[Federal Register Volume 62, Number 232 (Wednesday, December 3, 1997)]
[Notices]
[Pages 63991-63993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31619]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22910; 812-10638]


First American Funds, Inc., et al.

November 25, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under section 12(d)(1)(J) of 
the Investment Company Act of 1940 (the ``Act'') exempting applicants 
from sections 12(d)(1)(A) and (B) of the Act, under sections 6(c) and 
17(d) of the Act exempting applicants from section 17(a) of the Act, 
and under section 17(d) of the Act and rule 17d-1 to permit certain 
joint transactions.

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SUMMARY OF APPLICATION: The requested order would supersede a prior 
order to permit certain registered investment companies to invest 
excess cash in money market funds advised by the same adviser for cash 
management purposes. The order also would amend a prior order 
permitting a fund of funds to purchase shares of certain investment 
companies in the same group of investment companies in excess of the 
limits of section 12(d)(1).
    Applicants: First American Funds, Inc. (``FAF''), First American 
Strategy Funds, Inc. (``FASF''), First American Investment Funds, Inc. 
(``FAIF''), including each current series and each subsequently created 
series of FAF, FASF and FAIF, U.S. Bank National Association or any 
other entity controlling, controlled by, or under common control with 
U.S. Bank National Association (``U.S. Bank''), and other registered 
investment companies or their series that are now or in the future 
advised by U.S. Bank.
    Filing Dates: The application was filed on April 29, 1997 and 
amended on October 1, 1997. Applicants have agreed to file an 
additional amendment during the notice period, the substance of which 
is incorporated in this notice.
    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 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 December 
22, 1997, and should be accompanied by proof of service on applicants 
in the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. FAF, FASF, and FAIF, Oaks, Pennsylvania 19456; U.S. Bank, 601 
Second Avenue South, Minneapolis, Minnesota 55402.

FOR FURTHER INFORMATION CONTACT:
J. Amanda Machen, Senior Counsel, at (202) 942-7120, or Mary Kay Frech, 
Branch Chief, at (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 at the 
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. FAIF is a registered open-end management investment company that 
currently offers twenty-three series, each of which is a variable net 
asset value fund. FAF is a registered open-end management investment 
company that currently offers three series, each of which is a money 
market fund subject to the requirements of rule 2a-7 under the Act. 
Each existing series of FAF and any future money market portfolio of 
FAF or FAIF or of other registered investment companies advised by U.S. 
Bank are referred to collectively as ``Money Market Funds.'' Each 
existing series of FAIF and any future variable net asset value 
portfolio of FAIF or FAF or of other registered investment companies 
advised by U.S. Bank are referred to collectively as ``Non-Money Market 
Funds.'' The Money Market Funds and the Non-Money Market Funds are 
referred to as the ``Funds.''
    2. FASF is a registered open-end management investment company that 
currently offers four series, each of which is a variable net asset 
value fund. Under an existing order (``Fund of Funds Order''),\1\ FASF 
operates as a ``fund of funds,'' the principal investments of which are 
shares of certain series of FAIF and FAF (``Underlying Portfolios'').
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    \1\ First American Investment Strategy Funds, Inc., Investment 
Company Act Release Nos. 22173 (Aug. 26, 1996) (notice) and 22241 
(Sept. 23, 1996) (order).
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    3. U.S. Bank, a wholly owned subsidiary of U.S. Bancorp (``USBC''), 
a bank holding company, serves as investment adviser for each series of 
FAIF, FAF and FASF. U.S. Bank has retained Marvin & Palmer Associates, 
Inc. (``Marvin & Palmer'') as a sub-adviser for FAIF's International 
Fund (U.S. Bank, Marvin & Palmer, and any future sub-adviser to any 
Fund are referred to collectively as the ``Investment Advisers''). 
First Trust National Association (the ``Custodian'') a wholly owned 
subsidiary of USBC, serves as custodian for the assets of each series 
of FAIF, FAF, and FASF.
    4. Pursuant to an exemptive order, the Non-Money Market Funds can 
invest in the money market series of FAF in excess of the limits of 
section 12(d)(1) of the Act, so long as each Fund's aggregate 
investment in the money market fund does not exceed the greater of 5% 
of the Fund's total net assets or $2.5 million (``Cash Sweep 
Order'').\2\
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    \2\ First American Investment Funds, Inc., Investment Company 
Act Release Nos. 21722 (Jan. 30, 1996) (notice) and 21784 (Feb. 27, 
1996) (order).
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    5. Applicants request an order that would (a) supersede the Cash 
Sweep Order to permit (i) each of the Funds (``Investing Funds'') to 
use the cash reserves that have not been invested in portfolio 
securities (``Uninvested Cash'') to purchase shares of one or more of 
the Money Market Funds, provided that no Investing Fund will have more 
than an aggregate of 25% of its total assets invested in all Money 
Market Funds at any time, and (ii) the Money Market Funds to sell their 
shares to, and to redeem their shares from, the Investing Funds; and 
(b) amend the Fund of Funds Order to permit FASF to invest in shares of 
Underlying Portfolios that will in turn invest in shares of the Money 
Market Funds to the extent permitted by the order sought in this 
application (``Amended Cash Sweep Order'').\3\ Because the Amended Cash 
Sweep Order will allow the Underlying Portfolios to invest greater 
amounts in the Money Market Funds than is allowed under the Cash Sweep 
Order, condition 2 to the Fund of Funds Order would be amended to allow 
FASF to continue to invest in the Underlying Portfolios.\4\
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    \3\ The Amended Cash Sweep Order also would delete conditions 3 
and 6 in the Fund of Funds Order.
    \4\ The fund of funds series of FASF are not ``Investing Funds'' 
as defined in the application, therefore any investment by them in 
the Money Market Funds would be under the Fund of Funds Order and 
subject to the conditions of that Order.
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    6. Each of the Funds has, or may have, Uninvested Cash held by its 
Custodian.

[[Page 63992]]

Uninvested Cash may result from a variety of sources, including 
dividends or interest received on portfolio securities, unsettled 
securities transactions, reserves held for investment strategy 
purposes, scheduled maturity of investments, liquidation of investment 
securities to meet anticipated redemptions, dividend payments, or new 
cash received from investors.\5\ By investing Uninvested Cash in the 
Money Market Funds, applicants believe that the Investing Funds will be 
able to reduce their transaction costs, create more liquidity, enjoy 
greater returns on the Uninvested Cash and further diversify their 
holdings.
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    \5\ Uninvested Cash does not include cash collateral received in 
connection with the Investing Funds' securities lending activities.
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Applicants' Legal Analysis

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if the securities represent more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or if the securities, together with the securities of other 
acquired investment companies, represent more than 10% of the acquiring 
company's total assets. Section 12(d)(1)(B) of the Act provides that no 
registered open-end investment company may sell its securities to 
another investment company if the sale will cause the acquiring company 
to own more than 3% of the acquired company's voting stock, or if the 
sale will cause more than 10% of the acquired company's voting stock to 
be owned by investment companies. The perceived abuses section 12(d)(1) 
sought to address include undue influence by an acquiring fund over the 
management of an acquired fund, layering of fees, and complex fund 
structures.
    2. Applicants' request would permit the Investing Funds to use 
Uninvested Cash to acquire shares of Money Market Funds in excess of 
the percentage limitations set our in section 12(d)(1)(A). Applicants 
propose that each Investing Fund be permitted to invest in shares of 
the Money Market Funds so long as no Investing Fund will have more than 
an aggregate of 25% of its total assets invested in all Money Market 
Funds at any time. Applicants' request also would permit Money Market 
Funds to sell their securities to Investing Funds in excess of the 
percentage limitations set out in section 12(d)(1)(B). Applicants state 
that relief permitting an Investing Fund to invest up to 25% of its 
total net assets in shares of the Money Market Funds is appropriate 
because at any given time, 25% or more of an Investing Fund's total 
assets may be comprised of Uninvested Cash. Applicants also request 
amendment of condition 2 to the Fund of Funds Order to permit the FASF 
funds to continue to invest in shares of Underlying Portfolios, which 
in turn invest in shares of the Money Market Funds, in reliance on the 
Amended Cash Sweep Order.
    3. Section 12(d)(1)(J) provides that the SEC can exempt any persons 
or transactions from section 12(d)(1) if the exemption is consistent 
with the public interest and the protection of investors. For the 
following reasons, applicants believe the proposed transactions satisfy 
this standard.
    4. Applicants believe that none of the concerns underlying section 
12(d)(1) are presented by the proposed transactions. Applicants state 
that, because the Investment Advisers and their affiliates will not 
derive any investment advisory or other fees in connection with the 
Investing Funds' purchase or sale of shares of the Money Market Funds, 
the Investment Advisers are not susceptible to undue influence in their 
management of the Money Market Funds because of threatened redemptions 
from the Money Market Funds or loss of fees.
    5. Applicants maintain that the proposed arrangement would not 
result in the inappropriate layering of either sales charges or 
investment advisory fees. Shares of the Money Market Funds sold to and 
redeemed by the Investing Funds will not be subject to a sales load, 
redemption fee, distribution fee under rule 12b-1 under the Act, or 
service fee. In addition, each Investment Adviser will credit to the 
respective Investing Fund, or waive, the investment advisory fees that 
it earns based on the Investing Fund's investments in the Money Market 
Funds to the extent the fees are based upon the Investing Fund's assets 
invested in shares of the Money Market Funds.
    6. Regarding the complexity of the proposed structure, applicants 
note that the net asset value of each current Money Market Fund is, and 
has been since its inception, maintained at a constant $1.00 per share. 
Therefore, applicants submit that the value of the Investing Funds' 
investments in the Money Market Funds will be easily determinable. In 
addition, applicants maintain that the Fund of Funds Order already 
permits FASF to invest in Underlying Portfolios, which invest in Money 
Market Funds, provided that the Underlying Portfolios comply with 
certain conditions. As a result, applicants submit that no additional 
complexity will be created by amending the Fund of Funds Order to 
reflect the Amended Cash Sweep Order.
    7. Section 17(a) of the Act makes it unlawful for any affiliated 
person of a registered investment company, acting as principal, to sell 
or purchase any security to or from the company. Section 2(a)(3) of the 
Act defines an affiliated person of an investment company to include 
any investment adviser of the investment company and any person 
directly or indirectly controlling, or under common control with, the 
investment adviser. Under section 2(a)(3), each series within FAIF, 
FASF, and FAF may be deemed to be under common control with each of the 
others, and thus an affiliated person of each of the other series of 
FAIF, FASF, and FAF. As a result, section 17(a) would bar the sale of 
shares of the Money Market Funds to the Investing Funds, and the 
redemption of the shares by the Money Market Funds.
    8. Section 17(b) of the Act authorizes the SEC to exempt a 
transaction from section 17(a) if the terms of the proposed 
transaction, including the consideration to be paid or received, are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned, and the proposed transaction is consistent with the 
policy of each investment company concerned and the general purposes of 
the Act. Section 6(c) of the Act permits the SEC to exempt persons or 
transactions from any provision of the Act, if the exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants submit, for the reasons discussed 
below, that their request for relief satisfies these standards.
    9. Applicants submit that the proposed transactions will not 
involve overreaching because the Investing Funds retain their ability 
to invest their Uninvested Cash directly in money market instruments, 
as authorized by their respective investment objectives and policies, 
if they believe they can obtain a higher return or for any other 
reason. Similarly, each of the Money Market Funds has the right to 
discontinue selling shares to any of the Investing Funds if its board 
of directors determines that the sales would adversely affect its 
portfolio management and operations. In addition, applicants note that 
shares of the Money Market Funds will be purchased and redeemed at 
their net asset value, the same consideration paid

[[Page 63993]]

and received for these shares by any other shareholder.
    10. Section 17(d) and rule 17d-1 prohibit an affiliated person of a 
registered investment company, acting as principal, from participating 
in any joint arrangement with the investment company unless the SEC has 
issued an order authorizing the arrangement. In determining whether to 
grant an exemption under rule 17d-1, the SEC considers whether the 
investment company's participation in the joint enterprise 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 other participants. Applicants state 
that each Investment Fund, by purchasing shares of the Money Market 
Funds, each Investment Adviser, by managing the assets of the Investing 
Funds, and each of the Money Market Funds, by selling shares to the 
Investing Funds, could be deemed to be participants in a joint 
enterprise. Applicants assert that investments by the Investing Funds 
in shares of the Money Market Funds will be on the same basis and will 
be indistinguishable from that of any other participant or shareholder 
and that the transactions will be consistent with the Act. In addition, 
applicants state that the proposed transactions may result in cost 
savings for the Investing Funds.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Shares of the Money Market Funds sold to and redeemed from the 
Investing Funds will not be subject to a sales load, redemption fee, 
distribution fee under a plan adopted in accordance with rule 12b-1, or 
service fee (as defined in rule 2830(b)(9) of the National Association 
of Securities Dealer's Rules of Conduct).
    2. No Money Market Fund will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1) of the Act.
    3. Each of the Investing Funds will be permitted to invest 
Uninvested Cash in, and hold shares of, a Money Market Fund only to the 
extent that the Investing Fund's aggregate investment in all Money 
Market Funds taken as a group does not exceed 25% of the Investing 
Fund's total assets.
    4. Each Fund shall be advised by U.S. Bank or a person controlling, 
controlled by, or under common control with U.S. Bank.
    5. Investment by an Investing Fund in shares of a Money Market Fund 
will be consistent with each Investing Fund's respective investment 
restrictions and policies as set forth in its prospectuses and 
statements of additional information.
    6. The applicants will cause the Investment Advisers, in their 
capacities as advisers for the Money Market Funds, to remit to the 
respective Investing Fund, or waive, an amount equal to all investment 
advisory fees received by them under their respective advisory 
agreements with the Money Market Funds to the extent such fees are 
based upon the Investing Fund's assets invested in shares of the Money 
Market Funds. Any of these fees remitted or waived will not be subject 
to recoupment by the Funds' Investment Advisers at a later date.
    7. FASF may continue to rely on the Funds of Funds Order, subject 
to compliance with the conditions it contains, except for conditions 3 
and 6, which are deleted. Condition 2 to the Fund of Funds Order is 
amended to read as follows: ``No Underlying Portfolio will acquire 
securities of any other investment company in excess of the limits 
contained in section 12(d)(1)(A) of the Act, except to the extent that 
the Underlying Portfolio other than a Money Market Fund acquires 
securities of another investment company under exemptive relief from 
the Commission permitting the Underlying Portfolio to purchase 
securities of an affiliated money market fund for short-term cash 
management purposes.''

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margareet H. McFarland,
Deputy Secretary.
[FR Doc. 97-31619 Filed 12-2-97; 8:45 am]
BILLING CODE 8010-01-M