[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)]
[Notices]
[Pages 3933-3938]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1854]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23004; 812-10134]
Daily Money Fund, et al.; Notice of Application
January 20, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``Act'') granting an exemption under section 6(c) of
the Act from sections 13(a), 18(f), and 21(b) of the Act, under
sections 6(c) and 17(b) of the Act from sections 17(a)(1) and (3) of
the Act, and under rule 17d-1 under the Act to permit certain
transactions in accordance with section 17(d) of the Act and rule 17d-
1.
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SUMMARY OF APPLICATION: The requested order would permit certain
registered open-end funds and unregistered funds to enter into
insurance agreements with an affiliated mutual insurance company (the
``Mutual Company''). The Mutual Company would provide limited insurance
coverage for certain money market assets held by the funds.
APPLICANTS: Daily Money Fund, Fidelity Aberdeen Street Trust, Fidelity
Advisor Series I, Fidelity Advisor Series II, Fidelity Advisor Series
III, Fidelity Advisor Series IV, Fidelity Advisor Series V, Fidelity
Advisor Series VI, Fidelity Advisor Series VII, Fidelity Advisor Series
VIII, Fidelity Beacon Street Trust, Fidelity Boston Street Trust,
Fidelity California Municipal Trust, Fidelity California Municipal
Trust II, Fidelity Capital Trust, Fidelity Charles Street Trust,
Fidelity Commonwealth Trust, Fidelity Concord Street Trust, Fidelity
Congress Street Fund, Fidelity Contrafund, Fidelity Court Street Trust,
Fidelity Court Street Trust II, Fidelity Destiny Portfolios, Fidelity
Devonshire Trust, Fidelity Exchange Fund, Fidelity Financial Trust,
Fidelity Fixed-Income Trust, Fidelity Government Securities Fund,
Fidelity Hastings Street Trust, Fidelity Hereford Street Trust,
Fidelity Income Fund, Fidelity Institutional Cash Portfolios, Fidelity
Institutional Tax-Exempt Cash Portfolios, Fidelity Investment Trust,
Fidelity Magellan Fund, Fidelity Massachusetts Municipal Trust,
Fidelity Money Market Trust, Fidelity Mt. Vernon Street Trust, Fidelity
Municipal Trust, Fidelity Municipal Trust II, Fidelity Newbury Street
Trust, Fidelity New York Municipal Trust, Fidelity New York Municipal
Trust II, North Carolina Capital Management Trust, Fidelity Phillips
Street Trust, Fidelity Puritan Trust, Fidelity Revere Street Trust,
Fidelity School Street Trust, Fidelity Securities Fund, Fidelity Select
Portfolios, Fidelity Summer Street Trust, Fidelity Trend Fund, Fidelity
Union Street Trust, Fidelity Union Street Trust II, Fidelity U.S.
Investments-Bond Fund, L.P., Fidelity U.S. Investments-Government
Securities Fund, L.P., Variable Insurance Products Fund, Variable
Insurance Products Fund II, Variable Insurance Products Fund III
(collectively, the ``Trusts''); Fidelity Canadian Asset Allocation
Fund, Fidelity U.S. Money Market Fund, Fidelity Asset Manager Fund,
Fidelity Canadian Bond Fund, Fidelity Canadian Growth Company Fund,
Fidelity Canadian Income Fund, Fidelity Canadian Short Term Asset Fund,
Fidelity Capital Builder Fund, Fidelity Emerging Markets Bond Fund,
Fidelity Emerging Markets Portfolio Fund, Fidelity European Growth
Fund, Fidelity Far East Fund, Fidelity Growth America Fund, Fidelity
International Portfolio Fund, Fidelity Japanese Growth Fund, Fidelity
Latin America Growth Fund, Fidelity North American Income Fund,
Fidelity RSP Global Bond Fund, Fidelity Small Cap America Fund,
Fidelity True North Fund, Fidelity Managed Income Fund, Fidelity Focus
Consumer Industries Fund, Fidelity Focus Financial Services Fund,
Fidelity Focus Health Care Fund, Fidelity Focus Natural Resources Fund,
Fidelity Focus Technology Fund (collectively, the ``Canadian Funds'');
Fidelity Advisor U.S. Large-Cap Stock Fund (Bermuda) Ltd., Fidelity
Advisor World Europe Fund (Bermuda) Ltd., Fidelity Advisor World
Southeast Asia Fund (Bermuda) Ltd., Fidelity World Advisor World U.S.
Limited Term Bond Fund (Bermuda) Ltd., Fidelity Advisor World U.S.
Government Investment Fund (Bermuda) Ltd., Fidelity Advisor World U.S.
Treasury Money Fund
[[Page 3934]]
(Bermuda) Ltd. (collectively, the ``Fidelity Advisor World Funds'');
Fidelity Investments Canada, Ltd. (``FICL''); Fidelity Management and
Research Company (``FMR''); Fidelity Distributors Corporation
(``FDC''); National Financial Services Corporation (``NFSC'') \1\; each
Trust and each registered investment company and series thereof that
are currently or in the future advised by FMR or a person controlling,
controlled by, or under common control with FMR (collectively with FMR,
the ``Adviser'') or distributed by FDC or NFSC (collectively, the
``Registered Funds''); the Fidelity Advisor World Funds, the Canadian
Funds, and other pooled investment funds advised or in the future
advised by the Adviser, that are offered exclusively outside the United
States to non-U.S. residents (the ``Unregistered Funds''); and state
and local entities or accounts thereof advised or in the future advised
by the Adviser that are exempt from regulation under the Act pursuant
to section 2(b) of the Act (the ``2(b) Entities'') (collectively, the
Registered Funds, the Unregistered Funds, and the 2(b) Entities are the
``Funds'').
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\1\ The terms ``FDC'' and ``NFSC'' include any other company
controlled by or under common control with FMR that acts in the
future as distributor for the Trusts or their series.
FILING DATES: The application was filed on May 7, 1996, and amended on
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December 3, 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 February 16,
1998, 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 consented. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, 82 Devonshire Street, Boston, Massachusetts 02109.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Senior Counsel, at (202) 942-0572 (Division of
Investment Management, Office of Investment Company Regulation), or
Mercer E. Bullard, Special Counsel, at (202) 942-0659 (Division of
Investment Management, Office of Chief Counsel).
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 5th Street, NW., Washington, DC
20549 (telephone (202) 942-8090).
Applicants' Representations
A. Overview
1. Each of the Registered Funds is an open-end investment company
registered under the Act and offers one or more portfolios. The
Fidelity Advisor World Funds are portfolios of mutual funds established
under the laws of Bermuda. The Canadian Funds are portfolios
established under the laws of Canada. The only 2(b) Entity that
currently may rely on the requested order is the Massachusetts
Municipal Depository Trust (``Municipal Trust''), which is established
pursuant to Massachusetts law.\2\
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\2\ In order to participate in the Mutual Company, a 2(b) Entity
(including the Municipal Trust) would have to determine that the
proposed investments in instruments through the proposed
transactions are consistent with state laws or administrative rules
regulating the 2(b) Entity. If not, it must seek to have those laws
or rules amended. Accordingly, the Municipal Trust is not named as
an applicant because it considers it premature to join formally.
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2. The Adviser, an investment adviser registered under the
Investment Advisers Act of 1940, acts as investment adviser to each
Registered Fund and its portfolios and provides the Registered Funds
with administrative services. FICL acts as the investment adviser to
the Canadian Funds. FDC and NFSC act as the distributors of all the
Registered Funds. FMR, FICL, FDC, and NFSC are all direct or indirect
subsidiaries of FMR Corp.
3. Applicants propose that certain Funds (``Participating Funds'')
enter into insurance agreements with the Mutual Company. The Mutual
Company would provide insurance coverage for certain loss events
(``Loss Events'') described below with regards to certain money market
securities (``Insurable Assets''). Initially, applicants expect that
the only Participating Funds will be U.S. dollar denominated money
market funds.\3\ Other types of Funds may participate in the future if
the Fund's Adviser and board of trustees determine that the insurance
would be of value to the Fund and that the Fund had an independent need
for the insurance coverage.
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\3\ Money market funds are funds that have as their objective
the generation of income and the preservation of capital. Money
market funds are subject to rule 2a-7 under the Act, which contains
several conditions limiting the risk and volatility of securities in
which a money market fund may invest.
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B. Mutual Company Operations
1. The Mutual Company will be organized as a Bermuda mutual
insurance company and will be governed by a board of directors
consisting of employees of FMR or FMR Corp. and other persons
associated with the Mutual Company. As a mutual insurance company, the
Mutual Company will not issue stock. Proprietary interests in the
Mutual Company will belong only to the Participating Funds as
policyholders. Each Participating Fund will have equal voting rights,
i.e., each Participating Fund will have one vote. The board of trustees
(``Trustees'') of each Registered Fund will exercise the Fund's voting
rights. The Funds will have voting rights with respect to (a) the
election and removal of the Mutual Company's board of directors; (b)
the dissolution or liquidation of the Mutual Company; (c) the amendment
of the Mutual Company's articles of incorporation or other governing
instrument; (d) any merger, consolidation or sale of substantially all
of the Mutual Company's assets; and (e) additional matters relating to
the Mutual Company as may be required or authorized by law.
2. Employees of the Adviser will be involved in the day-to-day
operations of the Mutual Company, including determining and
implementing the investment policies of the Mutual Company and managing
its assets. The Mutual Company will employ an unaffiliated third party
in Bermuda to conduct its administrative and ministerial activities.
3. The Mutual Company will operate on a break-even basis and any
reserves and surplus will be used (a) to increase the Mutual Company's
aggregate coverage and/or the risk retained by the Mutual Company and/
or (b) to decrease the premiums charged by the Mutual Company. The
Mutual Company will pay no dividends or distributions, and neither the
Funds' interest in the Mutual Company nor the policies will be
transferable. A Participating Fund that terminates its participation
prior to the liquidation of the Mutual Company will not receive any
proceeds, regardless of whether the Mutual Company has a surplus at the
time. If the Mutual Company is liquidated when it has a surplus,
Participating Funds at that time will divide the proceeds based on
their relative levels of premium payments to the Mutual Company during
its existence.
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C. Insurance Coverage
1. Insurable Assets are securities that, at the time of purchase,
are money market securities eligible pursuant to rule 2a-7 under the
Act (including repurchase agreements), other than: (i) U.S. Treasury
securities backed by the full faith and credit of the U.S. Government,
and (ii) other obligations all of the principal and interest of which
are backed by the full faith and credit of the U.S. Government.
2. Loss Events include losses incurred by a Participating Fund in
connection with a nonpayment of principal or interest by the issuer
when due and payable, or the institution of a bankruptcy, insolvency,
or similar proceeding with respect to the issuer and/or credit
enhancement provider (if any) of an Insurable Asset. Loss Events also
include losses in connection with a default relating to a credit
enhancement. In addition, Loss Events include the inability of a Fund
to recover fully the amount loaned under a repurchase agreement because
of an event of default under the contract (``repo-related Loss
Event''), and losses resulting if certain payments to a Participating
Fund were subsequently considered a preference in bankruptcy
(``preference-related Loss Event''). In the future, the definition of
Loss Events could be expanded.
3. The Adviser or the Mutual Company will retain insurance
professionals to set the aggregate annual premium based upon their
assessment of the risk of Loss Events occurring with respect to
Insurable Assets in which the Funds invest. The insurable
professionals, using actuarial standards, will allocate the premium
among the Participating Funds based on the risk characteristics of the
different types of Insurable Assets held by each Fund.
4. The insurance policy (``Policy'') written by the Mutual Company
will be structured as a claims-made policy. The Policy will have a term
of one year and will be renewable. Neither the Mutual Company nor a
Participating Fund will be permitted to terminate or decrease its
coverage during a policy year. The Policy will have no cash surrender
value, will not be transferable, and will not provide for the payment
of any dividend or other distribution.
5. Loss recoveries by the Participating Funds will be limited to
$100 million annually in the aggregate. A Participating Fund will
recover for a Loss Event only to the extent that the amount of its loss
exceeds the deductible amount of 0.30% of a Participating Fund's
Insurable Assets, which will be applied on a per loss basis for each
Fund. There are no limits (other than the Policy limit) on the amount
of loss recoverable by a Participating Fund in a particular year or
with respect to any single issuer.
6. The Mutual Company also would provide coverage for certain
wrongful acts on the part of past or present officers, Trustees, or
employees of a Participating Fund that result in the Fund sustaining a
Loss Event. This coverage would not apply to FMR in its capacity as
investment adviser to the Funds. Wrongful acts would include any breach
of duty, neglect, error, misstatement, misleading statement, omission
or other act committed or wrongfully attempted by an employee resulting
in a Participating Fund sustaining a loss attributable to a Loss Event.
The coverage is not fidelity bond coverage and will not be subject to
rule 17g-1 under the Act. The coverage would generally expand the
existing errors and omissions coverage maintained by a Participating
Fund by covering losses not currently covered by the Fund's existing
policy. For example, the Mutual Company would cover losses that result
from wrongful acts in connection with the purchase of an investment
that was not rule 2a-7 eligible and that are in an amount that exceeds
the amount covered under the Participating Fund's existing errors and
omissions policy.
D. Mutual Company Capitalization
1. As noted above, the Mutual Company will have an annual aggregate
Policy limit of $100 million. The Mutual Company initially will cover
the first $30 million in claims from payments collected from the
Participating Funds and Fidelity, with third-party reinsurance covering
the remaining $70 million. The first $30 million will be capitalized by
the following sources: (i) A one-year loan by Fidelity of $250,000
(``Fidelity Note''), (ii) a one-year demand note by the participating
funds of $450,000 in the aggregate (``Fund Notes''), (iii) first-year
premiums of approximately $2.7 million, (iv) assessable premiums of
approximately $11 million, and (v) a commitment by Fidelity of
approximately $17 million. If the Mutual Company's reserves are
insufficient to cover claims, it will use its other assets in the
following order: (a) The Fund Notes, (b) the FMR Note, (c) the premium
assessment, (d) FMR's commitment, and (e) reinsurance.
2. The amount of each Fund Note will be determined on a pro rata
basis in the same proportion as the Fund's premium payment. Because the
Fund Notes are demand notes, a Participating Fund will not be required
to pay any monies to the Mutual Company unless these are one or more
covered Loss Events exceeding the Mutual Company's available reserves
and surplus funds. Fund Notes will be drawn upon and will be repaid to
the Funds by the Mutual Company on a pro rata basis.
3. In addition, because annual premiums in the initial years of
operation will be insufficient to permit the Mutual Company to provide
the $30 million of coverage it will retain, the Company's insurance
policies will be ``assessable.'' Thus, if a Loss Event occurs, each
Participating Fund will be subject, in addition to its annual premium
payments, to a special premium assessment initially estimated to be
approximately two and one half times its annual premium payment. A
Fund's annual and special assessment premiums will be paid from the
general assets of the Fund, except that FMR will pay the premiums for
Funds with ``all-inclusive'' management agreements, under which FMR is
contractually obligated to pay all Fund expenses. The special premium
assessment will be made on a pro rata basis by each Participating Fund
in the same proportion as the Fund's then current pro rata shares of
its regular premium payment, regardless of which Fund actually sustains
a Loss Event. If reserves and surplus funds in the Mutual Company build
up sufficiently, applicants expect the assessment rate to decline over
time.
4. Assuming that all the Fund Notes are fully drawn upon and the
Funds are subject to the maximum special premium assessment, applicants
anticipate that the maximum commitment by all Participating Funds
(which as of October 31, 1997, had approximately $98 billion in net
assets) to the Mutual Company would initially amount to approximately
$11 million resulting in a projected maximum commitment by the Funds
that would not exceed .04% of the Funds' net assets. Thus, any monies
required to be paid by a Participating Fund pursuant to the Fund Notes
or special assessment in a given year would not cause the net asset
value of a money market Fund to be reduced below $1.00 per share.
5. The Mutual Company also will receive a $17 million commitment
from FMR backed by a letter of credit to cover Loss Events exceeding
the Mutual Company's reserves and surplus funds and the Participating
Funds' assessable policies. FMR's commitment to cover losses would
stand behind the premiums and assessable policies of the Participating
Funds and is expected to decline over time as reserves increase. The
Mutual Company will pay FMR an
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annual fee, at market rates, for the commitment. The rate of the annual
fee will be the same amount as the lowest rate FMR would then pay a
bank for a letter of credit in a comparable amount. The reinsurance
obtained by the Mutual Company will stand behind the premiums,
assessable policies, and FMR's commitment.
E. Insurance Claims
1. The order of the payment of claims will be based on the date the
loss was incurred. In the event of multiple losses occurring on the
same date in excess of the Policy limit, claims will be paid pro rata
based on the amount of a fund's loss in excess of its deductible.
2. A Participating Fund that experiences a Loss Event typically
would receive payment within approximately 30 days of filing an
acceptable proof of loss with the Mutual Company. Entities providing
reinsurance will be obligated to pay the Mutual Company within the same
period of time. Normal insurance subrogation rights will be provided in
connection with the insurance coverage.
3. Beginning the day of the Loss Event until the proceeds of a
Participating Fund's claim are received from the Mutual Company, the
net asset value of a Participating Fund that sustains a Loss Event will
be computed by recording the amount of the expected recovery as a
receivable on the books of the Fund, subject to the Policy limit. Prior
to recording a receivable, a Participating Fund will have contacted the
Mutual Company upon the occurrence of a Loss Event to determine the
amount of available coverage. The recovery will be determined by
calculating the amount of the Participating Fund's loss and comparing
this number to the coverage remaining under the Policy limit for the
policy year in question. The relevant receivable on a Participating
Fund's books will be computable and recorded prior to the Fund's next
net asset value determination following a Loss Event.
F. Disclosure of the Insurance
1. A brief description of the nature and extent of the insurance
coverage will be contained in each Registered Fund's registration
statement and, if required by generally accepted accounting principles
(``GAAP''), its financial statements. The insurance coverage provided
by the Mutual Company will not be used in connection with the marketing
of the sale of shares of the Registered Funds, and thus will not be
discussed in any marketing or sales literature distributed with respect
to any Registered Fund.
Applicants' Legal Analysis
A. Sections 13(a) and 18(f)
1. Section 18(f)(1) of the Act generally prohibits a registered
open-end investment company from issuing any senior security. Section
13(a)(2) of the Act requires that a registered investment company
obtain shareholder authorization before issuing any senior security not
contemplated by the recitals of policy in its registration statement.
Section 13(a)(3) of the Act provides that no registered investment
company will, unless authorized by the vote of a majority of its
outstanding voting securities, deviate from any investment policy that
is changeable only if authorized by shareholder vote, or deviate from
any policy recited in its registration statement pursuant to section
8(b)(3) of the Act. Each Registered Fund has a fundamental investment
policy prohibiting the issuance of senior securities except as
permitted under the Act. Applicants request relief from sections 13(a)
and 18(f) to the extent that the assessable feature of the policy
entered into by each Registered Fund and the obligation of each Fund
pursuant to the Fund Notes could be deemed the issuance of senior
securities by the Registered Funds, and thus be prohibited by section
18(f) and in contravention of a Registered Fund's fundamental policy
against issuing senior securities pursuant to section 13(a)(2), and its
deviation from that policy in contravention of section 13(a)(3). Relief
from section 13(a)(3) would extend only to existing Registered Funds
with a fundamental investment restriction prohibiting investments in
senior securities and to any other Registered Funds that have such
policies at the time the Adviser becomes the Fund's investment adviser.
2. Section 6(c) of the Act permits the SEC to exempt any person or
transaction from any provision of the Act, if the exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies of the Act. For the reasons provided below, applicants argue
that the requested order meets the section 6(c) standards.
3. Applicants state that sections 13(a) and 18(f) resulted from
Congress' desire to eliminate certain practices including (a) heavy
borrowings by investment companies from the public without adequate
assets and reserves, (b) the complexity of capital structures which
induced investment companies to invest in risky securities to produce
income necessary to cover the high cost of borrowings, (c) the freedom
of investment companies to borrow funds for speculation, and (d) the
propensity of senior securities to mislead investors by conveying false
impression of freedom from risk, and to increase the speculative nature
of both the common stock and senior securities of investment companies.
4. Applicants state that the assessable feature of the policy and
the obligations created by the Fund Notes will not give rise to the
abuses at which sections 13(a) and 18(f) are directed. Applicants
submit that neither the assessable feature nor the Fund Notes will
involve speculative trading or leverage in the typical sense because a
Registered Fund will not be buying portfolio securities with borrowed
money. Applicants believe that the proposed insurance coverage will not
create an unduly complicated capital structure. Applicants contend
that, because of the limited coverage and the deductible, the insurance
coverage will not induce a Registered Fund to invest in risky
securities.
5. Applicants further state that neither the special assessment
feature nor the Fund Notes will change the risk/reward characteristics
of any Registered Fund. Applicants submit that payment of monies by a
Registered Fund pursuant to the Fund Notes will have no effect on the
Fund's net asset value because the Fund will record a receivable on its
books and will receive interest at market rates on those monies.
Further, applicants believe that, even assuming that all the Fund Notes
are drawn upon and the Funds are subject to the maximum special
assessment, it is projected that the maximum amount payable by the
Participating Fund will be de minimis in relation to their total net
assets.
B. Sections 17(a) (1) and (2)
1. Sections 17(a) (1) and (2) of the Act generally prohibit sales
or purchases of securities to or from a registered investment company
by any affiliated person of the company or any affiliated person of an
affiliated person. 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 anyone under common control with the
investment company. Under section 2(a)(3), FMR, as investment adviser
of each of the Funds, is an affiliated person of each Fund. Further,
because the Funds either share a common investment adviser or have an
investment adviser that is under common control with those of the other
Funds, and most Registered Funds also share a common board of trustees
or
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other governing body, each Fund may be deemed to be under common
control with all other Funds and, therefore, may be deemed to be an
affiliated person of those Funds.
2. Each Participating Fund will have voting rights in the Mutual
Company. To the extent that the Mutual Company could be deemed to be
controlled by, or under common control with, the Participating Funds or
the Adviser and thus an affiliated person of the Registered Funds,
applicants believe that the insurance coverage could be deemed to be
controlled by, or under common control with, the Participating Funds or
the Adviser and thus an affiliated person of the Registered Funds,
applicants believe that the insurance coverage could be deemed
``property'' subject to the prohibition of section 17(a)(1) against an
affiliate of a Registered Fund selling property to the Fund. In
addition, applicants state that FMR's commitment to the Mutual Company
could be viewed as a sale of property to the Registered Funds (as the
indirect beneficiaries of the commitment and payers of the fee) by an
affiliated person of the Registered Funds under section 17(a)(1).
Further, applicants state that FMR's contribution of cash to the Mutual
company in exchange for the FMR Note could be considered the sale of a
security for property by the Mutual Company, a company controlled by
the Registered Funds, to FMR under section 17(a)(2). Applicants request
exemptions from the provisions of sections 17(a) (1) and (2) to permit
these transactions.
3. Section 17(b) of the Act permits the SEC to grant an order
permitting a transaction otherwise prohibited by section 17(a) if it
finds that the terms of the proposed transaction are fair and
reasonable and do not involve overreaching on the part of any person
concerned. For the reasons stated below, applicants believe that the
terms of the transactions meet the standards of sections 6(c) and
17(b).
4. Applicants state that the insurance coverage will provide the
Participating Funds and their shareholders with a means of reducing
their risk of loss from defaulting Insurable Assets and repo- and
preference-related Loss Events and, in some cases, protection against
their net asset value per share dropping below $1.00. Applicants
believe that the proposed transactions do not involve overarching
because the coverage could not be obtained from an unaffiliated third-
party issuer at a comparable price. In addition, applicants state that
the proposed arrangement is consistent with the policies of each
Participating Fund.
C. Sections 17(a)(3) and 21(b)
1. Section 17(a)(3) of the Act generally prohibits an affiliated
person or an affiliated person of an affiliated person of a registered
investment company from borrowing money or other property from the
company or from any company controlled by the registered company except
in certain circumstances not relevant here. Section 21(b) makes it
unlawful for any registered investment company to lend money or
property to any person, directly or indirectly, if the person controls
or is under common control with the registered company.
2. Applicants seek relief from section 17(a)(3) and from section
21(b) to the extent that the Fund Notes, if drawn upon by the Mutual
Company, could be deemed the borrowing of money or property from the
Registered Funds by an affiliated person. Applicants state that
sections 17(a)(3) and 21(b) were intended to prevent a party with
strong potential adverse interests and influence over the investment
decisions of a registered investment company from causing or inducing
the investment company to engage in lending transactions that are
detrimental to the best interests of the investment company and its
shareholders. Applicants believe that the Fund Notes do not raise these
concerns because: (a) The amount of each Fund's Fund Note will be
determined on a pro rata basis in the same proportion as the Fund's
then current pro rata share of its regular premium payment, (b) all
Fund Notes will have the same terms, which will be fair and reasonable
to each Fund, and (c) any interest received by the Funds on the Fund
Notes will be determined according to a market rate.
D. Section 17(d) and Rule 17d-1
1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
an affiliated person of a registered investment company or an
affiliated person of an affiliated person, acting as principal, from
participating in any joint arrangement in which the investment company
participates unless the arrangement has been approved by the SEC.
Applicants believe that the involvement of FMR and the Participating
Funds in the Mutual Company could be deemed to constitute participation
in a joint arrangement because of: (a) The payment of premiums by the
Funds to the Mutual Company for insurance coverage and the rights of
the Funds to certain payments from the Mutual Company in connection
with a Loss Event, (b) the assessable feature of the Policies, (c) the
receipt by FMR from the Mutual Company of interest on the FMR Note and
an annual fee for its commitment, and (d) FMR's contribution of cash to
the Mutual Company in exchange for the FMR Note.
2. Rule 17d-1(b) provides that, 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. For the reasons stated below, applicants believe that the
requested relief meets these standards.
3. Applicants state that the Registered Funds will not participate
in the arrangement on a basis that is different from or less
advantageous than other Participating Funds because each Fund's premium
will be allocated in accordance with the risk characteristics of the
different types of Insurable Assets in which the Funds invest based
upon actuarial standards. Applicants state that each Participating
Fund's assessable portion will be on a pro rata basis according to its
share of the regular premium payments. Applicants also state that, in
the case of multiple loss events in a single year, the Mutual Company
will make payments chronologically based on the date on which a Loss
Event occurs up to the annual Policy limit. Applicants note that, while
a Registered Fund may not recover on a loss in a particular year, all
Registered Funds will be treated in the same manner.
4. Applicants state that the Mutual Company is intended to provide
substantial benefits to the Participating Funds, including protection
against losses incurred from defaulting Insurable Assets and from repo-
and preference-related Loss Events. Further, applicants note that the
interest received by FMR on the FMR note and the fee it will receive
for its commitment to cover losses of the Mutual Company will be
determined according to a market rate. Applicants state that the fees
will compensate FMR for assuming significant economic risks and that
FMR will receive no other direct benefits from its involvement with the
Mutual Company.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. The Trustees, including a majority of the Trustees who are not
``interested persons'' of any Registered or Unregistered Fund, as
defined in section
[[Page 3938]]
2(a)(19) of the Act (``Disinterested Trustees''), will initially and at
least annually thereafter, in each year a Registered Fund participates
in the insurance arrangement, determine (a) that the Policy is in the
best interests of the Registered Fund and its shareholders, (b) that
any amounts paid or potentially payable to the Mutual Company by the
Registered Fund including, without limitation, the premiums, the
special assessable premium, and the Fund Notes, are fair and reasonable
to the Registered Fund, (c) after reviewing all claims paid or denied
by the Mutual Company, that the settlement of all claims has been
reasonable and fair to the Registered Fund, and (d) that any procedures
adopted pursuant to condition 3 have been complied with.
2. Any conflicts that may arise concerning the Participating Funds
relating to the operation or policies of the Mutual Company will be
resolved on an equitable basis by a committee of the Disinterested
Trustees of the Registered Funds.
3. The Trustees of each Registered Fund, including a majority of
the Disinterested Trustees, will adopt procedures that are reasonably
designed to provide that the conditions in the application have been
complied with. The procedures will include, without limitation, the
guidelines set forth in the Statement of Policy Regarding Coverage,
attached as Exhibit D to the application, as it may be amended from
time to time.
4. Participation by a Registered Fund in the Mutual Company will be
consistent with the policy of the Fund, as recited in its registration
statement and reports filed under the Act.
5. The nature and extent of the insurance coverage will be briefly
described in each Registered Fund's current registration statement and,
if required by GAAP, in each Registered Fund's financial statements.
Other than this disclosure, the insurance coverage provided by the
Mutual Company will not be used in connection with the marketing of the
sales of shares of the Registered Funds.
6. Each Registered Fund will maintain and preserve permanently in
an easily accessible place a written copy of the procedures (and any
modifications thereto) described in condition (3) and will maintain and
preserve for a period of not less than six years from the end of the
fiscal year in which any Fund participated in the Mutual Company, the
first two years in an easily accessible place, a written record
relating to the premiums paid and any claims made by the Fund and any
action taken by the Mutual Company with respect to the claim, and the
information or materials upon which the determinations described in
condition (1) were made. The Mutual Company will make its records
available to the Trustees and the staff of the SEC upon request.
7. The Mutual Company will pay FMR for its commitment to cover
losses at a rate not to exceed the lowest rate FMR would then be paying
a bank for a letter of credit in a comparable amount.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-1854 Filed 1-26-98; 8:45 am]
BILLING CODE 8010-01-M