[Federal Register Volume 63, Number 74 (Friday, April 17, 1998)]
[Notices]
[Pages 19277-19280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10183]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23109; 812-9544]


State Street Bank and Trust Company; Notice of Application

April 13, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under sections 6(c) and 
17(b) of the Investment Company Act of 1940 (the ``Act'') from sections 
17(a)(1) and 17(a)(2) of the Act.

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SUMMARY OF APPLICATION: Applicant State Street Bank and Trust Company 
requests an order that would permit it to engage in repurchase 
agreements and currency transactions with certain affiliated registered 
management investment companies (the ``Funds'') for which applicant 
serves as custodian. Applicant will be an affiliated person, or an 
affiliated person of an affiliated person, of a Fund solely by reason 
of applicant's owning, controlling, or holding 5% or more (but less 
than 20%) of the outstanding voting securities of the Fund. The 
requested order would not extend to transactions between applicant and 
a Fund when applicant or an affiliated person of applicant is the 
investment adviser to the Fund.

FILING DATES: The application was filed on March 17, 1995, and amended 
on December 20, 1995. Applicant has agreed to file another amendment 
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. Any interested person 
may request a hearing by writing to the SEC's Secretary and serving 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on May 8, 1998 and 
should be accompanied by proof of service on applicant 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. Applicant: 225 Franklin Street, Boston, Massachusetts 02110.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Nadya B. Roytblat, 
Assistant Director, 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 (tel. 202-942-8090).

Applicant's Representations

    1. Applicant is a wholly-owned subsidiary of State Street Boston 
Corporation, a publicly held bank holding company. Applicant is 
organized as a trust company under the laws of the Commonwealth of 
Massachusetts and is a member of the Federal Reserve System. Applicant 
is a ``bank'' as that term is defined by section 2(a)(5) of the Act and 
meets the qualifications set forth in section 26(a)(1) of the Act for 
an investment company custodian. Applicant offers a wide variety of 
commercial and trust services, including custodian services to 
registered investment companies.
    2. One division of applicant, Capital Markets, is a dealer in 
government securities, foreign currency, and other instruments. Another 
division of applicant, Global Advisors, manages money on a 
discretionary basis for registered investment companies, collective and 
common trust funds, and separate accounts. Global Advisors may invest 
client funds in a wide variety of investment products, including shares 
of Funds. As a result of the investment activities of Global Advisors, 
applicant may at times own, hold, or control with the power to vote 
more than 5% of the shares of a Fund.
    3. Applicant proposes to enter into repurchase agreements and 
currency transactions with the Funds for which applicant serves as 
custodian. As a Fund's custodian, applicant is in a unique position to 
afford the Fund certain advantages, such as added investment 
flexibility, advantageous prices, and accurate and efficient 
settlements for these types of transactions.

Applicant's Legal Analysis

    1. Sections 17(a)(1) and 17(a)(2) of the Act prohibit an affiliated 
person of a Fund, or an affiliated person of an affiliated person of 
the Fund, from knowingly selling to or purchasing from the Fund any 
security or other property. Applicant represents that the purchase and 
sale of repurchase agreements are the types of transactions covered by 
section 17. Applicant also states that the proposed currency 
transactions may be covered by section 17 to the extent they involve 
the purchase or sale of property.
    2. Section 2(a)(3) of the Act defines an ``affiliated person'' of 
another person to include: (a) any person directly or indirectly 
owning, controlling, or holding with power to vote 5% or more of the 
outstanding voting securities of the other person; (b) any person 5% or 
more of whose outstanding voting securities are directly or indirectly

[[Page 19278]]

owned, controlled, or held with power to vote, by the other person; and 
(c) any person directly or indirectly controlling, controlled by, or 
under common control with, the other person.
    3. Applicant states that, as a result of the investment activities 
of Global Advisors, as described above, applicant may at times own, 
control, or hold with the power to vote 5% or more of the outstanding 
shares of a Fund and therefore constitute an affiliated person of the 
Fund. Furthermore, Funds may be affiliates of each other when they 
share common officers, directors, or investment advisers because the 
Funds may be deemed to be under common control. As a result, applicant 
states that, when it owns, controls, or holds with power to vote 5% or 
more of the outstanding shares of a Fund, it may be deemed to be an 
affiliated person of an affiliated person of all Funds in the same 
complex as the Fund.
    4. Under section 17(b), the SEC may issue an order of exemption 
from section 17(a) if evidence establishes that: (a) the terms of the 
proposed transaction are reasonable and fair and do not involve 
overreaching on the part of any person; (b) the proposed transaction is 
consistent with the policy of each registered investment company 
concerned; and (c) the proposed transaction is consistent with the 
general purposes of the Act. Under section 6(c), the SEC may exempt any 
person, security, or transaction from any provision of the Act or any 
rule 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. Applicant asserts that the proposed 
transactions meet the standards set forth in sections 6(c) and 17(b).
    5. Applicant represents that the requested relief would be 
conditioned on a Fund's adoption of certain procedures (the 
``Procedures''). Applicant asserts that the Procedures require careful 
monitoring by a Fund of securities transactions with applicant. 
Applicant states that the Procedures provide a mechanism to determine 
that: (a) the security to be purchased or sold by a Fund is consistent 
with the investment policy and objectives of that Fund and with the 
interests of its shareholders and is comparable to other similar 
securities in which the Fund is authorized to invest and currently is 
purchasing; (b) the terms of the proposed transaction are reasonable 
and fair to the shareholders of that Fund and do not involve 
overreaching on the part of any person concerned; and (c) the proposed 
transaction is consistent with the general purposes of the Act.
    6. Applicant submits that the primary purpose of section 17(a) is 
to prevent persons with the power to control an investment company from 
using that power to such persons' own pecuniary advantage (i.e., to 
prevent self-dealing). Applicant asserts that the degree of its 
affiliation with a Fund, coupled with the Procedures to be adopted by a 
Fund with respect to repurchase agreements and currency transactions 
with applicant, ameliorate the concerns underlying section 17. Further, 
applicant represents that there is or will be no express or implied 
understanding between applicant and the investment adviser of any Fund 
that such investment adviser will cause any Fund to enter into the 
transactions with applicant or give a preference to applicant in 
effecting such transactions between the Funds and applicant.
    7. Applicant states that preventing a Fund from effecting 
repurchase agreement (``repo'') transactions with applicant when 
applicant is the Fund's custodian would significantly limit the Fund's 
opportunity to obtain operational and processing cost savings on its 
repo transactions as well as impede its flexibility to invest cash 
balances late in the day. Applicant asserts that repo transactions with 
third parties which involve a transfer of securities through the Fed 
Wire to a Fund's custodian bank cannot be effected after 3:00 p.m. 
because the Fed Wire closes at that time. As a practical matter, 
applicant notes that such repo transactions generally have to be 
initiated well before 3:00 p.m. in order to insure consummation prior 
to the close. By contrast, applicant believes that repo transactions 
can be effected with applicant by Funds, for which applicant is 
custodian, after the close of the Fed Wire, because a transfer of 
securities can be effected through internal bookkeeping entries by 
applicant.
    8. Applicant states that, in circumstances in which applicant is a 
Fund's custodian and is effecting repo transactions with the Fund, 
applicant has adopted detailed procedures designed to give the Fund an 
ownership and/or perfected security interest in the collateral (i.e., 
the securities underlying the repo transaction). Applicant believes 
that these procedures ameliorate the risks associated with repo 
transactions when custody is maintained by the repo counterparty and 
not transferred to a third party. These risks may involve the 
insolvency of, and consequent default by, the repo counterparty, an 
attempt by the repo counterparty to retain assets (or offset against 
assets) when a dispute arises between the parties, or losses resulting 
from fraud or operational error due to the Fund's inability to 
determine whether the collateral exists.
    9. Applicant states that the securities underlying the repo 
transaction are maintained either in the Fund's custody account or on 
behalf of the specific Fund in an omnibus custodial account maintained 
by applicant at the Federal Reserve Bank of Boston. Applicant states 
that, in both cases, the securities are transferred to, or identified 
in, the custody account against a transfer of moneys out of the Fund's 
account to applicant's proprietary account. Applicant contends that the 
repo transaction securities so maintained are the assets of the Fund, 
not of applicant. Accordingly, applicant asserts that the risk of 
insolvency and the risks associated with commingling of assets are 
eliminated. Moreover, applicant states that in its capacity as 
custodian for the Fund, applicant marks its books and records to 
reflect the Fund's interest in the repo transaction securities. In 
addition, applicant states that written confirmations specifying the 
particular securities which are the subject of the repo transactions 
currently are sent to the Funds at the end of each trading day. In 
applicant's view, these procedures provide the Funds the same types of 
protections as would be the case if the securities were transferred to 
a third party.
    10. Applicant states that the inability of a Fund to effect foreign 
currency transactions with applicant, when applicant is custodian for 
the Fund, could inhibit the ability of the Fund to obtain best price 
and execution on its foreign currency transactions and deprive the Fund 
of certain operational advantages and efficiencies.
    11. Generally, the settlement of Fund transactions in foreign 
equity and debt securities is effected in the currency of the country 
of the issuer or the country in which the securities are traded. Thus, 
the Funds buy foreign currency to settle purchase transactions within 
foreign markets and sell foreign currency that they receive in the 
settlement of transactions in foreign markets. In addition, Funds often 
convert dividends or interest payments denominated in a particular 
currency into U.S. dollars or another currency. Some of the Funds also 
may enter into forward currency exchange contracts as a means of 
managing exchange rate risks. A Fund may enter into a foreign currency 
contract covering foreign securities held by the Fund in order to 
reduce or eliminate foreign currency exposure. Applicant states that 
the Funds will

[[Page 19279]]

represent that they will enter into foreign currency contracts in 
compliance with Investment Company Act Release No. 10666 (Apr. 18, 
1979).
    12. Currency transactions are entered into by telephone or 
computer. There is no centralized trading floor. Commercial banks act 
as the core of this market, quoting bid/asked prices and acting as 
principals. The spread between the bid and the asked price in the 
foreign exchange markets represents the potential profit to the market 
maker and the compensation for its perceived risk in quoting the price 
and selling or holding the currency. Foreign exchange rates generally 
are obtained through automated quotation systems. Applicant states that 
the Reuters Monitor Money Rates Service (``Reuters'') is the money rate 
quote service that currently is recognized in the currency markets as 
the most reliable.
    13. Applicant asserts that of particular importance to Funds in 
many cases are ``odd lot'' currency transactions, established by 
industry practice as those involving a United States dollar value of 
less than $1 million. Currency dealers generally do not make an active 
market in odd lot currency transactions, and indications for such 
transactions are not reported on Reuters. The exchange rate that can be 
obtained for an odd lot currency transaction generally varies directly 
with the size of the transaction and the type of currency.
    14. Applicant is a dealer in foreign currency and provides 
competitive quotations twenty four hours a day five days a week on over 
forty currencies. The most favorable price and execution on foreign 
currency transactions are normally achieved by requesting competitive 
quotations from foreign currency dealers with respect to a particular 
currency. The character of the market for a particular currency may 
vary widely in terms of price and availability. Therefore, applicant 
believes that it is important that the Funds have the ability to obtain 
quotations from as many major currency dealers as possible, including 
itself, to ensure that they are obtaining the most favorable price. 
Particularly when applicant is among a small number of competitive 
dealers in a currency, a Fund's ability to obtain the most favorable 
price or prompt execution would be directly restricted if a Fund is 
denied access to applicant.
    15. Applicant represents that access to applicant is particularly 
significant in connection with odd lot currency transactions. When 
applicant serves as a Fund's custodian, it will ordinarily accommodate 
any odd lot currency transaction required for securities settlement or 
related to the conversion of dividend and/or interest payments 
denominated in a particular currency into U.S. dollars or another 
currency. Because currency dealers do not make an active market in odd 
lot transactions, a Fund could have difficulty obtaining favorable 
prices and executions for these transactions absent the ability to 
effect transactions with applicant.
    16. Applicant states that the inability to effect foreign currency 
transactions with applicant when applicant is the Fund's custodian also 
would deprive the Fund of certain operational advantages and 
efficiencies. Settlement procedures for transactions with applicant in 
these cases are simpler and more easily coordinated than transactions 
with third parties, resulting in a lower trade settlement failure rate. 
In addition, applicant can execute foreign currency transactions for 
the Fund after normal business hours. Moreover, applicant, in its role 
as custodian, monitors the settlement process for all foreign exchange 
and security transactions. As a result, if there is a trade settlement 
failure, applicant is positioned to quickly identify the failure and 
minimize the costs to the Fund.
    17. Applicant states that its experience has been that Funds may at 
times engage in foreign currency transactions representing a 
significant percentage of their assets. As a result, applicant proposes 
that there will be no limit on the amount of a Fund's total assets that 
may be committed to foreign currency transactions with applicant. 
Applicant also represents that a significant percentage of currency 
transactions effected by applicant involve settlement terms that may 
range from one day to six months. Accordingly, applicant proposes that 
there will be no limit on the length of the currency contracts 
permitted under the requested relief.

Applicant's Conditions

    If the requested relief is granted, applicant agrees to comply with 
the following conditions.

A. General Conditions

    1. The board of directors of each Fund, including a majority of the 
directors who are not interested persons of the Fund, (a) will adopt 
procedures that are reasonably designed to provide that the conditions 
set forth below have been complied with; (b) will make and approve such 
changes to the procedures as deemed necessary; and (c) will determine 
no less frequently than quarterly that the transactions made pursuant 
to the order during the preceding quarter were effected in compliance 
with such procedures. The investment adviser of each Fund may implement 
these procedures, subject to the direction and control of the board of 
directors of each Fund. Applicant will only engage in repurchase 
agreements and currency transactions with Funds that agree to adhere to 
the specific conditions set forth below and have furnished evidence to 
applicant that they will agree to abide by the conditions.
    2. Each Fund (a) will maintain and preserve permanently in an 
easily accessible place a written copy of the procedures (and any 
modifications thereto) and a copy of the notice and order issued on the 
application; and (b) will maintain and preserve for a period of not 
less than six years from the end of the fiscal year in which any 
transaction occurred, the first two years in an easily accessible 
place, a written record of each transaction setting forth a description 
of the transaction, including the identity of the person on the other 
side of the transaction, the terms of the transaction, and the 
information or materials upon which the determinations described below 
were made.
    3. No Fund will engage in transactions with applicant if applicant 
exercises a controlling influence over that Fund. Applicant will have 
no affiliation with a Fund, except that applicant may directly or 
indirectly own, control, or hold less than 20% of the outstanding 
voting securities of the Fund.
    4. The transactions entered into by a Fund will be consistent with 
the investment objectives and policies of that Fund as recited in that 
Fund's registration statement and reports filed under the Act.

B. Repurchase Agreements

    1. Any repurchase agreement will meet the portfolio quality 
requirements set forth in paragraph (c)(3) of rule 2a-7 under the Act 
and be ``collateralized fully'' as defined in rule 2a-7.
    2. The quality, yield, and maturity of any repurchase agreement 
will be at least as favorable to a Fund as compared to other repurchase 
agreements that are appropriate for that Fund and that are being 
entered into during a comparable period of time.

C. Currency Transactions

    1. At the time any currency transaction is consummated, applicant's 
short-term debt instruments will meet the portfolio quality 
requirements of a ``First-Tier Security'' set forth in rule 2a-7 under 
the Act.

[[Page 19280]]

    2. Before any currency transaction is entered into, the Fund or its 
adviser must obtain such available market information as they deem 
necessary to determine that the price to be paid or received for, and 
the terms of, each transaction are at least as favorable as that 
available from other sources. This shall include the following 
information, without limitation:
    With respect to round lot currency transactions, the Fund must 
obtain and document the competitive indications with respect to the 
specific proposed transaction, either from two other currency dealers 
or from one currency dealer and from an automated quotation system 
approved by the board of directors of the Fund, including a majority of 
non-interested directors. In the case of odd lot currency transactions, 
the Fund must obtain and document the competitive indications with 
respect to (a) the specific proposed transaction from two other 
currency dealers; and (b) a round lot transaction of the same currency 
with the same settlement terms from one other currency dealer or an 
automated quotation system. Competitive quotation information must 
include price and settlement terms. Dealers must be those who, in the 
experience of the Fund's adviser, have demonstrated the consistent 
ability to provide professional execution of currency transactions at 
competitive market prices in the currencies of the type desired. The 
dealers also must be those who, in the experience of the Fund's 
adviser, are in a position to quote favorable prices.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10183 Filed 4-16-98; 8:45 am]
BILLING CODE 8010-01-M