[Federal Register Volume 64, Number 229 (Tuesday, November 30, 1999)]
[Notices]
[Pages 66938-66941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31030]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24173; 812-11702]


SSgA funds, et al.; Notice of Application

November 23, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'') under (i) section 6(c) of the Act granting an 
exemption from sections 18(f) and 21(b) of the Act; (ii) section 
12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of 
the Act; (iii) sections 6(c) and 17(b) of the Act granting an exemption 
from sections 17(a)(1) and 17(a)(3) of the Act; and (iv) section 17(d) 
of the Act and rule 17d-1 under the Act to permit certain joint 
arrangements.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain registered investment companies to participate in a joint 
lending and borrowing facility.

APPLICANTS: SSgA Funds and its existing and future series; any other 
existing or future registered open-end management investment company or 
series thereof that is advised or subadvised by State Street Bank and 
Trust Company (``SSB&T'') or a person controlling, controlled by, or 
under common control with SSB&T (``State Street'') and that is part of 
the same group of investment companies as SSgA Funds (together with 
SSgA Funds, the ``Funds''); and State Street.

FILING DATES: The application was filed on July 22, 1999. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is reflected in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the requested 
relief 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 December 
16, 1999, 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-
0609. Applicants, c/o Philip H. Newman, Esq., Goodwin, Procter & Hoar 
LLP, Exchange Place, Boston, Massachusetts 02109.

FOR FURTHER INFORMATION CONTACT: Michael W. Mundt, Branch Chief, (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 5th Street, NW, Washington, DC 
20549-0102 (tel. 202/942-8090).

Applicants' Representations

    1. SSgA Funds is registered under the Act as an open-end management 
investment company and is organized as a Massachusetts business trust. 
SSB&T serves as the investment adviser, custodian, and transfer agent 
for each series of SSgA Funds. SSB&T is a bank within the meaning of 
section 202(a)(2) of the Investment Advisers Act of 1940 (``Advisers 
Act'') and currently is not required to register as an investment 
adviser under the Advisers Act.
    2. Some Funds may lend money to banks or other entities by entering 
into repurchase agreements or purchasing other short-term instruments. 
Other Funds may borrow money from the same or other banks for temporary 
purposes to satisfy redemption requests

[[Page 66939]]

or to cover unanticipated cash shortfalls such as a trade ``fail'' in 
which cash payment for a portfolio security sold by a Fund has been 
delayed. Currently, some Funds have committed lines of credit with 
unaffiliated third party banks under which the banks are obligated to 
lend money to the Funds to meet the Funds' temporary cash needs.
    3. If the Funds were to borrow money from any bank under their 
current arrangement, the Funds would pay interest on the borrowed cash 
at a rate that would be significantly higher than the rate that would 
be earned by other (non-borrowing) Funds on investments in repurchase 
agreements and other short-term instruments of the same maturity as the 
bank loan. Applicants state that this differential represents the 
bank's profit for serving as a middleman between a borrower and lender. 
With respect to committed lines of credits, the Funds pay substantial 
commitment fees in addition to interest.
    4. Applicants request an order that would permit the Funds to enter 
into lending agreements (``Interfund Lending Agreements'') under which 
the Funds would lend and borrow money for temporary purposes directly 
to and from each other through a credit facility (``Interfund 
Loan'').\1\ Applicants state that the proposed credit facility would 
substantially reduce the Funds' potential borrowing costs and enhance 
Funds' ability to earn higher rates of interest on short-term lending. 
Although the proposed credit facility would substantially reduce the 
Funds' need to borrow from banks, the Funds would be free to continue 
their committed lines of credit or other borrowing arrangements with 
banks.
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    \1\ All Funds that currently intend to rely on the order have 
been named as applicants, and any other existing or future Fund that 
subsequently may rely on the order will comply with the terms and 
conditions in the application.
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    5. Applicants anticipate that the credit facility would provide a 
borrowing Fund with significant savings when the cash position of the 
Fund is insufficient to meet temporary cash requirements. The situation 
could arise when redemptions exceed anticipated volumes and the Funds 
have insufficient cash on hand to satisfy such redemptions. When the 
Funds liquidate portfolio securities to meet redemption requests, which 
normally are effected immediately, they often do not receive payment in 
settlement for up to three days (or longer for certain foreign 
transactions). The credit facility would provide a source of immediate, 
short-term liquidity pending settlement of the sale of portfolio 
securities.
    6. Applicants also propose using the credit facility when a sale of 
securities fails due to circumstances such as a delay in the delivery 
of cash to the Fund's custodian or improper delivery instructions by 
the broker effecting the transaction. Sales fails may present a cash 
shortfall if the fund has undertaken to purchase a security with the 
proceeds from securities sold. Under such circumstances, the Fund could 
fail on its intended purchase due to lack of funds from the previous 
sale, resulting in additional cost to the Fund, or sell a security on a 
same day settlement basis, earning a lower return on the investment. 
Use of the credit facility would enable the Fund to have access to 
immediate short-term liquidity without incurring custodian overdraft or 
other charges.
    7. While borrowing arrangements with banks may continue to be 
available to cover unanticipated redemptions and sale fails, under the 
proposed credit facility, a borrowing Fund would pay lower interest 
rates than those offered by banks on short-term loans. In addition, 
Funds making short-term cash loans directly to other Funds would earn 
interest at a rate higher than they otherwise could obtain from 
investing their cash in repurchase agreements or purchasing shares of 
an SSgA Fund that is a money market fund or short-term bond fund 
(``Central Fund'').\2\ Thus, applicants believe that the proposed 
credit facility would benefit both borrowing and lending Funds.
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    \2\ SSgA Funds and State Street have applied for an order from 
the SEC to permit certain SSgA Funds to invest cash balances in 
shares of Central Funds.
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    8. The interest rate charged to the Funds on any Interfund Loan 
(the ``Interfund Loan Rate'') would be the average of the ``Repo Rate'' 
and the ``Bank Loan Rate,'' both as defined below. The Repo Rate for 
any day would be the highest rate available to a lending Fund from 
investment in overnight repurchase agreements.\3\ The Bank Loan Rate 
for any day would be calculated by State Street each day an Interfund 
Loan is made according to a formula established by the Funds' trustees 
(the ``Trustees'') designed to approximate the lowest interest rate at 
which bank short-term loans would be available to the funds. The 
formula would be based upon a publicly available rate (e.g., Federal 
Funds plus 25 basis points) that would vary so as to reflect changing 
bank loan rates. Each Fund's Trustees periodically would review the 
continuing appropriateness of using the publicly available rate, as 
well as the relationship between the Bank Loan Rate and current bank 
loan rates that would be available to the Funds. The initial formula 
and any subsequent modifications to the formula would be subject to the 
approval of each Fund's Trustees.
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    \3\ SSgA Funds and State Street may in the future apply for an 
order from the SEC to permit the Funds to deposit cash balances that 
remain at the end of a trading day in one or more joint trading 
accounts to be used to enter into short-term investments. If such an 
order is obtained, the ``Repo Rate'' would be the highest rate from 
investments in overnight repurchase agreements that is available to 
a lending Fund or to a joint account in which a lending fund may 
participate.
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    9. The credit facility would be administered by a representative of 
State Street's fund accounting group and a compliance officer of the 
Funds (collectively, the ``Credit Facility Team''). Under the proposed 
credit facility, the portfolio managers for each participating Fund may 
provide standing instructions to participate daily as a borrower or 
lender. State Street on each business day would collect data on the 
uninvested cash and borrowing requirements of all participating Funds 
from the Funds' custodians. Once it has determined the aggregate amount 
of cash available for loans and borrowing demand, the Credit Facility 
Team would allocate loans among borrowing Funds without any further 
communication from portfolio managers. Applicants expect far more 
available uninvested cash each day than borrowing demand. After 
allocating cash for Interfund Loans, the Credit Facility Team will 
invest any remaining cash in accordance with the standing instructions 
from portfolio managers or return remaining amounts to the Funds. The 
money market Funds would not participate as borrowers.
    10. The Credit Facility Team would allocate borrowing demand and 
cash available for lending among the Funds on what the Team believes to 
be an equitable basis, subject to certain administrative procedures 
applicable to all Funds, such as the time of filing requests to 
participate, minimum loan lot sizes, and the need to minimize the 
number of transactions and associated administrative costs. To reduce 
transaction costs, each loan normally would be allocated in a manner 
intended to minimize the number of participants necessary to complete 
the loan transaction.
    11. State Street would (i) monitor the interest rates charged and 
the other terms and conditions of the loans, (ii) limit the borrowings 
and loans entered into by each Fund to ensure that they comply with the 
Fund's investment policies and limitations, (iii) ensure equitable 
treatment of each Fund, and (iv) make quarterly reports to the

[[Page 66940]]

Trustees concerning any transactions by the Funds under the credit 
facility and the interest rates charged. The method of allocation and 
related administrative procedures would be approved by each Fund's 
Trustees, including a majority of Trustees who are not ``interested 
persons'' of the Funds, as defined in section 2(a)(19) of the Act 
(``Independent Trustees''), to ensure that both borrowing and lending 
Funds participate on an equitable basis.
    12. State Street would administer the credit facility as part of 
its duties under its existing management or advisory and service 
contract with each Fund and would receive no additional fee as 
compensation for its services. State Street may collect standard 
pricing, recordkeeping, bookkeeping, and accounting fees applicable to 
repurchase and lending transactions generally, including transactions 
effected through the credit facility. Fees would be no higher than 
those applicable for comparable bank loan transactions.
    13. No Fund may participate in the credit facility unless: (i) the 
Fund has obtained shareholder approval for its participation or, if 
such approval is not required by law, the Fund's prospectus and/or 
statement of additional information have, prior to the Fund's lending 
or borrowing any amounts under the credit facility, disclosed the 
possibility of the Fund's participation in the credit facility; (ii) 
the Fund has fully disclosed all material information concerning the 
credit facility in its prospectus and/or statement of additional 
information; and (iii) the Fund's participation in the credit facility 
is consistent with its investment objectives, limitations, and 
organizational documents.
    14. In connection with the credit facility, applicants request an 
order under (i) section 6(c) of the Act granting relief from sections 
18(f) and 21(b) of the Act; (ii) section 12(d)(1)(J) of the Act 
granting relief from section 12(d)(1) of the Act; (iii) sections 6(c) 
and 17(b) of the Act granting relief from sections 17(a)(1) and 
17(a)(3) of the Act; and (iv) section 17(d) of the Act and rule 17d-1 
under the Act to permit certain joint arrangements.

Applicants' Legal Analysis

    1. Section 17(a)(3) generally prohibits any affiliated person, or 
affiliated person of an affiliated person, from borrowing money or 
other property from a registered investment company. Section 21(b) 
generally prohibits any registered management investment company from 
lending money or other property to any person if that person controls 
or is under common control with the company. Section 2(a)(3)(C) of the 
Act defines an ``affiliated person'' of another person, in part, to be 
any person directly or indirectly controlling, controlled by, or under 
common control with, the other person. Applicants state that the Funds 
may be under common control by virtue of having State Street as their 
common investment adviser, and/or by reason of having common officers, 
directors and/or trustees.
    2. Section 6(c) provides that an exemptive order may be granted 
where an 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. Section 17(b) 
authorizes the SEC to exempt a proposed transaction from section 17(a) 
provided that the terms of the transaction, including the consideration 
to be paid or received, are fair and reasonable and do not involve 
overreaching on the part of any person concerned, and the transaction 
is consistent with the policy of the investment company as recited in 
its registration statement and with the general purposes of the Act. 
Applicants believe that the proposed arrangements satisfy these 
standards for the reasons discussed below.
    3. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a person with potential adverse interests to 
and some influence over the investment decisions of a registered 
investment company from causing or inducing the investment company to 
engage in lending transactions that unfairly inure to the benefit of 
that person and that are detrimental to the best interests of the 
investment company and its shareholders. Applicants assert that the 
proposed credit facility transactions do not raise these concerns 
because (i) State Street would administer the program as a 
disinterested fiduciary; (ii) all Interfund Loans would consist only of 
uninvested cash reserves that the Fund otherwise would invest in short-
term repurchase agreements or other short-term instruments either 
directly or through the Central Funds; (iii) the Interfund Loans would 
not involve a greater risk than other similar investments; (iv) the 
lending Fund would receive interest at a rate higher than it could 
obtain through other similar investments; and (v) the borrowing Fund 
would pay interest at a rate lower than otherwise available to it under 
its bank loan agreements and avoid the up-front commitment fees 
associated with committed lines of credit. Moreover, applicants believe 
that the other conditions in the application would effectively preclude 
the possibility of any Fund obtaining an undue advantage over any other 
Fund.
    4. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company, or an affiliated person of an affiliated 
person, from selling any securities or other property to the company. 
Section 12(d)(1) of the Act generally makes it unlawful for a 
registered investment company to purchase or otherwise acquire any 
security issued by any other investment company except in accordance 
with the limitations set forth in that section. Applicants believe that 
the obligation of a borrowing Fund to repay an Interfund Loan may 
constitute a security. Section 12(d)(1)(J) provides that the SEC may 
exempt persons or transactions from any provision of section 12(d)(1) 
if and to the extent such exception is consistent with the public 
interest and the protection of investors. Applicants contend that the 
standards under sections 6(c), 17(b) and 12(d)(1)(J) are satisfied for 
all the reasons set forth above in support of their request for relief 
from sections 17(a)(3) and 21(b) and for the reasons discussed below.
    5. Applicants state that section 12(d)(1) was intended to prevent 
the pyramiding of investment companies in order to avoid duplicative 
costs and fees attendant upon multiple layers of investment companies. 
Applicants submit that the proposed credit facility does not involve 
these abuses. Applicants note that there would be no duplicative costs 
or fees to the Funds or shareholders, and that State Street would 
receive no additional compensation for its services in administering 
the credit facility. Applicants also note that the purpose of the 
proposed credit facility is to provide economic benefits for all the 
participating Funds.
    6. Section 18(f)(1) prohibits open-end investment companies from 
issuing any senior security except that a company is permitted to 
borrow from any bank, if immediately after the borrowing, there is an 
asset coverage of at least 300 per cent for all borrowings of the 
company. Under section 18(g) of the Act, the term ``senior security'' 
includes any bond, debenture, note, or similar obligation or instrument 
constituting a security and evidencing indebtedness. Applicants request 
exemptive relief from section 18(f)(1) to the limited extent necessary 
to implement the credit facility (because the lending Funds are not 
banks).
    6. No equity, taxable bond or money market Fund may lend to another 
Fund through the credit facility if the loan would cause its aggregate 
outstanding loans through the credit facility to

[[Page 66941]]

exceed 5%, 7.5% or 10%, respectively, of its net assets at the time of 
the loan.
    7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. A Fund's borrowings through the credit facility, as measured on 
the day when the most recent loan was made, will not exceed the greater 
of 125% of the Fund's total net cash redemptions and 102% of sales 
fails for the preceding seven calendar days.
    10. Each Interfund Loan may be called on one business day's notice 
by a lending Fund and may be repaid on any day by a borrowing Fund.
    11. A Fund's participation in the credit facility must be 
consistent with its investment policies and limitations and 
organizational documents.
    12. The Credit Facility Team will calculate total Fund borrowing 
and lending demand through the credit facility, and allocate loans on 
an equitable basis among the Funds without the intervention of any 
portfolio manager of the Funds. The Credit Facility Team will not 
solicit cash for the credit facility from any Fund or prospectively 
publish or disseminate loan demand data to portfolio managers. The 
Credit Facility Team will invest any amounts remaining after 
satisfaction of borrowing demand in accordance with the standing 
instructions from portfolio managers or return remaining amounts to the 
Funds.
    13. State Street will monitor the interest rates charged and the 
other terms and conditions of the Interfund Loans and will make a 
quarterly report to the Trustees concerning the participation of the 
Funds in the credit facility and the terms and other conditions of any 
extensions of credit under the facility.
    14. The Trustees of each Fund, including a majority of the 
Independent Trustees: (a) Will review no less frequently than quarterly 
the Fund's participation in the credit facility during the preceding 
quarter for compliance with the conditions of any order permitting the 
transactions; (b) will establish the Bank Loan Rate formula used to 
determine the interest rate on Interfund Loans and review no less 
frequently than annually the continuing appropriateness of the Bank 
Loan Rate formula; and (c) will review no less frequently than annually 
the continuing appropriateness of the Fund's participation in the 
credit facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and the default is not cured within two business days from its 
maturity or from the time the lending Fund makes a demand for payment 
under the provisions of the Interfund Lending Agreement, State Street 
will promptly refer the loan for arbitration to an independent 
arbitrator selected by the Trustees of any Fund involved in the loan 
who will serve as arbitrator of disputes concerning Interfund Loans.\4\ 
The arbitrator will resolve any problem promptly, and the arbitrator's 
decision will be binding on both Funds. The arbitrator will submit, at 
least annually, a written report to the Trustees setting forth a 
description of the nature of any dispute and the actions taken by the 
Funds to resolve the dispute.
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    \4\ If the dispute involves Funds with separate Boards, the 
Trustees of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
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    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
under the credit facility occurred, the first two years in an easily 
accessible place, written records of all such transactions setting 
forth a description of the terms of the transaction, including the 
amount, the maturity, and the rate of interest on the loan, the rate of 
interest available at the time on overnight repurchase agreements and 
bank borrowings, the yield of any Central Fund in which the lending 
Fund could otherwise invest, and such other information presented to 
the Fund's Trustees in connection with the review required by 
conditions 13 and 14.
    17. State Street will prepare and submit to the Trustees for review 
an initial report describing the operations of the credit facility and 
the procedures to be implemented to ensure that all Funds are created 
fairly. After commencement of operations of the credit facility, State 
Street will report on the operations of the credit facility at the 
Trustees' quarterly meetings.
    In addition, for two years following the commencement of the credit 
facility, the independent public accountant for each Fund shall prepare 
an annual report that evaluates State Street's assertion that it has 
established procedures reasonably designed to achieve compliance with 
the conditions of the order. The report shall be prepared in accordance 
with the Statements on Standards for Attestation Engagements No. 3 and 
it shall be filed pursuant to Item 77Q3 of Form N-SAR. In particular, 
the report shall address procedures designed to achieve the following 
objectives: (a) that the Interfund Loan Rate will be higher than the 
Repo Rate, and, if applicable, the yield of the Central Funds, but 
lower than the Bank Loan Rate; (b) compliance with the collateral 
requirements as set forth in the application; (c) compliance with the 
percentage limitations on interfund borrowing and lending; (d) 
allocation of interfund borrowing and lending demand in an equitable 
manner and in accordance with procedures established by the Trustees; 
and (e) that the interest rate on any Interfund Loan does not exceed 
the interest rate on any third party borrowings of a borrowing Fund at 
the time of the Interfund Loan.
    After the final report is filed, the Fund's external auditors, in 
connection with their Fund audit examinations, will continue to review 
the operation of the credit facility for compliance with the conditions 
of the application and their review will form the basis, in part, of 
the auditor's report on internal accounting controls in Form N-SAR.
    18. No Fund will participate in the credit facility upon receipt of 
requisite regulatory approval unless it has fully disclosed in its 
statement of additional information all material facts about its 
intended participation.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-31030 Filed 11-29-99; 8:45 am]
BILLING CODE 8010-01-M