[Federal Register Volume 67, Number 235 (Friday, December 6, 2002)]
[Notices]
[Pages 72706-72709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30913]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25840; 812-12524]


Maxim Series Fund, Inc., et al.; Notice of Application

December 2, 2002.
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 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 of Application: Applicants seek an order to permit certain 
registered investment companies to (a) pay 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) lend portfolio 
securities to affiliated broker-dealers.
    Applicants: Maxim Series Fund, Inc. (``Maxim''), Orchard Series 
Fund (``Orchard''), Barclays Global Investors Funds (``BGIF''), Master 
Investment Portfolio (``MIP''), iShares, Inc., and iShares Trust 
(collectively, the ``Trusts''), Barclays Global Fund Advisors 
(``BGFA''), and Barclays Global Investors, N.A. (``BGI'').
    Filing Dates: The application was filed on May 23, 2001, and 
amended on August 12, 2002, and November 27, 2002.
    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 December 
26, 2002, and should be accompanied by proof of service on the 
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, Barclays Global Investors, N.A., 45 Fremont Street, 
San Francisco, CA 94105.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 942-0634, or Mary Kay Frech, 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 is available for a fee at the 
SEC's Public Reference Branch, 450 5th Street, NW., Washington, DC 
20549 (telephone (202) 942-8090).

Applicants' Representations

    1. The Trusts are registered under the Act as open-end management 
investment companies and are either a Maryland corporation or a 
Delaware statutory trust. Each Trust consists of multiple series (the 
Trusts and their series, the ``Funds''). BGFA, an investment adviser 
registered under the

[[Page 72707]]

Investment Advisers Act of 1940, serves as investment adviser to the 
MIP, iShares, Inc., and iShares Trust Funds and as investment sub-
adviser to the Maxim and Orchard Funds and is a wholly-owned subsidiary 
of BGI. BGI is a national banking association and acts as a securities 
lending agent on behalf of fiduciary accounts and collective trust 
funds.
    2. Applicants request that the order also apply to any registered 
management investment company and series thereof that currently is or 
in the future may be advised or sub-advised by BGFA, or any successor 
in interest (included in the term ``Funds''),\1\ and any other broker-
dealers now or in the future controlling, controlled by, or under 
common control with BGI (``Affiliated Broker-Dealers''). All entities 
that currently intend to rely on the order are named as applicants. Any 
other existing or future entity that relies on the order in the future 
will comply with the terms and conditions in the application.
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    \1\ The term ``successor'' is limited to entities that result 
from a reorganization into another jurisdiction or a change in the 
type of business organization.
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    3. Each Fund is, or will be, authorized to lend its portfolio 
securities. The Funds seek to participate from time to time as lenders 
in a securities lending program administered by BGI (the 
``Program'').\2\ Under the Program, BGI acts as securities lending 
agent for each of the Funds pursuant to a securities lending agency 
agreement (``Lending Agreement''). BGI will enter into securities loan 
agreements (``Loan Agreements'') on behalf of a Fund with registered 
broker-dealers, including Affiliated Broker-Dealers, that wish to 
borrow securities owned by the Fund (``Borrowers''). Applicants 
represent that the duties to be performed by BGI as lending agent will 
not exceed the parameters set forth in Norwest Bank, N.A. (pub. avail. 
May 25, 1995).
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    \2\ Applicants represent that BGI's personnel providing day-to-
day lending agency services to the Funds will not provide investment 
advisory services to the Funds or participate in any way in the 
selection of portfolio securities for, or any other aspects of the 
management of, the funds.
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    4. Pursuant to the Loan Agreements, BGI will deliver portfolio 
securities to the Borrowers, who have been approved by a Fund, in 
exchange for cash collateral or other types of collateral, such as U.S. 
government securities. Cash collateral will be delivered in connection 
with most loans. BGI will invest the cash collateral on behalf of the 
Fund in accordance with specific parameters established by the Fund. 
These guidelines include the permissible investment of the cash 
collateral, as well as a list of eligible types of investments.
    5. With respect to loans that are collateralized by cash, the 
Borrower will be entitled to receive a fee based on the amount of cash 
collateral. The Fund is compensated on the spread between the net 
amount earned on the investment of cash collateral and the Borrower's 
fee. In the case of collateral other than cash, the Fund will receive a 
loan fee paid by the Borrower equal to a percentage of the market value 
of the loaned securities as specified in the Loan Agreement. BGI may 
invest the cash collateral in certain short-term instruments through 
one or more joint accounts which will operate in reliance on the no-
action letter issued to The Chase Manhattan Bank (pub. avail. Jul. 24, 
2001). BGI may also invest the cash collateral in money market funds, 
including those managed by BGFA, in reliance on an exemptive order.
    6. Applicants request an order to permit (a) the Funds to pay BGI, 
and BGI as lending agent to accept, fees based on a share of the 
proceeds derived from the Program, and (b) the Funds to lend portfolio 
securities to Affiliated Broker-Dealers.

Applicants' Legal Analysis

A. Payment of Lending Agent Fees to BGI

    1. Section 17(d) 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 
unless the Commission has approved the transaction. Section 2(a)(3) of 
the Act defines an affiliated person of another person to include any 
person directly or indirectly controlling, controlled by, or under 
common control with, the other person. Because BGI is the parent 
company of BGFA, an investment adviser for each Fund, BGI is an 
affiliated person of an affiliated person (or second-tier affiliate) of 
the Funds. Applicants state that a fee arrangement between a lending 
agent and a lending registered investment company, under which 
compensation is based on a percentage of the revenue generated by the 
securities lending transactions, may be a joint enterprise or other 
joint arrangement or profit sharing plan within the meaning of section 
17(d) and rule 17d-1. Accordingly, applicants request an order under 
section 17(d) of the Act and rule 17d-1 under the Act to permit each 
Fund to pay, and BGI to accept, fees that are based on a share of the 
proceeds derived by the lending Funds in connection with the Program.
    2. In determining whether to approve a joint 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.
    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 BGI, as lending agent, will meet the 
standards of rule 17d-1:
    a. In connection with the approval of BGI as lending agent for a 
Fund and implementation of the proposed fee arrangement, a majority of 
the board of directors or trustees (the ``Board''), including a 
majority of the directors or trustees who are not ``interested 
persons'' within the meaning of section 2(a)(19) of the Act (the 
``Disinterested Members''), of the Fund will determine that (i) the 
contract with BGI is in the best interest of the Fund and its 
shareholders; (ii) the services performed by BGI are required for the 
Fund; (iii) the nature and quality of the services provided by BGI are 
at least equal to those provided by others offering the same or similar 
services; and (iv) the fees for BGI's services are fair and reasonable 
in light of the usual and customary charges imposed by others for 
services of the same nature and quality.
    b. Each Fund's Lending Agreement with BGI 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 Members) makes the 
findings referred to in paragraph (a) above.
    c. In connection with the initial implementation of the proposed 
fee arrangement whereby BGI 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 Members, 
will (i) determine at each regular quarterly

[[Page 72708]]

meeting whether 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 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 modifications thereto) described in the application 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 loan transaction setting forth a description of 
the security loaned, the identity of the person on the other side of 
the loan transaction, the terms of the loan transaction, and the 
information or materials upon which it was determined that each loan 
was made in accordance with the procedures set forth above and the 
conditions to the application.
    4. Applicants state that, under the terms of a Lending Agreement, 
BGI or an affiliate may indemnify a Fund against losses incurred by the 
Fund resulting from a default by one or more Borrowers that participate 
in the Program. Applicants request an order under sections 6(c) and 
17(b) of the Act for an exemption from section 17(a) and under section 
17(d) of the Act and rule 17d-1 under the Act to permit the Funds to 
purchase the right to indemnification by BGI or an affiliate in 
instances of Borrower default, and under sections 6(c) and 17(b) of the 
Act for an exemption from section 17(a) to permit a Fund to accept an 
indemnification payment from BGI or an affiliate in exchange for the 
Fund's right to proceed against the defaulting Borrower 
(``Indemnification'').
    5. Sections 17(a)(1) and (2) of the Act make it unlawful for an 
affiliated person of a registered investment company or an affiliated 
person of that person, acting as principal, to knowingly sell or 
purchase any security or other property to or from the company. 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 Indemnification is an increasingly common term 
provided by non-affiliated securities lending agents to investment 
companies. Applicants state that Indemnification, if any, will be part 
of the Lending Agreement between BGI and a Fund and no separate fee 
will be charged for the Indemnification without obtaining further 
exemptive relief from the Commission. Applicants state that the 
Indemnification right will not be applied differently based on the 
identity of a Borrower. Furthermore, applicants state that a Fund's 
Board will be asked to review any Indemnification settlements made by 
the Fund at each quarterly Board meeting. A Fund will not accept any 
amount less than the full amount of the loss under an Indemnification 
settlement without obtaining an exemptive order from the Commission.

B. Lending to Affiliated Broker-Dealers

    1. Section 17(a)(3) of the Act makes it unlawful for any affiliated 
person of or principal underwriter for a registered investment company 
or an affiliated person of such person, acting as principal, to borrow 
money or other property from the registered investment company. 
Applicants state that because the Affiliated Broker-Dealers may be 
deemed to be controlled by or under common control with BGI and under 
common control with BGFA, the Affiliated Broker-Dealers may be deemed 
to be affiliated persons of BGI and/or BGFA, and also second-tier 
affiliated persons of the Funds. Accordingly, section 17(a)(3) would 
prohibit the Affiliated Broker-Dealers from borrowing portfolio 
securities from the Funds.
    2. 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 request relief under sections 6(c) and 17(b) of 
the Act exempting them from section 17(a)(3) of the Act, and under 
section 17(d) of the Act and rule 17d-1 under the Act to permit the 
Funds to lend portfolio securities to Affiliated Broker-Dealers. 
Applicants state that the Funds seek to diversify the Borrowers to whom 
they lend in order to ensure the stability and efficiency of the 
Program. Applicants submit that because only a few Borrowers may seek 
to borrow a particular security at a given time, a prohibition on 
lending to Affiliated Broker-Dealers could disadvantage a Fund.
    3. Applicants state that each loan to an Affiliated Broker-Dealer 
by a Fund will be made with a spread that is no lower than that applied 
to comparable loans to unaffiliated Borrowers.\3\ In this regard, 
applicants state that at least 50% of the loans made by the Funds, on 
an aggregate basis (by each ``group of investment companies,'' as 
defined in section 12(d)(1)(G) of the Act), will be made to 
unaffiliated Borrowers. Moreover, all loans will be made with spreads 
that are no lower than those set forth in a schedule of spreads 
established by the Board of each Fund, including a majority of the 
Disinterested Members. All transactions with the Affiliated Broker-
Dealers will be reviewed periodically by an officer of the Funds. The 
Fund's Board, including a majority of the Disinterested Members, also 
will review quarterly reports on all lending activity.
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    \3\ A ``spread'' is the compensation earned by a Fund, as 
lender, from a securities loan. The compensation is in the form 
either of a lending fee payable by the Borrower to the Fund (where 
non-cash collateral is posted) or of the excess--retained by the 
Fund--over a rebate rate payable by the Fund to the Borrower (where 
cash collateral is posted and then invested by the Fund).
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Applicants' Conditions

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

A. Payment of Lending Agent Fees

    1. The Program 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 Board 
members who are Disinterested Members, shall be required for the 
initial and subsequent approvals of BGI's service as lending agent for 
the Fund pursuant to the Program, and for any periodic review of loan 
transactions for which BGI acted as lending agent pursuant to the 
Program.

B. Lending to Affiliated Broker-Dealers

    1. The Funds on an aggregate basis (by each ``group of investment 
companies,'' as defined in section 12(d)(1)(G) of the Act) will make at 
least 50% of their portfolio securities loans to unaffiliated 
Borrowers.
    2. The total value of securities loaned to any one Borrower on the 
approved list will be in accordance with a schedule to be approved by 
the Fund's Board, but in no event will the total value of securities 
lent to any one Affiliated Broker-Dealer exceed 10% of the net assets 
of the Fund, computed at market value.
    3. A Fund will not make any loan to an Affiliated Broker-Dealer 
unless the income attributable to such loan fully covers the 
transaction costs incurred in making such loan.
    4. a. All loans will be made with spreads no lower than those set 
forth in a schedule of spreads which will be established and may be 
modified from

[[Page 72709]]

time to time by each Fund's Board and by a majority of the 
Disinterested Members (``Schedule of Spreads'').
    b. The Schedule of Spreads will set forth rates of compensation to 
each Fund that are reasonable and fair and that are determined in light 
of those considerations set forth in the application.
    c. The Schedule of Spreads will be uniformly applied to all 
Borrowers of a Fund's securities, and will specify the lowest allowable 
spread with respect to a loan of securities to any Borrower.
    d. If a security is loaned to an unaffiliated Borrower with a 
spread higher than the minimum set forth in the Schedule of Spreads, 
all comparable loans to an Affiliated Broker-Dealer will be made at no 
less than the higher spread.
    e. The Program will be monitored on a daily basis by an officer of 
the Fund who is subject to section 36(a) of the Act. This officer will 
review the terms of each loan to an Affiliated Broker-Dealer for 
comparability with loans to unaffiliated Borrowers and conformity with 
the Schedule of Spreads, and will periodically, and at least quarterly, 
report his or her findings to each Fund's Board, including a majority 
of the Disinterested Members.
    5. Each Fund's Board, including a majority of the Disinterested 
Members, (a) will determine no less frequently than quarterly that all 
transactions with Affiliated Broker-Dealers effected during the 
preceding quarter were effected in compliance with the requirements of 
the procedures adopted by the Board and the conditions of the requested 
order and that such transactions were conducted on terms which were 
reasonable and fair; and (b) will review no less frequently than 
annually such procedures for their continuing appropriateness.
    6. The Funds will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures (and any 
modifications thereto) which are followed in lending securities and 
shall maintain and preserve for a period of not less than six years 
from the end of the fiscal year in which any loan occurs, the first two 
years in an easily accessible place, a written record of each loan 
setting forth the number of shares loaned, the face amount of the 
securities loaned, the fee received (or the rebate rate remitted), the 
identity of the Borrower, the terms of the loan and any other 
information or materials upon which the finding was made that each loan 
made to an Affiliated Broker-Dealer was fair and reasonable and that 
the procedures followed in making such loan were in accordance with the 
other undertakings set forth in the application.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30913 Filed 12-5-02; 8:45 am]
BILLING CODE 8010-01-P