[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47046-47050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23761]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23418; 812-10912]


State Street Bank and Trust Company, et al.; Notice of 
Application

August 27, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

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

-----------------------------------------------------------------------

SUMMARY OF THE APPLICATION: Applicants request an order to permit 
certain registered investment companies and private funds (``Lending 
Funds'') to use cash collateral from securities lending transactions 
(``Cash Collateral'') to purchase shares (``Shares'') of one or more 
series of State Street Navigator Securities Lending Trust (the 
``Trust'') and to pay fees based on a share of the revenue generated 
from securities lending transactions to State Street Bank and Trust 
Company (``State Street''). The order also would permit State Street 
and certain of its affiliates (``State Street Entities'') to engage in 
principal transactions with, and receive brokerage commissions from, 
certain Lending Funds that are affiliated with State Street or State 
Street Entities solely as a result of investing Cash Collateral in the 
Trust.

APPLICANTS: State Street, the Trust, and SSgA Funds.

FILING DATES: The application was filed on December 22, 1997. 
Applicants have agreed to file an amendment during the notice period, 
the substance of which is described in this notice.


[[Page 47047]]


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 21, 
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 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. 
State Street, Two International Place, Boston, MA 02110; Trust, c/o 
Raymond P. Boulanger, Exchange Place, 25th Floor, Boston, MA 02109; 
SSgA Funds, 909 A Street, Tacoma, WA 98402.

FOR FURTHER INFORMATION CONTACT:
Michael W. Mundt, Staff Attorney, at (202) 942-0578, or Mary Kay Frech, 
Branch Chief, at (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 Fifth St., NW., Washington, DC 
20549, (202) 942-8090.

Applicants' Representations

    1. State Street, a wholly-owned subsidiary of State Street Boston 
Corporation, is a Massachusetts chartered trust company and a member of 
the Federal Reserve System. State Street provides institutional custody 
and asset management services and serves as investment adviser or 
subadviser for several registered management investment companies. SSgA 
Funds, a Massachusetts business trust, is an open-end management 
investment company registered under the Act that has established 19 
series, each advised by State Street. State Street also administers a 
securities lending program (the ``Program'').
    2. The Trust is a Massachusetts business trust and an open-end 
management investment company registered under the Act. The Trust has 
established three series in which Cash Collateral may be invested: 
State Street Navigator Securities Lending Prime Portfolio (``Prime 
Portfolio''), State Street Navigator Securities Lending Government 
Portfolio (``Government Portfolio''), and State Street Navigator 
Securities Lending Short-Term Bond Portfolio (``Bond Portfolio'') (each 
an ``Investment Fund''). The Prime Portfolio and Government Portfolio 
value their securities based on the amortized cost method and comply 
with rule 2a-7 under the Act. The Bond Portfolio invests in a variety 
of securities whose duration will not exceed five years. None of the 
Investment Funds may purchase shares of any registered investment 
company.
    3. Shares of the Investment Funds are offered exclusively to 
Lending Funds and other institutional investors participating in the 
Program and are sold directly by the Trust on a private placement basis 
in accordance with Regulation D under the Securities Act of 1933. 
Shares are not subject to a sales load, redemption fee or asset-based 
distribution fee. State Street serves as investment adviser, custodian, 
transfer agent, and administrator of the Trust with respect to each 
Investment Fund and is entitled to receive a fee for these services.
    4. Participants in the Program may include: (i) one or more series 
of SSgA Funds and any other registered investment company or series 
that is or in the future may be advised by State Street, or by any 
other entity controlling, controlled by, or under common control with 
State Street (each an ``Affiliated Lending Fund'');\1\ or (ii) any 
other registered investment company or series (each an ``Other Lending 
Fund,'' and together with the Affiliated Lending Funds, the 
``Registered Lending Funds''), and (iii) any entity excluded from the 
definition of ``investment company'' under section 3(c)(1) or section 
3(c)(7) of the Act (each a ``Private Lending Fund'').
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    5. With respect to Affiliated Lending Funds, State Street 
represents that its personnel providing day-to-day lending agency 
services to the Affiliated Lending Funds do not provide investment 
advisory services to or participate in any way in the selection of 
portfolio securities or other aspects of management for the Affiliated 
Lending Funds.
    6. Under the Program, State Street and each Lending Fund enter into 
a securities lending agreement (``Lending Agreement'') that appoints 
State Street to serve as securities lending agent and authorizes State 
Street to enter into a master borrowing agreement (``Borrowing 
Agreement'') with certain entities designated by a Lending Fund 
(``Borrowers''). Under the Borrowing Agreement, State Street lends 
securities to Borrowers in exchange for Cash Collateral or other types 
of collateral, such as U.S. Government securities or irrevocable 
letters of credit, upon the consent of the Lending Fund. Cash 
Collateral is delivered in connection with most loans. State Street 
invests any Cash Collateral in Shares of one or more Investment Funds 
on behalf of the Lending Fund in accordance with specific guidelines 
provided by the Lending Fund. These guidelines identify the particular 
Investment Funds and other investments, if any, in which Cash 
Collateral may be invested, as well as the amounts that may be 
invested.
    7. With respect to loans involving Cash Collateral, the Lending 
Fund commits to pay the Borrower a fixed return on the collateral for 
the term of the loan (``Borrower's Rebate''). The difference between 
the Borrower's Rebate and the actual return on the investment of the 
Cash Collateral is divided between the Lending Fund and State Street in 
accordance with the terms of the Lending Agreement (``Shared Return''). 
In the case of collateral other than cash, State Street negotiates a 
loan fee to be paid by the Borrower, which is divided between the 
Lending Fund and State Street in accordance with the terms of the 
Lending Agreement (``Shared Lending Fee'').
    8. As agent for a Registered Lending Fund, State Street may not 
purchase Shares of an Investment Fund with Cash Collateral unless 
participation in the Program has been approved by a majority of the 
directors or trustees of the Registered Lending Fund that are not 
``interested persons'' of the Registered Lending Fund within the 
meaning of section 2(a)(19) of the Act (``Disinterested Directors''). 
These directors or trustees are required to evaluate the Program on at 
least an annual basis to determine that the investment of Cash 
Collateral in an Investment Fund is in the best interests of the 
shareholders of the Registered Lending Fund.
    9. In addition, State Street may not purchase Shares of any 
Investment Fund as agent for a Registered Lending Fund unless the 
Registered Lending Fund has represented to State Street that (i) its 
policies generally permit the Registered Lending Fund to engage in 
securities lending transactions, (ii) the transactions are conducted in 
accordance with the guidelines of the SEC and/or its staff, (iii) the 
Registered Lending Fund's policies permit the

[[Page 47048]]

Registered Lending Fund to purchase Shares of the Investment Funds with 
Cash Collateral, and (iv) the Registered Lending Fund's securities 
lending activities are conducted in accordance with all representations 
and conditions in the application applicable to a Registered Lending 
Fund.

Applicants' Legal Analysis

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

    1. Section 12(d)(1)(A) of the Act prohibits an investment company 
from acquiring shares of a registered investment company if the 
securities represent more than 3% of the total outstanding voting stock 
of the acquired company, more than 5% of the total assets of the 
acquiring company, or, together with the securities of any other 
investment companies, more than 10% of the total assets of the 
acquiring company. Section 12(d)(1)(B) of the Act prohibits a 
registered open-end investment company from selling its shares 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 generally. Any entity that is excluded 
from the definition of ``investment company'' under sections 3(c)(1) or 
3(c)(7) of the Act is deemed to be an investment company for the 
purposes of the 3% limitations specified in sections 12(d)(1) (A) and 
(B) with respect to purchases by and sales to such company.
    2. Section 12(d)(1)(J) of the Act provides that the SEC may exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions, from any provision of section 
12(d)(1) if such 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 Investment Funds 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 the proposed arrangement will not give 
rise to the policy concerns underlying sections 12(d)(1)(A) and (B). 
Applicants note that Shares will be sold without a sales load, 
redemption fee, or asset-based sales charge or service fee. Applicants 
further state that, because investment advisory fees paid by Lending 
Funds will not be affected by the value of the collateral received by 
the Lending Funds in connection with the loaned securities, the fees 
that would be paid to State Street by an Investment Fund, including 
investment advisory fees, should not be viewed as duplicative of the 
advisory fees paid by the Lending Funds. Because each Investment Fund 
will be operated for the purpose of providing the necessary liquidity 
to satisfy the demands of the Program, applicants argue that the 
Investment Funds will not be susceptible to control through the threat 
of large redemptions. Applicants assert that there is no concern that 
Shares will be purchased by an inappropriate investor because Shares 
will be offered exclusively to participants in the Program, who are 
knowledgeable and sophisticated investors. Applicants also note that an 
Investment Fund will not invest in shares of any investment company.
    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 
principal, to sell any security to, or purchase any security from, the 
registered investment company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another person to include 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; 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. An investment adviser to each of the Affiliated Lending Funds 
and the Investment Funds, State Street could be deemed to control both 
the Affiliated Lending Funds and the Investment Funds. Accordingly, the 
Affiliated Lending Funds and Investment Funds could be deemed to be 
under common control and affiliated persons of each other. In addition, 
if an Other Lending Fund acquires 5% or more of an Investment Fund's 
Shares, the Investment Fund could be deemed an affiliated person of the 
Other Lending Fund. Moreover, because series of a registered investment 
company could be considered to be under common control, an Other 
Lending Fund that is a series could be considered an affiliate of 
another series of the registered investment company. If the other 
series is affiliated with an Investment Fund (by virtue of a common 
investment adviser or a 5% or more ownership interest in the Investment 
Fund), the Investment Fund could be deemed to be a Second-tier 
Affiliate of the Other Lending Fund. In light of these possible 
affiliations, section 17(a) could prevent an Investment Fund from 
selling Shares to and redeeming Shares from certain Registered Lending 
Funds.
    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 
are reasonable and fair and do not involve overreaching on the part of 
any person concerned, and if the proposed transaction is consistent 
with the policy of each registered investment company concerned and 
with the general purposes of the Act. 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.
    8. Applicants request an order under sections 6(c) and 17(b) of the 
Act to permit the Registered Lending Funds to purchase Shares of the 
Investment Funds. Applicants submit that the terms of the proposed 
transactions are reasonable and fair and consistent with the general 
purposes of the Act, as well as with the policies of the respective 
Registered Lending Funds. Applicants assert that Registered Lending 
Funds will be treated like any other shareholders of the Trust and will 
purchase and redeem Shares on the same terms and basis, including 
price, as other shareholders. Applicants note that a Registered Lending 
Fund will only be permitted to invest Cash Collateral in an Investment 
Fund that invests in instruments that the Registered Lending Fund has 
previously determined to be acceptable for the investment of Cash 
Collateral. Cash Collateral from loans by Registered Lending Funds that 
are money market funds (``Money Market Lending Funds'') will not be 
used to acquire shares of any Investment Fund that does not comply with 
the requirements of rule 2a-7 under the Act. For these reasons, 
applicants believe that their requested relief meets the standards of 
sections 6(c) and 17(b) of the Act.
    9. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person of a registered investment company or any Second-
tier Affiliate, acting as principal, from effecting any transaction in 
connection with any joint enterprise or joint arrangement in which the 
investment company participates, unless and

[[Page 47049]]

application regarding the joint arrangement has been filed with the SEC 
and granted by order.
    10. State Street, as investment adviser to the Affiliated Lending 
Funds, is an affiliated person of the Affiliated Lending Funds. State 
Street may also be a Second-tier Affiliate of Other Lending Funds that 
purchase more than 5% of an Investment Fund. Applicants state that the 
Affiliated Lending Funds and potentially the Other Lending Funds by 
purchasing and redeeming Shares, the Investment Funds by selling Shares 
to and redeeming Shares for the Lending Funds, and State Street by 
acting as investment adviser to the Affiliated Lending Funds and the 
Investment Funds and by acting as lending agent, investing Cash 
Collateral, and sharing revenue generated by the securities lending 
transactions, could be considered participants in a joint enterprise or 
arrangement. Applicants request an order in accordance with section 
17(d) and rule 17d-1 to permit certain transactions incident to 
investments in Shares.
    11. Under rule 17d-1, in passing on applications for orders under 
section 17(d), the SEC must consider whether the investment company's 
participation in the joint enterprise or joint arrangement is 
consistent with the provisions, policies, and purposes of the Act and 
the extent to which such participation is on a basis different from or 
less advantageous than that of other participants.
    12. Applicants assert that the Registered Lending Funds will invest 
in the Investment Funds on the same basis as other participants in the 
Program. Accordingly, applicants believe that the proposed investment 
in Shares meets the standards of section 17(d) and rule 17d-1.

B. Payment of Fees by the Registered Lending Funds to State Street

    1. Applicants also believe that a lending agent arrangement between 
Registered Lending Funds and State Street under which compensation is 
based on a share of the revenue generated by State Street's efforts as 
lending agent may be a joint enterprise or other joint arrangement 
requiring as order under section 17(d) of the Act and rule 17d-1 under 
the Act. Consequently, applicants request an order to permit State 
Street, as lending agent, to receive either a portion of the Shared 
Return or Shared Lending Fee from the Registered Lending Funds.
    2. Applicants submit that to safeguard each Affiliated Lending Fund 
and its shareholders, applicants will adopt the following procedures to 
ensure that the proposed fee arrangement and other terms governing the 
relationship with State Street, as lending agent, will meet the 
standards of rule 17d-1:
    (a) In connection with the approval of State Street as lending 
agent for an Affiliated Lending Fund and implementation of the proposed 
fee arrangement, a majority of the board of directors or trustees of 
the Affiliated Lending Fund (the ``Board''), including a majority of 
the Disinterested Directors, will determine that: (i) The contract with 
State Street is in the best interests of the Affiliated Lending Fund 
and its shareholders, (ii) the services to be performed by State Street 
are appropriate for the Affiliated Lending Fund, (iii) the nature and 
quality of the services provided by State Street are at least equal to 
those services offered and provided by others, and (iv) the fees for 
State Street's services are fair and reasonable in light of the usual 
and customary charges imposed by others for services of the same nature 
and quality.
    (b) Each Affiliated Lending Fund's contract with State Street for 
lending agent services will be reviewed annually and will be approved 
for continuation only if a majority of the Board (including a majority 
of the Disinterested Directors) makes the findings referred to in 
paragraph (a) above.
    (c) In connection with the initial implementation of the proposed 
fee arrangement whereby State Street will be compensated as lending 
agent based on a percentage of the revenue generated by an Affiliated 
Lending Fund's participation in the Program, the Board will obtain 
competing quotes with respect to lending agent fees from at least three 
independent lending agents to assist the Board in making the findings 
referred to in paragraph (a) above.
    (d) The Board, including a majority of the Disinterested Directors, 
will: (i) Determine at each regular quarterly meeting that the loan 
transactions during the prior quarter were effected in compliance with 
the conditions and procedures set forth in the application and, (ii) 
review no less frequently than annually the conditions and procedures 
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 any modifications) described in the 
application of otherwise followed in connection with lending securities 
pursuant to the 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 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, the 
terms of the loan transaction, and the information or materials upon 
which the determination was made that each loan was made in accordance 
with the procedures set forth above and the conditions to the 
application.
    3. With respect to Other Lending Funds, applicants assert that the 
nature of the affiliation between the Other Lending Funds and State 
Street is only technical. Applicants assert that State Street would not 
have any influence over the decisions made by any Other Lending Fund 
and that any fee arrangements between the Other Lending Funds and State 
Street will be the product of arms-length bargaining. Accordingly, 
applicants believe that the proposed arrangement between Other Lending 
Funds and State Street would meet the standards of rule 17d-1.

C. Transactions by Other Lending Funds With State Street and State 
Street Entities

    1. As noted above, sections 17(a)(1) and (2) prohibit certain 
principal transactions between a registered investment company and its 
affiliates. Applicants assert that State Street could be deemed a 
Second-tier Affiliate of an Other Lending Fund that owns 5% of an 
Investment Fund. In addition, to the extent that State Street, State 
Street Entities, and the Investment Funds are deemed to be under common 
control, applicants believe that a State Street Entity could be 
considered an affiliate of an Investment Fund and a Second-tier 
Affiliate of an Other Lending Fund.
    2. Applicants request relief under sections 6(c) and 17(b) from 
section 17(a) to permit principal transactions between Other Lending 
Funds and State Street or State Street Entities where the affiliation 
between the parties arises solely as a result of an investment by an 
Other Lending Fund in Shares. Applicants state that there will be no 
element of self-dealing because neither State Street nor any State 
Street Entity has any influence over the decisions made by any Other 
Lending Fund. Applicants assert that each transaction will be the 
product of arms-length bargaining. Because the interests of the Other 
Lending Funds' investment advisers and sub-advisers are solely aligned 
with those of the Other Lending Funds (to which the advisers have 
fiduciary responsibilities), applicants

[[Page 47050]]

believe it is reasonable to conclude that the consideration paid to or 
received by Other Lending Funds in connection with a principal 
transaction with State Street or a State Street Entity will be 
reasonable and fair.
    3. Section 17(e) of the Act makes it unlawful for any affiliated 
person of a registered investment company, or any Second-tier 
Affiliate, acting as broker in connection with the sale of securities 
to or by that registered investment company, to receive from any source 
a commission for effecting the transaction that exceeds specified 
limits. Rule 17e-1 provides that a commission shall be deemed a usual 
and customary broker's commission if certain procedures are followed by 
the registered investment company.
    4. Applicants request relief under section 6(c) from section 17(e) 
to the extent necessary to permit State Street and the State Street 
Entities to receive fees or commissions for acting as broker or agent 
in connection with the purchase or sale of securities for any Other 
Lending Fund for which State Street or a State Street Entity becomes a 
Second-tier Affiliate solely because of the investment by the Other 
Lending Fund in Shares.
    5. Applicants submit that brokerage or similar transactions by 
State Street or a State Street Entity for the Other Lending Funds raise 
no possibility of self-dealing or any concern that these Other Lending 
Funds would be managed in the interest of State Street or a State 
Street Entity. Applicants believe that each transaction between an 
Other Lending Fund and State Street or a State Street Entity would be 
the product of arms-length bargaining because each adviser or sub-
adviser to an Other Lending Fund would have no interest in benefiting 
State Street or a State Street Entity at the expense of the Other 
Lending Fund.

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 Registered Lending Fund 
will comply with all present and future applicable guidelines of the 
SEC and its staff regarding securities lending arrangements.
    2. The approval of an Affiliated Lending Fund's Board, including a 
majority of the Disinterested Directors, shall be required for the 
initial and subsequent approvals of State Street's service as lending 
agent for the Affiliated Lending Fund pursuant to the Program, for the 
institution of all procedures relating to the Program as it relates to 
the Affiliated Lending Fund, and for any periodic review of loan 
transactions for which State Street acted as lending agent pursuant to 
the Program.
    3. No Registered Lending Fund will purchase Shares of any 
Investment Fund unless participation in the Program has been approved 
by a majority of the Disinterested Directors of the Registered Lending 
Fund. Such directors and trustees also will evaluate the Program no 
less frequently than annually and determine that investing Cash 
Collateral in the Investment Funds is in the best interests of the 
shareholders of the Registered Lending Fund.
    4. Investment in Shares of an Investment Fund by a particular 
Registered Lending Fund will be consistent with the Registered Lending 
Fund's investment objectives and policies. A Money Market 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 
Registered Lending Fund will be in accordance with the guidelines 
regarding the investment of Cash Collateral specified by the Registered 
Lending Fund in the Lending Agreement. A Registered 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 Registered 
Lending Fund and if that Investment Fund invests in the types of 
instruments that the Registered Lending Fund has authorized for the 
investment of its Cash Collateral.
    6. Shares of an Investment Fund will not be subject to a sales 
load, redemption fee or 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, Inc.).
    7. None of the Investment Funds may purchase shares of any 
investment company.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-23761 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M