[Federal Register Volume 59, Number 99 (Tuesday, May 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12571]
[[Page Unknown]]
[Federal Register: May 24, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20306; File No. 812-8732]
Applications, Hearings; Determinations, etc. 231 Funds
May 17, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: The 231 Funds (the ``Fund''), and Continental Bank N.A.
(the ``Adviser'').
RELEVANT ACT SECTIONS: Section 17(d) and rule 17d-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit any of the
Fund's existing and future money market series, and any other series
that holds itself out as a money market fund and for which the Adviser,
or any person directly or indirectly controlling, controlled by, or
under common control with the Adviser, serves as investment adviser
(each a ``Portfolio''), and the investment adviser of such Portfolio,
jointly to enter into master repurchase agreements with non-affiliated
financial institutions.
FILING DATE: The application was filed on December 17, 1993, and
amended on March 29, 1994, and May 12, 1994.
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 the
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 June 13, 1994,
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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549.
Applicants: the Fund, 125 West 55th Street, New York, New York 10019;
the Adviser, 231 South LaSalle Street, Chicago, Illinois 60697.
FOR FURTHER INFORMATION CONTACT:
James J. Dwyer, Staff Attorney, at (202) 942-0581, or C. David Messman,
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
SEC's Public Reference Branch.
Applicants' Representations
1. The Fund is a registered investment company that currently
offers three money market series: Prime Fund, U.s. Government
Securities Fund, and Treasury Fund. Each series may offer up to three
classes of shares.\1\ The Adviser is the investment adviser of the
Fund, and serves as custodian of the Fund's assets. Fund shares are
distributed by The 231 Broker-Dealer Services, Inc. (the
``Distributor''), and in the past were distributed by Concord Financial
Group, Inc., a wholly-owned subsidiary of Concord Holding Corporation,
the parent of the Distributor.
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\1\Emerald Funds, Investment Company Act Release Nos. 20032
(Jan. 24, 1994) (notice) and 20086 (Feb. 22, 1994) (order).
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2. Applicants request that the order of exemption permit the
Adviser, on behalf of each of the Portfolios it advisers, to enter into
repurchase transactions where, as further described below, the Adviser
in certain circumstances would co-invest with the Portfolio engaging in
the transaction. No Portfolio would jointly enter into a repurchase
agreement with any other Portfolio.
3. An order to purchase Portfolio shares must be received by
Supervised Service Company, Inc., the transfer agent, prior to the
determination of the net asset value of the Portfolio (the
``Determination Time'') to be executed on a given day, except that
purchase orders effected through the Adviser's computer system may be
received by the Adviser, in its capacity as custodian, as of the
Determination Time. Purchase orders received after the Determination
Time will be executed the next business day. The Determination Time,
which is also when the net income of a Portfolio is determined and
declared as a dividend to the shareholders of record, is 2:30 p.m.
Eastern Time for the U.S. Government Securities Fund and the Treasury
Fund, and 3 p.m. Eastern Time for the Prime Fund. Orders for the
purchase of shares of the Portfolios are executed only when monies are
available to the custodian by 4 p.m. Eastern Time for investment by the
Portfolio.
4. Purchasers of Portfolio shares include, without limitation,
individuals, businesses, and customers of the Adviser or its affiliates
that maintain customer-directed, non-discretionary accounts or
discretionary accounts at the Adviser or its affiliates. The Adviser,
in accordance with its customers' standing orders, automatically will
``sweep'' excess cash balances from the customers' accounts by means of
a computer system. The proceeds from the sweep program will be held by
the Adviser, as custodian, and will be available immediately for
investment in Portfolio shares. The total assets actually invested in
the Portfolios through the sweep program, however, would not be known
until the machine processing required to process the Adviser's
accounting system is completed (the ``Completion Time''), which
normally will not be later than 4 a.m. Eastern Time the following
morning.
5. If a Portfolio were to accept orders from the Adviser through
the sweep program without special agreements for investment of the
proceeds of these orders, dividends would be payable on shares
purchased pursuant to such orders. The proceeds of such orders,
however, would remain uninvested overnight, and dividends to other
shareholders of the applicable Portfolio would be diluted. The
requested relief would permit the Adviser to enter into repurchase
transactions on behalf of the Portfolios at the applicable
Determination Time in an amount which it considers, based upon its
experience in administering its computer sweep program, to be
sufficient to invest the net assets of the Portfolios attributable to
the operation of the sweep program that day. The exact amount of the
repurchase transaction would not be known until the Completion Time.
6. The investment policies of the Portfolios permit each Portfolio
to enter into repurchase agreement transactions with financial
institutions such as banks and broker-dealers (each a ``Seller''). The
Seller would not be the Adviser or any other affiliated person of the
Portfolio, or any affiliated person of such an affiliated person. On
the day the Seller and the Portfolio enter into a repurchase
transaction, the applicable master agreement requires the Seller to
sell to the Portfolio and on the same day transfer to the Portfolio or
applicable custodian the particular eligible securities subject to the
repurchase transaction against crediting the sale price of the
securities to an account of the Seller in immediately available funds.
The particular eligible securities would be identified in and defined
by reference to that day's confirmation of the transaction. The
Portfolios presently intend to use an agreement substantially similar
to the Master Repurchase Agreement developed by the Public Securities
Association. At the time of the Seller's transfer of securities to the
Portfolio, the Seller is required to take action to perfect a security
interest in favor of the Portfolio in the transferred securities. Each
repurchase agreement transaction will be ``collateralized fully,'' as
that term is defined in rule 2a-7.
7. To the extent that the repurchase transaction was sufficient to
make a Portfolio fully invested with respect to its sweep funds, the
Portfolio's records would reflect the specific amount it had in fact
invested in the transaction. If the repurchase transaction was not
sufficient to make the Portfolio fully invested with respect to its
sweep funds, the Portfolio's records would reflect its investment in
the entire amount of the repurchase transaction, and the Adviser would
retain an uninvested cash position with respect to funds in excess of
the agreement. Any amounts invested by the Adviser that exceed amounts
available for reinvestment will be deemed to have been purchased by the
Adviser for its own account. Because of its experience and
relationships with its customers, the Adviser normally has the ability
to predict accurately the amount of the sweep funds and normally would
enter into a transaction in an amount greater than its estimated
proceeds from the sweep.
8. Until the Completion Time, the Portfolio would have a perfected
security interest in all of the transferred securities. However, only
those specific securities described in the trade ticket confirming the
amount of the transaction that the Portfolio in fact had entered into
with its own assets, which would be prepared the next day by the
Adviser, as custodian, would be subject to the transaction. The Adviser
also would confirm the amount, if any, that the Adviser had purchased
with its own funds.\2\ Apart from the different amounts of the
repurchase transactions, the terms of the transactions and the
confirmation of the allocation to the Portfolio and the Adviser would
be identical.
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\2\As a matter of practice, the Sellers issue confirmations for
the repurchase transactions on the same day as the transaction.
Therefore, the confirmation will not show the allocation of the
repurchase transactions between the Adviser and the Portfolios. In
order to create a written record of the dollar amounts allocated to
the Portfolios and the specific securities purchased by the
Portfolios, the Adviser would issue a trade ticket on the next
business day, after the facts are known.
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9. Ordinarily, each repurchase transaction effected with sweep
funds would be secured by one issue of Treasury notes or other
securities. To the extent that any repurchase transaction is secured by
two or more issues of securities differing as to quality, maturity, or
rate, each security will be apportioned between the Portfolio and the
Adviser pro rata to the extent possible. Where such apportionment is
not possible, securities will be apportioned in a manner that the
Adviser believes will leave each party in a comparably secured
position.
Applicants' Legal Analysis
1. Section 17(d) makes it unlawful for any affiliated person of a
registered investment company, acting as principal, to effect any
transaction in which such registered investment company is a joint or a
joint and several participant with such affiliated person in
contravention of such rules and regulations as the SEC may prescribe.
Rule 17d-1 provides that, in passing upon applications for an exemption
from section 17(d), the SEC will consider whether the participation of
the registered investment company in the joint enterprise, joint
arrangement, or profit-sharing plan on the basis proposed is consistent
with the provisions, policies and purposes of the Act, and the extent
to which such participation is on a basis different from or less
advantageous than that of the other participants.
2. Applicants acknowledge that, to the extent that assets of the
Adviser, as an affiliated person of a Portfolio, are used with those of
a Portfolio to enter into repurchase transactions, they may be deemed
to be participating in a joint arrangement or joint enterprise
prohibited by the Act. Applicants contend that a Portfolio's
participation in the proposed transactions will not be on a basis
different from, or less advantageous than, that of the Adviser.
3. Applicants contend that the proposed procedure for helping to
ensure that the Portfolio is fully invested provides only benefits and
no disadvantages to shareholders. The Portfolio's rights vis-a-vis
Sellers under repurchase transactions will be protected by a standard
industry agreement. In addition, the Portfolios will comply with the
SEC's position concerning repurchase agreements set forth in Investment
Company Act Release Nos. 13005 (Feb. 2, 1983) and with other existing
and future positions taken by the SEC or its staff by rule,
interpretive release, no-action letter, any release adopting any new
rule, or any release adopting any amendments to any existing rule.
4. Applicants submit that the proposed repurchase transactions are
reasonable and fair to the Portfolios, do not involve overreaching on
the part of any person, and are consistent with the provisions,
policies, and purchases of the Act. Applicants state further that the
requested order is appropriate in the public interest and consistent
with the protection of investors.
For the SEC, by the Division of Investment, Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12571 Filed 5-23-94; 8:45 am]
BILLING CODE 8010-01-M