[Federal Register Volume 69, Number 94 (Friday, May 14, 2004)]
[Notices]
[Pages 26901-26905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10951]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26446; 812-13051]


J.P. Morgan Investment Management Inc., et al., Notice of 
Application

May 10, 2004.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order 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.

-----------------------------------------------------------------------

Applicants: J.P. Morgan Investment Management, Inc., (``JPMIM''), any 
other existing or future registered investment adviser which acts as 
investment adviser or subadviser to a Money Market Fund (defined below) 
and which controls, is controlled by, or is under common control (as 
defined in section 2(a)(9) of the Act) with J.P. Morgan Chase & Co. 
(``JPM'') (``Future Advisers''),\1\ J.P. Morgan Securities Inc. 
(``JPMSI''), J.P. Morgan Mutual Fund Trust (``JPMMFT''), all existing 
and

[[Page 26902]]

future series of JPMMFT which are money market funds subject to rule 
2a-7 under the Act, and any existing or future registered investment 
companies and their series which are money market funds subject to rule 
2a-7 under the Act, that are advised or subadvised by the Advisers.\2\
---------------------------------------------------------------------------

    \1\ JPMIM and the Future Advisers are referred to collectively 
in this notice as the Advisers. Any Adviser that currently intends 
to rely on the requested order is named as an applicant in this 
application. Any other Adviser that relies on the order in the 
future will comply with the terms and conditions of this 
application.
    \2\ All existing or future series of JPMMFT which are money 
market funds subject to rule 2a-7 under the Act and are authorized 
to invest in Municipal Instruments (as defined below) and any 
existing or future registered investment companies and their series 
which are money market funds subject to rule 2a-7 under the Act and 
which are authorized to invest in Municipal Instruments and which 
are advised or subadvised by the Advisers are referred to 
collectively in this notice as the ``Money Market Funds.'' Any Money 
Market Fund that currently intends to rely on the requested order is 
named as an applicant in this application. Any other Money Market 
Fund that relies on the order in the future will comply with the 
terms and conditions of this application.

Summary of Application: Applicants request an order to permit the Money 
Market Funds to engage in principal transactions in tax-exempt money 
---------------------------------------------------------------------------
market instruments with JPMSI.

Filing Dates: The application was filed on December 17, 2003, and 
amended on April 27, 2004.

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 June 7, 2004, 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 may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants: c/o Philip von Turk, Esq., JPMorgan Chase Bank, 
Legal Department, 345 Park Avenue, 5th Floor, New York, NY 10154-1002; 
and Robert B. Adams, Esq. and Merrill B. Stone, Esq., Kelley Drye & 
Warren LLP, 101 Park Avenue, New York, NY 10178.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, 
(202) 942-0634 or Janet M. Grossnickle, Branch Chief, (202) 942-0564 
(Office of Investment Company Regulation, Division of Investment 
Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. JPMMFT is an open-end management investment company registered 
under the Act and is organized as a business trust under the laws of 
the Commonwealth of Massachusetts. Certain series of JPMMFT are Money 
Market Funds which are authorized to invest in Municipal 
Instruments.\3\ ``Municipal Instruments'' are short-term tax-exempt 
money market securities, including tax-exempt securities that qualify 
for purchase by a money market fund under rule 2a-7 under the Act due 
to the existence of a floating rate of interest or a demand feature.
---------------------------------------------------------------------------

    \3\ The current Money Market Funds of JPMMFT are J.P. Morgan 
Liquid Assets Money Market Fund, J.P. Morgan California Tax Free 
Money Market Fund, J.P. Morgan New York Tax Free Money Market Fund, 
J.P. Morgan Prime Money Mark Fund and J.P. Morgan Tax Free Money 
Market Fund. In 2002, a Commission order was issued permitting 
certain of the Money Market Funds to engage in principal 
transactions in taxable money market instruments with JPMSI. J.P. 
Morgan Fleming Asset Management (USA), Inc., et al., Investment 
Company Act Release Nos. 25574 (May 15, 2002) (notice) and 25608 
(June 11, 2002) (order). While the Money Market Funds which are not 
tax-exempt funds generally do not invest in Municipal Instruments, 
each has the investment flexibility to do so under its investment 
objectives and policies.
---------------------------------------------------------------------------

    2. JPMIM, a Delaware corporation, is a wholly owned subsidiary of 
JPM, a bank holding company and a Delaware corporation. JPMIM is 
registered as an investment adviser under the Investment Advisers Act 
of 1940. Currently, each Money Market Fund has an investment advisory 
agreement with JPMIM under which JPMIM provides investment advisory and 
management services.
    3. JPMSI is a wholly-owned subsidiary of JPM and is registered as a 
broker-dealer under the Securities Exchange Act of 1934 (the ``1934 
Act''). JPMSI, a primary dealer in U.S. Government securities, is one 
of the largest dealers in money market instruments, including Municipal 
Instruments, in the United States.
    4. Applicants state that the Advisers and JPMSI are functionally 
independent of each other. JPMSI and the Advisers operate as completely 
separate entities under the umbrella of JPM, the parent holding 
company. While JPMSI and the Advisers are under common control, each 
entity has its own separate directors, officers and employees, is 
separately capitalized, maintains its own separate books and records 
and operates on different sides of walls of separation with respect to 
the Money Market Funds and Municipal Securities. The Advisers also 
maintain offices physically separate from JPMSI.
    5. Investment decisions for the Money Market Funds are determined 
solely by the Advisers. The portfolio managers and other employees that 
are responsible for the investment of the Money Market Funds are 
employed solely by one of the Advisers (and not JPMSI), and have lines 
of reporting responsibility solely within the Advisers. The 
compensation of personnel assigned to an Adviser will not depend on the 
volume or nature of trades with JPMSI, except to the extent that such 
trades may affect the profits and losses of JPM and its subsidiaries as 
a whole.
    6. Municipal Instruments are commonly referred to as ``tax-exempt 
money market instruments'' and are traded in the ``tax-exempt money 
market.'' Applicants state that the tax-exempt money market is 
generally characterized by: (a) Obligors or guarantors having high 
credit ratings and, accordingly, relatively low risk of principal 
losses due to credit events; (b) trading in over-the-counter markets, 
consisting of dealer firms that are primarily major securities firms or 
large banks; (c) trading costs to the portfolio primarily consisting of 
dealer or underwriter spreads, typically not greater than 12.5 basis 
points (0.125%), but subject to variations based on the type of 
instrument or the occurrence of turbulent market conditions; (d) an 
elaborate telephone communication network to match buyers with sellers, 
which generally precludes being able to obtain a single market price 
for a given instrument at any given time; and (e) varying price, 
volatility, liquidity and availability for each type of instrument 
within the market.
    7. Applicants state that recent growth in tax-exempt money market 
fund assets and withdrawals by several major dealers from making 
markets in Municipal Instruments have contributed to the limited 
availability of Municipal Instruments to money market funds that are 
authorized to purchase Municipal Instruments. Applicants assert that, 
over the past few years, the growth in money market funds that purchase 
Municipal Instruments has substantially outpaced the growth in 
Municipal Instruments.
    8. Applicants state that JPMSI has remained committed to the tax-
exempt market, and has moved to fill the void left by departing 
dealers. As the number of dealers with which the Money Market Funds can 
transact business has decreased, it has become even more important for 
the Money Market Funds to have meaningful access to all of the

[[Page 26903]]

major dealers in Municipal Instruments in order to diversify each Money 
Market Fund's investments, to maintain portfolio liquidity, and to 
increase opportunities for obtaining best price and execution with 
respect to portfolio trades.
    9. Applicants state that Municipal Instruments include conventional 
municipal notes (``conventional notes''), tax-exempt commercial paper, 
and variable rate demand notes. Applicants state that there is no 
comprehensive information published as to the dollar amount and volume 
of secondary market transactions executed in Municipal Instruments. 
However, JPMSI believes that it is generally one of the top five 
secondary market dealers in Municipal Instruments. Based upon JPMSI 
estimates, JPMSI was responsible for 12.8% of the trading volume in 
variable rate demand notes and tax-exempt commercial paper among JPMSI 
and nine other leading dealers as of October, 2003. This estimate 
includes 12.2% of the trading volume of variable rate demand notes and 
14.7% of tax-exempt commercial paper. In addition, JPMSI, estimates 
that its market share in 2002 for Municipal Instruments in the new 
issue market included 6.4% of conventional notes, 14% of tax-exempt 
commercial paper and 12% of variable rate demand notes.
    10. Subject to the general supervision of the trustees of JPMMFT 
(collectively, the ``Trustees''), the Advisers are responsible for 
making investment decisions and for the placement of portfolio 
transactions. The Money Market Funds have no obligation to deal with 
any dealer or group of dealers in the execution of their portfolio 
transactions. When placing orders, an Adviser must attempt to obtain 
the best net price and the most favorable execution of its orders. In 
doing so, it takes into account such factors as price, the size, type 
and difficulty of the transaction involved and the dealer's general 
execution and operational facilities.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to sections 6(c) and 17(b) 
of the Act exempting certain transactions from the provisions of 
section 17(a) of the Act to permit JPMSI, acting as principal, to sell 
to or purchase from the Money Market Funds Municipal Instruments, 
subject to the conditions set forth below.
    2. Section 17(a) of the Act generally prohibits an affiliated 
person or principal underwriter of a registered investment company, or 
any affiliated person of that person, acting as principal, from selling 
to or purchasing from the registered company, or any company controlled 
by the registered company, any security or other property. Because an 
Adviser is an affiliated person of the Money Market Funds it advises 
and JPMSI and the Advisers are under common control, the Money Market 
Funds are currently prohibited from conducting portfolio transactions 
with JPMSI in transactions in which JPMSI acts as principal.
    3. Section 17(b) of the Act provides that the Commission, upon 
application, may exempt a transaction from the provisions of section 
17(a) if evidence establishes that the terms of the proposed 
transaction, including the consideration to be paid, are reasonable and 
fair, and do not involve overreaching on the part of any person 
concerned, and that the proposed transaction is consistent with the 
policy of the registered investment company concerned and with the 
general purposes of the Act. Section 6(c) provides that the Commission 
may conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from any provision or provisions of the Act or of any 
rule or regulation thereunder, if and to the extent that such 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.
    4. Applicants contend that the rationale for the proposed order is 
based upon the decreased liquidity in the money market in Municipal 
Instruments, the major role played in the tax-exempt money market by 
JPMSI and the special requirements of the Money Market Funds with 
respect to their portfolio transactions. In particular applicants note 
the following:
    a. With over $14 billion invested in Municipal Instruments, the 
Money Market Funds are major buyers and sellers in the tax-exempt money 
market with a strong need for access to large quantities of high 
quality Municipal Instruments. The applicants believe that access to 
such a significant dealer as JPMSI in this market increases the Money 
Market Funds' ability to obtain suitable portfolio securities.
    b. The fact that the Money Market Funds regularly invest in 
securities with short maturities, combined with the active portfolio 
management techniques employed by the Advisers often results in high 
portfolio activity and the need to make numerous purchases and sales of 
securities and instruments. This high portfolio activity emphasizes the 
importance of increasing opportunities to obtain suitable portfolio 
securities and best price and execution.
    c. The tax-exempt money market is highly competitive, and 
maintaining a dealer as prominent as JPMSI in the pool of dealers with 
which the Money Market Funds could conduct principal transactions may 
provide the Money Market Funds with opportunities to purchase and sell 
Municipal Instruments, including those not available from other 
sources.
    d. JPMSI is such a major factor in the tax-exempt money market that 
being unable to deal directly with JPMSI may indirectly deprive the 
Money Market Funds of obtaining best price and execution even when the 
Money Market Funds trade with unaffiliated dealers.
    5. Applicants believe that the requested order will benefit the 
investors of each Money Market Fund by providing the Money Market Funds 
with more complete access to Municipal Instruments which is needed to 
ensure the availability of suitable portfolio securities at the best 
price and execution. Applicants believe that the conditions below and 
procedures to be followed with respect to principal transactions 
between the Money Market Funds and the Advisers with JPMSI are designed 
to ensure that the terms of such transactions will be, in all 
instances, reasonable and fair, will not involve overreaching on the 
part of any person concerned, and would eliminate the possibility of 
abuses. Applicants further submit that the requested exemption is 
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.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The exemption shall be applicable to principal transactions in 
the secondary market and primary or secondary fixed price dealer 
offerings not made pursuant to underwriting syndicates. Principal 
purchase or sale transactions will be conducted only in Municipal 
Instruments that are First Tier Securities as defined in rule 2a-
7(a)(12)(i) under the Act. Notwithstanding the foregoing, if a Money 
Market Fund purchases a Municipal Instrument meeting the above 
requirements from JPMSI and, subsequent to such purchase the security 
becomes no longer an ``Eligible Security,'' the Money Market Fund may 
sell the security to JPMSI in a manner consistent with the requirements 
of rule

[[Page 26904]]

2a-7(c)(6)(i)(B). The exemption shall not apply to any purchase or sale 
of any security issued by JPM or any affiliated person thereof or to 
any security subject to a Demand Feature or Guarantee, as defined in 
rule 2a-7, issued by JPM or any affiliated person thereof. For purposes 
of this requirement, JPM will not be considered to be the issuer of a 
Demand Feature or Guarantee solely by reason of the fact that JPM or an 
affiliate thereof serves as a remarketing agent for a Municipal 
Instrument.
    2. A determination will be made with respect to each principal 
transaction conducted by a Money Market Fund pursuant to the order, 
based upon the information reasonably available to the Money Market 
Funds and the Advisers, that the price available from JPMSI is at least 
as favorable to the Money Market Fund as the prices obtained from two 
other dealer bids in connection with securities falling within the same 
category of instrument, quality and maturity (but not necessarily the 
identical security or issuer) (``price test''). In the case of variable 
rate demand notes, for which dealer bids are not ordinarily available, 
the Money Market Funds will only undertake purchases and sales where 
the rate of interest to be earned from the variable rate demand note is 
at least equal to that of variable rate demand notes of comparable 
quality that are available from other dealers. Neither JPM nor any 
other affiliate thereof (other than the Advisers) will have any 
involvement with respect to proposed transactions between the Money 
Market Funds and the Advisers and, except to the extent set forth in 
condition 6(d) below, will not attempt to influence or control in any 
way the placing by the Money Market Funds or the Advisers of orders 
with JPMSI.
    3. Before any principal transaction may be conducted pursuant to 
the order, the Money Market Funds or the Advisers must obtain such 
information as they deem reasonably necessary to determine that the 
price test has been satisfied. In the case of each purchase or sale 
transaction, the Money Market Funds or the Advisers must make and 
document a good faith determination with respect to compliance with the 
price test based on current price information obtained through the 
contemporaneous solicitation of bona fide offers in connection with 
securities falling within the same category of instrument, quality and 
maturity (but not necessarily the identical security or issuer). With 
respect to variable rate demand notes, contemporaneous solicitation of 
a bona fide offer will be construed to mean any bona fide offer 
solicited during the same trading day. With respect to prospective 
purchases of securities by a Money Market Fund, the dealer firms from 
which prices are solicited must be those who have securities of the 
same categories and the type desired in their inventories and who are 
in a position to quote favorable prices with respect thereto. With 
respect to the prospective sale of securities by a Money Market Fund, 
these dealer firms must be those who, in the experience of the Money 
Market Funds and the Advisers, are in a position to quote favorable 
prices.
    4. Principal transactions conducted by a Money Market Fund pursuant 
to the order shall be limited to no more than an aggregate of 20% of 
the purchases and 20% of the sales of Municipal Instruments conducted 
by that Money Market Fund. These calculations shall be measured on an 
annual basis and shall be computed with respect to the dollar volume 
thereof. For the purposes of these calculations, purchases of Municipal 
Instruments by a Money Market Fund shall also count towards the 25% 
cumulative limitation for purchases or sales set forth in condition 3 
of J.P. Morgan Fleming Asset Management (USA), Inc., Investment Company 
Act Release No. 25574 (May 11, 2002).
    5. JPMSI's dealer spread regarding any transaction with the Money 
Market Funds will be no greater than its customary dealer spread on 
similar transactions (with unaffiliated parties) of a similar size 
during a comparable time period. Its customary dealer spread also will 
be consistent with the average or standard spread charged by dealers in 
money market securities of a similar type and transaction size.
    6. The Advisers, on the one hand, and JPMSI, on the other, will 
operate on different sides of appropriate walls of separation with 
respect to the Money Market Funds and Municipal Instruments. The walls 
of separation will include all of the following characteristics, and 
such others as may from time to time be considered reasonable by JPMSI 
and the Advisers to facilitate the factual independence of the Advisers 
from JPMSI:
    a. Each of the Advisers will maintain offices physically separate 
from those of JPMSI.
    b. The compensation of persons assigned to any of the Advisers 
(i.e., executive, administrative or investment personnel) will not 
depend on the volume or nature of trades effected by the Advisers for 
the Money Market Funds with JPMSI under the exemption, except to the 
extent that such trades may affect the profits and losses of JPM and 
its subsidiaries as a whole.
    c. JPMSI will not compensate the Advisers from its profits or 
losses on such specific transactions with any of the Advisers, provided 
that the allocation of the profits by JPM to its shareholders and the 
determination of general firm-wide compensation of officers and 
employees, will be unaffected by this undertaking.
    d. Personnel assigned to the Advisers' investment advisory 
operations on behalf of the Money Market Funds will be exclusively 
devoted to the business and affairs of one or more of the Advisers. 
Personnel assigned to JPMSI will not participate in the decision-making 
process for or otherwise seek to influence the Advisers other than in 
the normal course of sales and dealer activities of the same nature as 
are simultaneously being carried out with respect to nonaffiliated 
institutional clients. Each Adviser, on the one hand, and JPMSI, on the 
other hand, may nonetheless maintain affiliations other than with 
respect to the Money Market Funds, as follows:
    i. Adviser personnel may rely on research, including credit 
analysis and reports prepared internally by various subsidiaries and 
divisions of JPMSI.
    ii. Certain senior executives of JPM with responsibility for 
overseeing operations of various divisions, subsidiaries and affiliates 
of JPM are not precluded from exercising those functions over the 
Advisers because they oversee JPMSI as well, provided that such persons 
shall not have any involvement with respect to proposed transactions 
pursuant to the exemption and will not in any way attempt to influence 
or control the placing by the Money Market Funds or any Adviser of 
orders in respect of Municipal Instruments with JPMSI.
    7. The Money Market Funds and the Advisers will maintain such 
records with respect to those transactions conducted pursuant to the 
exemption as may be necessary to confirm compliance with the conditions 
to the requested relief. To this end, each Money Market Fund shall 
maintain the following:
    a. An itemized daily record of all purchases and sales of 
securities pursuant to the exemption, showing for each transaction the 
following: (i) The name and quantity of securities; (ii) the unit 
purchase or sale price; and (iii) the time and date of the transaction. 
For each transaction (other than variable rate demand notes), these 
records shall document two quotations received from other dealers for 
securities falling within the same category of instrument, quality and 
maturity; including the

[[Page 26905]]

following: (i) The names of the dealers; (ii) the names of the 
securities; (iii) the prices quoted; and (iv) the times and dates the 
quotations were received. In the case of variable rate demand notes, 
the same records shall be maintained except that the rates of return 
quoted will be substituted for the prices quoted.
    b. Records sufficient to verify compliance with the volume 
limitations contained in condition (4) above. JPMSI will provide the 
Money Market Funds with all records and information necessary to 
implement this requirement.
    The records required by this condition (7) will be maintained and 
preserved in the same manner as records required under rule 31a-1(b)(1) 
under the Act.
    8. The legal and compliance departments of JPMSI and the Advisers 
will prepare and administer guidelines for personnel of JPMSI and the 
Advisers to make certain that transactions conducted pursuant to the 
order comply with the conditions set forth in the order and that the 
parties generally maintain arm's-length relationships. In the training 
of JPMSI's personnel, particular emphasis will be placed upon the fact 
that the Money Market Funds are to receive rates as favorable as other 
institutional purchasers buying the same quantities. The legal and 
compliance departments will periodically monitor the activities of 
JPMSI and the Advisers to make certain that the conditions set forth in 
the order are adhered to.
    9. The Trustees who are not ``interested persons,'' as defined in 
section 2(a)(19) of the Act (``Independent Trustees''), will approve, 
periodically review, and update as necessary, guidelines for the Money 
Market Funds and the Advisers that are reasonably designed to make 
certain that the transactions conducted pursuant to the exemption 
comply with the conditions set forth therein and that the above 
procedures are followed in all respects. The Independent Trustees will 
periodically monitor the activities of the Money Market Funds and the 
Advisers in this regard to ensure that these goals are being 
accomplished.
    10. The Trustees, including a majority of the Independent Trustees, 
will have approved each Money Market Fund's participation in 
transactions conducted pursuant to the exemption and determined that 
such participation by the Money Market Fund is in the best interests of 
the Money Market Fund and its shareholders. The minutes of the meeting 
of the Trustees at which this approval was given must reflect in detail 
the reasons for the Trustees' determination. The Trustees will review 
no less frequently than annually each Money Market Fund's participation 
in transactions conducted pursuant to the exemption during the prior 
year and determine whether the Money Market Fund's participation in 
such transactions continues to be in the best interests of the Money 
Market Fund and its shareholders. Such review will include (but not be 
limited to) (a) a comparison of the volume of transactions in each type 
of security conducted pursuant to the exemption to the market presence 
of JPMSI in the market for that type of security, which market data may 
be based on good faith estimates to the extent that current formal data 
is not reasonably available, and (b) a determination that the Money 
Market Funds are maintaining appropriate trading relationships with 
other sources for each type of security, to ensure that there are 
appropriate sources for the quotations required by condition 3. The 
minutes of the meetings of the Trustees at which these determinations 
are made will reflect in detail the reasons for the Trustees' 
determinations.
    11. A majority of Trustees will be Independent Trustees and these 
Independent Trustees will select and nominate any other Independent 
Trustees. Any person who acts as legal counsel for the Independent 
Trustees will be an independent legal counsel within the meaning of 
rule 0-1 under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-10951 Filed 5-13-04; 8:45 am]
BILLING CODE 8010-01-P