[Federal Register Volume 64, Number 27 (Wednesday, February 10, 1999)]
[Notices]
[Pages 6723-6725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3175]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23679; 812-11056]


The Charles Schwab Family of Funds, et al.; Notice of Application

February 4, 1999.
AGENCY: Securities and Exchange Commission (SEC).

ACTION: Notice of an application for an order pursuant to section 17(d) 
of the Investment Company Act of 1940 (``Act''') and rule 17d-1 under 
the Act.

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SUMMARY OF THE APPLICATION: Applicants request an order to permit 
certain registered management investment companies to deposit their 
uninvested cash balances, cash held for investment purposes, and cash 
collateral from securities lending transactions into one or more joint 
accounts to be used to enter into short-term investments.

APPLICANTS: The Charles Schwab Family of Funds (``Family of Funds''), 
Schwab Investments (``Investments''), Schwab Capital Trust (``Capital 
Trust''), and Schwab Annuity Portfolios (``Annuity Portfolios'') (each 
a ``Trust'' and collectively, the ``Trusts''); and Charles Schwab 
Investment Management, Inc. (``Investment Manager'').

Filing Dates: The application was filed on March 9, 1998 and was 
amended on October 16, 1998 and February 1, 1999.

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 
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 March 1, 1999 
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 may request 
notification by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC. 
20549. Applicants, Attn: Koji Felton, 101 Montgomery Street, San 
Francisco, CA 94104.

FOR FURTHER INFORMATION CONTACT: Rachel H. Graham, Senior Counsel, at 
(202) 942-0583, or Christine Y. Greenlees, 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 (telephone (202) 942-8090).

Applicants' Representations

    1. The Trusts are open-end management investment companies 
registered under the Act. Each Trust currently offers multiple series 
(each a ``Fund'' and, collectively, the ``Funds''). The assets of the 
Funds are held by two bank custodians, neither of which is an 
affiliated person of any of the Funds or of the Investment Manager.
    2. The Investment Manager is registered under the Investment 
Advisers Act of 1940 and serves as investment adviser for each of the 
Funds. The Investment Manager is a wholly-owned subsidiary of the 
Charles Schwab Corporation.
    3. Applicants request that any relief granted pursuant to the 
application also apply to (i) future series of the Trusts and (ii) all 
other registered management investment companies for which the 
Investment Manager (or a person controlling, controlled by, or under 
common control with the Investment Manager) may now or in the future 
act as investment adviser (collectively, the ``Future Funds'').\1\
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    \1\ Each Fund that currently intends to rely on the requested 
order is named as an applicant. Any Future Fund that relies on the 
requested relief will do so only in compliance with the terms and 
conditions of the application.
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    4. At the end of each trading day, each Fund has, or may have, 
uninvested cash balances representing proceeds from sales of portfolio 
securities and/or cash awaiting investment (``Cash Balances''). The 
Cash Balance of each Fund is invested by the Investment Manager in 
short-term investments authorized by the Fund's investment policies. 
Currently, the Investment Manager must make these investments 
separately on behalf of each Fund. Applicants assert that these 
separate purchases result in certain inefficiencies, a limitation on 
the return that some or all of the Funds could otherwise achieve, and 
higher costs.
    5. Several of the Funds are authorized to engage in securities 
lending transactions, for which the Funds. custodians may serve as 
lending agent. In connection with these transactions, the Funds may 
receive collateral in the form of either cash (``Cash Collateral'') or 
certain securities. When Cash Collateral is received, it is expected to 
be invested in a manner consistent with (i) the Fund's investment 
objectives and

[[Page 6724]]

restrictions and (ii) SEC and staff guidelines concerning the 
investment of Cash Collateral.
    6. Applicants propose that the Funds establish joint accounts 
(``Joint Accounts'') with one or both of the Funds' custodians into 
which the Funds may deposit some or all of their Cash Balances and Cash 
Collateral. The daily balances in the Joint Accounts would be invested 
in: (1) Repurchase agreements ``collateralized fully,'' as defined in 
rule 2a-7 under the Act; (ii) interest-bearing or discounted commercial 
paper, including dollar-denominated commercial paper of foreign 
issuers; and (iii) any other short-term taxable or tax-exempt money 
market instruments, including variable rate demand notes, that 
constitute ``eligible securities,'' as defined in rule 2a-7 under the 
Act (collectively, ``Short-Term Investments'').
    7. Any repurchase agreements entered into through the Joint 
Accounts will comply with the terms of Investment Company Act Release 
No. 13005 (Feb. 2, 1983). The participating Funds will not enter into 
``hold-in-custody'' repurchase agreements in which the counterparty or 
one of its affiliated persons may have possession of, or control over, 
the collateral subject to the agreement except in instances when cash 
is received very late in the business day or would otherwise be 
unavailable for investment.
    8. Applicants acknowledge that they have a continuing obligation to 
monitor the SEC's and the staff's published statements on repurchase 
agreements, and they represent that repurchase agreement transactions 
entered into through a Joint Account will comply with future positions 
of the SEC and the staff to the extent that such positions set forth 
different or additional requirements regarding repurchase agreements. 
In the event that the SEC or the staff sets forth guidelines with 
respect to other Short-Term Investments, all such investments made 
through the Joint Accounts will comply with those guidelines. All 
purchases through the Joint Accounts also will comply with all present 
and future SEC and staff positions concerning the investment of Cash 
Collateral in connection with securities lending activities.
    9. Each Fund's decision to invest through a Joint Account would be 
based on the same factors as its decision to make any other short-term 
liquid investment consistent with its investment objectives, policies, 
and restrictions. The Joint Accounts will only be used to aggregate 
what otherwise would be one or more daily transactions by some or all 
participating Funds to manage their respective daily Cash Balances and 
Cash Collateral.
    10. The Investment Manager will be responsible for investing the 
cash held in the Joint Accounts, establishing accounting and control 
procedures, and ensuring fair treatment of the participating Funds. The 
Investment manager will not charge any additional or separate fees for 
administering or advising the Joint Accounts and will have no monetary 
participation in the Joint Accounts.

Applicants' Legal Analysis

    1. Section 17(d) of the Act and rule 17d-1 prohibit an affiliated 
person of a registered investment company, or an affiliated person of 
such a person, acting as principal, from participating in any joint 
enterprise or arrangement in which that investment company is a 
participant, unless the SEC has issued an order authorizing the 
arrangement. In determining whether the grant such an order, the SEC 
may consider whether to participation of the registered investment 
company in the proposed 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 in the arrangement.
    2. Under section 2(a)(3)(C) of the Act, each Fund may be deemed to 
be an ``affiliated person'' of each other Fund if the Investment 
Manager were deemed to control each Fund. Applicants state that each 
Fund participating in a Joint Account and the Investment Manager, by 
managing that Joint Account, may be deemed to be ``joint participants'' 
in a transaction within the meaning of section 17(d) of the Act. 
Applicants further state that each Joint Account may be deemed to be a 
``joint enterprise or other joint arrangement'' within the meaning of 
rule 17d-1.
    3. Applicants assert that no Fund would be in a less favorable 
position than any other Fund as a result of its participation in one or 
more Joint Accounts. Applicants also assert that the proposed operation 
of the Joint Accounts will not result in any conflicts of interest 
among any of the Funds and the Investment Manager. Each Fund's 
liability on any Short-Term Investment invested in through the Joint 
Accounts will be limited to its interest in such Short-Term Investment.
    4. Applicants state that operation of the Joint Accounts could 
result in certain benefits to the Fund. The Funds may earn a higher 
rate of return on investments through the Joint Accounts relative to 
the returns they could earn individually. Under most market conditions, 
applicants assert, it is generally possible to negotiate a rate of 
return on larger investments that is higher than that available on 
smaller investments. Applicants also contend that the enhanced 
purchasing power available through a Joint Account may permit the Funds 
to enter into Short-Term Investments with a greater number of dealers 
and issuers and may reduce the possibility of the Funds' Cash Balances 
and Cash Collateral remaining uninvested. In addition, the Joint 
Accounts may result in certain administrative efficiencies and lessen 
the potential for error by reducing the number of trade tickets and 
cash wires that the counterparties to each Short-Term Investment, the 
Funds' custodians, and the Investment Manager must process.
    5. Applicants submit that the proposed Joint Accounts meet the 
criteria of rule 17d-1 for issuance of an order. Applicants state that 
although the Investment Manager may realize some benefit through 
administrative convenience and reduced clerical costs, the Funds would 
be the primary beneficiaries of the Joint Accounts.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. One or more Joint Accounts will be established on behalf of the 
Funds as separate cash accounts into which a Fund may deposit daily all 
or a portion of its uninvested Cash Balances and Cash Collateral. The 
Joint Accounts may be established with one or both custodians, and more 
than one Joint Account may be established with either custodian. The 
Joint Accounts will not be distinguishable from any other accounts 
maintained by the Funds at their custodians except that monies from the 
Funds will be deposited in the Joint Accounts on a commingled basis. 
The Joint Accounts will not have a separate existence and will not have 
indicia of a separate legal entity. The sole function of the Joint 
Accounts will be to provide a convenient way of aggregating individual 
transactions that would otherwise require daily management by the 
Investment Manager of uninvested Cash Balances and Cash Collateral.
    2. If a Fund wishes to participate in a Joint Account that will be 
maintained by a custodian other than its regular custodian, the Fund 
would appoint that custodian as its sub-custodian for the limited 
purpose of: (a) Receiving and disbursing cash; (b) holding any Short-
Term Investments purchased by the

[[Page 6725]]

Joint Account; and (c) holding any collateral received from a 
transaction effected through the joint Account. Any Fund that appoints 
a sub-custodian will have taken all necessary actions to authorize that 
entity as its legal custodian, including all actions required under the 
Act.
    3. Assets in the Joint Accounts will be invested in one or more of 
the following Short-Term Investments, as determined by the Investment 
Manager (or, in the case of Cash Collateral, the custodian, in its role 
as securities leading agent): (a) Repurchase agreements 
``collateralized fully'' (as defined in rule 2a-7 under the Act); (b) 
interest-bearing or discounted commercial paper, including dollar-
denominated commercial paper of foreign issuers; and (c) any other 
short-term taxable and tax-exempt money market instruments, including 
variable rate demand notes, that constitute ``eligible securities'' (as 
defined in rule 2a-7 under the Act). Short-Term Investments that are 
repurchase agreements would have a remaining maturity of 60 days or 
less and other Short-Term Investments would have a remaining maturity 
of 90 days or less, each as calculated in accordance with rule 2a-7 
under the Act. Cash Collateral in a Joint Account would be invested in 
Short-Term Investments that have a remaining maturity of 397 days or 
less, as calculated in accordance with rule 2a-7 under the Act. No Fund 
will be permitted to invest in a Joint Account unless the Short-Term 
Investments in that Joint Account will comply with the investment 
policies and guidelines of that Fund.
    4. All assets held by the Joint Accounts will be valued on an 
amortized cost basis to the extent permitted by applicable SEC or staff 
releases, rules, letters, or orders.
    5. Each participating Fund valuing its net assets in reliance on 
rule 2a-7 under the Act will the average maturity of the instruments in 
the Joint Account in which the Fund has an interest (determined on a 
dollar-weighted basis) for the purpose of computing its average 
portfolio maturity with respect to its portion of the assets held in a 
Joint Account on that day.
    6. In order to ensure that there will be no opportunity for any 
Fund to use any part of a balance of a Joint Account credited to 
another Fund, no Fund will be allowed to create a negative balance in 
any Joint Account for any reason. Each Fund would be permitted to draw 
down its entire balance in a Joint Account at any time, provided that 
the Investment Manager determines that such draw-down would have no 
significant adverse impact on any other Fund participating in that 
Joint Account. Each Fund's decision to invest in a Joint Account would 
be solely at its option, and no Fund will be obligated to invest in a 
Joint Account or to maintain any minimum balance in a Joint Account. In 
addition, each Fund will retain the sole rights of ownership to any of 
its assets invested in a Joint Account, including interest payable on 
such assets invested in the Joint Account.
    7. The Investment Manager will administer, manage, and invest the 
cash in the Joint Accounts in accordance with, and as part of, its 
duties under existing or future investment advisory contracts with the 
Trusts and/or the Funds and will not collect any additional or separate 
fee for advising any Joint Account.
    8. The administration of the Joint Accounts would be within the 
fidelity bond coverage required by section 17(g) of the Act and rule 
17g-1 under the Act.
    9. The board of directors of each Fund will adopt procedures 
pursuant to which the Joint Accounts will operate, which will be 
reasonably designed to provide that the requirements of this 
application will be met. Each board of directors will make and approve 
such changes as it deems necessary to ensure that such procedures are 
followed. In addition, the board of directors of each Fund will 
determine, no less frequently than annually, that the Joint Accounts 
have been operated in accordance with the adopted procedures and will 
only permit a Fund to continue to participate therein if it determines 
that there is a reasonable likelihood that the Fund and its 
shareholders will benefit from the Fund's continued participation.
    10. Each Fund will participate in a Joint Account on the same basis 
as any other Fund in conformity with its respective fundamental 
investment objectives, policies, and restrictions. Any Future Fund that 
participates in a Joint Account would be required to do so on the same 
terms and conditions as the existing Funds.
    11. Any Short-Term Investments made through the Joint Account will 
satisfy the investment criteria of all Funds participating in that 
investment.
    12. Each Fund's investment in a Joint Account will be documented 
daily on its books and on the books of its custodian. The Investment 
Manager and the custodian of each participating Fund will maintain 
records documenting, for any given day, each Fund's aggregate 
investment in a Joint Account and each Fund's pro rata share of each 
investment made through such Joint Account. The records for each such 
Fund shall be maintained in conformity with section 31 of the Act and 
the rules and regulations thereunder.
    13. Every Fund participating in the Joint Accounts will not 
necessarily have its cash invested in every Short-Term Investment. 
However, to the extent that a Fund's case is applied to a particular 
Short-Term Investment, the Fund will participate in and own its 
proportionate share of such Short-Term Investment, and any income 
earned or accrued thereon, based upon the percentage of such investment 
purchased with monies contributed by the Fund.
    14. Short-Term Investments held in a Joint Account generally will 
not be sold prior to maturity unless: (a) The Investment Manager 
believes the investment no longer presents minimal credit risk; (b) the 
investment no longer satisfies the investment criteria of all Funds 
participating in the investment because of a credit downgrading or 
otherwise; or (c) in the case of a repurchase agreement, the 
counterparty defaults. The Investment Manager may, however, sell any 
Short-Term Investment (or a fractional portion thereof) on behalf of 
some or all participating Funds prior to the maturity of the investment 
if the cost of such transactions will be borne solely by the selling 
Funds and the transaction will not adversely affect other Funds 
participating in that Joint Account. In no case would an early 
termination by less than all participating Funds be permitted if it 
would reduce the principal amount or yield received by other Funds in a 
particular Joint Account or otherwise adversely affect the other 
participating Funds. Each Fund participating in a Joint Account will be 
deemed to have consented to such sale and partition of the investments 
in the Joint Account.
    15. Short-Term Investments held through a Joint Account with a 
remaining maturity of more than seven days, as calculated pursuant to 
rule 2a-7 under the Act, will be considered illiquid and subject to the 
restriction that the Fund may not invest more than 15%, or in the case 
of a money market fund, more than 10% (or such other percentage as set 
forth by the SEC from time to time) of its net assets in illiquid 
securities, if the Investment manager cannot sell the instrument, or 
the Fund's fractional interest in such instrument, pursuant to the 
preceding condition.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3175 Filed 2-9-99; 8:45 am]
BILLING CODE 8010-01-M