agreement (a ``Lending Agreement'') 
with each Lending Fund.\4\ The Lending Agreement will authorize the 
Bank, as agent for the Lending Fund, to lend portfolio securities of 
the Lending Fund to each person designated by the Lending Fund as an 
eligible borrower (each, a ``Borrower''), and to enter into a master 
borrowing agreement with each Borrower (each, a ``Borrowing 
Agreement''). The pool of eligible Borrowers may be modified from time 
to time by each Lending Fund, acting through its authorized officers.
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    \3\ The Bank will not be an affiliated person of any Lending 
Fund or an affiliated person of an affiliated person of any Lending 
Fund within the meaning of section 2(a)(3) of the Act, except that, 
if any Lending Fund directly or indirectly owns, controls, or holds 
with the power to vote 5% or more of the shares of a Master Fund, 
the Bank will be an affiliated person of an affiliated person of the 
Lending Fund. Moreover, no Lending Fund will be an affiliated person 
of any Feeder Fund or an affiliated person of an affiliated person 
of any Feeder Fund, except that a Lending Fund may (i) directly or 
indirectly own, control, or hold with power to vote more than 5% of 
the voting securities of a Feeder Fund or a Master Fund, or (ii) be 
an affiliated person of another Lending Fund that directly or 
indirectly owns, controls, or holds with the power to vote more than 
5% of the voting securities of a Feeder Fund or Master Fund.
    \4\ Certain Lending Funds participating in the Program may be 
management investment companies that hold themselves out as ``money 
market funds'' and comply with the requirements of rule 2a-7 under 
the Act (``Money Market Lending Funds'').
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    6. The Lending Agreement and the Borrowing Agreement will 
establish, for each transaction, the initial and ongoing 
collateralization requirements, the types of collateral that may be 
accepted, and the manner in which the Borrower's return on the 
collateral (the ``Borrower's Rebate'') will be established. The Lending 
Agreement will (i) fix the percentage difference between the Borrower's 
Rebate and the actual return on the investment of the collateral (the 
``Net Income'') to be retained by the Lending Fund and the percentage 
to be

[[Page 54487]]

paid by the Lending Fund to the Bank, and (ii) authorize the Bank, as 
agent for the Lending Fund, to negotiate the Borrower's Rebate for each 
transaction and to commit the Lending Fund to pay the Borrower's 
Rebate. The Lending Fund will be responsible for paying the Borrower's 
Rebate and returning the principal amount of the collateral to the 
Borrower. Each loan will be terminable, at any time, by the Borrower or 
the Lending Fund.
    7. During the term of each loan, the Lending Fund will retain the 
economic rights of an owner of the securities that are the subject of a 
loan, including the right to receive from the Borrower all dividends 
and distributions made with respect to those securities. The Bank will 
monitor corporate actions with respect to securities loaned by each 
Lending Fund and will reallocate or terminate loans at the direction of 
the Lending Fund, as necessary, to enable the Lending Funds to vote 
those securities.\5\
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    \5\ The Borrowing Agreement will provide that within three 
trading days (or such other time period as is the customary 
settlement period for the loaned securities) of the Lending Fund 
giving notice of the termination of any loan, the Borrower is 
required to transfer the loaned securities (or certificates for 
identical securities) to the Bank, as agent for the Lending Fund, or 
to the Lending Fund's custodian, and pay to the Bank or to the 
Lending Fund's custodian the amount of all dividends and 
distributions that would have been payable to the Lending Fund on or 
with respect to such securities if they had not been loaned, to the 
extent not previously paid.
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    8. Applicants anticipate that the collateral delivered in 
connection with most loans will consist of cash. In order to maximize 
investment return on the securities lending activities, each Lending 
Agreement will authorize the Bank, as agent for the Lending Fund, to 
invest the cash in shares of one or more Feeder Funds, in accordance 
with the terms of the Lending Agreement and instructions received from 
authorized officers of the Lending Fund.\6\ The Bank, as agent for a 
Lending Fund, will not purchase shares of any Feeder Fund with cash 
collateral unless participation in the Program has been approved by a 
majority of the directors or trustees of the Lending Fund who are not 
``interested persons'' of the Lending Fund within the meaning of 
section 2(a)(19) of the Act. Such directors or trustees will also 
evaluate the Program no less frequently than annually, and determine 
that investing cash collateral in the Feeder Fund is in the best 
interests of the shareholders of the Lending Fund. Each Lending Fund 
will reserve the right to rescind authorization to invest in a Feeder 
Fund. Moreover, each Lending Fund that authorizes the Bank to invest 
cash collateral in a Feeder Fund will be provided a copy of the 
confidential offering circular for such Feeder Fund, and with such 
other disclosure documents that the Bank determines may be appropriate 
to ensure that each Lending Fund is fully informed with respect to the 
investment considerations and risks associated with investing cash 
collateral in the Feeder Funds.
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    \6\ Cash collateral from transactions in which the lender is a 
Money Market Lending Fund will not be used to acquire shares of any 
Feeder Fund that does not comply with the requirements of rule 2a-7.
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    9. Applicants request an order to permit (i) the Bank, as agent of 
the Lending Funds, to invest cash collateral derived from loaned 
securities in shares of the Feeder Trust; and the Lending Funds to 
purchase from the Feeder Trust, and (ii) the Feeder Trust to sell to 
the Lending Funds, shares issued by the Feeder Trust. Applicants also 
request an order to permit the Lending Funds, the Feeder Trust, the 
Master Trust, and the Bank to effect certain joint transactions 
incident to the Program.

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. 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. Section 12(d)(1)(J) provides that the SEC may exempt any person 
or transaction from any provision of section 12(d)(1) if and to the 
extent that such exemption is consistent with the public interest and 
the protection of investors. Applicants request an exemption under 
section 12(d)(1)(J) to permit the Bank, as agent of the Lending Funds, 
to invest cash collateral derived from loaned securities in the Feeder 
Funds in excess of the limits imposed by section 12(d)(1) of the Act.
    3. Applicants believe that the investment of cash collateral by 
Lending Funds in the Feeder Funds will provide Lending Funds with the 
opportunity to maximize returns with less investment risk than if the 
cash collateral received by each Lending Fund were segregated in a 
separate account from which purchases and sales of securities would be 
made. In addition, applicants believe that participation in the Program 
will permit the Lending Funds to minimize credit risk and interest rate 
risk through diversification. Applicants also believe that the 
administrative burdens, such as the daily monitoring of total assets 
and other investments of the Lending Funds associated with compliance 
with section 12(d)(1) may impair the ability of the Bank to provide 
securities lending services to Lending Funds in an economical and 
administratively efficient manner, and, therefore, may create 
competitive disadvantages for the Lending Funds relative to other 
institutional investors that seek to engage in securities lending 
activities.
    4. Applicants submit that the investment of cash collateral 
received in connection with securities loans by Lending Funds in the 
Feeder Funds does not give rise to the policy concerns of section 
12(d)(1), which include unnecessary duplication of costs (such as sales 
loads, advisory fees, and administrative costs), and undue influence by 
the fund holding company over its underlying funds arising from the 
threat of large scale redemptions of the securities of the underlying 
investment companies. Applicants state that there will be no layering 
of sales or distribution charges because shares of the Feeder Funds 
acquired by the Lending Funds will be sold without a sales charge or 
redemption fee and the assets allocated to the Lending Funds will not 
be subject to any asset-based sales charge. Applicants also state that 
each Master Fund will be structured to accommodate the increased needs 
of liquidity associated with securities lending transactions by 
maintaining an appropriate average weighted maturity or effective 
duration and, therefore, will not be susceptible to control through the 
threat of large scale redemptions. Accordingly, applicants believe that 
the requested exemption from section 12(d)(1) is consistent with the 
public interest and the protection of investors.

B. Section 17(a)

    1. 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 an affiliated person, acting as a principal, to sell any 
security to, or purchase any security from, such registered investment 
company. From time to

[[Page 54488]]

time, it is possible that a Lending Fund may directly or indirectly 
own, control, or hold with power to vote 5% or more of the shares of a 
Feeder Fund, which will result in the Lending Fund being an 
``affiliated person'' of the Feeder Fund. In these circumstances, the 
purchase or redemption of shares of a Feeder Fund for the same Lending 
Fund or an affiliated person of such Lending Fund could violate section 
17(a) of the Act.
    2. 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 concerned, and with the 
general purposes of the Act. Because section 17(b) could be interpreted 
to exempt only a single transaction, applicants are also seeking relief 
pursuant to section 6(c) of the Act to permit the investment of cash 
collateral in shares of the Feeder Funds as proposed in the 
application.\7\
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    \7\ See Keystone Custodian Funds, Inc., 21 S.E.C. 295 (1945).
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    3. Section 6(c) provides that the SEC may exempt any person or 
transaction from any provision of the Act or any rule or regulation 
thereunder ``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 purposes fairly intended by the policy and 
provisions'' of the Act. Applicants believe that relief is appropriate 
under section 6(c) of the Act for the same reasons that it is 
appropriate under section 17(b), as discussed below.
    4. Applicants believe that the proposed transactions will be 
reasonable and fair, and consistent with the general purposes of the 
Act as well as the policies of each Lending Fund. The Lending Funds 
will not be able to purchase or redeem shares of the Feeder Funds at a 
price lower or higher than the per share net asset value of the Feeder 
Funds, and no sales load, redemption fee, or asset-based sales charge 
will be charged with respect to shares of the Feeder Funds sold to 
Lending Funds. Moreover, applicants note that the low fees charged by 
the Bank for services provided to the Feeder Trust and Master Trust 
will be subject to intense scrutiny and, therefore, will remain fair 
and reasonable to the Feeder Trust and the Master Trust, the Feeder 
Trust's shareholders and the Lending Funds. Finally, the Bank will not 
purchase shares of any Feeder Fund, as agent for a Lending Fund, unless 
the Lending Fund, or an authorized officer of the Lending Fund, has 
represented to the Bank that (i) its policies generally permit the 
Lending Fund to engage in securities lending transactions, (ii) such 
transactions will be conducted in accordance with the securities 
lending guidelines established in a series of no-action letters issued 
by the SEC's Division of Investment Management,\8\ (iii) its policies 
permit the Lending Fund to purchase shares of the Feeder Funds with 
cash collateral, and (iv) its securities lending activities will be 
conducted in accordance with all representations and conditions in the 
application applicable to such Lending Fund.
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    \8\ See e.g. Sife Trust Fund (pub. avail. Feb. 17, 1982).
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C. Section 17(d) and Rule 17d-1

    1. Section 17(d) of the Act and rule 17d-1 thereunder prohibit any 
affiliated person of a registered investment company, acting as 
principal, from effecting any transaction in connection with any joint 
enterprise or joint arrangement in which such registered investment 
company participates. The ownership by a Lending Fund or its 
affiliates, from time to time, of 5% or more of the shares of a Feeder 
Fund or Master Fund, could cause such Lending Fund to be an affiliated 
person of the Feeder Trust or the Master Trust, or an affiliated person 
of an affiliated person of the Feeder Trust or the Master Trust. In 
addition, the Bank, as investment adviser for each Master Fund, will be 
an affiliated person of the Master Trust. As an affiliated person of 
the Master Trust, the Bank may, from time to time, be an affiliated 
person of an affiliated person of one or more Lending Funds by virtue 
of such Lending Fund's interests in the Master Trust. Consequently, the 
proposed purchase of shares of a Feeder Fund with cash collateral, the 
redemption of such shares, the sharing of Net Income among the Bank and 
the Lending Funds, and the payment of fees by the Feeder Trust and the 
Master Trust to the Bank may constitute a joint transaction for which 
an exemptive order is required.
    2. Rule 17d-1 permits the SEC to issue an order with respect to a 
joint transaction. In passing on applications for orders under rule 
17d-1, 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 such participation is on a basis different from or 
less advantageous than that of other participants. Applicants believe 
that it is appropriate to grant an exemption under rule 17d-1 from the 
restrictions of section 17(d) of the Act.
    3. Each Lending Fund will invest in a class of shares of the Feeder 
Trust on the same basis as every other shareholder of the Feeder Trust 
investing in the same class of shares, and all shares within a class 
will be priced in the same manner and will be redeemable under the same 
terms. In addition, no class of shares of a Feeder Fund in which a 
Lending Fund invests will be subject to any sales load, redemption fee, 
or asset-based sales charge. The arrangements regarding the sharing of 
Net Income between the Bank and each Lending Fund are the product of 
arm's length negotiations between the Lending Fund and the Bank. 
Finally, applicants state that the proposed investment of cash 
collateral by Lending Funds in shares of the Feeder Funds is consistent 
with the provisions and purposes of the Act.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. No Lending Fund will purchase shares of any Feeder Fund unless 
participation in the Program has been approved by a majority of the 
directors or trustees of the Lending Fund that are not ``interested 
persons'' of the Lending Fund within the meaning of section 2(a)(19) of 
the Act. Such directors or trustees will also evaluate the Program no 
less frequently than annually, and determine that investing cash 
collateral in the Feeder Fund is in the best interests of the 
shareholders of the Lending Fund.
    2. The Bank will lend portfolio securities of each of the Lending 
Funds only in accordance with the guidelines specified by such Lending 
Fund.
    3. Cash collateral from loans by Lending Funds will be invested in 
shares of each Feeder Fund subject to such limitations and guidelines 
as are specified by the Lending Funds.
    4. Cash collateral from loans by Money Market Lending Funds will 
not be used to acquire shares of any Feeder Fund that does not comply 
with the requirements of rule 2a-7 under the Act.
    5. The shares of a Feeder Fund sold to Lending Funds will not be 
subject to a sales load or redemption fee and assets of the Feeder Fund 
and the Master Fund allocable to Feeder Funds will not be subject to 
any asset-based sales charge (as defined in rule 2830(b)(8)(A) of the 
Rules of Conduct of the National Association of Securities Dealers).
    6. The Bank will not acquire shares of any Feeder Fund on behalf of 
any

[[Page 54489]]

Lending Fund if, at the time of such acquisition, (i) the Bank is an 
affiliated person of the Lending Fund or an affiliated person of an 
affiliated person of the Lending Fund, or (ii) the Lending Fund is an 
affiliated person of the Feeder Fund or an affiliated person of an 
affiliated person of the Feeder Fund, in either case, by means other 
than by directly or indirectly owning, controlling, or holding with the 
power of vote 5% or more of the shares of a Feeder Fund or a Master 
Fund by the Lending Fund or an affiliated person of the Lending Fund.
    7. In connection with all matters requiring a vote of shareholders 
of a Feeder Fund, the Bank will pass through voting rights to those 
Lending Funds that have a beneficial interest in such Lending Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27657 Filed 10-17-97; 8:45 am]
BILLING CODE 8010-01-M