[Federal Register Volume 68, Number 98 (Wednesday, May 21, 2003)]
[Notices]
[Pages 27867-27869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12736]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26047; 812-12770]


The MainStay Funds, et al.; Notice of Application

May 15, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 12(d)(1)(J) 
of the Investment Company Act of 1940 (the ``Act'') for an exemption 
from sections 12(d)(1)(A) and (B) of the Act, under sections 6(c) and 
17(b) of 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 the Application: The requested order would permit 
certain registered management investment companies to invest uninvested 
cash and cash collateral in affiliated money market funds in excess of 
the limits in sections 12(d)(1)(A) and (B) of the Act.
    Applicants: The MainStay Funds (``MainStay''), Mainstay VP Series 
Fund, Inc. (``VP''), Eclipse Funds, Eclipse Funds, Inc., New York Life 
Investment Management Institutional Funds (``NYLIM Institutional'') and 
McMorgan Funds (together the ``Funds''), all existing and future series 
of the Funds (together the ``Portfolios''), New York Life Investment 
Management LLC (``NYLIM''), MacKay Shields LLC (``MacKay'') and 
McMorgan & Company LLC (``McMorgan,'' together with NYLIM and Mackay, 
the ``Adviser''), and any other registered management investment 
company and series thereof currently or in the future advised by the 
Adviser or any entity controlling, controlled by, or under common 
control with the Adviser (included in the term ``Adviser'')(each such 
investment company included in the term ``Funds'' and its series 
included in the term ``Portfolios'').
    Filing Dates: The application was filed on February 12, 2002 and 
amended on May 9, 2003.
    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 June 9, 2003, 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, Commission, 450 Fifth Street, NW., Washington, 
DC, 20549-0609. Applicants, c/o Paul Schott Stevens, Esq., Dechert, 
1775 Eye Street NW., Washington, DC, 20006.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel, 
at (202) 942-0714, 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. Each Fund is registered under the Act as an open management 
investment company. MainStay and Eclipse Funds are Massachusetts 
business trusts and consist of twenty-four and four Portfolios, 
respectively. VP and Eclipse Funds, Inc., are Maryland corporations and 
are comprised of nineteen and fourteen Portfolios, respectively. 
McMorgan Funds and NYLIM Institutional are Delaware business trusts and 
consist of five and one Portfolios, respectively. The Portfolio of 
NYLIM Institutional holds itself out as a money market fund that 
complies with rule 2a-7 under the Act (together with any future 
Portfolios that comply with rule 2a-7 under the Act, the ``Money Market 
Funds'').\1\
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    \1\ All existing Funds that currently intend to rely on the 
requested relief are named as applicants. The term ``Adviser'' shall 
include successor(s) in interests, which are entities that result 
from a reorganization of the entity into another jurisdiction or a 
change in the type of business organization of the entity. Any other 
existing and future entity that may rely on the relief in the future 
will do so only in accordance with the terms and conditions of the 
application.
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    2. NYLIM, an investment adviser registered under the Investment 
Advisers Act of 1940 (``Advisers Act''), serves as investment adviser 
to the Portfolios. MacKay and McMorgan, investment advisers registered 
under the Advisers Act, are subadvisers to certain Portfolios. The 
Adviser serves or may serve as investment adviser to privately managed 
accounts which are entities that are not pooled investment vehicles 
(``Managed Accounts''). NYLIM, MacKay and McMorgan are indirect wholly-
owned subsidiaries of New York Life Insurance Company.
    3. Portfolios that are not Money Market Funds (the ``Investing 
Funds'') and Managed Accounts have, or are expected to have, cash 
reserves (``Uninvested Cash''). Such Uninvested Cash may result from a 
variety of sources, including dividends or interest received on 
portfolio securities, unsettled securities transactions, strategic 
reserves, matured investments, liquidated proceeds from investment 
securities, or new investor monies. Certain Investing Funds and Managed 
Accounts also may participate in a securities lending program under 
which an Investing Fund may lend its portfolio securities to registered 
broker-dealers or other institutional investors (``Securities Lending 
Program''). The loans will be continuously secured by collateral, equal 
at all times to at least the market value of the securities loaned 
(such collateral, when in the form of cash, ``Cash Collateral'' and 
together with Uninvested Cash, ``Cash Balances''). The Managed Accounts 
also may have Cash Collateral.
    4. Applicants request an order to permit the Investing Funds and 
Managed Accounts to invest their Cash Balances in shares of one or more 
Money Market Funds and the Money Market Funds to sell their shares to, 
and redeem their shares from, the Investing Funds and Managed Accounts 
and the Adviser to effect the proposed transactions. Investment of Cash 
Balances in shares of the Money Market Funds will be made consistent 
with each Investing Fund's investment restrictions and policies as set 
forth in its prospectus and statement of additional information. 
Applicants believe that the proposed transactions may reduce 
transaction costs, create more liquidity, increase returns, and further 
diversify holdings.
    5. Applicants state that the Managed Accounts and Money Market 
Funds engage in the purchase and sale transactions with each other in 
reliance of rule 17a-7 under the Act. Applicants seek relief to permit 
these interfund transactions to continue in the event that the Managed 
Accounts become 5% or more owners of the Money Market Funds 
(``Interfund Transactions'').

[[Page 27868]]

Applicants' Legal Analysis

I. Investment of Cash Balances in the Money Market Funds

A. Section 12(d)(1) of the Act
    1. Section 12(d)(1)(A) of the Act provides, in pertinent part, 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, in pertinent part, 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 from any provision of 
section 12(d)(1) if, and to the extent that, such exemption is 
consistent with the public interest and the protection of investors. 
Applicants request relief under section 12(d)(1)(J) from the percentage 
limitations of sections 12(d)(1)(A) and (B) to permit the Investing 
Funds 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 represent that the proposed 
arrangement will not result in an inappropriate layering of fees 
because shares of the Money Market Funds sold to and redeemed from 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 
under the Act, or service fee (as defined in rule 2830(b)(9) of the 
National Association of Securities Dealers' (``NASD'') Conduct Rules). 
If a Money Market Fund offers more than one class of securities, each 
Investing Fund will invest Cash Balances only in the class with the 
lowest expense ratio at the time of the investment. Before approving 
any advisory contract with the Adviser for an Investing Fund, its board 
of directors (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''), will 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 
Funds by the Adviser as a result of the investment of Uninvested Cash 
in a Money Market Fund. Applicants represent that no Money Market Fund 
will acquire securities of any other investment company in excess of 
the limitations contained in section 12(d)(1)(A) of the Act.
B. Section 17(a) of the Act
    4. Section 17(a) of the Act makes it unlawful for any affiliated 
person of a registered investment company, or an affiliated person of 
such person, 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, among others, any person 
directly or indirectly controlling, controlled by, or under common 
control with the other person and any person owning, controlling, or 
holding with power to vote, 5% or more of the other person. Applicants 
state that, because the Portfolios and Managed Accounts share a common 
investment adviser, a Portfolio may be deemed to be under common 
control with each of the other Portfolios, and thus an affiliated 
person of each of the other Portfolios. In addition, if the relief is 
granted, an Investing Fund and Managed Account may own more than 5% of 
certain Money Market Funds and such Investing Funds and Managed 
Accounts may be deemed affiliated persons of each other. As a result, 
section 17(a) would prohibit the sale of the shares of a Money Market 
Fund to the Investing Funds and Managed Accounts, and the redemption of 
such shares by the Investing Funds and the Managed Accounts.
    5. Section 17(b) of the Act authorizes the Commission 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 investment company concerned, and the proposed 
transaction is consistent with the general purposes of the Act. Section 
6(c) of the Act permits the Commission to exempt persons or 
transactions from any provision of the Act if the 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.
    6. Applicants submit that their request for relief to permit the 
purchase and redemption of shares of a Money Market Fund by the 
Investing Funds and Managed Accounts satisfies the standards in 
sections 6(c) and 17(b) of the Act. Applicants note that shares of the 
Money Market Funds will be purchased and redeemed at their net asset 
value, the same consideration paid and received for these shares by any 
other shareholder. Applicants state that the Investing Funds will 
retain their ability to invest Cash Balances directly in money market 
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 Money Market Fund may 
discontinue selling shares to any of the Investing Funds if the Board 
of the Money Market Fund or the Adviser determines that such sale would 
adversely affect the Money Market Fund's portfolio management and 
operations.
C. Section 17(d) of the Act and Rule 17d-1 under the Act
    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. Applicants state that each Investing Fund and 
Managed Account, by purchasing shares of the Money Market Funds, each 
Money Market Fund, by selling shares to and redeeming shares from, the 
Investing Funds and Managed Accounts, and the Adviser, by effecting the 
proposed transactions, could be deemed to be participants in a joint 
enterprise or 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 
participation by the investment company is on a basis different from or 
less advantageous than that of other participants. Applicants submit 
that the

[[Page 27869]]

investment by the Investing Funds and Managed Accounts in shares of a 
Money Market Fund would be made on the same basis and indistinguishable 
from those of any other shareholders. Applicants state that, for the 
reasons discussed above, the proposed transactions meet the standards 
for an order under rule 17d-1.

II. Interfund Transactions

    9. Applicants state that Money Market Funds and Managed Accounts 
may rely on rule 17a-7 under the Act to conduct Interfund Transactions. 
Rule 17a-7 under the Act provides an exemption from section 17(a) for 
purchase and sale transactions between a registered investment company 
and an affiliated person of such company (or an affiliated person of an 
affiliated person), provided certain condition are met, including that 
the affiliation between the registered investment company and the 
affiliated person (or an affiliated person of the affiliated person) 
must exist solely by reason of having a common investment adviser, 
common officers and/or common directors. Applicants state that by 
virtue of the Managed Accounts owning 5% or more of the outstanding 
voting securities of a Money Market Fund, the Managed Accounts and the 
Money Market Funds would no longer be affiliated solely by reason of 
having a common investment adviser, common officers and/or common 
directors.
    10. Applicants request relief under sections 6(c) and 17(b) of the 
Act to permit the Interfund Transactions. Applicants state that to 
engage in Interfund Transactions, the Managed Accounts and Money Market 
Funds will comply with rule 17a-7 under the Act in all respects other 
than the requirement that the parties to the transaction be affiliated 
persons (or affiliated person of affiliated persons) of each other 
solely by reason of having a common investment adviser or investment 
advisers that are affiliated persons of each other, common officer and/
or common directors, solely because the Managed Accounts and the Money 
Market Funds might become affiliated persons within the meaning of 
sections 2(a)(3)(A) and (B) of the Act.

Applicants' Conditions

    Applicants 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 under a plan adopted in accordance with rule 12b-1 
under the Act or service fee (as defined in rule 2830(b)(9) of the 
NASD's Conduct Rules).
    2. No Money Market Fund will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.
    3. Each of the Investing Funds will invest Uninvested Cash in, and 
hold shares of, a Money Market Fund only to the extent that such 
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. Each Investing Fund, Managed Account and Money Market Fund 
relying on the order will be advised by the Adviser. An Investing Fund 
that is subadvised, but not advised, by a NYLIM Adviser may rely on the 
order provided that the NYLIM Adviser managers the Cash Balances and 
the Investing Fund is in the same group of investment companies (as 
defined in section 12(d)(1)(G) of the Act) as the Money Market Fund in 
which the Investing Fund invests its Cash Balances.
    5. Investment of Cash Balances by an Investing Fund in shares of 
the Money Market Funds will be in accordance with each Investing Fund's 
respective investment restrictions and will be consistent with each 
Investing Fund's policies as set forth in its prospectus and statement 
of additional information.
    6. 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 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. In connection with approving 
any advisory contract for an Investing Fund, the Board, including a 
majority of the Independent Trustees, 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 the Uninvested Cash being 
invested in the Money Market Funds. The minute books of the Investing 
Fund will record fully the Board's consideration in approving the 
advisory contract, including the considerations referred to above.
    7. Before any Investing Fund may participate in a Securities 
Lending Program, a majority of the Board, including a majority of the 
Independent Trustees of the Investing Fund, will approve the Investing 
Fund's participation in the 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 such Investing Fund.
    8. To engage in Interfund Transactions, the Managed Accounts and 
Money Market Funds will comply with rule 17a-7 under the Act in all 
respects other than the requirement that the parties to the 
transactions be affiliated persons (or affiliated persons of affiliated 
persons) of each other solely by reason of having a common investment 
adviser or investment advisers that are affiliated persons of each 
other, common officers and/or common directors, solely because the 
Managed Accounts and the Money Market Funds might become affiliated 
persons within the meaning of sections 2(a)(3)(A) and (B) of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-12736 Filed 5-20-03; 8:45 am]
BILLING CODE 8010-01-P