[Federal Register Volume 68, Number 5 (Wednesday, January 8, 2003)]
[Notices]
[Pages 1071-1073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-300]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25880; 812-12676]


Neuberger Berman Equity Funds, et al.; Notice of Application

January 2, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under sections 6(c) and 
17(b) of the Investment Company Act of 1940 (``Act'') for an exemption 
from section 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 (a) 
Certain registered investment companies to pay an affiliated lending 
agent a fee based on a share of the revenue derived from securities 
lending activities; and (b) the registered investment companies to lend 
portfolio securities to affiliated broker-dealers. The requested order 
would supersede certain prior orders. \1\
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    \1\ Energy Fund Incorporated, Investment Company Act Release 
Nos. 11175 (May 19, 1980) (notice) and 11249 (July 3, 1980) (order); 
Energy Fund Inc., Investment Company Act Release Nos. 14452 (April 
4, 1985) (notice) and 14498 (May 2, 1985) (order).
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    Applicants: Neuberger Berman Equity Funds, Neuberger Berman Income 
Funds, Neuberger Berman Advisers Management Trust, Neuberger Berman 
Intermediate Municipal Fund Inc., Neuberger Berman California 
Intermediate Municipal Fund Inc., Neuberger Berman New York 
Intermediate Municipal Fund Inc., Neuberger Berman Real Estate Income 
Fund Inc. (the ``Funds''), Neuberger Berman, LLC (``Neuberger 
Berman''), and Neuberger Berman Management Inc. (``NBMI'').
    Filing Dates: The application was filed on October 26, 2001 and 
amended on December 23, 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 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 January 27, 2003, 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 Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, DC 
20549-0609. Applicants: c/o Ellen Metzger, Esq., Neuberger Berman, LLC, 
605 3rd Avenue, 21st Floor, New York, NY 10158-3698.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
942-0582, 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 may be obtained for a fee at the 
Commission's Public Reference Branch, 450 5th Street, NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. Each of the Funds is either an open-end or closed-end management 
investment company registered under the Act. Several of the Funds are 
comprised of multiple series (the Funds and any existing or future 
series thereof, collectively, the ``Lending Funds''). NBMI is the 
investment manager and administrator to the Funds and their series and 
the principal underwriter of those Funds that are open-end management 
investment companies. Neuberger Berman serves as the sub-adviser to the 
Funds. Pursuant to the sub-advisory agreement with NBMI, Neuberger 
Berman is compensated for providing investment research; however, all 
investment decisions for the Funds are made by NBMI. Both NBMI and 
Neuberger Berman are registered as investment advisers under the 
Investment Advisers Act of 1940 and broker-dealers under the Securities 
Exchange Act of 1934. NBMI and Neuberger Berman are wholly owned 
subsidiaries of Neuberger Berman Inc., a publicly owned holding 
company.
    2. Applicants request that any relief granted pursuant to the 
application also apply to any other registered investment company or 
series thereof for which NBMI or any entity controlling, controlled by 
or under common control with NBMI serves as investment adviser. All 
existing entities that currently intend to rely on the order have been 
named as applicants. Any other existing or future entity that wishes to 
rely on the order will do so only in accordance with the terms and 
conditions of the application.
    3. The Lending Funds propose to enter into an agency securities 
lending program (the ``Securities Lending Program''). The agent for the 
Securities Lending Program will be an operating unit of Neuberger 
Berman (the ``NB Securities Lending Group'').\2\ The NB Securities 
Lending Group's activities as lending agent for the Lending Funds will 
be conducted under the supervision of investment management personnel 
of NBMI. Subject to the parameters set forth in procedures approved by 
the board of trustees or directors (``Board'') of each Lending Fund, 
NBMI will pre-approve eligible borrowers. In addition, NBMI will be 
responsible for determining what portion, if any, of assets of the 
Lending Funds will be allocated to securities lending activities, 
subject to each Lending Fund's fundamental or operating policies. NBMI 
will be responsible for investing all cash collateral received in 
respect of the securities loans.
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    \2\ In addition, the applicants may utilize the employees of 
entities controlling, controlled by or under common control with 
Neuberger Berman in performing the securities lending activities to 
be performed by NB Securities Lending Group.
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    4. As securities lending agent for the Lending Funds, the NB 
Securities Lending Group will be responsible for, among other things, 
selecting borrowers from the pre-approved list, entering into loans of 
pre-approved securities with pre-approved borrowers on pre-approved 
terms, and performing administrative or ministerial functions in 
connection with each Lending Fund's securities lending program. The NB 
Securities Lending Group will deliver loaned securities received from 
the Lending Funds to borrowers; arrange for the return of loaned 
securities to the Lending Funds at the termination of the loans; 
monitor daily the value of the loaned securities and collateral; 
request that borrowers add to the collateral when required by the loan 
agreement; and provide recordkeeping and accounting services necessary 
for the

[[Page 1072]]

operation of the Securities Lending Program.\3\
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    \3\ The personnel of the NB Securities Lending Group who will 
provide day-to-day lending agency services to the Lending Funds do 
not and will not provide investment advisory services to the Lending 
Funds, or participate in any way in the selection of portfolio 
securities or other aspects of the management of the Lending Funds.
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    5. Securities loans generally are collateralized by U.S. Government 
securities, cash or letters of credit. When the collateral is cash, the 
lender invests the cash collateral during the loan period and, after 
paying the borrower an agreed upon interest rate, retains the remainder 
thereof, which is usually shared with the securities lending agent. If 
the collateral is a U.S. Government security or letter of credit, the 
borrower pays a lending fee, which is usually shared between the lender 
and the securities lending agent.
    6. The applicants request relief to permit: (a) The Lending Funds 
to pay Neuberger Berman, or an entity controlling, controlled by, or 
under common control with Neuberger Berman, a fee based on a share of 
the revenue derived from securities lending activities; and (b) the 
Lending Funds to lend portfolio securities to Neuberger Berman and any 
broker-dealer, other than NBMI, that controls, is controlled by, or is 
under common control with, Neuberger Berman (collectively, the 
``Affiliated Broker-Dealers'').

Applicants' Legal Analysis

A. Payment of Lending Agent Fees

    1. Section 17(d) of the Act and rule 17d-1 thereunder 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 an investment company to 
include the investment company's adviser. As the Lending Funds' sub-
adviser, Neuberger Berman may be deemed to be an affiliated person of 
the Lending Funds. Because a fee arrangement between a lending agent 
and a Lending Fund, under which compensation is based on a percentage 
of the revenue generated by 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, applicants request 
an order to permit each Lending Fund to pay, and Neuberger Berman to 
accept, such fees in connection with services provided by Neuberger 
Berman to a Lending Fund.
    2. Applicants propose that each Lending Fund adopt the following 
procedures to ensure that the proposed fee arrangement and the other 
terms governing the relationship with the NB Securities Lending Group 
will meet the standards of rule 17d-1:
    a. In connection with the approval of the NB Securities Lending 
Group as lending agent for the Lending Funds, and implementation of the 
proposed fee arrangement, a majority of the Board of each Lending Fund 
(including a majority of the trustees or directors of each Lending Fund 
who are not ``interested persons'' as defined in section 2(a)(19) of 
the Act (the ``Independent Trustees/Directors'')) will determine that 
(i) The contract with the NB Securities Lending Group is in the best 
interests of the Lending Fund and its shareholders; (ii) the services 
to be performed by the NB Securities Lending Group are appropriate for 
the Lending Fund; (iii) the nature and quality of the services to be 
provided by the NB Securities Lending Group are at least equal to those 
provided by others offering the same or similar services; and (iv) the 
fees for the NB Securities Lending Group'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. In connection with the approval of the NB Securities Lending 
Group as lending agent for the Lending Funds and the initial 
implementation of the proposed fee arrangement, the Board of each 
Lending Fund will review competing quotes with respect to lending 
agency fees from at least three independent lending agents to assist 
the Board in making the findings referred to in paragraph (a) above.
    c. Each Lending Fund's contract with the NB Securities Lending 
Group for lending agent services will be reviewed annually and will be 
approved for continuation only if a majority of the Board, including a 
majority of the Independent Trustees/Directors, makes the findings 
referred to in paragraph (a) above.
    d. The Board, including a majority of the Independent Trustees/
Directors, will (i) determine at each regular quarterly meeting on the 
basis of reports submitted by the NB Securities Lending Group 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 not less frequently than annually the conditions and 
procedures for continuing appropriateness.
    e. Each Lending Fund will (i) Maintain and preserve permanently in 
an easily accessible place a written copy of the procedures and 
conditions 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 Securities Lending 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 the determination was made that 
each loan was made in accordance with the procedures set forth above 
and the conditions to the application.

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 a person (``second-tier affiliate''), 
acting as principal, to borrow money or other property from the 
registered investment company. Applicants state that because Neuberger 
Berman is sub-adviser to the Lending Funds, and the other Affiliated 
Broker-Dealers are under common control with Neuberger Berman and NBMI, 
an Affiliated Broker-Dealer may be considered an affiliated person, or 
a second-tier affiliate, of a Lending Fund. Accordingly, section 
17(a)(3) would prohibit the Affiliated Broker-Dealers from borrowing 
securities from the Lending Funds.
    2. As noted above, section 17(d) and rule 17d-1 generally prohibit 
joint transactions involving registered investment companies and 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), and under section 17(d) and rule 
17d-1 to permit the Lending Funds to lend portfolio securities to 
Affiliated Broker-Dealers.
    3. Applicants state that each loan to an Affiliated Broker-Dealer 
by a Lending Fund will be made with a spread that is no lower than that 
applied to comparable loans to unaffiliated broker-dealers.\4\ In this 
regard, applicants state

[[Page 1073]]

that at least 50% of the loans made by the Lending Funds, on an 
aggregate basis, 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, including a majority 
of the Independent Trustees/Directors, or by a committee of the Board 
made up of Independent Trustees/Directors (the ``Lending Committee''), 
and all transactions with Affiliated Broker-Dealers will be reviewed 
periodically by an officer of the Lending Fund. The Board, including a 
majority of the Independent Trustees/Directors, also will review 
quarterly reports on all lending activity.
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    \4\ A ``spread'' is the compensation earned by a Lending Fund 
from a securities loan, which compensation is in the form either of 
a lending fee payable by the borrower to the Lending Fund (when non-
cash collateral is posted) or of the excess retained by the Lending 
Fund over a rebate rate payable by the Lending Fund to the borrower 
(when cash collateral is posted and then invested by the Lending 
Fund).
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Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Securities Lending Program will comply with all present and 
future applicable Commission and staff positions regarding securities 
lending arrangements.
    2. Approval of the Board, including a majority of the Independent 
Trustees/Directors, shall be required for the initial and subsequent 
approvals of the NB Securities Lending Group as lending agent for a 
Lending Fund, for the institution of all procedures relating to the 
Securities Lending Program, and for any periodic review of loan 
transactions for which the NB Securities Lending Group acted as lending 
agent.
    3. Each Lending Fund will (i) Maintain and preserve permanently in 
an easily accessible place a written copy of the procedures (with any 
modifications) that are followed in connection with lending securities 
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 occurred, 
the first two years in an easily accessible place, a written record of 
each such loan transaction setting forth the number of shares loaned, 
the face amount of the securities loaned, the fee received (or rebate 
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.
    4. The Lending Funds, on an aggregate basis, will make at least 50% 
of their portfolio securities loans to unaffiliated borrowers.
    5. a. All loans will be made with spreads no lower than those 
provided for in a schedule of spreads, which will be established and 
may be modified from time to time by the Board and by a majority of the 
Independent Trustees/Directors or by the Lending Committee (``Schedule 
of Spreads''). The Schedule of Spreads and any modifications thereto 
will be ratified by the full Board of each Lending Fund and by a 
majority of the Independent Trustees/Directors.
    b. The Schedule of Spreads will provide for rates of compensation 
to the Lending Funds 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 the Lending Funds' portfolio 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 provided for in the Schedule of Spreads, 
all comparable loans to an Affiliated Broker-Dealer will be made at no 
less than the higher spread.
    e. Each Lending Fund's Securities Lending Program will be monitored 
on a daily basis by an officer of the Lending 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 the Lending Fund's Board, including a majority of the Independent 
Trustees/Directors, or the Lending Committee.
    6. A Lending Fund will not make any loan to an Affiliated Broker-
Dealer unless the income to the Lending Fund attributable to such loan 
fully covers the transaction costs, if any, incurred in making the 
loan.
    7. The Boards of the Lending Funds, including a majority of the 
Independent Trustees/Directors, (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 any order that may be granted and that such transactions 
were conducted on terms that were reasonable and fair, and (b) will 
review no less frequently than annually such requirements and 
conditions for their continuing appropriateness.
    8. 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 Board of each Lending Fund, 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 Lending Fund, computed at market value.
    For the Commission, by the Division of Investment Management, under 
delegated authority.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-300 Filed 1-7-03; 8:45 am]
BILLING CODE 8010-01-P