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Decber 18, 1998 

Ref. No. 98-17 

RESPONSE OF TH OFFICE OF CllF COUNSEL Drier Biddle & Reath LLP 

DMSION OF INSTM MAAGEME File No. 132-3 

Our 

Your letr date Decber 17, 1998, reques our assurce tht we would not
 

recmmend enorcement acton to the Securties and Exchae Commsion ("Commssion") under 

Secon 17(e) of 
 the Investen Company Act of 1940 ("Act") if cert open-ed maement 

invesent companes ("Funds") uti a broker, who is an "afat person" under Secon 

2(a)(3) of the Act of 
 the Funds' 'investent adviser, and thereby is an "afate peson of an 

afate person" of eah Fund ("Affliate Broker''), to effec foreign cuency tractons in the
 

Interban maket in the Iner described in your letr. 

FACTS 

You represen tht the Interban foreign curency maket is a highy liquid, global 

currency maket tht offers execon in over 50 cuencies and operate on a 24-hour basis, five 

days a week. You stte tht some of the maket's key parcipants are invesent ban, 

commercia ban, cetr ban, corporations, and cuency brokers and deaers. Unle 

commodties exchaes, which tre foreign curency futues contrct and relate futues options, 

Interban maet parcipants buy and sell curencies in forwd and spot tracon, and ca 

1 You stte tht, whie the curency product tht are tred in both
 also tre curency options. 


maket are substtialy sim, the Interban maet offers a number of advataes over foreign
 

cuency tracons tht are execte on the commodties exchages.2
 

In genera, parcipan in the Interban maet tht execute tractons for customers
 

tae a position in the maket and ea a sprea betee the bid and asked curency price. In 

contr you st tht the Afate Broker would not chage a sprea but would in chage
 

its custmers a separte, disclosed commssion for eah tracton. 3 You stte th these
 

A forward curency tracon involves a 
 contr to purchae or sell a speifc cuency 

at a futue date and price agee upon by the pares at the tie tht the contr is enred into. A
 

spot curency tracon provides for the imedate or nea-term setement of 
 the cuency being 

bought or sold. A curency option involves the purchae or sale of the right, but not the obligation, 

to buy or sell a specifed amount of a parcular curency at a specifed price with a cert tie
 

period. 

2 For exaple, you cite the abilty of Interban maket parcipants to tre a greater 

number of dierent foreign curencies, to negotiate var term to mee the specifc nee of the 

counterpares, and to execute tres on a 24-hour basis. You also stte th the Interban maket 

is more liquid th the maket for exchae-traded foreign currency futues and options.
 

3 The Afate Broker would chage commssions on either a "ha-turn" or "round-tu" 

basis. Commssions paid on a ha-tu basis involve a separate commssion each tie a 

traaction is either opened or closed as opposed to round-turn commssions, which involve a
 
4 

,." ~;.. ........ '. l' ".p'" -., ~l-"" tl' ,
 

...~.; ~K '; -r~:,ø;~. ... ~- ..,... I.... 

.. comissIons are simai to the. 
 commsions chaged by futures commssion merchats ("FCMs") 

for ~~hae-tred curency futues contr and options. You also stte tht for exchaetr~ curencies, the Afate Br~ker would base its commssions on the same stdad lot sizs
 

tit 'âiê used by FCMs. For curencies tht are not exchage-tred the Afate Broker would 

base its commssions on lot sizes specifed in its cusomer fee schedule. 

You believe tht the Afate Broker may be able to provide the Funds wi servces tht
 

are superior to servces provided by other Interban maket parcipants. Accrdi to your letr,
 

under norm circumces, maket-ma counrpares in the Inrban maet generay 

chage a bid/asked sprea of betee 0.05% and 0.10% of the notona amount of the tracon
 

for tracons in major curencies. Ths spre may be wider for less liquid curencies or durg 

ties when there is litte tr acvity. You st tht becuse of 
 the siz of the Interban 

maket and the lage number of parcipants, the prices tht cert parcipan in the Interban
 

maet are wi to pay may not be rey apparent to al parcipan. You al st tht the 

Funds.believe th the Afte Broker, in some caes, would be able to provide the Funds with
 

increaed maket coverae and, consequently, betr prices on an afr-eecuton basis with respe
 

to some foreign cuency tracons. 

Under the proposed arement, the Funds wi have the option, but wi not be requied 

to use the Affliilte Broker to effec Interban foreign cuency trons. The Affliate 

Broker wi chage the Funds a per lot dollar-based commsion for eah curency contr for 

Interban tractons and wi recive no other compeation in connecon with those
 

tractons. The Funds may use the Afte Broker only if 
 the Funds' Bo of 
 Trusts ("Trust"), includi a majority of the trsts who are not "inrest persons," have approved
 

cert procures ("Secon 17(e) Procures") tht are. designed to prote the inrest of 
 the 

Funds and their shaeholders. You stte tht the Secon 17(e) Procures wi satfy the
 

requiements of RUle 17e-l under the Act and wi provide safeguds in addition to those 

provided by tht rue.4
 

single commssion which is payable when the tracon is intialy. entered into and tht covers 

both the opén and closin of the tracon. 

You stte th cert of the Secon 17( e) Procures are designed to en th the
 

Funds' investent adviers ("Investent Advisers'') mee their obligations to seek be execution
 

for tracons effect on beha of 
 the Funds. You fuer stte th among these, the Funds'
 

Investent Advisers wi be prohibite from usin the Afate Broker in ince where dojn 

so would be inconsistt with the Investent Advisers' obligations to seek best exection, ~ 

where the Funds could de diecy with an Interban parcipant on betr term 
 th they could
 

obta by executi the tracon though the Afate Broker. You also represen tht the
 

Secon 17(e) Procures wi alow the Funds to consider usin the Afate Broker only when 

the price obtaed for a foreign curency tranacon, plus the Afate Broker's commssion, is at 

lea as favorable as the price contemporaneously quote by an independent source previously
 

selec by the Trusts. The Secon 17(e) Procures also wi require tht the Trus review, 

at lea anualy, the Afate Broker's qualty of exection for the Funds and overa
 

responsiveness and pedonnce. We tae no position on wheter these procures satisfy the 

Investent Advisers' best execution obligations.
 

2 
ANALYSIS 

Secon 17( e )(1) of the Act gtmeraly prohibits any afliate person of a registred 

investent company, or any afate person of such person, actg as agent, from accepti 

compensation for the purchae or sale of any propert to or for such regstred company, excet in 

the course of such person's business as an underwter or broker. Secon 17(e)(2) lits the
 

amount of remuneration which may be recived by a person act in reliance on the broker 

excetion in Secon 17(e)(I).5 Secon 17(e) wa designed to eli the poteal for selfdeag tht exist when persons i1ffliilte with an investent company, act as agents, recive
 

compenation for purchaes of propert from and saes of propert to the investent company.6
 

In of prohibitig such trons for persons ac as brokers, Congess chose to detr
 

abuses by liti the amount of compenon as well as the circumces under whch brokers
 

may recive compeation in connecon with seces tracons eff on beha of afat
 

invesen companes
 

You believe th but for 
 the Act's defition of 
 "broker," the Affliated Broker could avai 

itself of the broker excetion contaed in Secon 17(e)(I). Becuse the defition of 
 broker under Secon 2(a)(6) of the Act is restct to persons who effec trons in "secties," and
 

becuse Interban tracons may not involve trons in secures,7 Secon 17( e) may not
 

permt the Afte Broker to ene in Interban tracons on beha of the Funds. You 

attbut the lite scope of the broker excetion to the fu th invesent companes did not
 

inves in curencies in 1940 when the Act wa en. You believe th since then global
 

ecnomies have becme increainy inte and foreign invesen, and the use of foreign 

curency tracons to mae those investents, have becme increaingly import. You 

believe tht, in light of the importce of these trons and the advataes th Interban
 

tracons have over exchae-tred foreign curency product, the Funds' use of the Afate 

Broker wi fuer the interest of the Funds and their shaeholders. Moreover, you believe tht, in
 

effec Interban foreign currency tracons puruat to the Secon 17( e) Procures, the 

5 Secon 17(e)(2) lits the remuneration th any afat broker of a regired
 

investent 'Cmpany may recive in connecon with a secties tracon to (A) the usua and
 

custma broker's commssion for trons efec on an exchae, (B) two percent of 
 the 

sales price for secnda distbutions, and (C) one percet for other purchaes or saes. Rule 

17e-l defies when commssions or fee paid to secties brokers wi be deeed not to exce the
 

usua and cusma brokerae commssion for purses of Secon 17(e)(2)(A). 

6 See Heas Before a Subcommtt of 
 the Commtt on Bang and Curency, U.S. Sente, 76th Cong., 3d Sess. 262 (1940); Hea Before a House Subcommtt of 
 the 

Commtt on Interstte and Foreign Commerce, 76th Cong., 3d Sess. 98 (1940); U.S. v. Deutsch, 

451 F.2d 98, 108 (1971), cert. dened 404 U.S. 1019 (1972). 

Secon 2(a)(36) of 


7 the Act which defies "security," does not include the term 

"curency" or "curency contract. " You st tht the stha issued letrs which appea
 

contrctry regardig wheter curency and curency tracons fa with the Act's defition 

of securty. For puroses of ths letr, we assume, without decidi, th forwd and spot currency contrct and curency 
 options are not secties With the Act's defition. 

3 
Afate Broker wi be actg in a maer tht is not inconsist with the intent of Secon 

17(e).8 

You stte tht the Secton 17( e) Procures wi satisfy the requirements of Rule 17e-l 

under the Act and thereby wi extd to the Funds' Inrban foreign currency tractons the
 

same proteons, at a mium tht apply to the Funds' securties tractons.9 Rule 17e-l 

defies when commssions or fees paid to secuties brokers wi be deeed not to exce the usua 

and custma brokerae commssion as set fort in Secon 17(e)(2)(A). Under the Secton 17(e) 

Procures, the Trusts wi be responsible for enur tht the Afat Broker's commssions 

. are reaonable and fa as compared to the commssions recived by other brokers in connecon 

with comparble tracons involvig sim cuencies being purchaed or sold durg a 10 You also stte tht the 
 comparble period of tie. Secon 17(e) Procures wi include 

additiona safeguds not contaed wi the provisions of Secon 17( e) and Rue 17e-l. Among
 

these, the Secon 17(e) Procures wi ca the Afte Broker's tota commssion at 0.03% of
 

the notona amount of eah Inrban trcton.
 

We agee tht it would not be inconsist with the int of Secon 17( e) to permt the 

Afate Broker to reive commssions for effec trctons in the Interban foreign 

curency maket for the Funds. We therefore would not recmmend enorceent acon to the 

Commsion under Secon 17(e) if 
 the Funds uti the Afate Broker in effec such
 

. tractons. In ta ths position, we rely parculy on your representaons th (1) al
 

.. tracons wi be conduct in acrdace with the Funds' Secon 17(e) Procures, which wi
 

satfy the requiements of Rue 17e-l, and (2) the Affliate Broker's commssion wi not exce 

0.03% of the notona amount of 
 the parcular cuency tracon involved. 

8 In support of your arguent, you cit inces in which the Division st ha agee not
 

to recmmend enorceent acon to the Commsion under Secton 17(e) ifFCMs recived 

compensation from afate invesent companes for effecg futues tranacons on
 

commodties exchaes. You believe tht, becuse Inrban foreign curency trons are
 

substtiy simar to futues contr and options tred on the commodty exchaes, simar
 

reliefis appropriate. See. ~ Kidder. Peabody Governent Income Fund. Inc. (pub. avai. Sept.
 

15, 1986) (sttig tht the stwould not recmmend enorceent acon under Secon 17(e) or 

Rule 17e-l if an FCM recives Commssions for exec futues cont on a commodties 

exchae on beha of an afte investent company, provided th the arement complies
 

with Secon 17(e) and Rule 17e-l); Sheason Lehm Brothers. Inc. (pub. ava. Feb. 18, 1986) 

(same, excet th Sheason agee to comply with the litations of Secon 17(e)(2)(C) by 

cappin brokerae commssions for ficial futues and options tranons exec on a 

commodties exchae at 1% of 
 the purchae price of 
 the fures contrct). 

9 We tae no position on wheter the specifc procures described in your letr satisfy the 

requiements of Rule 17e-l. 

10 In ma ths detrmtion, you stte tht the Investent Advisers wi compare the
 

Afate Broker's commssions to those of (1) other currency brokers tht chage commssions for 

tracons on the Interban maket and (2) FCMs who execute foreign curency futues
 

contrct and options tres on commodties exchages.
 

4 
Ou position is based on the fa and circumces set fort in your letr. Any dierent
 

fa or circumces may requie dirent conclusions.
 

~.
 

5 
LAW OFFICES
 

DRINKER BIDDLE & REATH LLP
 

SUITE 900 

901 FIFTEENTH STREET. N.W. 

PHILADELPHIA NATIONAL BANK BUILDING 

1345 CHESTNUT STREET 

SUITE 300 

105 COLLEGE ROAD EAST 'lHINGTON. DC 20005 - 2333 

12021842-8800 PHILADELPHIA, PA 19107-3496 P.O. BOX 627 PRINCETON. NJ 08542-0627 

TELEPHONE: (2151 988-2700 16091716-6500 

FAX: 12151 988-2757 SUITE 300 

1000 WESTLAKES DRIVE 

BERWYN. PA 19312 - 2409 

December 17, 1998 16101993-2200 

Investment Company Act of 1940: 

Section 17( e) 

Douglas J. Scheidt, Esq. 

Associate Director and Chief Counsel 

Division of Investment Management 

Securties and Exchange Commission 

Mail Stop 5-6
 

450 Fifth Street, N.W. 

Washington, D.C. 20549 

Re: Interban Transactions Under Investment Companv Act Section 17(e)
 

Dear Mr. Scheidt: 

We act as counsel to a number of open-end rnanagement investment companies. 

the Investment Company Act of 1940, as amended (the "Act"), that 

engage in foreign curency transactions in the Interban market ("Interban transactions"). We 

are writing to request the advice of the staff that it would not recommend that the Commission 

take action under Section 17 (e) of the Act if a broker that is an "affiliated person," as dermed in. 

("Funds") registered under 


Section 2(a)(3) of the Act, of a Fund's investment adviser, and thereby is an "affliated person of
 

an afliated person" of the Fund ("Affiiated Broker"), acts as a broker in connection 
 with the'
 

Fund's Interban transactions in the maner described in this letter. 

1. Background.
 

The Interban market is generally viewed as the most liquid market in 
 the world for foreign curency trading. The market operates globally on a 24-hour basis, five days 
 a week, with an estimated volume exceeding $1.2 trillon daily. Key paricipants in the market include 

investment bans, commercial bans, central bans, corporations, curency brokèrs and dealers ' 

and speculators. Although there are thousands of market paricipants, commercial bans act as 

the core of the Interban market and provide essential liquidity to the market. 

PHTRAS\266059\! 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 2 

Paricipants in the Interban market can buy and sell curencies in forward and 

spot transactions, and can also trade in curency options. A forward curency transaction 

involves a contract to purchase or sell a specific curency at a futue date and price agreed upon 

by the paries at the time the contract is entered into. A contract counterpar may either accept 

or make delivery of the curency specified in the contract at the matuty of a forward contract or, 

prior to matuty, enter into a closing transaction involving the purchase or sale of an offsetting
 

amount of curency. A spot curency transaction involves an obligation providing for immediate 

or near-term settlement of the curency being bought or sold. A curency option involves the 

purchase or sale (for a premium) of 
 the right (but not the obligation) to buy or sell a specified 

amount of curency at a specified price withn a specified time period. 

Foreign curency contracts and options traded in the Interban market have been 

viewed as being substantially similar to foreign curency futues contracts and related futues 

options that are traded on commodity exchanges. See,~, Philadelphia Stock Exchange. Inc. 

1994 SEC No-Act. LEXIS 888 (October 18, 1994) (curency options listed on securties 

exchanges, options on foreign curency futues contracts, over-the-counter foreign curency 

options traded in the Interban rnarket and curency options traded on foreign exchanges said to 

be "fuctionally and economically equivalent"); Philadelphia Stock Exchange. Inc. 1991 SEC 

No-Act. LEXIS 880 (July 9, 1991) (analogous treatment given to foreign curency futues 

contracts and forward contracts to purchase or sell curencies justified for puroses of 

broker/dealer n~t capital rule because of 
 the simlarty of 
 the two products and the high degree of 

correlation between a futues contract's settlement price and the corresponding forward contract's 

rate). . Curency transactions in the Interban market, however, can offer a number of advantages 

in comparson to exchange-traded futues contracts and options in that Interban transactions can 

relate to a greater number of different foreign curencies, can include terms that are negotiated to 

meet the needs of 
 the paricular counterparies, can be executed durng banng hours in many 

different time zones and can offer significantly greater liquidity. 

We have been asked whether a Fund's use of an Affliated Broker for such 

transactions might be permissible under Section 17(e) of 
 the Act under the following facts. 

Unlike many paricipants in the Interban market, an Affliated Broker's execution desk would 

not take a position in the market for its own account, and the Affliated Broker would not ear a 

spread between bid and asked currency prices in transactions executed for a Fund. Rather, the 

Affiliated Broker would charge a Fund a separate, disclosed commission for its services ón each 

transaction, which would be charged on either a "half-tu" basis (involving a separate 

commission each time a transaction is either opened or closed) or a "round-tu" basis (involving 

PHTRANS\266059\1 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 3 

a single commission when a transaction is intially entered into that covers both the opening and 

closing ofthe customer's curency transaction). These commissions would be similar to the 

commissions charged by futues commission merchants on exchange-traded curency futues 

contracts and options, and the Affliated Broker would base its commissions for curency 

contracts on the same stadard lot sizes that are used by futues commission merchants (or 

substatial equivalents in the case of curencies that are not traded on commodities exchanges). 

For example, in spot and forward transactions in the Australian dollar, a curency that is also 

traded in the futues market, the Afliated Broker would charge a flat, dollar-based commission 

based on the same stadard lot size used by futues commission merchants. Similarly, in 

transactions in the Belgian franc, a curency that is not traded in the futues market, the Affliated 

Broker would charge a flat, dollar-based commission based on a stadard lot size set fort in the 

Affiliated Broker's customer fee schedule. 

As discussed fuer below, the stahas previously stated that it would not 

recommend that the Commission tae action under Section 17(e) of 
 the Act in situations 

involving the payment of commissions to futues commission merchants by affliated investment 

companes in connection with transactions in exchange-traded futues contracts and options, 

subject to certain conditions. We are unaware that the staffhas previously addressed the 

payment of commissions by an investment company to an afliated foreign curency broker in 

connection with transactions in the Interban market. We believe, however, that the same 

considerations apply under Section 17(e) with respect to both Interban transactions and 

transactions in foreign curency futues contracts and options in light of their substatial 

similarties. We also believe that a Fund's proposed use of an Affliated Broker as described in
 

this letter will fuher the interests of the Fund and its shareholders, and will be fully consistent 

with the policies of Section 17(e) of 
 the Act and Rule 17e-1 thereunder, as well as the positions 

previously taen by the staff. 

In paricular, it should be noted that, as described fuer below, an Affliated 

Broker's commissions from a Fund (a) will not exceed "the usual and customar broker's 

commission" as provided in Section 17(e)(2)(A) of 
 the Act and Rule 17e-1 thereunder, (b) will 

otherwse comply with the provisions of 
 Rule 17e-1, and (c) will not exceed 0.03% of the 

notional amount of any curency transaction. In addition, a Fund would use an Affiliated Broker 

for Interban transactions only where the Affliated Broker charges commissions to its other 

Interban customers and the commissions charged to the Fund are no greater than the Affiiated 

Broker's normal commissions. 

PliTRJ~S\266059\ i 
DRINKER BIDDLE & REATH LLP
 

Douglas 1. Scheidt, Esq. 

December 17, 1998 

Page 4 

We are, therefore, requesting the advice of the staff 
 that it will not recommend

that the Commission tae action under Section 1 7 (e) of the Act if an Affiiated Broker acts as a 

broker for a Fund in connection with Interban transactions in the maner 
 described in 
 ths letter. 

2. Factual Situation.
 

Each Fund's investment adviser ("Investment Adviser") is responsible for 

decisions to buy and sell investments, including curencies, on behalf of the Fund, for the 

selection of brokers and dealers to execute the Fund's portfolio transactions, and for the 

negotiation of brokerage commissions, if any, in connection with such trsactions. In.placing 

orders for the purchase and sale of portfolio securties and other assets for 
 the Funds; each. 

Investment Adviser is responsible for seeking best execution in conformance with 
 applicable 

law. 

The Funds (with certain exceptions, such as Funds that are "money market fuds" 

withn the meanng of 
 Rule 2a-7 under the Act and certin Funds that invest principally in U.S. 

Governentor muncipal securties) are permitted, under their stated investment policies, to buy 

and sell foreign curencies. These Funds may engage in both Interban transactions and 

transactions in exchange-traded futues contracts and options. They frequently chooseto engage 

in Interban transactions because of the advantages described above. Market-making 

counterparies in the Interban market quote and the Funds pay, under normal circumstaces, a 

bid/asked sprejld of between five and ten "points" (0.05% and 0.10%) for major curencies. The 

bid/asked spread is generally affected by market liquidity so that the spread may widen, or the 

cost to a Fund may increase, for less widely traded curencies or during times when there is little 

trading activity in the market. In order to mize their costs, the Funds generally attempt to 

execute with counterparies that quote the narowest spread. 

Because of the size of the foreign curency market and the large number of market 

paricipants, the prices that certin paricipants in the Interban market are willng to pay (and the 

spreads they are willng to accept) may not always be known immediately by other market 

paricipants (including the Funds). Curently, Affiliated Brokers do not provide any Interban 

brokerage services for the Funds we represent. Certain Funds believe, however, that in some 

cases an Affliated Broker would be able to provide the Funds with increased market coverage 

and, consequently, better prices on an after-execution basis with respect to some of their foreign 

curency transactions. 

PHTRAS\266059\l 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 5
 

3. Proposed Use of Affiliated Brokers.
 

Under the proposed arangement, the Funds wil have no obligation to use an 

Affiiated Broker for any curency transactions. Rather, as explained fuher below, a Fund wil 

use an Affliated Broker only afer it has demonstrated to the satisfaction of a Fund's Board of 

Trustees that its commission is reasonable and fai and only when the price obtained by an 

Affiliated Broker for a paricular Interban transaction, plus the Affliated Broker's commission, 

is at least as favorable as the price contemporaneously quoted by another independent source 

previously selected by the Board. As stated above, in these transactions the Affiliated Broker's 

execution desk will not tae a position in the market for its own account. Rather, the Affliated 

Broker wil be acting as broker on behalf of 
 the Funds, and the only compensation the Affliated Broker wil receive in connection 
 with the transactions will be paid by the Funds. This 

compensation wil consist of a flat, dollar-based commission that is based on specified lot sizes. 

In no event wil an Affiiated Broker ear a spread on a Fund's curency transactions. The
 

confirmation statements provided by an Afliated Broker to a Fund will show that the Affliated 

Broker is acting as broker and will set forth the commission rate. The Funds will not be required 

to deposit assets or post margin with an Affiliated Broker in connection with their curency 1 tranactions. 

More specifically, under the proposed arangement, all Interban transactions 

handled by an Affliated Broker for a Fund will be subject to procedures (the "Section 17(e) 

Procedures") adopted by the Fund's Board of Trustees, including a majority of its trustees who 

are not "interested persons" thereof (the "Independent Trustees"). These Procedures will satisfy 

the requirements of Section 17 (e) of the Act and Rule 17 e-1 thereunder (insofar as such 

Procedures relate to Interban transactions, rather than exchange-traded securties, as described 

herein), as well as the additional safeguds described in this letter, to ensure that the interests of 

the Funds and their shareholders are fully protected and that the Congressional policies expressed 

in Section 17(e) are satisfied. In paricular, the Section 17(e) Procedures will require that (1)
 

each Interban transaction must be appropriate for, and consistent with the policies of, the Fund 

involved, and (2) the commission, fee or other remuneration received by an Affiliated Broker for 

its services in connection with the transactions (a) must not exceed the usual and customar 

1. The Funds will, of course, segregate assets with their custodians or sub-custodians, or 

wil otherwise cover their curency transactions, when and as required under Section 18
 

ofthe Act.
 

PHTRANS\266059\ i 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 6 

broker's commission,2 (b) must be no greater than its normal customer commission, and (c) must 

not exceed 0.03% ofthe notional amount of 
 the paricular curency transaction involved. In each 

2. Consistent with Rule 17e-l, the commission, fee or other remuneration received by an 

Affiliated Broker wil be deerned as not exceeding "the usua and customar broker's 

commission" if it is reasonable and fair as compared to the remuneration received by 

other, unafliated firms in connection with comparable transactions involving similar 

curencies being purchased and sold durng a comparable period of time. To establish the 

reasonableness and fairness of an Affliated Broker's commissions, a Fund's Investment 

Adviser will be directed by the Fund to use reasonable efforts to obtan information on 

the fees of other curency brokers that charge commssions on Interban transactions. In 

addition, an Affliated Broker's commissions may be compared to those charged by 

futues commission merchants on exchange-traded curency futues contracts and 

options. 

We believe that, for puroses of ths analysis, comparson of an Affiiated Broker's 

commissions with the commissions of futues commssion merchants is appropnate for 

several reasons. First, futues commission merchants and an Affliated Broker would 

compete in the foreign curency markets. Investors generally have the choice of entenng 

into foreign curency contracts on either a futues exchange or in the Interban market. 

In both cases these contracts permit investors to assume or shift the nsk of changes in 

foreign curency exchange rates in accordance with their business objectives. The 

services provided to these investors by futues commissions merchants and an Affliated 

Broker are similar - to execute curency contracts for customers at favorable rates in a 

higWy developed and liquid market. Second, because of 
 the similarties between 

Interban and futues transactions, an important consideration to investors is the 

comparative costs of these transactions. Like futues commssion merchants, an 

Mfiliated Broker would charge commissions instead of spreads on curency transactions. 

In addition, like futues commssion merchants, an Affiliated Broker would base its 

commissions on stadard lot sizes used for foreign curency futures transactions. 

For these reasons, we believe that the comparsons with the fees charged by other 

Interban foreign curency brokers and futures commission merchants will be more than
 

adequate to enable the Trustees to determine independently whether an Affiliated 

Broker's commissions are fair and reasonable. In addition, the reasonableness and 

fairness of an Affliated Broker's commissions wil be otherwise demonstrated by the 

(continued. ..) 

PHTRANS\266059\1 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 7 

Interban transaction placed with an Affliated Broker, all contract terms (including price) for the 

Fund and the counterpar located by an Affliated Broker wil be identical, and an Affliated 

Broker's only compensation will be its stated commission from the Fund as described above. 

In this maner, the Section 17(e) Procedures will be designed to effectute the 

puroses of Section 17 (e) and protect the Funds against any potential overreaching by (1) 

establishing a lirnit on the amount of compensation that an Affliated Broker can receive in 

connection with a Fund's Interban transactions, which is substatially lower than the limitation 

in Section 17( e )(2)(C), and (2) limiting an Affiliated Broker's remuneration to its normal 

commission, which must be reasonable and fair as compared to the remuneration charged by 

other firms.
 

In addition, a Fund's Section 17(e) Procedures will provide other protections 

additional to those contained in Section 17(e) and Rile 17e-1. As previously stated, each 

Investment Adviser is responsible for seeking best execution in connection with a Fund's 

investment transactions in conformance with applicable law. To provide independent assurance 

that best execution is being achieved, the Procedures will provide for both the testing of each 

transaction placed with an Affliated Broker as well as periodic.reviews by a Fund's Board of 

Trustees, including its Independent Trustees, of an Affliated Broker's execution services. 

In paricular, the Procedures wil require that a Fund may use an Affiliated Broker 

only when the price obtained by an Affliated Broker for a paricular Interban transaction, plus 

the Affliated Broker's commission, is at least as favorable as the price contemporaneously 

quoted by another independent source previously selected by the Board and its Independent 

Trustees. In addition, the Section 17(e) Procedures will specifically provide that the Board of 

Trustees of a Fund, including a majority of 
 the Independent Trustees, will review, prior to the 

implementation of 
 the arangement described in this letter and thereafter at least anually, an 

Affliated Broker's quality of execution for the Fund and overall responsiveness and 

performance. In connection with this review, the Board and its Independent Trustees will 

consider not only the reasonableness of the Affliated Broker's commissions, but also other 

relevant factors such as the natue of the Interban market, the Affliated Broker's abilty to
 

provide effcient access to that market, the Affliated Broker's experience and reputation, the
 

( ..continued) 

requirement that the price of each transaction handled by the Affiliated Broker (including 

an Affliated Brok~r's commission) must be independently tested as described above. 

PHTRANS\266059\ i 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 8 

timeliness of the Affliated Broker's execution services, its abilty to place difficult trades and its 

success in obtaining favorable prices. In this regard, the Procedures will specifically provide that 

a Fund's Investment Adviser will not use an Affliated Broker in situations where such use could 

be inconsistent with the 
 Investment Adviser's undertakng to seek best execution (such as where 

there is only one dealer in a paricular curency with whom a Fund can deal directly on better 

terms than it could obtan from an Affliated Broker after including its commission).3 

The Section 17 (e) Procedures will also require the Board of Trustees of a Fund, 

including a majority of its Independent Trustees, to determine no less frequently than quarerly 

that all Interban transactions handled by an Affliated Broker durng the preceding quaer were 

executed in compliance with the Procedures. In this connection, the Procedures will require a 

Fund's Investment Adviser to record and retain the information necessar for the Board to rnake 

these determinations, and to present ths information at the Board's quaerly meetings. Among 

other thngs, ths information will show for each transaction executed through an Afliated 

Broker: (1) the date and time a curency trade was placed with an Affliated Broker; (2) the 

identity and amount of the curency involved and the settlement date; (3) the price of the traded 

curencies; (4) the amount of the Afliated Broker's commission (which the Affliated Broker 

will represent, in each instance, was no greater than its normal customer commission); (5) the 

commssions charged by other unaffliated firms in connection with comparable transactions 

involving similar curencies being purchased and sold during a comparable period of time; and 

(6) the price obtained contemporaneously to verify the competitiveness of 
 the price obtained by

the Affiliated Broker. The Section 17( e) Procedures will provide fuer for the maintenance and 

preservation of the Procedures and of wrtten records with respect thereto in conformance to the 

provisions of paragraph (c) of 
 Rule 17e-l under the Act and the representations in this letter. 

4. Section 17(e) of the Act. 

Section 17 (e)(1) of the Act makes it unlawfl for an affliated person of a 

registered investment company, or an affiliated person of such person, acting as agent, to accept 

from any source any compensation (other than a regular salar or wages from such registered 

company) for the purchase or sale of any propert to or for such registered company or any 

3. Please note, however, that while the Section l7 (e) Procedures will address an Investment
 

Adviser's obligation to setk best execution, we are not requesting the staffs views on 

whether adherence to the Procedures wil, in fact, satisfy that obligation. 

PHTRANS\266059\ i 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 9 

controlled company thereof, except in the course of such person's business as an underwter or 

broker. 

Section 17(e)(2) sets forth a specific statutory limitation on the remuneration a 

broker can receive when effecting securties tranactions for a registered investment company. 

That sub-section provides in relevant par that it is unawfl for an afliated person of a 

registered investment 
 company , or an affliated person of such person: 

Acting as broker, in connection with the sale of securties to or by 

such registered company or any controlled company thereof, to receive frorn any 

source a commission, fee, or other remuneration for effecting such tranaction 

which exceeds (A) the usual and customar broker commission if 
 the sale is effected on a securties exchange, or (B) two per centu of 
 the sales pnce if 
 the 

sale is effected in connection with a secondar distrbution of such securties, or 

(C) one per centu of the purchase or sale pnce of such securties if the sale is 

otherwse effected uness the Commission shall, by rules and regulations or order 

in the public interest and consistent with the protection of investors, permit a 

larger commission. 

Section 17 (e) was designed to prevent affiliates of an investment company, who 

act as agents, from personally profiting through commissions ana other payments from sales and 

purchases of 
 propert by that investment company. However, Section 17(e)(1) specifically 

permits affiliated persons to receive commissions in a transaction that involves an affliated 

investment company if they receive such commissions in the course of their business as 

underwters or brokers. 

An Affliated Broker could clearly avail itself of 
 the provisions of 
 Section 17(e) in connection with the transactions descnbed in this letter except for the definition of "broker" in 

Section 2(a)(6) of 
 the Act, which limits the term to securties brokers. An Affliated Broker may 

not be acting as a "broker" as so defined because at least certin types of curency transactions 

may not involve transactions in "securties" as that term is defined in Section 2(a)(36) of 
 the 

Pff~S\266059\1 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 10
 

Act.4 For this reason, Section 17(e)(2) may not permit the Funds' use of an Affiliated Broker in
 

connection with Interban transactions in compliance with the provisions of that Section. The 

failure to expressly include curency transactions within the types of 
 transactions that are 

permitted under Section 17(e)(2), however, is undoubtedly attbutable to the fact that registered 

investment companies generally did not invest in foreign securties and curencies in 1940 when 

the Act was enacted. Since then, however, the global economies have become increasingly 

integrated and co-dependent, registered investment companes that invest par or all of their 

assets in foreign securities have become common, and the use of foreign curency transactions in 

connection with the management of foreign investments has become ever more important. 

Moreover, in light of the investment puroses for which curency transactions are used, and the 

size and liquidity of the Interban market, an investment company should be permitted to use an 

affliated broker in Interban transactions pursuat to the standards and procedures described in
 

this letter that are comparable to, and exceed, those required under Section 17(e)(2) and Rule 

17 e-l.
 

) In paricular, we note that the Funds' proposed Section 17(e) Procedures will 

incorporate the protections and procedures of both Section 17 (e) of the Act and Rule 17 e-l 

thereunder, and wil thereby provide the Funds with the same safeguads for their transactions in 

Interban transactions as those provided for the Funds' transactions in securties though an 

Affliated Broker. Section 17(e)(2)(C) limits the remuneration an Affliated Broker can receive
 

to 1 % of the purchase or sale price when a securties sale is not effected on a securties exchange 

4. Section 2(a)(6) of 
 the Act provides that "(b)roker means any person engaged in the 

business of effecting transactions in securties for the account of others, but does not 

include a ban or any person solely by reason of the fact that such person is an 

underwter for one or more investment companes." The definition of "securty" in 

Section 2(a)(36) of 
 the Act does not mention "curency" or "curency contracts." In 

Fidelity Management & Research Company 1988 SEC No-Act. LEXIS 809 (June 13, 

1988), it was assumed, for puroses of applying Rile 17a-7 under the Act, that curency 

itself was not a "securty" as defined in the Act. On the other hand, in Curency Fund 

1986 SEC No-Act. LEXIS 2759 (September 25, 1986), the staffwas unable to concur 

that a "forward curency contract" or "foreign curency contract" was not a securty for 

puroses of 
 the Act, and in Davidson & Associates. P.C. 1992 SEC No-Act. LEXIS 717

(May 7, 1992), the staff 
 stated that "ra) forward contract on a foreign curency may be a

securty under Section 2(a)(36) of the 1940 Act."
 

PHTRANS\266059\ i 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 11
 

or in connection with a secondar distribution of securties. Rule 17 e-l provides that for sales 

effected on a securties exchange, a commission, fee or other remuneration paid to an Affliated 

Broker will be deemed as not exceeding the usual and customar broker's commission, if: 

(a) The commission, fee, or other remuneration
 

received or to be received is reasonable and fair compared to the commission, fee 

or other remuneration received by other brokers in connection with comparable 

transactions involving similar securties being purchased or sold on a securties 

exchange durg a comparable period of time; 

(b) The board of directors, including a majority of the
 

directors of 
 the investment company who are not interested persons thereof: (1) 

has adopted procedures which are reasonably designed to provide that such 

commssion, fee or other remuneration is consistent with the stadard described in 

paragraph (a) of 
 ths rule; (2) makes and approves such changes as the board 

deems necessar; and (3) determines no less frequently than quarerly that all 

transactions effected pursuant to ths rule durng the preceding quarer were 

effected in compliance with such procedures; and 

(c) The investment company (1) shall maintain and
 

. preserve permanently in an easily accessible place a wrtten copy of the 

procedures (and any modification thereto) described in paragraph (b)( 1) of this 

rule; and (2) shall maintain and preserve for a period not less than six years from 

the end ofthe.fiscal year in which any transactions occured, the first two years in 

an easily accessible place, a wrtten record of each such transaction setting forth 

the amount and source of 
 the commission, fee or other remuneration received or 

to be received, the identity of the person acting as broker, the terms of the 

transaction, and the information or materials upon which the findings described in 

paragraph (b)(3) of this rule were made. 

As noted above, the only compensation an Affiliated Broker wil receive in 

connection with the Funds' Interban transactions wil be a commission that, under the proposed 

Section 17( e ) 
 Procedures, (1) canot exceed 0.03% of the notional amount of any transaction, (2) 

must be reasonable and fair as compared to the commssions, fees or other remuneration received 

by other unaffiliated firms in connection with comparabl~ transactions involving similar 

PHTRANS\266059\ i 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 12
 

curencies being purchased and sold durng a comparable period of 
 time, and (3) canot exceed 

the Affiliated Broker's normal customer commission. In addition, the Section 17(e) Procedures 

will provide additional protections not prescribed by either Section 17( e) or Rule 17e-l. Under 

the Procedures, reports showing that these requirements have been met will be presented to a 

Fund's Board of 
 Trustees, including its Independent Trustees, no less frequently than quarerly. 

Furhermore, the Procedures will provide for anua Board review of an Affliated Broker's 

overall performance as broker. In this maner, the Section 17(e) Procedures wil provide 

adequate assurance that the commissions paid by the Funds to an Affliated Broker in Interban
 

transactions are reasonable and fair and, in addition, that the prices paid by the Funds in their 

transactions are competitive. 

5. Prior No-Action Letters.
 

We believe that the proposed arangements described in this letter regarding the 

Funds' use of an Affiliated Broker as broker in Interban transactions are substatially similar to
 

the arangements considered by the staff in the past involving the use of futures commission 

merchants by affliated investment companies in connection with transactions in exchange-traded 

futues contracts and options. See Prudential-Bache Governent Plus Fund. Inc. and PrudentialBache Securties. Inc. 1985 SEC No-Act. LEXIS 2519 (September 3, 1985); Shearson Lehman 

Brothers. Inc. 1986 SEC No-Act. LEXIS 2274 (Februar 18, 1986); Drexel Buram Lambert 

1986 SEC No-Act. LEXIS 2556 (July 28, 1986); and Kidder. Peabody Governent Income 

Fund. Inc. 1986 SEC No-Act. LEXIS 2731 (September 15, 1986).5 In those letters, although the 

staff believed that a futures commission merchant did not appear to be within the definition of 

"broker" contained in Section 2(a)(6) of 
 the Act, the staff also believed that it would not be 

inconsistent with the intent of 
 Sections 17(e)(l) and 17(e)(2) and Rule 17e-l to permit a futues 

commission merchant to receive commissions from affliated investment companies, as long as 

the conditions expressed in the letters were met. 

As noted above, foreign curency contracts and options traded in the Interban 

market are substantially similar to foreign curency futures contracts and options traded on 

commodity exchanges. In addition, the conditions of the aforementioned letters are substatially 

incorporated into the proposed arangement. A Fund's Section 17(e) Procedures will require that 

5. Cf. Investors Syndicate of America. Inc. 1977 SEC No-Act. LEXIS 1393 (May 19, 1977)
 

(payment in connection with the origination of mortgages by affiliate that were purchased 

by investment company permitted subject to the limitations of Section 17( e )(2)(C)). 

PHTRANS\266059\1 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 13
 

(1) èach Interban transaction must be appropriate for, and consistent with the policies of, the
 

Fund involved, and (2) the commission, fee or other remuneration received by an Affliated
 

Broker for its services in connection with the transactions (a) must not exceed 0.03% of 
 the 

notional amount of the paricular curency transaction involved, (b) must be reasonable and fair 

as compared to the remuneration received by other, unafliated firms in connection with
 

comparable transactions involving similar curencies being purchased and sold durng a 

comparable period oftime, and (c) must be no greater than an Affliated Broker's normal 

customer commission. The Section 17(e) Procedures will require a Fund's Board of 
 Trustees, including a majority of its Independent Trustees, to determine no less frequently than quarerly 

that all Interban transactions handled by an Affiliated Broker durng the preceding quaer 

complied with the Procedures, and wil also provide for the maintenance and preservation of the 

Procedures and appropriate wrtten records with respect thereto. In addition, the Procedures will 

provide that at least anually a Fund's Board of 
 Trustees, including its Independent Trustees, 

will review an Affiiated Broker's quality of execution for the Fund and overall responsiveness 

and performance, and will approve the independent sources that are used to test the 

competitiveness of 
 the prices quoted by an Affiliated Broker. 

The Section 17(e) Procedures will also ensure that a Fund's Board of 
 Trustees receives adequate information to evaluate independently whether the requirements of 
 the 

Procedures have been met. Under the conditions stated in this letter, the oversight by the Board 

of Trustees of the use of an Affliated Broker in connection with Interban transactions pursuat 

to the Section 17(e) Procedures will provide an effective safeguard against the abuses that might 

otherwse be inherent in a transaction between affliated paries. 

6. Conclusion.
 

We believe that the ability to use an Affiiated Broker will benefit the Funds and 

their shareholders by providing the Funds the opportty to increase their coverage of the 

Interban market and thereby obtain better prices for their Interban transactions. The 

commissions paid by the Funds to an Affliated Broker will never exceed 0.03% of 
 the notional 

amount of any Interban transaction and, therefore, wil always be substantially less than the 

maximum amount permitted by Section 17(e)(2)(C) of 
 the Act. In addition, the proposed 

standards for using an Affiliated Broker wil not only satisfy the requirements of Section 17(e) 

and Rule 17e-l, but wil also provide substantial additional protections. An Affliated Broker's 

proposed curency transactions for the Funds will, therefore, be fully consistent with the intent 

and puroses of Section i 7( e). In addition, we believe that the Funds' proposed use of an 

Affliated Broker in connection with Interban transactions is substantially similar to the use of 

PHTRANS\266059\ i 
DRINKER BIDDLE & REATH LLP
 

Douglas J. Scheidt, Esq. 

December 17, 1998 

Page 14
 

affiiated futues commissions merchants which was previously considered by the staff in the 

letters cited above, and should be treated by the staff in a similar maner. 

For the foregoing reasons, we respectfully request the stas advice that it wil not
 

recommend enforcement action to the Commission under Section 17(e) of 
 the Act if 
 the Funds 

use an Affliated Broker, and the Affliated Broker receives commissions, in connection with the
 

Funds' Interban transactions as described herein. 

Please do not hesitate to call Jeffey A. Dalke at (215) 988-2607 or 

Daniel A. Moonay of 
 this office at (215) 988-2670 with any questions regarding the matters 

discussed in this letter. 

If, for any reason, the staff 
 believes it will be unable to give the assurance 

requested, we ask for the opportty to speak with you, or another member of your staff, prior to 

the issuance of any formal letter. Than you for your consideration. 

Very trly yours,
 

DRIKER BIDDLE & REATH LLP 

By: 1£'1 A - Õ PJ A. Dalke
 

JAD:sc 

PHTRANS\266059\!