[Federal Register Volume 62, Number 234 (Friday, December 5, 1997)]
[Notices]
[Pages 64411-64414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31847]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 22918; 812-10688]


Strong Advantage Fund, Inc., et al.; Notice of Application

November 28, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under section 17(d) of the 
Investment Company Act of 1940 (the ``Act'') and rule 17d-1.

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    Summary of the Application: Applicants request an order to permit 
certain investment companies to deposit their uninvested cash balances 
in joint accounts to be used to enter into short-term investments.
    Applicants: Strong Advantage Fund, Inc., Strong Asia Pacific Fund, 
Inc., Strong Asset Allocation Fund, Inc., Strong Common Stock Fund, 
Inc., Strong Conservative Equity Funds, Inc., Strong Corporate Bond 
Fund, Inc., Strong Discovery Fund, Inc., Strong Equity Funds, Inc., 
Strong Government Securities Fund, Inc., Strong Heritage Reserve 
Series, Inc., Strong High-Yield Municipal Bond Funds, Inc., Strong 
Income Funds, Inc., Strong Institutional Funds, Inc., Strong 
International Bond Fund, Inc., Strong International Stock Fund, Inc., 
Strong Money Market Fund, Inc., Strong Municipal Funds, Inc., Strong 
Municipal Bond Fund, Inc., Strong Short-Term Bond Fund, Inc., Strong 
Short-Term Global Bond Fund, Inc., Strong Short-Term Municipal Bond 
Fund, Inc., Strong Special Fund II, Inc., Strong Total Return Fund, 
Inc., Strong Variable Insurance Funds, Inc. (``Funds''), Strong Capital 
Management, Inc. (the ``Adviser'') and Strong Funds Distributors, Inc. 
(the ``Distributor'').
    Filing Dates: The application was filed on June 2, 1997 and amended 
on October 6, 1997. Applicants have agreed to file an amendment to the 
application during the notice period, the substance of which is 
included in this notice.
    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 
23, 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, One Hundred Heritage Reserve, Menomonee Falls, 
Wisconsin 53051.

FOR FURTHER INFORMATION CONTACT:
Joseph B. McDonald, Jr., Senior Counsel, at (202) 942-0533, 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, 450 Fifth St., N.W., Washington, D.C. 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. Each Fund is incorporated under the laws of the State of 
Wisconsin and registered under the Act as an open-end management 
investment company. All of the Funds are series companies that may 
issue one or more classes of shares.
    2. The Adviser, incorporated under the laws of the State of 
Wisconsin, is an investment adviser registered under the Investment 
Advisers Act of 1940. The Adviser acts as each Fund's investment 
manager, provides the Funds with various administrative services, and 
acts as transfer and dividend disbursing agent for the Funds. The 
Distributor, incorporated under the laws of the State of Wisconsin, is 
a broker-dealer registered under the Securities Exchange Act of 1934. 
The Distributor is an indirect subsidiary of the Adviser

[[Page 64412]]

and acts as principal underwriter of each of the Funds.
    3. Applicants request that any relief granted pursuant to the 
application also apply to all other registered investment companies and 
series thereof that are part of the same group of investment companies 
(as defined in rule 11a-3 under the Act) and: (a) for which the 
Adviser, or a person controlling, controlled by, or under common 
control with the Adviser may in the future act as investment adviser; 
or (b) for which the Distributor, or a person controlling, controlled 
by, or under common control with the Distributor may in the future act 
as principal underwriter. The Funds that intend to rely on the 
requested order are named as applicants. Funds for which the Adviser or 
Distributor acts as investment adviser and/or principal underwriter in 
the future will not rely on the requested relief except upon the terms 
and conditions contained in the application.
    4. All of the Funds are authorized by their investment policies to 
invest at least a portion of their uninvested cash balances in short-
term liquid assets, including repurchase agreements, high-grade 
commercial paper, U.S. Government securities and other short-term debt 
obligations (``Short-Term Investments'').
    5. The assets of the Funds are held by Firstar Trust Company and/or 
Brown Brothers Harriman & Co. as custodians (collectively, the 
``Custodian''), neither of which controls, is controlled by or is under 
common control with, any of the Funds or the Adviser. At the end of 
each trading day, some or all of the funds may have uninvested cash 
balances in accounts at their respective Custodian that would not 
otherwise be invested in portfolio securities by the Adviser. 
Generally, such cash balances of the Funds are, or would be, invested 
in short-term liquid assets, such as commercial paper, U.S. Treasury 
bills, shares of certain Funds that value their net assets in reliance 
on rule 2a-7 under the Act,\1\ and repurchase agreements.
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    \1\ Applicants have obtained an exemptive order from the SEC 
that permits certain Funds to purchase shares of affiliated Funds 
that are money market funds, in excess of the limitations prescribed 
in section 12(d)(1) of the Act, for cash management purposes. See 
Strong Advantage Fund, Inc., Investment Company Act Release Nos. 
22308 (Oct. 31, 1996) (notice) and 22356 (Nov. 26, 1996) (order).
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    6. Applicants propose that the Funds deposit uninvested cash 
balances that remain at the end of the trading day into one or more 
joint accounts (the ``Joint Accounts'') and that the daily balances of 
the Joint Accounts be invested in Short-Term Investments. Each Fund 
would invest through a Joint Account only to the extent that the Fund 
intends to invest in Short-Term Investments consistent with its 
respective investment objectives, policies and restrictions. The 
decision to employ a Joint Account for each fund will be based on the 
same factors as the decision to make any other investment in Short-Term 
Investments for the Fund.
    7. Currently, the Adviser must enter into repurchase agreements and 
purchase other money market instruments separately on behalf of each 
Fund. This requires the Adviser to monitor multiple sources of cash 
availability, to allocate opportunities among the Funds, to execute 
multiple trades in similar securities on any given day and to settle 
the trades in a number of separate accounts. The sole purpose of the 
Joint Accounts will be to provide a convenient means of aggregating 
what otherwise would be one or more daily transactions for some or all 
Funds necessary to manage their respective daily account balances.
    8. The Adviser will not charge any additional or separate fees for 
operating or advising the Joint Accounts and will have no monetary 
participation in the Joint Accounts, but would continue to receive from 
each Fund its asset-based advisory fee with respect to each Fund's 
assets. The Adviser will be responsible for investing funds held by the 
Joint Accounts, establishing accounting and control procedures, and 
ensuring fair treatment of the Funds. All purchases through a Joint 
Account will be subject to the same systems and standards for acquiring 
investments for individual Funds.
    9. Any repurchase agreements entered into through the Joint 
Accounts will comply with the terms of Investment Company Act Release 
No. 13005 (February 2, 1983). Applicants acknowledge that they have a 
continuing obligation to monitor the SEC's published statements on 
repurchase agreements, and represent that the repurchase agreement 
transactions entered into through a Joint Account will comply with 
future positions of the SEC to the extent that such positions set forth 
different or additional requirements regarding repurchase agreements. 
In the event that the SEC sets forth guidelines with respect to other 
Short-Term Investments, all such investments made through any Joint 
Account will comply with those guidelines.

Applicants' Legal Analysis

    1. Section 17(d) and rule 17d-1 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.
    2. The Funds, by participating in the Joint Accounts, and the 
Adviser, by managing the 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 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. Rule 17d-1 provides, in part, that no affiliated person of any 
registered investment company and no affiliated person of such a 
person, acting as principal, shall participate in, or effect any 
transaction in connection with, any joint enterprise or other joint 
arrangement or profit-sharing plan in which any such registered company 
is a participant, and which is entered into, adopted or modified 
subsequent to the effective date of the rule, unless an application 
regarding such joint enterprise, arrangement of profit-sharing plan has 
been filed with the SEC and has been granted by an order.
    4. The Funds may earn a higher rate of return on investments 
effected through the Joint Accounts relative to the returns the Funds 
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 the Funds and may 
reduce the possibility that the Funds' cash balances remain uninvested.
    5. 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 sellers of Short-Term Investments, the Custodian, and the Adviser's 
accounting and trading departments.
    6. Applicants assert that no Fund will be in a less favorable 
position as a result of the Joint Accounts. Applicants believe that 
each Fund's investment in a Joint Account would not be subject to the 
claims of creditors, whether brought in bankruptcy, insolvency or other 
legal proceeding, of any other Fund. Each Fund's liability on any 
Short-Term Investment will be limited to its interest in such 
investment; no Fund will be jointly liable for the investments of any 
other Fund.

[[Page 64413]]

    7. Although the Adviser will realize some benefits through 
administrative convenience and some possible reduction in clerical 
costs, the Funds will be the primary benefactors of the Joint Accounts 
because the Joint Accounts may result in higher returns and will be a 
more efficient means of administering daily cash investments.
    8. Applicants submit that the proposed operation of the Joint 
Accounts, as described in the application, is consistent with the 
provisions, policies and purposes of the Act, and that no Fund will 
participate in the Joint Accounts on a basis different from or less 
advantageous than that of any other Fund.

Applicants' Conditions

    Applicants will comply with the following as conditions to any 
order granted by the SEC:
    1. A separate custodial cash account will be established with the 
Custodian for each Joint Account into which each Fund will be permitted 
to have deposited daily some or all of its uninvested net cash 
balances. A Fund may transfer a portion of its daily cash balances to 
more than one Joint Account. The Joint Accounts will not be 
distinguishable from any other accounts maintained by the Funds at the 
Custodian, except that monies from the Funds will be deposited in the 
Joint Accounts on a commingled basis. The Joint Accounts will not have 
a separate existence and will not have any indicia of a separate legal 
entity. The sole function of the Joint Accounts will be to provide a 
convenient means of aggregating individual transactions in Short-Term 
Investments which would otherwise require daily management by the 
Adviser of each Fund's uninvested cash balances.
    2. Cash in the Joint Accounts, as directed by the Adviser, will be 
invested in one or more of the following: (a) repurchase agreements 
which are ``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 money market instruments, that constitute ``Eligible 
Securities'' (as defined in rule 2a-7 under the Act). The repurchase 
agreements entered into through the Joint Accounts will have remaining 
maturities of 60 days or less, and any other Short-Term Investments 
will have a remaining maturity of 90 days or less, each as calculated 
in accordance with rule 2a-7 under the Act. No Fund will be permitted 
to invest in a Joint Account unless the Short-Term Investments in such 
Joint Account will comply with the investment policies and guidelines 
of that Fund.
    3. All assets held in the Joint Accounts will be valued on an 
amortized cost basis to the extent permitted by applicable SEC 
releases, rules, or orders.
    4. Each Fund that values 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 Fund 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 ensure that there will be no opportunity for any 
Fund to use any part of a balance of a Joint Account credited to 
another Fund, no Fund will be allowed to create a negative balance in 
any Joint Account for any reason, although each Fund will be permitted 
to draw down its entire balance at any time. Each Fund's decision to 
invest in the Joint Accounts will be solely at its option, and no Fund 
will be obligated to invest in the Joint Accounts or to maintain any 
minimum balance in the Joint Accounts. In addition, each Fund will 
retain the sole rights of ownership to any of its assets invested in 
the Joint Accounts, including interest payable on such assets invested 
in the Joint Accounts.
    6. The Adviser will administer the investment of cash balances in 
and operation of the Joint Accounts as part of its general duties under 
the existing or any future advisory agreements it has with the Funds 
and will not collect any additional or separate fees for advising the 
Joint Accounts.
    7. The administration of the Joint Accounts will be within the 
fidelity bond coverage required by section 17(g) of the Act and rule 
17g-1 thereunder.
    8. The boards of directors of the Funds (each a ``Board'' and 
collectively, the ``Boards'') 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 of 
the Boards will make and approve such changes as it deems necessary to 
ensure that such procedures are followed. In addition, the Board of 
each Fund will determine, no less frequently than annually, that the 
Joint Accounts have been operated in accordance with such procedures 
and will only permit a Fund to continue to participate therein if it 
determines that there is a reasonable likelihood that the Fund and its 
shareholders will benefit from the Fund's continued participation.
    9. Each Fund's participation in a Joint Account (i.e., its 
proportionate share of the Short-Term Investments effected through the 
Joint Accounts) will be documented daily on its books and on the books 
of the Custodian. Each Fund will maintain records (in conformity with 
section 31 of the Act and the rules thereunder) documenting, for any 
given day, its aggregate investment through each Joint Account and its 
pro rata share of each Short-Term Investment transaction made through 
such Joint Account.
    10. Each investment made through a Joint Account will satisfy the 
investment criteria of each Fund participating in the joint investment.
    11. Not every Fund participating in a Joint Account necessarily 
will have its cash invested in every Short-Term Investment entered into 
through the Joint Account. However, to the extent that a Fund's cash is 
applied to a particular investment made through a Joint Account, the 
Fund will participate in and own a proportionate share of such Short-
Term Investment, and any income earned or accrued thereon, based upon 
the percentage of such investment purchased with monies contributed by 
the Fund.
    12. Short-Term Investments held in a Joint Account generally will 
not be sold prior to maturity, except if: (a) the Adviser believes the 
investment no longer presents minimal credit risks; (b) the investment 
no longer satisfies the investment criteria of all Funds owning a pro 
rata share of the investment, because of a credit downgrading or 
otherwise; or (c) in the case of a repurchase agreement, the 
counterparty defaults. The Adviser may, however, sell any Short-Term 
Investment (or any fractional portion thereof) on behalf of some or all 
Funds prior to the maturity of the investment if the cost of such 
transactions will be borne solely by the selling Funds and the 
transactions will not adversely affect other Funds participating in the 
Joint Account. In no case would an early termination by less than all 
Funds be permitted if it would reduce the principal amount or yield 
received by other Funds in the Joint Accounts or otherwise adversely 
affect the other Funds. Each Fund in a Joint Account will be deemed to 
have consented to such sale and partition of the investments in the 
Joint Account.
    13. 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, will be considered illiquid and, for any Fund 
that is an

[[Page 64414]]

open-end investment company registered under the Act, subject to the 
restriction that the Fund may not invest more than 15% (or such other 
percentage as set forth by the SEC from time to time) of its net assets 
in illiquid securities and any similar restrictions set forth in the 
Fund's investment restrictions and policies, if the Adviser cannot sell 
the instrument, or the Fund's fractional interest in such instrument, 
pursuant to the preceding condition.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31847 Filed 12-4-97; 8:45 am]
BILLING CODE 8010-01-M