[Federal Register Volume 67, Number 26 (Thursday, February 7, 2002)]
[Notices]
[Pages 5857-5859]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2958]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC--25407; 812-12664]


Commonfund Institutional Funds, et al.; Notice of Application

February 1, 2002.
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 (``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 thereunder to permit 
certain joint transactions.

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    Summary of Application: Applicants request an order to permit 
certain registered open-end management investment companies to invest 
uninvested cash and cash collateral in one or more affiliated money 
market funds and/or short-term bond funds.
    Applicants: Commonfund Institutional Funds (the ``Company'') and 
Commonfund Asset Management Company, Inc. (``Comanco'').
    Filing Dates: The application was filed on October 18, 2001 and 
amended on January 31, 2002.
    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 February 26, 2002, 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 who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants: John W. Auchincloss, General Counsel, 
Commonfund Institutional Funds, 15 Old Danbury Road, PO Box 812, 
Wilton, CT 06897-0812.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
942-0614, 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 Company is organized as a Delaware business trust and 
registered under the Act as an open-end management investment company. 
The Company currently consists of eight investment portfolios 
(``Funds''), including CIF Short Duration Fund (``Short Duration 
Fund'').\1\ Comanco, an indirect, wholly owned subsidiary of The Common 
Fund for Nonprofit Organizations, serves as investment adviser for the 
Company, and is registered under the Investment Advisers Act of 1940.
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    \1\ All investment companies that currently intend to rely on 
the requested relief have been named as applicants and any existing 
or future registered open-end management investment company that may 
rely on the requested relief in the future will do so only in 
accordance with the terms and conditions of the application. The 
applicants are also seeking relief for any registered open-end 
management investment company or series thereof that is currently, 
or in the future may be advised by the Adviser, as defined below 
(included in the term ``Funds''). Comanco and any person 
controlling, controlled by or under common control with Comanco that 
currently or in the future serves as investment adviser to a fund 
are collectively referred to as the ``Adviser''.
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    2. Each Fund has, or may be expected to have, uninvested cash in an 
account at its custodian (``Uninvested Cash''). Uninvested Cash may 
result from a variety of sources, such as dividends or interest 
received on portfolio securities, unsettled securities transactions, 
reserves held for investment purposes, scheduled maturity of 
investments, proceeds from liquidation of investment securities, 
dividend payments, or money received from investors. Certain of the 
Funds may also 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 will be 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 certain of the Funds (the 
``Investing Funds'') to use Cash Balances to purchase shares of the 
Short Duration Fund, as well as any future Fund that operates as a 
money market fund in accordance with Rule 2a-7 under the Act (``Money 
Market Fund'' and together with the Short Duration Fund, the ``Cash 
Management Funds''), and the Cash Management Funds to sell their shares 
to, and redeem their shares from, each of the Investing Funds. The 
Short Duration Fund seeks current income with some price appreciation, 
each consistent with liquidity and safety of principal, by investing in 
fixed income securities, and generally will maintain an effective 
duration of one year or less. Investment of Cash Balances in shares of 
the Cash Management Funds will be made only to the extent consistent 
with such Investing Fund's investment restrictions and policies as set 
forth in its prospectus and statement of additional information. 
Applicants believe that the proposed transactions will result in higher 
yields, increased investment opportunities, reduced transaction costs, 
increased returns, reduced administrative burdens, enhanced liquidity, 
and increased diversification.

[[Page 5858]]

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 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 Cash Management Funds.
    3. Applicants state that the proposed arrangement would not result 
in the abuses that section 12(d)(1)(A) and (B) were intended to 
prevent. Applicants state that because each Cash Management Fund will 
maintain a highly liquid portfolio, an Investing Fund will not be in a 
position to gain undue influence over a Cash Management 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 Cash Management 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 Cash 
Management Fund offers more than one class of securities, each 
Investing Fund will invest only in the class with the lowest expense 
ratio (taking into account the expected impact of the Investing Fund's 
investment) at the time of the investment. Before the next meeting of 
the board of directors (the ``Board'') of an Investing Fund is held for 
the purpose of voting on an advisory contract under section 15(a) of 
the Act, 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 attributable to, managing the assets of 
the Investing Fund that can be expected to be invested in the Cash 
Management Funds. In connection with approving any advisory contract 
for an Investing Fund, the Board, including a majority of the directors 
who are not ``interested persons,'' as defined in section 2(a)(19) of 
the Act (``Independent Directors'') will 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 provided to the 
Investing Fund by the Adviser as a result of Uninvested Cash being 
invested in a Cash Management Fund. Applicants represent that no Cash 
Management Fund whose shares are held by an Investing Fund will acquire 
securities of any 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)(3) 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 each of the Investing 
Funds may be deemed to be under common control, and therefore 
affiliated persons of each other, because they have a common investment 
adviser or their investment advisers may be under common control. In 
addition, applicants submit that because an Investing Fund could 
acquire 5% or more of the outstanding voting shares of a Cash 
Management Fund, such Investing Fund might be deemed an affiliated 
person of the Cash Management Fund. Accordingly, applicants state that 
the sale of shares of the Cash Management Fund to the Investing Funds, 
and the redemption of such shares by the Investing Funds, may 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 the 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 Cash Management Fund shares by the Investing 
Funds satisfies the standards of sections 17(b) and 6(c) of the Act. 
Applicants state that the investment by the Investing Funds in shares 
of the Cash Management Funds will be on the same terms and on the same 
basis as any other shareholders, and that the consideration paid and 
received by the Investing Funds on the sale and redemption of shares of 
a Cash Management Fund will be based on the Cash Management Fund's net 
asset value per share. In addition, under the proposed transactions, 
the Investing Funds will retain their ability to invest their Cash 
Balances directly in money market instruments or short-term instruments 
as authorized by their respective investment objectives and policies, 
if they believe they can obtain a higher rate of return, or for any 
other reason. Applicants also state that each of the Cash Management 
Funds reserves the right to discontinue selling shares to any of the 
Investing Funds if the management of the Cash Management Fund 
determines that such sales would adversely affect its portfolio 
management and operations.
    7. Section 17(d) of the Act and rule 17d-1 thereunder 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 Cash Management Funds), each Adviser of an

[[Page 5859]]

Investing Fund (by managing the assets of the Investing Funds invested 
in the Cash Management Funds), and each Cash Management Fund (by 
selling shares to and redeeming them from the Investing Funds) could 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 thereunder.
    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. Applicants submit that the proposed 
transactions meet these standards because the investments by the 
Investing Funds in shares of the Cash Management Funds will be on the 
same basis and will be indistinguishable from any other shareholder 
account maintained by the same class of the Cash Management Funds, and 
the transactions will be consistent with the Act.

Applicants' Conditions

    Applicants agree that any order granting the requested relief shall 
be subject to the following conditions:
    1. Shares of the Cash Management 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 of the Investing Funds is 
held for purposes of voting on an advisory contract under section 15 of 
the Act, the Adviser to the Investing Funds 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 Cash Management Funds. 
Before approving any advisory contract for an Investing Fund, the Board 
of the Investing Fund, including a majority of the Independent 
Directors, shall consider to what extent, if any, the advisory fees 
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 Cash 
Management Fund. The minute books of the Investing Fund will record 
fully the Board's considerations in approving the advisory contract, 
including the considerations referred to above.
    3. Each of the Investing Funds will invest Uninvested Cash in, and 
hold share of, the Cash Management Funds only to the extent that the 
Investing Fund's aggregate investment of Uninvested Cash in the Cash 
Management Funds does not exceed 25 percent of the Investing Fund's 
total assets. For purposes of this limitation, each Investing Fund or 
series thereof will be treated as a separate investment company.
    4. Investment of Cash Balances in shares of the Cash Management 
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. No Investing Fund that relies on rule 2a-7 
under the Act will invest in a Cash Management Fund that is not a Money 
Market Fund.
    5. No Cash Management Fund shall acquire securities of any 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.
    6. Each Investing Fund and Cash Management Fund that may rely on 
the order shall be advised by the Adviser.
    7. Before a Fund may participate in a Securities Lending Program, a 
majority of the Board, including a majority of the Independent 
Directors, will approve the Fund's participation in the Securities 
Lending Program. Such directors 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 Cash 
Management Funds is in the best interests 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. 02-2958 Filed 2-6-02; 8:45 am]
BILLING CODE 8010-01-P