~bA /. 

21 APR 1994
 Pl!Bll 

Our Ref. No. 94-147-CC
 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Federated Investors
 

DIVISION OF INVESTMENT MAAGEMENT File No. 132-3
 

Your letter of March 16, 1994 requests our assurance that we
 

would not recommend enforcement action to the Commission under
 

section 17 (a) of the Investment Company Act of 1940 (the "1940
 

Act") 1/ if certain registered investment companies distributed
 

and administered by affiliates of Federated Investors (the
 

"Funds") engage in the transactions described in your letter.
 

Each Fund is advised by a bank (or affiliated person of a
 

bank), which also is a fiduciary of a common trust fund and/or
 

collective investment fund ("Common Trust"). ~/ The Fund
 

advisers have determined that it would be in the best interests
 

of the Funds' shareholders for the Funds to acquire the assets of
 

the Common Trusts. ~/ In this regard, you state that the
 

proposed transactions would provide each Fund with additional
 

assets consistent with its investment objective and policies,
 

permit greater diversification, and contribute to economies of
 

scale in the management of each Fund's assets. Consequently, the
 

advisers propose to cause the Funds to purchase substantially all
 

of the assets of the Common Trusts in exchange for Fund shares,
 

which shares would be distributed to the participating trust
 

accounts of the Common Trusts.
 

You represent that, except for the requirement that the
 

transaction be a purchase or sale for cash, each proposed
 

transaction will comply with all the requirements of
 

Rule 17a-7 under the 1940 Act. ~/ Specifically, you state that
 

(1) securities purchased or sold in the proposed transactions


will be valued in accordance with each Fund's traditional
 

1/ section 17 (a) generally prohibits affiliated persons of a


registered investment company from selling securities to, or
 

purchasing securities from, the investment company.
 

Z/ Telephone conversation with Matthew G. Maloney on Mar. 28,
 1994. 

~/ The banks, as fiduciaries, have determined that it would be


in the best interests of the Common Trusts for the Funds to
 

acquire the assets of the Common Trusts.
 

4/ Rule 17a-7 conditionally exempts from the prohibitions of
 

Section 17 (a) certain purchases and sales of securities
 

between registered investment companies and certain
 

affiliated persons, where the affiliation arises solely by
 

reason of having a common investment adviser, common
 

directors, and/ or common off icers.
 
~ 

valuation methods used to calculate net asset value and, in
 

particular, will be consistent with the requirements of
 

Rule 17a-7 (b) i (2) the proposed transactions are consistent with
 

the investment objective and policies of each Fundi (3) the
 

proposed transactions will not involve payment of any brokerage
 

commission, fee (other than customary transfer fees),. or other
 

remuneration; and (4) each Fund will comply with paragraphs (e)
 

and (f) of Rule 17a-7 in connection with the proposed
 

transactions. In addition, you represent that, other than the
 

bank in its fiduciary capacity, no affiliated person of a Fund,
 

or affiliated person of an affiliated person of the Fund, will
 

have any beneficial interest in the Common Trust involved in the
 

proposed transaction with the Fund.
 

On the basis of the facts and representations in your letter
 

and without necessarily agreeing with your legal analysis, we
 

would not recommend enforcement action to the Commission under
 

section 17 (a) if the Funds engage in the transactions described
 

in your letter. 5/ This response only expresses the Division's
 

5/ See The First National Bank of Chicago (pub. avail.
 

Sept. 22, 1992); The First National Bank of Chicago (pub.
 

avail. Feb. 5, 1986); American National Medical Association
 

Retirement Plan (pub. avai I. Jan. 15, 1987); Lincoln
 

National Investment Management Company (pub. avail. Apr. 25,


1976) . 

- 2 ­
. ,"\ ~.' 

. . 

posi tion on enforcement action and does not purport to express 

any legal conclusions on the questions presented. ~/
 

7:~u::ru~/df


Senior Counsel
 

6/ In The First National Bank of Chicago (pub. avail. Sept. 22,
 

1992), the staff, because of conflict-of-interest concerns,
 

conditioned a similar grant of relief under section 17 (a) on
 

an undertaking from a fund's adviser that it would follow
 

certain procedures when it had the authority to vote fund
 

shares held in a fiduciary capacity. While we remain
 

concerned about potential conflicts of interest when an
 

adviser can control the voting of fund shares, we have
 

reconsidered our position. Because the proposed transaction
 

itself does not require the adviser to vote fund shares, we
 

have not conditioned Federated Investors' no-action relief
 

on this type of undertaking, and will not do so in response
 

to future requests for substantially similar relief. We
 

note, however, that, if a fund's adviser is a fiduciary for
 

an employee benefit plan, Section 406 (b) of the Employee
 

Retirement Income Security Act of 1974, as amended, may
 

prohibi t the fiduciary from voting any fund shares owned by
 

the plan on a matter in which the fiduciary has an interest
 

(~, approval of the advisory contract). section 406 (b)


prohibits a plan fiduciary from dealing with the assets of
 

the plan in its own interest.
 

- 3 ­
." " 

DICKSTEIN, SHAPIRO & MORIN 

2101 L STREET, N.W.
 

WASH INGTON, D. C. 20037-1526 8300 800NE BOULEVARD
 

VIENNA. VIRGINIA 22182-2626 202 785-9700 703 847-9190
 MATTHEW G. MALONEY 

FACSIMILE 202887-0689
 598 MADISON AVENUE
 DIRECT DIAL TELEX 892608 DSM WSH
 NEW YORK. N.Y. 10022-1614 . 202828-2218 

212 832-1900 

15 RUE DE MARIGNAN 

March 16, 1994 75008 PARIS, FRANCE
 

33.1.40.76.02.86 

1940 Act/1? (a) 

Office of Chief Counsel A(J ~~ ~ l'il. 

Division of Investment Management
 SECTION Securities and Exchange Commission
 

450 Fifth street, N.W. RULE l;t~ -1­

Washington, D. C. 20549
 

i~ii~BILITY 4/-,191­ Ladies and Gentlemen:
 

On behalf of the registered investment companies (the
 

"Funds") advised and/or distributed by affiliates of Federated
 

Investors ("Federated"), we respectfully request that the Staff
 

of the Division of Investment Management confirm that it will not
 

recommend enforcement action to the Securities and Exchange
 

Commission (the "SEC") under section 17 (a) of the Investment
 

Company Act of 1940 (the "1940 Act") with respect to the
 

transactions described below. This letter supersedes our prior
 

correspondence with the Staff dated September 17, 1992, March 25,
 

1993, August 9, 1993 and October 29, 1993 and reflects the series
 

of discussions we have had telephonically with various members of
 

the Staff since the date of our original submission in September


1992. 

Facts 

The Funds are management investment companies. Certain
 

of the Funds are advised by a bank or affiliated persons of a
 

bank and distributed and administered by affiliates of Federated
 

(collectively, "Private Label Funds"). In a number of cases, a


bank which serves as investment adviser to a Private Label Fund
 

maintains a common trust fund and/or a commingled investment fund
 

(the "Common Trust") established under applicable state or


federal laws for the commingled investment of securities held by
 

the bank in its fiduciary capacity.
 

At the present time, the investment advisers and Funds
 

listed on Exhibit A hereto are considering engaging in the
 

transactions described below. As confirmed in the telephone
 

conversation of October 14, 1992, however, we specifically
 

request that the requested relief be made available not only to
 

these Funds and advisers but to all other existing and
 

to-be-established Private Label Funds which from time to time
 

propose to engage in transactions of the character described
 

38 
. \ 

Office of Chief Counsel
 

March 16, 1994
 

Page 2
 

herein subject, of course, to compliance with the conditions


described herein. 

Prooosed Transaction
 

In their capacities as investment advisers to one or more
 

Private Label Funds and fiduciaries with respect to one or more
 

Common Trusts, a number of banks have determined that it would be
 

in the best interests of both the Private Label Fund and the
 

Common Trust for the Private Label Fund to purchase substantially
 

all of the assets held by the Common Trust. The bank has
 

determined that ownership by the Private Label Fund of the assets
 

held by the Common Trust would be consistent with the investment
 

objective and policies of the Private Label Fund, and would be in
 

the best interests of its shareholders. In addition, the
 

transaction would be effected in accordance with, and pursuant


to, procedures approved by the Private Label Fund i s Board of 

Directors or Trustees which are designed to ensure substantial
 compliance with Rule l7a-7. 

Accordingly, the bank proposes to cause the Private Label
 

Fund to acquire substantially all the assets of the Common Trust,
 

and the Private Label Fund simultaneously proposes to issue to
 

the Common Trust shares of the Private Label Fund which
 

immediately thereafter would be distributed to the participating
 

trust accounts of the Common Trust. The aggregate net asset
 

value of Private Label Fund shares issued to the Common Trust
 

would be equal in value to the total fair market value of the
 

assets acquired by the Private Label Fund. Securi ties purchased
 

or sold in the proposed transaction would be valued in accordance
 

with the Private Label Fund i s traditional valuation methods used
 

to calculate net asset value and, in particular, would be
 

consistent with the requirements of Rule 17a-7 (b). As fiduciary
 

for the Common Trust and all fiduciary accounts participating
 

therein, the bank has determined that it has the power and
 

authority to engage in the proposed transaction, and would comply
 

with all obligations imposed upon it by applicable fiduciary


laws. 

The proposed transactions would not involve payment of
 

any brokerage commission, fee (other than customary transfer
 

fees), or other remuneration. Except for the requirement that
 

the transaction be a purchase or sale for no consideration other
 

than cash, the proposed transactions would comply with the
 

requirements of Rule 17a-7 and would be subject to the procedures
 adopted by the Pr,i vate Label Fund i s Board of Directors or 

Trustees to ensure compliance with the requirements of
 

Rule 17a-7. Other than the bank, no person who is an affiliated
 

person of the Private Label Fund, or an affiliated person of an
 

affiliated person of the Private Label Fund, within the meaning
 

38 
Office of Chief Counsel
 

March 16, 1994
 

Page 3
 

of Section 2 (a) (3) of the 1940 Act would have a beneficial 

interest in the proposed transaction.
 

Both the bank and the Private Label Fund desire to
 

consummate the proposed transaction because it would provide the
 

Private Label Fund with additional assets consistent with its
 

investment objective and policies, permit greater diversification
 

and contribute to economies of scale in the management of the
 

Private Label Fund i s assets, which will benefit existing
 

shareholders of the Private Label Fund.
 

Leaal Considerations
 

section 17(a) (1) of the 1940 Act states that "(i)t shall
 

be unlawful for any affiliated person * * * of * * * a registered
 

investment company * * * or any affiliated person of such a
 

person * * * acting as principal * * * knowingly to sell any
 

security or other property to such registered investment company
 

* * *." The bank is an affiliated person of the Private Label
 

Fund by virtue of being its investment adviser, i and also would
 

be deemed to be an affiliated person of the Common Trust by
 2 Since
 virtue of the control it exercises over it as trustee. 


the Common Trust itself proposes to sell securities to the
 

Private Label Fund, and the Private Label Fund proposes to
 

purchase such securities from the Common Trust, it may be argued
 

that an affiliated person, or an affiliated person of an
 

affiliated person, of the Private Label Fund, acting as
 

principal, proposes to sell securities to the Private Label Fund
 and that such transaction would violate section 17 (a) . 

The SEC has previously determined, however, that certain
 

transactions which involve the purchase or sale of securities by
 

a registered investment company from another person which is an
 

affiliated person, or affiliated person of an affiliated person,
 

of such an investment company, solely by reason of having common
 

investment advisers, directors or officers do not necessarily
 

give rise to the concerns underlying section 17 (a) of the 1940
 

Act and may be effected without exemptive relief provided certain
 

safèguards are in place to prevent the abuses designed to be
 

prevented by section 17(a). Thus, for example, Rule 17a-7


1 section 2 (a) (3) (E) of the 1940 Act defines an "affiliated 

person" of another person as "if such other person is an
 

investment company, any investment adviser thereof, or any member
 

of an advisory board thereof."


2 section 2 (a) (3) (C) of the 1940 Åct defines an "affiliated 

person" of another person as "any person directly or indirectly
 

controlling, controlled by, or under common control with, such
 

other person."
 

38 
Office of Chief Counsel
 

March 16, 1994
 

Page 4
 

permi ts the purchase or sale of securities between an investment
 

company and another investment company or other account advised
 

by the same (or affiliated) investment adviser provided the
 

conditions set forth in the rule are met.
 

Rule 17a-7 states that a "purchase or sale transaction
 

* * * between a registered investment company * * * and a person
 

which is an affiliated person of such registered investment
 

company (or affiliated person of such person) solely by reason of
 

having a common investment advisor * * * is exempt from
 

Section 17 (a) of the Act" provided that certain enumerated
 conditions are met. As indicated in the above description of the proposed transaction, sections (b) - (f) of Rule 17a-7 will be 

satisfied by the transaction participants.
 

Rule 17a-7 exempts transactions involving affiliation
 

solely by virtue of having a common investment adviser. Although
 

the Bank is technically not an investment adviser to the Common
 

Trust, its position as trustee with respect to the Common Trust
 

and each of its participating fiduciary accounts is functionally
 

equivalent to that of an investment adviser. As a practical
 

matter ,the bank, as fiduciary, manages the investment and
 

reinvestment of the Common Trust i s assets in the same manner as
 

an investment adviser provides advisory services to an investment


company. Consequently, the bank effectively serves as investment 

adviser to both the Private Label Fund and the Common Trust.
 

As structured, the requirement of Rule 17a-7 (a) that cash
 

be the sole consideration for the proposed purchase or sale would
 

not be met. As proposed, the Private Label Fund would not pay
 

cash for the assets of the Common Trust, but instead would issue
 

Private Label Fund shares to the Common Trust in an aggregate
 

amount equal to the net asset value of the cash and securities
 

acquired, which shares would then be distributed by the Common
 

Trust to its participants.
 

The absence of cash consideration has not precluded the
 

staff from granting no-action relief in the past to similar
 

transactions. For example, in Trustfunds Institutional Managed
 

Trust (pub. avail. July 20,1988), a transaction was proposed
 

wherein two portfolios of a registered investment company would
 

enter into a purchase and sale of securities. The transaction
 

contemplated that the shareholders of one portfolio would
 

"redeem" their shares and purchase shares of the other portfolio.
 

Rather than receive cash from the first portfolio, however, it
 

was proposed that the second portfolio issue its shares to the
 

first portfolio's shareholders. Simul taneously, the second
 

portfolio would acquire the portfolio securities with the shares
 

treated as the consideration for such purchase. No cash changed


hands. 

3956 
Office of Chief Counsel
 

March 16, 1994
 

Page 5
 

Trustfunds Institutional Managed Trust argued' that the
 

proposed transaction was "encompassed" by Rule 17a-7 and within
 

the exemption. No-action reI ief was granted by the Commission.
 

No-action positions were granted on similar facts in The First
 

National Bank of Chicago (pub. avail. Sept. 22, 1992), American
 

Medical Association (pub. avail. Jan. 15, 1987), Metropolitan
 

Series Fund, Incorporated (pub. avail. Aug. 29, 1986), and Cash
 

Accumulation Trust (pub. avail. Nov. 30, 1984).
 

The common theme underlying the Staff's analysis in
 

various no-action relief granted in reliance on Rule 17a-7
 

appears to be to focus on whether an affiliated person of the
 

registered investment company or its investment adviser
 participates in and benefits directly from the transaction. In 

at least three no-action letters, the Staff conditioned the grant
 

of relief on a requirement that no affiliated person of the
 

participating investment company would have any beneficial
 

interest in the account or fund selling securities to the
 

registered investment company. See The First National Bank of
 

Chicago (pub. avail. Feb. 5, 1986), American Medical Association
 

(pub. avail. Jan. 15, 1987), and Lincoln National Investment


Management Company (pub. avail. April 25, 1976). As stated
 

above, no affiliated person of the Private Label Fund, other than
 

the bank in its fiduciary capacity, would have any interest in
 

the Common Trust.
 

The proposed transaction is consistent with staff
 

concerns as evidenced in no-action relief previously granted
 

under Rule 17a-7. In addition, no-action relief granted under
 

Rule 17a-7 demonstrate that failure to comply literally with the
 

cash requirement of Rule 17a-7(a) is not fatal.
 

In a series of conversations with the undersigned since
 

the date of our original submission, the Staff have articulated a
 

view that any request for no-action relief should be conditioned
 

upon an undertaking by the adviser to a Fund that such adviser,
 

or any affiliate thereof which possesses voting rights in respect
 

of Fund shares issued in a transaction described above, agree
 

either to pass through such voting rights to a cO-fiduciary or
 

beneficiary or vote all such shares pro rata in a manner
 

consistent with voting of other shares of the Fund for which the
 

bank does not possess such voting rights. As indicated in our
 

discussions, we believe that such a condition would be
 

inappropriate and unnecessary.
 

Conclusion 

The conditions of Rule 17a-7 were designed to safeguard
 

the interests of investment company shareholders. An SEC Release
 

indicates that the conditions were intended "to limit the
 

. 

38 
. 

Office of Chief Counsel
 

March 16, 1994
 

Page 6
 

exemption to those situations where the Commission, upon the
 

basis of its experience, considers that there is no likelihood of
 

overreaching of the investment companies participating in the
 

transaction." Investment Company Act Release No. 4604, 31 Fed.
 

Reg. 7913 (June 3, 1966). By substantially complying with the
 

conditions of Rule 17a-7, the interests of the Private Label Fund
 

shareholders are protected. Previous no-action relief granted
 

under Rule 17a-7 demonstrates that compliance with the cash
 

requirement of the Rule is not essential for the protection of
 

the shareholders.
 

Accordingly, we respectfully request that the staff
 

advise us that it will not recommend any enforcement action to
 

the SEC if a Private Label Fund engages in the proposed
 

transaction as described herein in reliance upon Rule 1 7a-7 ,
 

subject to compliance by the Private Label Fund with all of the
 requirements of Rule i 7a-7 except for the cash requirement of 

Rule 17a-7 (a) . If the Staff intends to issue a response that is
 

adverse to this request, we respectfully further request the
 

opportuni ty to have a conference prior to the issuance of such
 

response. If you have any questions regarding this request,
 

please contact the undersigned at (202) 828-2218.
 

Very truly yours,
 C)~~

Matthew G. Maloney
 

MGM/kld 

cc: Julia Ulstrup
 

. 

3156 
.. 

Exhibit A 

Investment Adviser: 

Fund: 

Investment Adviser: 

Fund: 

Investment Adviser: 

Fund: 

Deposi t Guaranty National Bank 

DG Investor Series 

First Alabama Bank 

First Priority Funds 

Mark Twain Bank 

Mark Twain Funds