[Federal Register Volume 66, Number 169 (Thursday, August 30, 2001)]
[Notices]
[Pages 45881-45883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21889]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25136; 812-12270]


ARK Funds, et al.; Notice of Application

August 24, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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SUMMARY: The requested order would permit certain registered open-end 
management investment companies to invest uninvested cash and cash 
collateral in affiliated money market funds.
    Applicants: The ARK Funds, and each existing and futures registered 
open-end management investment company for which Allied Investment 
Advisers (``AIA''), or any existing or future persons controlling, 
controlled by, or under common control with AIA (together with AIA, the 
``Advisers'') serves as an investment adviser (collectively, with ARK 
Funds, the ``Investment Companies''), all existing and future series of 
the Investment Companies (the ``Funds''), and the Advisers.
    Filing Dates: The application was filed on September 25, 2000 and 
amended on August 23, 2001.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on September 18, 2001, 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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Ark Funds, One Freedom Valley 
Drive, Oaks, PA, 19456. AIA, 100 E. Pratt Street, Baltimore, MD 21201.

FOR FURTHER INFORMATION CONTACT: Julia Kim Gilmer, Senior Counsel, at 
(202) 942-0528, or Nadya B. Roytblat, Assistant Director, 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 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. The ARK Funds, a Massachusetts business trust, is registered 
under the Act as an open-end management investment company and 
currently consists of thirty Funds. Nine of the Funds hold themselves 
out as money market funds and comply with rule 2a-7 under the Act 
(together with any other funds money market Funds subject to rule 2a-7, 
``Money Market Funds'').\1\ AIA, a Maryland corporation and a wholly-
owned subsidiary of Allfirst Bank, is the investment adviser to each 
portfolio of the Ark Funds and is registered under the Investment 
Advisers Act of 1940.\2\
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    \1\ Each existing registered open-end management investment 
company that currently intends to rely on the order is named as an 
applicant. Any other existing or future registered open-end 
management investment company that subsequently relies on the order 
will do so only in accordance with the terms and conditions of the 
application.
    \2\ Applicants also request that the order extend to any entity 
or entities that result from a reorganization of AIA into another 
jurisdiction or a change in type of business organization.
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    2. Each Fund has, or may have, cash held by its custodian 
(``Uninvested Cash''). Uninvested Cash may result from a variety of 
sources, including dividends or interest received on portfolio 
securities, unsettled securities transactions, reserves held for 
investment strategy purposes, scheduled maturity of investments, 
liquidation of investment securities, dividend payments, or money 
received from investors. Certain funds also may participate in a 
securities lending program under which the Fund may lend its portfolio 
securities to registered broker-dealers or other institutional 
investors. The loans are continuously secured by collateral equal at 
all times to at least the market value of the securities loaned. 
Collateral for these loans may include cash (``Cash Collateral'' and 
together with Uninvested Cash, ``Cash Balances'').
    3. Applicants request relief to permit each Fund to use Cash 
Balances to purchase shares of one or more Money Market Funds (such 
Funds, including Money Market Funds that purchase shares of other Money 
Market Funds, are referred to as ``Investing Funds''), and the Money 
Market Funds to sell their shares to, and redeem their shares from, the 
Investing Funds. Investment of Cash Balances in shares of Money Market 
Funds will be made only if permitted by the Investment Fund's 
investment restrictions and to the extent consistent with the 
investment restrictions and policies set forth in its prospectus and 
statement of additional information. Applicants believe that the 
proposed transactions will result in ready liquidity, greater returns, 
increased diversity of holdings and reduce transaction costs, risk of 
counterparty default, and the market risk associated with direct 
purchases of short-term obligations.

Applicants' Legal Analysis

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if such securities represent more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or if such

[[Page 45882]]

securities, together with the securities of other acquired investment 
companies, represent more than 10% of the acquiring company's total 
assets. Section 12(d)(1)(B) of the Act provides that no registered 
open-end investment company may sell its securities to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies.
    2. Section 12(d)(1)(J) of the Act authorizes the Commission to 
exempt any person, security or transaction (or classes thereof) from 
any provision of section 12(d)(1) if, and to the extent that, the 
exemption is consistent with the public interest and the protection of 
investors. Applicants request an exemption from the provisions of 
sections 12(d)(1)(A) and (B) to the extent necessary to permit each 
Investing Fund to invest Cash Balances in the Money Market Funds.
    3. Applicants state that the proposed arrangement would not result 
in the abuses that sections 12(d)(1)(A) and (B) were intended to 
prevent. Applicants state that because each Money Market Fund will 
maintain a highly liquid portfolio, an Investing Fund will not be in a 
position to gain undue influence over a Money Market Fund through 
threat of redemption. Applicants also represent that the proposed 
arrangement will not result in an inappropriate layering of fees 
because shares of the Money Market Funds sold to the Investing Funds 
will not be subject to a sales load, redemption fee, distribution fee 
under a plan adopted in accordance with rule 12b-1 or service fee (as 
defined in rule 2830(b)(9) of the National Association of Securities 
Dealers, Inc. (``NASD'') Conduct Rules) or, if such shares are subject 
to any such fees in the future, the Adviser will waive its advisory fee 
for each Investing Fund in an amount that offsets the amount of such 
fees incurred by the Investing Fund. Applicants state that if a Money 
Market Fund offers more than one class of securities, each Investing 
Fund will invest only in the class with the lowest expense ration at 
the time of the investment. Before the next meeting of the Funds' board 
of trustees (the ``Board'') is held for the purpose of voting on an 
advisory contract, the Board, including a majority of the trustees who 
are not ``interested persons,'' as defined in section 2(a)(19) of the 
Act (``Independent Trustees'') shall consider to what extent, if any, 
the advisory fees charged to each Investing Fund by the Adviser should 
be reduced to account for reduced services in a Money Market Fund. 
Applicants represent that no Money Market Fund whose shares are held by 
an Investing Fund will acquire securities of an other investment 
company in excess of the limitations contained in section 12(d)(1)(A) 
of the Act.
    4. Section 17(a) of the Act makes it unlawful for any affiliated 
person of a registered investment company, acting as principal, to sell 
or purchase any security to or from the company. Section 2(a)(30 of the 
Act defines an ``affiliated person'' of an investment company to 
include the investment adviser, any person that owns 5% or more of the 
outstanding voting securities of that company, and any person directly 
or indirectly controlling, controlled by, or under common control with 
the investment company. Applicants state that the Investing Funds may 
be deemed to be under common control, and therefore affiliated persons 
of each other, because the Investing Funds have a common investment 
adviser or because their investment advisers may be under common 
control. In addition, applicants submit that the Advisers may hold more 
than 5% of the outstanding shares of certain Funds and that under these 
circumstances, the Funds may be deemed to be affiliated persons of one 
another. Accordingly, applicants state that the sale of Money Market 
Fund shares to the Investing Funds, and the redemption of such shares, 
would be prohibited under section 17(a).
    5. Section 17(b) of the Act authorizes the Commission to exempt a 
proposed transaction from section 17(a) of the Act if the terms of the 
proposed 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, the proposed transaction is 
consistent with the policies of each registered investment company 
involved, and with the general purposes of the Act. Section 6(c) of the 
Act provides, in part, 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 if, and to the extent 
that such exemption is necessary or appropriate in the public interest 
and is consistent with protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    6. Applicants submit that their request for relief to permit the 
purchase and redemption of Money Market Fund shares by the Investing 
Funds satisfies the standards in sections 17(b) and 6(c) of the Act. 
Applicants note that shares of the Money Market Funds will be purchased 
and redeemed by the Investing Funds at their net asset value, the same 
consideration paid and received for these shares by any other 
shareholder in the same class of the Money Market Fund. The Investing 
Funds will retain their ability to invest their Cash Balances directly 
in money market instruments as authorized by their respective 
investment objectives and policies if the Adviser believes that the 
Investing Funds can obtain a higher rate of return, or for any other 
reason. Applicants also state that each Money Market Fund will maintain 
the right to discontinue selling shares to any of the Investing Funds 
if the Trustees of the Money Market Fund determine that such sales 
would adversely affect the Money Market Fund's portfolio management and 
operations.
    7. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
an affiliated person of an investment company, acting as principal, 
from participating in or effecting any transaction in connection with 
any joint enterprise or joint arrangement in which the investment 
company participates, unless the Commission has issued an order 
authorizing the arrangement. Applicants state that each Investing Fund 
(by purchasing shares of the Money Market Funds), the Advisers (by 
managing the assets of the Investing Funds invested in the Money Market 
Funds), and each Money Market Fund (by selling shares to and redeeming 
them from the Investing Funds) might be deemed to be participants in a 
joint enterprise or other joint arrangement within the meaning of 
section 17(d) of the Act and rule 17d-1 under the Act.
    8. Rule 17d-1 permits the Commission to approve a proposed joint 
transaction covered by the terms of section 17(d) of the Act. In 
determining whether to approve a transaction, the Commission will 
consider whether the proposed transaction is consistent with the 
provisions, policies, and purposes of the Act, and the extent to which 
the participation is on a basis different from or less advantageous 
than that of other participants. Applicant submit that the proposed 
transactions meet these standards because the investments by the 
Investing Funds in shares of the Money Market Funds will be on the same 
basis and will be indistinguishable from any other shareholder account 
maintained by the same class of the Money Market Funds, and the 
transactions will be consistent with the Act.

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Applicants' Conditions

    Applicant agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Shares of the Money Market Funds sold to and redeemed by the 
Investing Funds will not be subject to a sales load, redemption fee, 
distribution fee adopted in accordance with rule 12b-1 under the Act, 
or service fee (as defined in rule 2830(b)(9) of the NASD Conduct 
Rules), or if such shares are subject to any such fee, the Adviser will 
waive its advisory fee for each Investing Fund in an amount that 
offsets the amount of such fees incurred by the Investing Fund.
    2. Before the next meeting of the Board is held for the purpose of 
voting on an advisory contract under section 15 of the Act, the Board, 
including a majority of the Independent Trustees, taking into account 
all relevant factors, shall consider to what extent, if any, the 
advisory fee charged to the Investing Fund by the Adviser should be 
reduced to account for reduced services provided to the Investing Fund 
by the Adviser as a result of Uninvested Cash being invested in the 
Money Market Funds. In connection with this consideration, the Adviser 
to the Investing Fund will provide the Board with specific information 
regarding the approximate cost to the Adviser of, or portion of the 
advisory fee under the existing advisory contract attributable to, 
managing the Uninvested Cash of the Investing Fund that can be expected 
to be invested in the Money Market Funds. The minute books of the 
Investing Fund will record fully the Board's considerations in 
approving the advisory contract, including the consideration relating 
to fees referred to above.
    3. Each Investing Fund will invest Uninvested Cash in, and hold 
shares of, the Money Market Funds only to the extent that the Investing 
Fund's aggregate investment of Uninvested Cash in the Money Market 
Funds does not exceed 25 percent of the Investing Fund's total assets. 
For purposes of this limitation, each Investing Fund will be treated as 
a separate investment company.
    4. Investment of Cash Balances in shares of the Money Market Funds 
will be in accordance with each Investing Fund's respective investment 
restrictions, if any, and will be consistent with each Investing Fund's 
policies as set forth in its prospectus and statement of additional 
information.
    5. Each Investing Fund, each Money Market Fund, and any future Fund 
that may rely on the order shall be advised by an Adviser.
    6. No Money Market Fund, the shares of which are held by an 
Investing Fund, shall acquire securities of any investment company in 
excess of the limits contained in section 12(d)(1)(A) of the Act.
    7. Before a Fund may participate in the Securities Lending Program, 
a majority of its Board, including a majority of the Independent 
Trustees, will approve the Fund's participation in a Securities Lending 
Program. Such Trustees also will evaluate the securities lending 
arrangement and its results no less frequently than annually and 
determine that any investment of Cash Collateral in the Money Market 
Funds is in the best interest of the shareholders of the Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21889 Filed 8-29-01; 8:45 am]
BILLING CODE 8010-01-M