[Federal Register Volume 65, Number 206 (Tuesday, October 24, 2000)]
[Notices]
[Pages 63653-63657]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27234]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-24695; 812-11746]
Provident Institutional Funds, et al.; Notice of Application
October 18, 2000.
Agency: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application under sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
section 17(a) of the Act.
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SUMMARY OF APPLICATION: Applicants seek an order that would permit a
registered open-end management investment company to enter into
repurchase agreements with an affiliated person.
Applicants: Provident Institutional Funds (the ``Fund''), the PNC
Financial Services Group, Inc. (``PNC''), and blackRock Advisors, Inc.
(``BlackRock'').
FILING DATES: The application was filed on August 12, 1999, and amended
on October 18, 2000.
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 November
8, 2000, 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 BlackRock Financial Management, 345 Park Avenue,
New York, New York 10154.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Special Counsel, at
(202) 942-0572, 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 at the
SEC's Public Reference Branch, 450 5th Street, NW., Washington, DC
20549-0102 (tel. (202) 942-8090).
[[Page 63654]]
Applicants' Representations
1. The Fund is an open-end, diversified management investment
company consisting of ten series (each, a ``Series''). Each Series is a
money market fund that complies with rule 2a-7 under the Act.
2. BlackRock, an investment adviser registered under the Investment
Advisers Act of 1940 (``Advisers Act''), is the investment adviser for
each Series. BlackRock is a direct wholly-owned subsidiary of
BlackRock, Inc., which, in turn, is a majority-owned subsidiary of PNC
Bank, N.A. (``PNC Bank''). PNC Bank is a wholly-owned subsidiary of
PNC. PNC is a bank holding company that operates subsidiary banks and
other subsidiaries engaged in financial businesses. PFPC Trust company,
an indirect wholly-owned subsidiary of PNC, is the Fund's custodian.
3. Applicants request that relief be extended to (a) any other
investment adviser registered under the Advisers Act that controls, is
controlled by, or is under common control with BlackRock (collectively,
the ``Advisors''), and (b) any entity that controls, is controlled by,
or is under common control with PNC (collectively, the ``PNC
Companies''). \1\ Applicants also request that the relief be extended
to future Series of the Fund and to such other registered open-end
management investment companies and their series that in the future:
(a) are advised by the Advisors or the PNC Companies, (b) are taxable
money market funds under rule 2a-7 under the Act, and (c) effect
purchases and sales through PNC's ``sweep'' program (collectively, such
future companies and the Fund are the ``Funds''). \2\
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\1\ Applicants represent that every Advisor will be registered
under the Advisers Act, and any PNC Company that serves as an
investment adviser to any Series will be registered or exempt from
registration under the Advisers Act.
\2\ Any future entity that relies on the requested order will do
so only in accordance with the terms and conditions of the
application. Each entity that currently intends to rely on the
requested order has been named as an applicant.
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4. The Fund's shares are purchased by customers of the PNC
Companies, including qualified deposit, custody, agency, and trust
accounts, through their accounts with the PNC Companies. The Fund's
shares may be purchased through automatic investment transactions. In
these transactions, one of PNC's subsidiary banks, as agent, follows
the standing instructions of the customer and automatically invests
excess cash balances in the customer's accounts in shares of one or
more Series (``sweep program''). \3\ Each of the participating Series
currently declares dividends daily to shareholders of record as of 4
p.m. on that day and accepts orders at the next net asset value
determined after the order is received. Net asset value is determined
as of 12 noon and 5:30 p.m. Orders are executed when good funds are
received, which is normally after the dividend is declared for the day
on which the order is received. Accordingly, in the sweep program,
customers do not earn a dividend in the Fund for the day on which the
customers' banking transactions occurred. This would normally result in
the customers losing a day's worth of income on such funds.
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\3\ In accordance with the standing instructions of the
customers of the PNC Companies, the computer program also provides
for the automatic redemption of Fund shares held in an account as of
the next determined net asset value if the cash balance in the
account is less than the minimum balance specified by the customer.
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5. To permit BlackRock, as the Fund's investment adviser, to invest
anticipated new assets attributable to the sweep program on the same
day that they are available for investment (despite the fact that the
exact amount will not be known until after the time for investment that
day), applicants propose that the PNC Companies enter into overnight
repurchase agreements with each Series. The assets would be invested in
fund shares as of the time the relevant Series determined its net asset
value on the same day the sweep occurs (the ``Sweep Time''). The Fund
proposes to enter into a master repurchase agreement with the PNC
Companies, which is substantially the same as the industry standard
master repurchase agreement promulgated by the Public Securities
Association, covering all repurchase agreement transactions (the
``Master Repurchase Agreement'').
6. In order to enable each Series to handle sweep transactions that
result in net redemptions as well as net investments, BlackRock would
plan each day's portfolio transactions for each Series to include an
overnight repurchase agreement transaction with the PNC Companies in a
specified standing base amount (``Base Amount''). The Base Amount would
represent the greatest amount of net redemptions likely to be
experienced by a Series as a result of the sweep program on any given
day and would be approximately 2% to 5% of the aggregate net asset
value of each Series and would be the amount that a Series otherwise
would have in uninvested cash to meet redemptions expected from the
sweep program. The Base Amount as to any particular Series on any
particular day will not exceed 5% of that Series' net assets prior to
giving effect to the sweep for that day, or such lower amount as the
Fund's board of trustees (``Board''), including a majority of the
trustees who are not ``interested persons,'' as defined by section
2(a)(19) of the Act, of the PNC Companies, the Advisors, or the Fund
(``Independent Trustees''), may determine. The purpose of a repurchase
agreement in the Base Amount would be to enable a Series to adjust its
earning assets downward after normal trading hours in response to a net
redemption being required by the sweep program for that Series on a
particular day. Thus, the Base Amount for each Series would be the
amount of the purchase agreement that would be in effect overnight with
the PNC Companies if the sweep program produces no net investment or
net redemption, giving the Series an opportunity to reduce the
repurchase agreement (and thus its assets) if there are net redemptions
on that day. If the operation of the sweep program produces net
investment into a Series on a given day, the Fund will invest the net
amount swept into that Series by increasing the Base Amount of the
overnight repurchase agreement transaction with the PNC Companies by
the net amount being swept into the Series. If the operation of the
sweep program produces net redemptions from a Series on a given day,
the amount of the overnight repurchase agreement transaction for that
Series will be reduced from the Base Amount by the net amount being
redeemed.
7. Applicants intend to limit the amount of each Series' net assets
that may be invested pursuant to the requested order with the PNC
Companies to a percentage upon which applicants from time to time may
agree (the ``Maximum Purchase Amount''). The Maximum Purchase Amount
may fluctuate but will not exceed 15% of the net assets of a Series
after giving effect to the sweep for that day.
8. To facilitate the repurchase transaction where the exact amount
of the overnight repurchase agreement and, consequently, the amount of
the required collateral is not known until PNC's computer processing is
completed during the night (the ``Completion Time''), the PNC
Companies, at no cost to the Fund, will maintain at all times in a
segregated subcustodian account in the name of the Fund, for the
benefit of the applicable Series, collateral having a value when added
to the value of the collateral collateralizing any overnight repurchase
agreements with the PNC Companies outstanding at the time, at least
equal to the amount (the ``Required Collateral Amount'') necessary to
collateralize fully (within the meaning of rule 2a-7 under Act)
repurchase agreements with
[[Page 63655]]
the Fund on behalf of each applicable Series in an amount equal to the
Maximum Purchase Amount. BlackRock will notify the Fund's custodian and
PNC of any change in the Maximum Purchase Amount, and the PNC Companies
will adjust the amount of collateral maintained in the segregated
account as often as necessary so that it at least equal the aggregate
Required Collateral Amount for the applicable Series. The relevant
Series will have a perfect security interest in the repurchase
agreement collateral held in the account.
9. PNC Bank's Trust Department will act as the Fund's subcustodian
pursuant to a subcustodian agreement approved by the Board, including a
majority of the Independent Trustees.\4\ The Fund's assets held by PNC
Bank's Trust Department would be maintained in a segregated custodian
account established on behalf of the Fund in accordance with the rules
and standards of the Comptroller of the Currency and the Act. PNC
Bank's Trust Department would receive the eligible securities
transferred to it in its capacity as subcustodian for the Fund and hold
them in a manner complying with the requirements of section 17(f) of
the Act. After the Completion Time that night, the records maintained
by PNC Bank's Trust Department in its capacity as the Funds'
subcustodian would show:
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\4\ The subcustodian account may be maintained with PNC Bank's
Trust Department or a nominee qualified to act as a custodian
pursuant to section 17(f) of the Act, and references in this notice
to PNC Bank's Trust Department mean either entity.
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(a) For each customer account participating in the sweep program, a
cash entry for the number of shares of the applicable Series' shares
purchased or redeemed and a corresponding sub-entry for the number of
shares purchased or redeemed as of the Sweep Time through operation of
the computer sweep program; and
(b) For the Fund's subcustodian account, all purchase and sales
transactions (which, where a PNC Company is a trustee, nominee, or the
equivalent, may be a single net purchase or redemption transaction for
a number of subaccounts maintained by that PNC Company) and the net
cash proceeds, if any, received by the Fund for each applicable Series
through the operation of the sweep (or, conversely, the net redemption
proceeds paid or payable by the Fund for each applicable Series if
there were net redemptions). In addition, the Fund's subcustodian
account would reflect the specific amount in fact invested in an
overnight repurchase agreement for each applicable Series (including
the ownership of the securities securing the repurchase agreement). If
the sweep resulted in net redemptions for any Series, the subcustodian
account would reflect this fact and show reduced or no ownership of
securities held in the subcustodian account to secure repurchase
transactions with the PNC Companies, since (contrary to expectations)
none of the Fund's assets had been used to purchase such securities. To
the extent that securities transferred to secure the repurchase
agreements exceeded the amount of collateral actually required for that
day's repurchase agreements (as shown by the results of the day's
computer processing), the appropriate PNC Company would be shown to be
the owner of the excess securities.
10. After the Completion Time, PNC would transmit to the Funds'
transfer agent records relating to the automatic investment
transaction. The transfer agent's records would then show an entry to
each of the corresponding shareholder accounts for the number of each
relevant Series' shares automatically purchased or redeemed as of the
Sweep Time through operation of the sweep.
11. Each Series will purchase only securities in which it may
invest as described in its prospectus and statement of additional
information and as limited by rule 2a-7. The Master Repurchase
Agreement will be collateralized only by securities that are, except as
to maturity, ``first-tier securities'' as defined by rule 2a-7(a)(12)
under the Act (``First-Tier Securities'') and that are eligible
collateral for the applicable Series under the Series' prospectuses and
statement of additional information and rule 2a-7 under the Act. The
transactions will comply with the guidelines set forth in Investment
Company Act Release No. 13005 (February 2, 1983) and will be
collateralized fully as that term is defined in rule 2a-7. Any
repurchase agreement entered into by a Fund will satisfy the
requirements of proposed rule 5b-3,\5\ if and when the rule is adopted
and becomes effective. The Master Repurchase Agreement will be subject
to annual approval with respect to each Series by the Board, including
a majority of the Independent Trustees.
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\5\ Investment Company Act Release No. 24050 (Sept. 23, 1999)
(proposing rule 5b-3).
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12. The transactions would be ``repurchase agreements'' for
purposes of Chapter 11 of the United States Bankruptcy Code and the
Financial Institutions Reform, Recovery and Enforcement Act of 1989.
These statutes provide that, if the bankruptcy of the counterparty
occurs, the repurchase agreement can be liquidated without being
subject to the potential delay associated with the automatic stay or
similar provision of those statutes.
Applicants' Legal Analysis
1. Section 17(a) of the Act makes it unlawful for any affiliated
person of a registered investment company, or any affiliated person of
such affiliated person, acting as principal, to sell or purchase any
security to or from such investment company. Section 2(a)(3) of the Act
defines an affiliated person to include any investment adviser of a
registered investment company and a person that controls, is controlled
by, or is under common control with another person. Each Advisor, as
the Funds' investment adviser, is affiliated with the Funds. In
addition, since each Advisor will be controlled by PNC and will be
under common control with each of the other PNC Companies, PNC and each
of the other PNC Companies would be an affiliated person of an
affiliated person (Advisor) of the Funds. Accordingly, the Advisors and
the PNC Companies are subject to the prohibitions contained in section
17(a) with respect to the Funds.
2. Section 17(b) of the Act authorizes the SEC to exempt a
transaction from section 17(a) if the terms of the proposed
transaction, including the consideration to be paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned, the proposed transaction is consistent with the
policy of each registered investment company concerned, and the
proposed transaction is consistent with the general policy of the Act.
3. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction or any class or classes of
persons, securities, or transactions from any provision of the Act, or
from any rule thereunder, if such 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. Applicants request relief under sections 17(b) and 6(c) of the Act
from section 17(a) of the Act to permit the Funds to engage in
overnight repurchase agreements with the PNC Companies. Applicants
submit that the requested relief satisfies the standards for relief in
sections 6(c) and 17(b) for the reasons discussed below.
4. Applicants submit that the requested relief is appropriate and
in the public interest because it will permit the applicable States to
invest at a favorable yield incremental net assets attributable to the
``sweep'' program on
[[Page 63656]]
the same day that such assets are available for investment. Applicants
believe that a more attractive ``sweep'' program of this type would
result in increased assets for the applicable Series and the Fund.
Applicants submit that a larger asset base for a particular Series
would benefit that Series' shareholders by spreading expenses over a
larger asset base.
5. Applicants contend that the proposed exemption is necessary to
enable the Fund to earn market rates of return on assets obtained on a
particular day through the sweep program. Applicants state that they
have been unable to local any unaffiliated issuer willing to engage in
the transactions on a basis as favorable to the Fund as the proposed
amendments.
6. Applicants state that PNC and its affiliates are aware of the
potential conflicts of interest inherent in the operation of the sweep
program if the proposed relief is granted. Applicants state that,
therefore, PNC and BlackRock have established procedures and conditions
to be followed by their employees and agents to prevent any
overreaching on the part of any person that could act to the detriment
of the Fund and to ensure that each transaction is effected on a
reasonable and fair basis.
7. Applicants submit that the proposed transactions will not reduce
any of the applicable Series' yields. If the operation of the proposed
sweep program shortens the Funds' average daily portfolio maturity, the
effect of the reduction would be minimal because: (a) each Series
currently maintains a relatively short average daily portfolio
maturity; (b) upon receipt of assets, the Series historically have
invested the assets in overnight or very short-term obligations with
the investment occurring one day later; and (c) yields on overnight
instruments are often very similar to or even higher than rates on
comparable credit quality instruments with maturities of 30 to 40 days.
Thus, applicants believe that any effect on yield as a result of the
proposed sweep program would be negligible. In addition, operations
pursuant to the independent pricing mechanism set forth in condition
(9) below should provide yields from sweep investments that are no
lower than similar non-sweep investments.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. No sweep account customer of any of the PNC Companies will be
permitted to effect a sweep transaction for any participating Series of
any Fund after the Sweep Time for the Series and the Series' net asset
value has been computed for that day.
2. The Board of each Fund, including a majority of the Independent
Trustees, will: (a) Adopt procedures that are reasonably designed to
provide that the conditions set forth below and the requirements of
Investment Company Act Release No. 13005 (Feb. 2, 1983) have been
complied with; (b) make and approve changes to the procedures as deemed
necessary; (c) determine no less frequently than quarterly that the
transactions made pursuant to the order during the preceding quarter
were effected in compliance with the procedures; and (d) approve the
Master Repurchase Agreement annually. The Advisor of each Fund may
implement these procedures, subject to the direction and control of the
Board of each Fund.
3. The legal or compliance department of, and internal and outside
auditors for, the PNC Companies (``Compliance Personnel'') will prepare
guidelines for the Advisors and the PNC Companies to ensure that the
transactions described in the application comply with the conditions of
the application and that the integrity of the program is maintained.
The Funds' independent public accountants will verify assets held in
each subcustodian account in accordance with rule 17f-2 under the Act.
The Compliance Personnel will periodically monitor the activities of
the Advisors and the PNC Companies in connection with the operation of
the sweep program to ensure that the conditions set forth in the
application are adhered to.
4. The terms of the relief will be disclosed fully in each Fund's
prospectus and statement of additional information. A schedule of all
transactions with the PNC Companies will be filed with each semi-annual
report filed by the Funds with the Commission pursuant to sections
30(a) and 30(b)(1) of the Act. The relevant Advisor will provide each
Fund's Board with a full report of the transactions under the sweep
program, as described in the application, no less frequently than
quarterly. The relevant Advisor also will provide each Fund's Board
with a statement that, as the Fund's investment adviser, it determined
the repurchase transactions to be necessary and appropriate under the
circumstances.
5. The Funds, the PNC Companies, and the Advisors will maintain
records with respect to those transactions conducted pursuant to the
requested exemption as may be necessary to confirm compliance with the
conditions to the requested relief. In this regard, each Fund will
maintain an itemized daily record of repurchase agreement transactions
entered into pursuant to the exemption, showing for each transaction:
That it has entered into the transaction; the entity with which it has
entered into the transaction; the purchase and repurchase prices; the
time and date of the transaction; the type and amount of collateral;
and the date fixed for termination of the transaction, which will
always be the next business day. For each transaction, the records also
shall document the quotations received from other dealers in accordance
with condition (9), including: The names of the dealers; the prices
quoted; and the times and dates the quotations were received. The
records required by this condition will be maintained and preserved in
the same manner as records required under rule 31a-1(b)(1) under the
Act.
6. The Maximum Purchase Amount will be the amount stipulated by the
PNC Companies from time to time but will not exceed 15% of the sum of
the net assets of the applicable Series after giving effect to the
sweep for any particular day. The Base Amount as to any particular
Series on any particular day will not exceed 5% of that Series' net
assets prior to giving effect to the sweep for that day, or such lower
amount as the Board of the Funds, including a majority of the
Independent Trustees, may determine. With respect to a particular
Series on a particular day, the amount invested pursuant to the
requested exemption will not exceed the lesser of the sum of the Base
Amount for that Series plus the amount swept into that Series on that
day or 15% of the next assets of that Series after giving effect to the
sweep for that day.
7. All records pertaining to the sweep program will be preserved
for a period of not less than six years, the first two years in an
easily accessible place, from the end of the fiscal year in which any
sweep transaction occurred.
8. In connection with overnight repurchase agreement transactions
pursuant to the Master Repurchase Agreement, the PNC Companies will
maintain at all times during operation of the sweep program in a
segregated subcustodian account in the name of the relevant Fund for
the benefit of the applicable Series' collateral comprised only of
securities that are, except for their maturity, First-Tier Securities
valued at an amount equal to the Required Collateral Amount. In
addition, the PNC Companies will transfer the collateral through the
book
[[Page 63657]]
entry system of the Federal Reserve, the Depository Trust Company, or
another book entry system approved by the Independent Trustees (each,
an ``approved book entry system'') and, in connection with the
transfer, each Fund's subcustodian account with PNC Bank's Trust
Department will be designated through an approved book entry system as
the recipient of the securities and the PNC Companies' internal records
and written confirmation will indicate that the collateral is being
held on behalf of and in the relevant Fund's name for the benefit of
the applicable Series. Each Fund thereby will acquire a security
interest in the collateral for the benefit of the applicable Series.
Any repurchase agreements entered into by a Fund will satisfy the
requirements of proposed rule 5b-3 under the Act, if and when the rule
is adopted and becomes effective.
9. Before any transaction may be conducted pursuant to the
requested exemption, the relevant Advisor must obtain the information
as it deems necessary to determine that the price test below has been
satisfied. Before any repurchase agreement is entered into pursuant to
the requested exemption, the relevant Advisor must obtain and document
competitive quotations from at least two other dealers with respect to
repurchase agreements comparable to the type of repurchase agreement
involved (including size, which would equal the Maximum Purchase Amount
for the particular Series in question, maturity, and collateral),
except that if quotations are unavailable from two dealers only one
other competitive quotation is required. In addition, the repurchase
transactions for which quotations are sought must be conventional
overnight repurchase agreements in which the funds would be transferred
by the relevant Fund on behalf of the participating Series as of the
same day that the transaction is entered into, and then returned by the
counterparty on the following business day. Before entering into a
transaction pursuant to the requested exemption, a determination will
be required in each instance, based upon the information available to
the relevant Advisor, that the income to be earned from the repurchase
agreement to be entered into with any PNC Company is at least equal to
that available from the repurchase agreements with respect to which
quotes were obtained.
10. No less frequently than quarterly, the Board of each Fund,
including a majority of the Independent Trustees, on behalf of each
Series of that Fund, will review the Base Amounts that have been
established for the Series during the preceding quarter to determine
whether the Base Amounts appropriately reflected the amounts of the
Series' net assets that would have remained uninvested at the Fund's
custodian in order to meet potential redemptions from the sweep program
if the Base Amounts were not available. To assist the Board in this
review, the Advisors will provide the Board with all relevant
information. The Board, including a majority of the Independent
Trustees, will take such steps as it deems necessary to assure that the
Base Amounts for each Series appropriately reflect the amounts of the
Series' net assets that would remain uninvested at the Fund's custodian
in order to meet potential redemptions from the sweep program if the
Base Amounts are not available.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-27234 Filed 10-23-00; 8:45 am]
BILLING CODE 8010-01-M