[Federal Register Volume 65, Number 85 (Tuesday, May 2, 2000)]
[Notices]
[Pages 25521-25524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10857]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24404; 812-11734]


Marshall Funds, Inc. et al.; Notice of Application

April 25, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 17(d) of the Investment 
Company Act of 1940 (the ``Act'') and rule 17d-1 under the Act to 
permit certain joint transactions.

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[[Page 25522]]

SUMMARY OF APPLICATION: Applicants seek an order to permit certain 
registered management investment companies (a) To pay to an affiliated 
lending agent, and the lending agent to accept, fees based on a share 
of the revenues generated from securities lending transactions, and (b) 
to permit the investment companies to deposit their uninvested cash and 
cash collateral received from securities lending transactions in one or 
more joint accounts that invest in short-term investments.

APPLICANTS: Marshall Funds, Inc. (``Marshall Funds''), M&I Management 
Corp. (the ``Adviser'') and Marshall & Ilsley Trust Company (``M&I 
Trust'').

FILING DATES: The application was filed on July 30, 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 application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicant with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on May 17, 2000 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 of a hearing by writing to the Commission's 
Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street N.W., Washington, DC 20549-0609. Applicants, c/o Janet D. Olsen, 
Esq., Bell, Boyd & Lloyd LLC, Three First National Plaza, 70 West 
Madison Street, Chicago, Illinois 60602.

FOR FURTHER INFORMATION CONTACT: Lawrence W. Pisto, Senior Counsel, at 
(202) 942-0527, or George J. Zornada, 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 
Commission's Public Reference Branch, 450 Fifth Street NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. Marshall Funds, a Wisconsin corporation, is registered under the 
Act as an open-end management investment company and consists of eleven 
separate series. The Adviser, a wholly-owned subsidiary of Marshall & 
Ilsley Corporation (``M&I Corp.''), a bank holding company, is 
registered under the Investment Advisers Act of 1940. The Adviser 
serves as investment adviser to each series of Marshall Funds. M&I 
Trust, also a wholly-owned subsidiary of M&I Corp., is the custodian 
for Marshall Funds. Applicants also request relief for each future 
series of Marshall Funds and any other registered management investment 
companies or series thereof, whether currently existing or organized in 
the future, that are advised or subadvised by the Adviser, or an entity 
controlling, controlled by, or under common control with, the Adviser 
(together, the ``Adviser'') (collectively, ``Future Funds''). Marshall 
Funds and the Future Funds are collectively referred to as the 
``Funds''.\1\
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    \1\ The requested relief would apply to Funds that are 
subadvised by the Adviser only to the extent that the Adviser 
manages the Cash Balances (as later defined) of those Funds. All 
existing entities that currently intend to rely on the requested 
relief have been named as applicants. Any existing or future entity 
that will rely on the relief in the future will comply with the 
terms and conditions contained in the application.
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    2. Each of the Funds is, or will be, permitted by its investment 
objectives, policies, and restrictions to lend its portfolio 
securities. Several of the Funds currently participate in a securities 
lending program (the ``Program'') administered by M&I Trust, which acts 
as lending agent. Under the Program, M&I Trust enters into agreements 
with certain unaffiliated borrowers that have been pre-approved by the 
Fund or the Adviser (``Borrowers'') that wish to borrow securities 
owned by a Fund. Applicants represent that the duties performed by M&I 
Trust as lending agent will not exceed those set forth in Norwest Bank, 
N.A. (pub. avail. May 25, 1995).
    3. With respect to loans that are collateralized by cash (``Cash 
Collateral''), the Borrower is entitled to receive a fixed fee based on 
the amount of Cash Collateral. The Fund is compensated on the spread 
between the net amount earned on the investment of the Cash Collateral 
and the Borrower's fee. In the case of collateral other than cash, the 
Fund receives a loan fee paid by the Borrower equal to a percentage of 
the market value of the loaned securities specified in the loan 
agreement. Applicants seek relief to permit the funds to pay, and M&I 
Trust to accept, fees based on a share of the revenues generated from 
securities lending transactions.
    4. Securities lending guidelines adopted by each Fund authorize and 
instruct M&I Trust, at the direction of the Adviser, to invest Cash 
Collateral on behalf of the Fund in investment options pre-approved by 
the Fund or the Adviser. The Funds also may be expected to have 
uninvested cash (``Uninvested Cash''), which may result from a variety 
of sources, including dividends or interest received on portfolio 
securities, unsettled transactions, reserves held for investment 
strategy purposes, scheduled maturity of investments, liquidation of 
investment securities to meet anticipated redemptions, dividend 
payments, or new monies received from investors (Uninvested Cash, 
together with Cash Collateral, ``Cash Balances'').
    5. Applicants propose to deposit Cash Balances into one or more 
joint accounts (``Joint Accounts'') established at M&I Trust for the 
purpose of investing in one or more of the following: (a) repurchase 
agreements ``collateralized fully'' as defined in rule 2a-7 under the 
Act,\2\ (b) U.S. dollar-denominated commercial paper (including 
securities issued or backed by the U.S. Government or its agencies or 
instrumentalities), and (c) any other short-term money market 
instruments that constitute ``Eligible Securities'' (as defined in rule 
2a-7 under the Act) (collectively, ``Short-Term Investments'').
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    \2\ The Joint Accounts will enter into ``hold-in-custody'' 
repurchase agreements (i.e., repurchase agreements where the 
counterparty or one of its affiliated persons may have possession 
of, or control over, the collateral subject to the agreement) only 
where cash is received late in the business day and otherwise would 
be unavailable for investments.
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    6. Any repurchase agreements entered into through a Joint Account 
will comply with the terms of Investment Company Act Release No. 13005 
(Feb. 2, 1983). Applicants acknowledge that they have a continuing 
obligation to monitor the Commission's published statements on 
repurchase agreements, and represent that repurchase agreement 
transactions will comply with future positions of the Commission to the 
extent that such positions set forth different or additional 
requirements regarding repurchase agreements. In the event that the 
commission sets forth guidelines with respect to other Short-Term 
Investments made through the Joint Accounts, the investments will 
comply with those guidelines.
    7. Each Fund will invest through a Joint Account only in conformity 
with its own investment objectives, policies and restrictions. The 
Adviser will have sole responsibility for determining a Fund's 
participation in a joint Account,

[[Page 25523]]

subject to standards and procedures established by the Fund's board of 
directors (``Board''). Neither the Adviser nor M&I Trust will receive 
any additional fees from the Funds for the administration of the Joint 
Accounts.

Applicants' Legal Analysis

A. Lending Agent Fees

    1. Section 17(b) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person of or principal underwriter for a registered 
investment company or any affiliated person of such person or principal 
underwriter, acting as principal, from effecting any transaction in 
connection with any joint enterprise or other joint arrangement or 
profit sharing plan, in which the investment company participates. Rule 
17d-1 permits the Commission to approve a proposed joint transaction 
covered by the terms of section 17(d). In determining whether to 
approve a transaction, the Commission is to consider whether the 
proposed transaction is consistent with the provisions, policies, and 
purposes of the Act, and the extent to which the participation of the 
investment companies is on a basis different from or less advantageous 
than that of the other participants.
    2. Section 2(a)(3) of the Act defines an affiliated person to 
include any person directly or indirectly controlling, controlled by, 
or under common control with, the other person and, if the other person 
is an investment company, its investment adviser. The adviser is an 
affiliated person of each Fund. Because M&I Trust and the Adviser are 
under the common control of M&I Corp., M&I Trust is an affiliated 
person of an affiliated person of each Fund. Accordingly, applicants 
request an order under section 17(d) and rule 17d-1 under the Act to 
the extent necessary to permit each Fund to pay, and M&I to accept, 
fees based on a share of the revenues generated from securities lending 
transactions.
    3. Applicants propose that each Fund adopt the following procedures 
to ensure that the proposed fee arrangement and the other terms 
governing the relationship with M&I Trust, as lending agent, will meet 
the standards of rule 17d-1:

    (a) In connection with the approval of M&I Trust as lending 
agent for a Fund and implementation of the proposed fee arrangement, 
a majority of the Board (including a majority of the directors who 
are not ``interested persons'' within the meaning of section 
2(a)(19) of the Act (the ``Disinterested Directors or Trustees'') 
will determine that (i) the contract with M&I Trust is in the best 
interests of the Fund and its shareholders; (ii) the services to be 
performed by M&I Trust are required for the Fund; (iii) the nature 
and quality of the services provided by M&I Trust are at least equal 
to those provided by others offering the same or similar services; 
and (iv) the fees charged by M&I Trust are fair and reasonable in 
light of the usual and customary charges imposed by other for 
services of the same nature and quality.
    (b) Each Fund's contract with M&I Trust for lending agent 
services will be reviewed at least annually and will be approved for 
continuation only if a majority of the Board (including a majority 
of the Disinterested Director or Trustees) makes the findings 
referred to in paragraph (a) above.
    (c) In connection with the initial implementation of the 
proposed fee arrangement whereby M&I Trust will be compensated as 
lending agent based on a percentage of the revenue generated by a 
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 or Trustees, 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 set forth in the application for 
continuing appropriateness.
    (e) Each 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 or 
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 such loan 
transaction setting forth a description of the security loaned, the 
identity of the Borrower, 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.

B. Investment of Cash Balances in the Joint Accounts

    1. As noted above, section 17(d) and rule 17d-1 generally prohibit 
joint transactions involving registered investment companies and 
certain of their affiliates unless the Commission has approved the 
transaction. Applicants state that the Funds, by participating in the 
proposed Joint Accounts, M&I Trust, by administering the proposed Joint 
Accounts, and the Adviser, by acting as the adviser for the Joint 
Accounts, could be deemed to be ``joint participants'' in a transaction 
within the meaning of section 17(d) of the Act. In addition, the 
proposed Joint Accounts could be deemed to be a ``joint enterprise or 
other joint arrangement'' within the meaning of rule 17d-1 under the 
Act. Accordingly, applicants request an order under section 17(d) and 
rule 17d-1 under the Act to permit them to participate in the proposed 
Joint Accounts.
    2. Applicants submit that the requested relief meets the standards 
of rule 17d-1 for issuance of an order. Each Fund will participate in 
any Joint Account on the same basis as every other Fund, subject to and 
in conformity with its own investment objectives, polices, and 
restrictions. Each Fund's liability on any Short-Term Investment would 
be limited to its own interest in such investment. Applicants also 
assert that the proposed method of operating the Joint Accounts will 
not result in any conflicts of interest among any of the Funds, M&I 
Trust and the Adviser.
    3. Applicants state that the operation of the Joint Accounts could 
result in certain benefits. Applicants state that, although M&I Trust 
may gain some benefit from the administrative convenience of the Funds 
investing in Short-Term Investments on a joint basis, and may 
experience some reduction in clerical costs, the Funds will be the 
primary beneficiaries due to increase efficiencies realized through use 
of the Joint Accounts, the possible increase in rates of return 
available, and, for some Funds, the opportunity to invest in Short-Term 
Investments

Applicants' Conditions

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

A. Securities Lending

    1. The securities lending program of each Fund will comply with all 
present and future applicable guidelines of the Commission and staff 
regarding securities lending arrangements.
    2. The approval of a Fund's Board, including a majority of the 
Disinterested Directors or Trustees, shall be required for the initial 
and subsequent approvals of M&I Trust's service as lending agent for 
the Fund pursuant to the Program, for the institution of all procedures 
relating to the Program as it relates to the Fund, and for any periodic 
review of loan transactions for which M&I Trust acted as lending agent 
pursuant to the Program.

B. Joint Accounts

    1. The Joint Accounts will not be distinguishable from any other 
accounts maintained by a Fund with M&I Trust

[[Page 25524]]

except that Cash Balances from various 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 and investment by each Fund of its 
Cash Balances.
    2. Short-Term Investments that are repurchase agreements will be 
``collateralized fully'' as defined in rule 2a-7 under the Act and all 
Short-Term Investments will have a remaining maturity of 397 days or 
less as calculated in accordance with Rule 2a-7 under the Act. 
Uninvested Cash in a Joint Account will be invested in Short-Term 
Investments with remaining maturities of 90 days or less, or if 
repurchase agreements, with remaining maturities of 60 days or less.
    3. All Short-Term Investments invested in through the Joint 
Accounts will be valued on an amortized cost basis to the extent 
permitted by applicable Commission releases, rules or orders.
    4. Each Fund that is a money market fund will use the dollar-
weighted average maturity of the Short-Term Investments in the Joint 
Accounts in which the Fund has an interest for the purpose of computing 
that Fund's average portfolio maturity with respect to the portion of 
the assets held by it in the Joint Account.
    5. 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, although each Fund will be permitted to draw down its 
share of the entire balance at any time, provided that the Adviser 
determines that such draw down would have no significant adverse impact 
on any other Fund in that Joint Account. Each Fund's decision to invest 
through the Joint Accounts would be solely at its option, and no Fund 
will be obligated to invest in a Joint Account or maintain a minimum 
balance in a Joint Account. In addition, each Fund will retain the sole 
rights of ownership to any of its assets invested in the Joint 
Accounts, including interest payable on such assets invested in the 
Joint Accounts.
    6. The Adviser will administer the investment of Cash Balances in, 
and the operation of, the Joint Accounts as part of its general duties 
under its advisory agreements with the Funds and neither M&I Trust nor 
the Adviser will receive additional or separate fees for administering 
the Joint Accounts.
    7. The administration of the Joint Accounts will be within the 
fidelity bond coverage required by section 17(g) of the Act and rule 
17g-1 under the Act.
    8. The Board for each Fund investing in Short-Term Investments 
through the Joint Accounts will adopt procedures pursuant to which the 
Joint Accounts will operate, which procedures will be reasonably 
designed to provide that the requirements of the requested order will 
be met. In addition, not less frequently than annually, the Board will 
evaluate the Joint Account arrangements, will determine whether the 
Joint Accounts have been operated in accordance with the adopted 
procedures, and will authorize a Fund's continued participation in the 
Joint Accounts only if the Board determines that there is a reasonable 
likelihood that such continued participation would benefit that Fund 
and its shareholders.
    9. Investment in a Joint Account by a particular Fund will be 
consistent with the Fund's investment objectives and policies.
    10. The Adviser and M&I Trust 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 Short-Term Investment made 
through such Joint Account. The records maintained for each Fund shall 
be maintained in conformity with section 31 of the Act and the rules 
and regulations thereunder.
    11. Short-Term Investments held in a Joint Account generally will 
not be sold prior to maturity except if: (a) The Adviser believes the 
investment no longer presents minimal credit risks; (b) the investment 
no longer satisfies the investment criteria of all Funds in the Joint 
Account because of downgrading or otherwise; or (c) in the case of a 
repurchase agreement, the counterparty defaults. Any Short-Term 
Investment (or any fractional portion thereof), however, may be sold on 
behalf of some or all of the Funds prior to the maturity of the 
investment if the cost of such transaction 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 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 Funds. Each Fund in a 
Joint Account will be deemed to have consented to such sale and 
partition of the investments in the Joint Account.
    12. 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 will be 
subject to the restriction that a Fund may not invest more than 15% or, 
in the case of a money market fund, more than 10% (or, in either case, 
such other percentage as set forth by the Commission from time to time) 
of its net assets in illiquid securities, if the Short-Term Investment 
or fractional interest therein cannot be sold pursuant to the preceding 
condition.
    13. Every Fund in the Joint Accounts will not necessarily have its 
Cash Balances invested in every Short-Term Investment. However, to the 
extent that a Fund's Cash Balances are 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 Short-Term Investment 
purchased with Cash Balances contributed by the Fund.
    14. The Joint Accounts will be established as one or more separate 
cash accounts on behalf of the Funds at M&I Trust. Each Fund may 
deposit daily all or a portion of its Cash Balances into the Joint 
Accounts. Each Fund whose regular custodian is a custodian other than 
M&I Trust Fund and that wishes to participate in a Joint Account would 
appoint M&I Trust as a sub-custodian for the limited purposes of: (a) 
Receiving and disbursing Cash Balances; (b) holding any Short-Term 
Investments; and (c) holding any collateral received from a transaction 
effected through a Joint Account. All Funds that so appoint M&I Trust 
will have taken all necessary actions to authorize M&I Trust as its 
legal custodian, including all actions required under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-10857 Filed 5-1-00; 8:45 am]
BILLING CODE 8010-01-M