[Federal Register Volume 63, Number 152 (Friday, August 7, 1998)]
[Notices]
[Pages 42461-42465]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21170]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-23370, 812-10800]


Bankers Trust Company, et al.; Notice of Application

July 31, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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SUMMARY OF APPLICATION: Applicants request an order to permit certain 
registered management investment companies to use cash collateral from 
securities lending transactions (``Cash Collateral'') to purchase 
shares of an affiliated registered management investment company (the 
``Trust''), and to pay fees based on a share of the revenue generated 
from securities lending transactions to Bankers Trust Company 
(``Bankers Trust''). The order also would permit Bankers Trust and 
certain of its affiliates to engage in principal securities 
transactions with, and receive brokerage commissions from, certain 
other registered investment companies that are affiliated with Bankers 
Trust solely as a result of investing Cash Collateral in the Trust.
    Applicants: Bankers Trust; Cash Management Portfolio, Treasury 
Money Portfolio, Tax Free Money Portfolio, NY Tax Free Money Portfolio, 
International Equity Portfolio, Equity 500 Index Portfolio, Short/
Intermediate U.S. Government Securities Portfolio, Asset Management 
Portfolio, Capital Appreciation Portfolio, Intermediate Tax Free 
Portfolio, BT Investment Portfolios and future series of the foregoing; 
the Trust, BT Investment Funds, BT Insurance Funds Trust, BT Pyramid 
Mutual Funds, BT Advisor Funds and future series of the foregoing; 
Fidelity Commonwealth Trust in respect of its Spartan Market Index 
Fund, Fidelity Concord Street Trust in respect of its Spartan extended 
Market Index Fund, Spartan International Index Fund, Spartan Total 
Market Index Fund, and Spartan US Equity Index Fund, and Fidelity 
Variable Insurance Products Fund II in respect of its Index 500 
Portfolio, and any other registered open-end or closed--end management 
investment company advised or sub-advised, or that invests 
substantially all of its assets in a registered investment company 
advised or subadvised, by bankers Trust or an entity controlling, 
controlled by or under common control with bankers Trust (each a ``BT 
Entity'') (collectively, ``Affiliated Lending Funds''); and 
Institutional Daily Assets Fund (the ``Money Fund''), and any series of 
the Trust or other registered management investment companies

[[Page 42462]]

advised by a BT Entity and established in the future in connection with 
the investment of Cash Collateral from securities lending transactions 
(together with the Money fund, the ``Investment Funds'').

FILING DATES: The application was filed on September 25, 1997. 
Applicants have agreed to file an amendment during the notice period, 
the substance of which is described 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 August 25, 1998, 
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, NW., Washington, DC 20549. 
Bankers Trust Entities, c/o Mr. Gerald T. Lins, Esq., Bankers Trust 
Company, One Bankers Trust Plaza, 31st Floor, New York, NY 10006. 
Fidelity Funds, c/o Fidelity Investments, 82 Devonshire Street, Boston, 
Massachusetts 02109.

FOR FURTHER INFORMATION CONTACT:
John K. Forst, Attorney Advisor, at (202) 942-0569, 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, NW., Washington, 
DC 20549 (tel. 202-942-8090).

Applicants' Representations

    1. Bankers Trust, a New York banking corporation, is a wholly-owned 
subsidiary of Bankers Trust Corporation. Bankers Trust serves as the 
investment adviser to the Affiliated Lending Funds, which are either 
open-end or closed-end management investment companies registered under 
the Act.\1\ Bankers Trust also is one of the world's leading providers 
of institutional custody services. In conjunction with its global 
custodial services, Bankers Trust operates one of the largest and most 
extensive securities lending programs (the ``Securities Lending 
Program'').
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    \1\ All existing Affiliated Lending Funds that currently intend 
to rely on the requested relief have been named as applicants. Any 
future Affiliated Lending Fund may rely on the order only in 
accordance with the terms and conditions in the application.
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    2. The Trust is an unincorporated business association organized 
under the laws of Massachusetts and is registered as an open-end 
management investment company under the Act. The Trust has several 
series, including the Money Fund. Shares of the Money Fund are offered 
primarily to Affiliated Lending Funds and other institutional investors 
participating in the Securities Lending Program, including other 
registered management investment companies (``Other Lending Funds''). 
The Money Fund values its securities using the amortized cost method 
and complies with rule 2a-7 under the Act. Shares of the Trust 
(``Shares'') are not subject to any sales load, redemption fee, or 
asset-based distribution fee. Bankers Trust serves as the investment 
adviser, custodian, transfer agent and administrator of the Money Fund 
and receives fees for these services. Other Investment Funds will be 
structured and operated in the same manner, but might not be money 
market funds.
    3. Affiliated Lending Funds and Other Lending Funds (collectively, 
``Lending Funds'') may loan their portfolio securities to various 
institutional borrowers. Pursuant to a securities lending agreement 
(the ``Securities Lending Agreement''), Bankers Trust acts as the 
securities lending agent for each Lending Fund. Each Lending Fund will 
represent to Bankers Trust that its policies generally permit the 
Lending Fund to engage in securities lending transactions. In addition, 
each Affiliated Lending Fund's board of trustees (the ``Board''), 
including a majority of the trustees who are not ``interested persons'' 
of the Fund (the ``Independent Trustees''), will initially approve 
Bankers Trust as the lending agent.
    4. Bankers Trust states that its personnel providing day-to-day 
lending agency services to the Affiliated Lending Funds do not provide 
investment advisory services to the Funds, or participate in any way in 
the selection of portfolio securities or other aspects of the 
management of the funds.
    5. Under the Securities Lending Program, Bankers Trust will enter 
into a borrowing agreement (the ``Borrowing Agreement'') with certain 
entities designated by Bankers Trust and approved by the Lending Fund 
as eligible to borrow portfolio securities (the ``Borrowers''). 
Collateral to be delivered by Borrowers under the Securities Lending 
Agreement and the Borrowing Agreement will be U.S. government 
securities, letters of credit or Cash Collateral.
    6. The Securities Lending Agreement will authorize and instruct 
Bankers Trust as agent for the Lending Fund to invest the Cash 
Collateral in accordance with specific guidelines provided by the 
Lending Fund. These guidelines will identify the particular Investment 
Funds and other investment vehicles, instruments and accounts, if any, 
in which Cash Collateral may be invested, and the amounts of Cash 
Collateral that may be invested in each Investment Fund and other 
authorized investments.
    7. An Affiliated Lending Fund and the lending agent derive income 
from the Securities Lending Program is one of two ways. If an 
Affiliated Lending Fund receives Cash Collateral it may invest the Cash 
Collateral and receive an investment return. Out of the return, the 
Affiliated Lending Fund pays the Borrower an agreed upon interest rate 
and retains the rest of the return. This investment return is split 
with the lending agent (``Shared Return''). When the collateral is a 
U.S. government security or a letter of credit, the Borrower pays the 
Affiliated Lending Fund a lending fee, which the Affiliated Lending 
Fund would share with the lending agent (``Shared Lending Fee'').
    8. Applicants request an order to permit the Lending Funds to use 
Cash Collateral received from Borrowers to purchase Shares of the Money 
Fund and other Investment Funds. Applicants also request an order to 
permit the Affiliated Lending Funds to pay Bankers Trust for its 
services as lending agent a portion of the Shared Return or Shared 
Lending Fee. Finally, applicants state that the Other Lending Funds may 
own more than 5% of an Investment Fund's outstanding voting securities 
and thus become affiliated persons of the Investment Fund. Bankers 
Trust, as investment adviser to the Investment Fund would therefore be 
an affiliated person of an affiliated person of the Lending Fund. 
Applicants thus request an order permitting Bankers Trust to engage in 
principal transactions with, and receive brokerage commissions and 
other compensation from, the Other Lending Funds.

Applicants' Legal Analysis

A. Investment of Cash Collateral by the Lending Funds in the Money Fund

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if such securities represent more than 3% of the acquired company's 
outstanding voting

[[Page 42463]]

stock, more than 5% of the acquiring company's total assets, or if such 
securities, together with the securities of other investment companies, 
represent more than 10% of the acquiring company's total assets. 
Section 12(d)(1)(B) provides that no registered open-end investment 
company may knowingly 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) of the Act provides that the SEC may exempt 
persons or transactions from any provision of section 12(d)(1) if and 
to the extent the exemption is consistent with the public interest and 
the protection of investors.
    3. Applicants seek an order under section 12(d)(1)(J) of the Act 
exempting them from the provisions of section 12(d)(1) of the Act to 
permit the Lending Funds to purchase, and the Trust to sell, securities 
in excess of the limits of sections 12(d)(1)(A) and 12(d)(1)(B) in 
connection with the Lending Funds' investment of Cash Collateral.
    4. Applicants state that each Investment Fund will be operated for 
the purpose of serving as the vehicle for the investment of Cash 
Collateral under the Securities Lending Program. Shares of the 
Investment Funds will not be subject to any sales load, redemption fee, 
or asset-based distribution or service fee. Applicants further state 
that, because investment advisory fees paid to Bankers Trust by the 
Affiliated Lending Funds will not be affected by the value of the 
collateral received by the Funds in connection with the loaned 
securities, the fees that would be paid to Bankers Trust by an 
Investment Fund, including investment advisory fees, should not be 
viewed as duplicative of the advisory fees paid by the Affiliated 
Lending Funds to Bankers Trust. Applicants also assert that there is no 
possibility of undue influence by the Lending Funds over the Investment 
Funds because each Investment Fund will be structured to accommodate 
the increased liquidity needs associated with securities lending 
transactions. Moreover, an Investment Fund will not invest in any 
investment company in excess of the limits of section 12(d)(1)(A) of 
the Act. For these reasons, applicants believe that the proposed 
arrangement does not raise the concerns underlying sections 12(d)(1) 
(A) and (B).
    5. 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 the affiliated person (``Second-Tier Affiliate''), acting as 
a principal, to sell any security to, or purchase any security from, 
the registered investment company. Section 17(d) of the Act and rule 
17d-1 under the Act prohibit any affiliated person of or principal 
underwriter for a registered investment company or any Second-Tier 
Affiliate, acting as principal, from effecting any transaction in 
connection with any joint enterprise or other joint arrangement or 
profit sharing plan in which the investment company participates, 
unless an application regarding the joint transaction has been filed 
with the SEC and granted by order. Section 2(a)(3) of the Act defines 
an ``affiliated person'' of another person to include 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, as well as any person directly or indirectly controlling, 
controlled by, or under common control with, the other person, and in 
the case of an investment company, its investment adviser.
    6. The Affiliated Lending Funds and Investment Funds are advised by 
Bankers Trust and thus are each affiliated persons of Bankers Trust and 
therefore may be deemed Second-Tier Affiliates. Accordingly, the sale 
and redemption of Shares of Investment Funds by the Affiliated Lending 
Funds may be prohibited under section 17(a). Moreover, if an Other 
Lending Fund acquires 5% or more of an Investment Fund's securities, 
the Other Lending Fund could be deemed an affiliated person of the 
Investment Fund, and thus subject to the same prohibitions. Applicants 
also state that the Affiliated Lending Funds and potentially the Other 
Lending Funds by purchasing and redeeming Shares, Bankers Trust by 
acting as investment adviser to the Affiliated Lending Funds and the 
Investment Funds, and Bankers Trust by providing other services to the 
Investment Funds at the same time that the Investment Funds sell Shares 
to the Lending Funds also could be deemed to be participants in a joint 
enterprise or arrangement within the meaning of section 17(d) of the 
Act and rule 17d-1 under the Act.
    7. 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 the general 
purposes of the Act.
    8. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, 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 policy and provisions of the Act.
    9. Under rule 17d-1, in passing on applications for orders under 
section 17(d), the SEC considers whether the company's participation in 
the proposed transaction is consistent with the provisions, policies, 
and purposes of the At, and the extent to which the participation is on 
a basis different from or less advantageous than that of other 
participants.
    10. Applicants request an order under sections 6(c), 17(b), and 
17(d) of the Act and rule 17d-1 under the Act to permit the Lending 
Funds to purchase Shares of the Investment Funds. Applicants state that 
the Lending Funds will purchase and redeem Shares of the Investment 
Funds based on their net asset value determined in accordance with the 
Act. Applicants also state that the Investment Funds will not impose 
any sales load, redemption or asset based distribution or service fees. 
Applicants also assert that the fees that the Investment Funds will pay 
Bankers Trust will not be duplicative of the fees that the Affiliated 
Lending Funds pay to Bankers Trust.
    11. Applicants further submit that a Lending Fund's Cash Collateral 
will be invested in a particular Investment Fund only if that 
Investment Fund invests in the types of instruments that the Lending 
Fund has authorized for the investment of its Cash Collateral. 
Applicants state that any Lending Fund that complies with the 
requirements of rule 2a-7 under the Act will invest only in an 
Investment Fund that also complies with that rule; and that the 
investment of Cash Collateral in the Investment Funds will be conducted 
in accordance with any SEC and staff securities lending guidelines. For 
these reasons, applicants believe that their requested relief meets the 
standards of sections 6(c), 17(b), and 17(d) of the Act and rule 17d-1 
under the Act.

B. Payment of Fees by the Lending Funds to Bankers Trust

    1. Bankers Trust, as investment adviser to the Affiliated Lending 
Funds, is an affiliated person of the Funds. As noted above, section 
17(d) and rule 17d-1 generally prohibit joint transactions involving 
investment companies and their affiliated persons

[[Page 42464]]

unless the SEC has approved the transaction. Applicants state that a 
lending agent agreement between a registered investment company and an 
affiliated person of the investment company under which compensation is 
based on a share of the revenue generated by the lending agent's 
efforts may constitute a joint arrangement within the meaning of 
section 17(d) and rule 17d-1. Consequently, applicants request an order 
to permit Bankers Trust, as lending agent, to receive either a portion 
of the Shared Return or a portion of the Shared Lending Fee from the 
Affiliated Lending Funds.
    2. Applicants propose that each Affiliated Lending Fund will adopt 
the following procedures to ensure that the proposed fee arrangement 
and the other terms governing the relationship with Bankers Trust, as 
lending agent, will meet the standards of rule 17d-1:
    (a) In connection with the approval of Bankers Trust as lending 
agent for an Affiliated Lending Fund and implementation of the proposed 
fee arrangement, a majority of the Board, including a majority of the 
Independent Trustees, will determine that: (i) The contract with 
Bankers Trust is in the best interests of the Affiliated Lending Fund 
and its shareholders; (ii) the services to be performed by Bankers 
Trust are appropriate for the Affiliated Lending Fund; (iii) the nature 
and quality of the services provided by Bankers Trust are at least 
equal to those provided by others offering the same or similar services 
for similar compensation; and (iv) the fees for Bankers Trust's 
services are within the range of, but in any event no higher than, the 
fees charged by Bankers Trust for services of the same nature and 
quality provided to unaffiliated parties.
    (b) Each Affiliated Lending Fund's contract with Bankers Trust for 
lending agent services will be reviewed annually by the Board and will 
be approved for continuation only if a majority of the Board (including 
a majority of the Independent Trustees) makes the findings referred to 
in paragraph (a) above.
    (c) In connection with the initial implementation of an arrangement 
whereby Bankers Trust will be compensated as lending agent based on a 
percentage of the revenue generated by an Affiliated Lending Fund's 
participation in the Securities Lending Program, the Board shall secure 
a certificate from Bankers Trust attesting to the factual accuracy of 
clause (iv) in paragraph (a) above. In addition, the Board will request 
and evaluate, and Bankers Trust shall furnish, such information and 
materials as the trustees, with and upon the advice of agents, 
consultants or counsel, determine to be appropriate in making the 
findings referred to in paragraph (a) above. Such information shall 
include, in any event, information concerning the fees charged by 
Bankers Trust to other institutional investors for performing similar 
services.
    (d) The Board, including a majority of the Independent Trustees, 
will (i) at each regular quarterly meeting determine, on the basis of 
reports submitted by Bankers Trust, that the loan transactions during 
the prior quarter were conducted in compliance with the conditions and 
procedures set forth in the application, and (ii) review no less 
frequently than annually the conditions and procedures set forth in the 
application for continuing appropriateness.
    (e) Each Affiliated Lending Fund will (i) maintain and preserve 
permanently in an easily accessible place a written copy of the 
procedures and conditions (and modifications thereto) described in the 
application or otherwise followed in connection with lending securities 
pursuant to the Securities Lending Program, and (ii) maintain and 
preserve for a period not less than six years from the end of the 
fiscal year in which any loan transaction pursuant to the Securities 
Lending Program occurred, the first two years in an easily accessible 
place, a written record of each loan transaction setting forth a 
description of the security loaned, the identity of the person on the 
other side of the loan transaction, and the terms of the loan 
transaction. In addition, each Affiliated Lending Fund will maintain 
all information or materials upon which a determination was made in 
accordance with the procedures set forth above and the conditions to 
the application.
    3. Applicants also request an order under section 17(d) of the Act 
and rule 17d-1 under the Act to permit Bankers Trust to receive lending 
agency fees based on a share of the securities lending revenues from 
certain Other Lending Funds. Applicants state that an Other Lending 
Fund may become a Second-Tier Affiliate of Bankers Trust by reason of 
acquiring 5% or more of the outstanding voting securities of an 
Investment Fund. Applicants also state that in certain cases Bankers 
Trust serves as the investment adviser to one series of a registered 
investment company, whereas other entities unaffiliated with Bankers 
Trust serve as investment advisers to other series of that investment 
company (each of the other series being an Other Lending Fund). Because 
the series may have the same board of directors, the series may be 
deemed to be under common control, and Bankers Trust, as adviser to one 
series, may be deemed a Second-Tier Affiliate of the series that are 
Other Lending Funds. Applicants assert that in both of these cases the 
decisions made on behalf of the Other Lending Funds are made by persons 
unaffiliated with Bankers Trust and that any fee arrangements between 
the Other Lending Funds and Bankers Trust therefore will be the product 
of arms-length bargaining.

C. Transactions by Other Lending Funds With Bankers Trust

    1. Applicants state that sections 17(a) (1) and (2) of the Act 
described above may prohibit principal transactions between Bankers 
Trust an Other Lending Fund that becomes a Second-Tier Affiliate of 
Bankers Trust upon acquiring 5% or more of the outstanding voting 
securities of an Investment Fund. Applicants further state that section 
17(e) of the Act may prohibit these Other Lending Funds from paying 
brokerage commissions or other fees to Bankers Trust.
    2. Applicants request an exemption under section 6(c) of the Act 
from sections 17(a) and 17(e) to permit the Other Lending Funds to 
engage in principal transactions with, and pay brokerage commissions 
and other fees to, Bankers Trust or a BT Entity. Applicants assert that 
Bankers Trust would not have any influence over the decisions made by 
any Other Lending Fund and that the transactions between the BT 
Entities and the Other Lending Funds would be the product of arms-
length bargaining.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. The securities lending program of each Lending Fund will comply 
with all present and future applicable SEC and staff positions 
regarding securities lending arrangements.
    2. The approval of an Affiliated Lending Fund's Board, including a 
majority of the Independent Trustees, shall be required for the initial 
and subsequent approvals of Bankers Trust's service as lending agent 
for the Affiliated Lending Fund pursuant to the Securities Lending 
Program, for the institution of all procedures relating to the 
Securities Lending Program as it relates to the Affiliated Lending 
Fund, and for any periodic review of loan transactions for which 
Bankers Trust acted as lending agent pursuant to the Securities Lending 
Program.

[[Page 42465]]

    3. A majority of the Board of each Affiliated Lending Fund 
(including a majority of the Independent Trustees of the Affiliated 
Lending Fund), will initially and at least annually thereafter 
determine that the investment of Cash Collateral in Shares of an 
Investment Fund is in the best interests of the shareholders of the 
Affiliated Lending Fund.
    4. Investment in Shares of an Investment Fund by a particular 
Lending Fund will be consistent with such Lending Fund's investment 
objectives and policies. A Lending Fund that complies with rule 2a-7 
under the Act will not invest its Cash Collateral in an Investment Fund 
that does not comply with the requirements of rule 2a-7.
    5. Investment in Shares of an Investment Fund by a particular 
Lending Fund will be in accordance with the guidelines regarding the 
investment of Cash Collateral specified by the Lending Fund in the 
Securities Lending Agreement. A Lending Fund's Cash Collateral will be 
invested in a particular Investment Fund only if that Investment Fund 
has been approved for investment by the Lending Fund and if that 
Investment Fund invests in the types of instruments that the Lending 
Fund has authorized for the investment of its Cash Collateral.
    6. The Shares of an Investment Fund will not be subject to a sales 
load, redemption fee, any asset-based sales charge, or service fee (as 
defined in rule 2830(b)(9) of the Conduct Rules of the National 
Association of Securities Dealers).
    7. An Investment Fund will not acquire securities of any investment 
company in excess of the limits contained in section 12(d)(1)(A) of the 
Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-21170 Filed 8-6-98; 8:45 am]
BILLING CODE 8010-01-M