[Federal Register Volume 63, Number 158 (Monday, August 17, 1998)]
[Notices]
[Pages 43971-43974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21959]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23383; 812-11164]


Countrywide Investment Trust, et al.; Notice of Application

August 11, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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SUMMARY OF APPLICATION: Applicants seek an order to permit Countrywide 
Investment Trust, Countrywide Tax-Free Trust, and Countrywide Strategic 
Trust (collectively, the ``Trusts'' and individually, a ``Trust'') to 
engage in certain securities transactions with banks, bank holding 
companies, and their affiliates that are ``affiliates'' of a Trust 
solely because they own, hold, or

[[Page 43972]]

control 5% or more of the outstanding voting securities of the Trust, 
or are an affiliated person, within the meaning of section 2(a)(3) of 
the Act, of the bank, bank holding company or its affiliate 
(collectively, ``Affiliated Banks'').

APPLICANTS: The Trusts and Countrywide Investments, Inc. (the 
``Adviser'').

FILING DATES: The application was filed on June 1, 1998 and amended on 
June 23, 1998. Applicants have agreed to file an 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. 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 September 8, 
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 contested. Persons may request 
notification of a hearing by writing the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants: 312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202.

FOR FURTHER INFORMATION CONTACT:
J. Amanda Machen, Senior Counsel, at (202) 942-7120, 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 at the 
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. Each Trust is organized as a Massachusetts business trust and is 
registered under the Act as an open-end management investment company. 
All of the Trusts have multiple portfolios (each a ``Fund''). The 
Adviser, a wholly-owned indirect subsidiary of Countrywide Credit 
Industries, Inc., is an investment adviser registered under the 
Investment Advisers Act of 1940 and serves as investment adviser to 
each of the Funds. Applicants request that the relief apply to any 
other existing or future registered open-end management investment 
company for which the Adviser, or any entity controlling, controlled 
by, or under common control with the Adviser, may in the future act as 
investment adviser.\1\
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    \1\ All existing entities that currently intend to rely on the 
requested order are named as applicants. Any other entities that 
subsequently rely on the order will comply with the terms and 
conditions of the application.
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    2. Applicants request an order that would permit the Funds to 
engage in securities transactions with Affiliated Banks that involve: 
(a) U.S. government securities; (b) municipal securities, repurchase 
agreements, bank obligations, synthetic municipal securities, and 
commercial paper (``Qualified Securities''); and (c) reverse repurchase 
agreements (collectively, ``Covered Securities'').
    3. All Qualified Securities will meet the following credit 
standards:
    a. For obligations that have a remaining maturity of 397 days or 
less, each security shall constitute an ``Eligible Security'' within 
the meaning of rule 2a-7; provided that, in the case of unrated 
securities (as defined in rule 2a-7(a)(28)), in addition to the 
requirements of rule 2a-7 applicable to the unrated securities, all 
determinations with respect to the comparability of the securities to 
rated securities (as defined in rule 2a-7(a)(19)) are also reviewed and 
approved at least quarterly by a majority of the Trust's trustees who 
are not interested persons of the Trust or Fund.
    b. For obligations that have a remaining maturity of more than 397 
days, each security (or another long-term security of the same issuer 
having comparable priority and security to such obligation) shall have 
been rated by a nationally-recognized statistical rating organization 
(``NRSRO'') in one of the four highest rating categories for long-term 
obligations; or, if the security and issuer have not been rated by any 
NRSRO, are determined by the Trust's or Fund's investment adviser to be 
comparable in credit quality to a security carrying a long-term rating 
in one of the four highest rating categories of an NRSRO, and the 
determination is reviewed and approved at least quarterly by a majority 
of the Trust's trustees who are not interested persons of the Trust or 
Fund.
    c. Any repurchase agreements will be collateralized fully within 
the meaning of rule 2a-7.
    d. For obligations subject to unconditional, irrevocable credit 
enhancement (including, without limitation, a guarantee, letter of 
credit or put), the Trust or Fund may rely upon the NRSRO ratings of 
the provider of the credit enhancement to determine whether the 
obligation satisfies the requirements of paragraphs (a) and (b) above. 
Such obligations shall be treated as rated securities to the extent 
that the credit enhancement is of comparable priority and security to 
the rated obligations of the provider of the credit enhancement.
    4. Applicants also request relief to permit the Funds to pay 
compensation to Affiliated Banks within the limits of section 17(e)(2) 
of the Act when the Affiliated Bank acts as agent for the Funds in 
executing transactions in Covered Securities.

Applicants' Legal Analysis

    1. Sections 17(a)(1) and 17(a)(2) of the Act prohibit an affiliated 
person of a registered investment company, or an affiliated person of 
an affiliated person of the registered company, from knowingly selling 
to or purchasing from the registered company any security or other 
property.
    2. Section 17(e)(1) of the Act prohibits any affiliated person of a 
registered investment company, or any affiliated person of such person, 
when acting as agent, from accepting from any source any compensation 
(other than a regular salary or wages from the registered company) for 
the purchase or sale of any property to or for the registered company, 
except in the course of the person's business as an underwriter or 
broker. Section 17(e)(2) of the Act provides that an affiliated person 
of a registered investment company, when acting as broker in the sale 
of securities to the registered company, may not receive compensation 
that exceeds: (a) The usual and customary broker's commission for sales 
made on a securities exchange; (b) 2% of the sales price for sales made 
in a secondary distribution of the security; or (c) 1% of the purchase 
or sale price of the securities sold in any other manner.
    3. 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 
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.
    4. Applicants state that where an entity is a record owner of 5% or 
more of the outstanding shares of a Fund, the entity may be considered 
an affiliated person (``first-tier affiliate'') of the Fund. Applicants 
further state that an entity

[[Page 43973]]

that is an affiliated person of a Fund may also be deemed an affiliated 
person of each other Fund that is advised by the same investment 
adviser. Moreover, an entity that is an affiliated person of the first-
tier affiliate, also would be an affiliated person of an affiliated 
person of the Funds. Thus, applicants state that Affiliated Banks would 
be prohibited by sections 17(a)(1) and (2) of the Act from engaging in 
securities transactions with the Funds. Applicants further state that 
banks are specifically excluded from the definition of broker in 
section 2(a)(6) of the Act. Thus, an Affiliated Bank that is a bank may 
be prohibited by section 17(e) from accepting any consideration in 
connection with a brokerage transaction when it acts as agent for the 
Funds.
    5. Section 17(b) of the Act provides that the SEC may exempt a 
transaction from the prohibitions of section 17(a) if evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid, are reasonable and fair and do not involve 
overreaching on the part of any person concerned and that the proposed 
transaction is consistent with the policy of the registered investment 
company concerned and with the general purposes of the Act.
    6. Section 6(c) of the Act provides that the SEC may conditionally 
or unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions, from any 
provisions of the Act, if and to the extent 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.
    7. Applicants request an exemption under sections 17(b) and 6(c) 
from sections 17(a)(1) and 17(a)(2) to permit the Funds to engage in 
transactions in Covered Securities with Affiliated Banks. Applicants 
also request an exemption under section 6(c) to permit Affiliated Banks 
to receive brokerage commissions from the Funds within the limits of 
section 17(e)(2) in connection with transactions in Covered Securities.
    8. Applicants assert that their proposal does not raise the 
concerns underlying sections 17(a) and 17(e) of the Act because of the 
technical nature of affiliation between the Affiliated Banks and the 
Funds and the types of securities that are Covered Securities. 
Applicants believe the applicability of sections 17(a)(1) and (2) of 
the Act to securities transactions between the Funds and Affiliated 
Banks in Covered Securities unnecessarily reduces the breadth of 
investment alternatives available to the Funds and would cause a 
significant disadvantage to the Funds' shareholders by restricting and 
inhibiting portfolio management. In addition, applicants state that the 
prohibitions of section 17(e) would inhibit the Funds' discretion to 
select the best agent for execution of their Covered Securities 
transactions.
    9. Applicants state that no Fund will engage in transactions with 
an Affiliated Bank that serves as investment adviser (including sub-
adviser) or sponsor to the Fund or Trust. Moreover, no Fund will engage 
in transactions in Covered Securities with any Affiliated Bank that 
controls the Fund or Trust within the meaning of section 2(a)(9) of the 
Act.
    10. Applicants also represent that there is no express or implied 
understanding between them and any Affiliated Bank that the applicants 
will cause the Funds to enter into transactions with the Affiliated 
Bank. Applicants further state that they will give no preference to any 
Affiliated Bank in effecting transactions between a Fund and an 
Affiliated Bank because the Affiliated Bank or its customers purchase 
shares of any of the Funds.
    11. Applicants also state that the conditions to the requested 
order would assure that the proposed transactions would be reasonable 
and fair, would not involve any overreaching, and would be consistent 
with the policies under section 17(a) and (e) of the Act.
    12. Applicants also state that in circumstances in which a Fund 
enters into a hold-in-custody repurchase agreement with an Affiliated 
Bank that is its custodian, they have adopted detailed procedures 
designed to give the Fund an ownership and/or perfected security 
interest in the collateral (i.e., the securities underlying the 
repurchase agreement). Applicants believe that these procedures 
ameliorate the risks associated with repurchase transactions when 
custody is maintained by the counterparty and not transferred to a 
third party. These risks may involve the insolvency of, and consequent 
default by, the repurchase counterparty, an attempt by the 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.
    13. Applicants represent that the securities underlying a hold-in-
custody repurchase transaction are maintained either in the Fund's 
custody account or on behalf of the specific Fund in an omnibus 
custodial account maintained by the Fund's custodian at the Federal 
Reserve Bank of Cleveland. Applicants further state that, in both 
cases, the securities are transferred to, or identified in, the custody 
account against a transfer of monies out of the Fund's account to the 
custodian's proprietary account. Applicants contend that the repurchase 
securities so maintained are the assets of the Fund, not of the 
custodian. Accordingly, applicants assert that the risk of insolvency 
and the risks associated with commingling of assets are eliminated. 
Moreover, applicants state that the Fund's custodian, in its capacity 
as such, marks its books and records to reflect the Fund's interest in 
the hold-in-custody repurchase securities. In addition, applicants 
state that written confirmations specifying the particular securities 
which are the subject of the hold-in-custody repurchase transactions 
currently are sent to the Funds at the end of each trading day. In 
applicants' 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.
    14. Applicants also represent that, at the time a Fund enters into 
a reverse repurchase agreement, the Fund will segregate assets with an 
approved custodian, consisting of cash, U.S. government securities, or 
other appropriate high-grade debt securities having a value not less 
than the value of the proceeds received plus accrued interest. The 
segregated assets will be marked-to-market daily and additional assets 
will be segregated on any day in which the assets fall below the 
repurchase price (plus accrued interest). Applicants submit that the 
credit standards applied to transactions with Affiliated Banks limit 
the risk of counterparty insolvency and that the solicitation 
procedures provide a high level of assurance that quoted rates will be 
representative of the prevailing available reverse repurchase rates. 
Applicants further assert that under the conditions to the application, 
the terms of reverse repurchase agreements will reflect arms-length 
negotiations and that the terms will be no less favorable to the Funds 
than similar agreements with other parties.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:

A. General Conditions

    1. The board of trustees of each of the Trusts, including a 
majority of the trustees who are not interested persons of the Trust: 
(a) Will adopt procedures that are reasonably designed to provide that 
the conditions set forth below and

[[Page 43974]]

the requirements of Investment Company Act Release No. 13005 (Feb. 2, 
1983), have been complied with; (b) will make and approve from time to 
time such changes to the procedures as are 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 Adviser may implement these 
procedures, subject to the direction and control of the board of 
trustees of the relevant Trust.
    2. Each Trust: (a) Will maintain and preserve permanently in an 
easily accessible place a written copy of the procedures (and any 
modifications to them); 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 
transactions occurred, the first two years in an easily accessible 
place, a written record of each such 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 material upon which the determinations described 
below were made.
    3. No Fund will engage in a transaction with an Affiliated Bank 
that is an investment adviser or sponsor to that Fund, or an Affiliated 
Bank controlling, controlled by, or under common control with the 
investment adviser or sponsor. No Fund will engage in transactions with 
an Affiliated Bank if such entity exercises a controlling influence 
over that Fund (and ``controlling influence'' shall be deemed to 
include, but is not limited to, directly or indirectly owning, 
controlling, or holding with power to vote more than 25% of the 
outstanding voting securities of that Fund). No Fund will purchase 
obligations of any Affiliated Bank (other than repurchase agreements) 
if, as a result, more than 5% of that Fund's total assets would be 
invested in obligations of that Affiliated Bank.
    4. The transactions entered into by a Fund will be consistent with 
the investment objectives and policies of that Fund as recited in the 
Trust's registration statement and reports filed under the Act. 
Further, the security to be purchased or sold by that Fund will be 
comparable in terms of quality, yield, and maturity to other similar 
securities that are appropriate for that Fund and that are being 
purchased or sold during a comparable period of time.
    5. The Funds will engage in transactions with Affiliated Banks only 
in U.S. government securities, reverse repurchase agreements, or 
Qualified Securities.

B. U.S. Government and Qualified Securities

    1. Before any transaction in U.S. government securities or 
Qualified Securities may be entered into with an Affiliated Bank, the 
Fund or the Adviser will obtain such information as it deems necessary 
to determine that the price or rate to be paid or received for the 
security is at least as favorable as that available from other sources 
for the same or substantially comparable securities in terms of quality 
and maturity. In this regard, the Fund or the Adviser will obtain and 
document competitive quotations from at least two other dealers or 
counterparties with respect to the specific proposed transaction. 
Competitive quotation information will include price or yield and 
settlement terms. These dealers or counterparties will be those who, in 
the experience of the Fund and the Adviser, have demonstrated the 
consistent ability to provide professional execution of U.S. government 
security and Qualified Security transactions at competitive market 
prices or yields. These dealers or counterparties also must be those 
who are in a position to quote favorable prices.
    2. Any repurchase agreement will be ``collateralized fully'' within 
the meaning of rule 2a-7.
    3. The commission, fee, spread, or other remuneration to be 
received by the Affiliated Bank as agent in transactions involving U.S. 
government and Qualified Securities will be reasonable and fair 
compared to the commission, fee, spread, or other remuneration received 
by other brokers or dealers in connection with comparable transactions 
involving similar securities being purchased or sold during a 
comparable period of time, but in no event will such commission, fee, 
spread or other remuneration exceed that which is stated in section 
17(e)(2) of the Act.

C. Reverse Repurchase Agreements

    Before any transaction in reverse repurchase agreements may be 
entered into with an Affiliated Bank, the Fund or the Adviser will 
obtain such information as it deems necessary to determine that the 
rate to be paid for the agreement is at least as favorable as that 
available from other sources. In this regard, the Fund or the Adviser 
will obtain and document quoted rates from at least two unaffiliated 
potential counterparties with which the Funds have arrangements to 
engage in such transactions. Solicited terms shall include the 
repurchase price, interest rates, repurchase dates, acceleration 
rights, maturity, collateralization requirements, and transaction 
charges.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-21959 Filed 8-14-98; 8:45 am]
BILLING CODE 8010-01-M