[Federal Register Volume 65, Number 206 (Tuesday, October 24, 2000)]
[Notices]
[Pages 63653-63657]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27234]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24695; 812-11746]


Provident Institutional Funds, et al.; Notice of Application

October 18, 2000.
Agency: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application under sections 6(c) and 17(b) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 17(a) of the Act.

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SUMMARY OF APPLICATION: Applicants seek an order that would permit a 
registered open-end management investment company to enter into 
repurchase agreements with an affiliated person.
    Applicants: Provident Institutional Funds (the ``Fund''), the PNC 
Financial Services Group, Inc. (``PNC''), and blackRock Advisors, Inc. 
(``BlackRock'').

FILING DATES: The application was filed on August 12, 1999, and amended 
on October 18, 2000.
    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 November 
8, 2000, 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, NW., Washington, DC 20549-
0609. Applicants, c/o BlackRock Financial Management, 345 Park Avenue, 
New York, New York 10154.

FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Special Counsel, at 
(202) 942-0572, or Christine Y. Greenlees, 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, 450 5th Street, NW., Washington, DC 
20549-0102 (tel. (202) 942-8090).

[[Page 63654]]

Applicants' Representations

    1. The Fund is an open-end, diversified management investment 
company consisting of ten series (each, a ``Series''). Each Series is a 
money market fund that complies with rule 2a-7 under the Act.
    2. BlackRock, an investment adviser registered under the Investment 
Advisers Act of 1940 (``Advisers Act''), is the investment adviser for 
each Series. BlackRock is a direct wholly-owned subsidiary of 
BlackRock, Inc., which, in turn, is a majority-owned subsidiary of PNC 
Bank, N.A. (``PNC Bank''). PNC Bank is a wholly-owned subsidiary of 
PNC. PNC is a bank holding company that operates subsidiary banks and 
other subsidiaries engaged in financial businesses. PFPC Trust company, 
an indirect wholly-owned subsidiary of PNC, is the Fund's custodian.
    3. Applicants request that relief be extended to (a) any other 
investment adviser registered under the Advisers Act that controls, is 
controlled by, or is under common control with BlackRock (collectively, 
the ``Advisors''), and (b) any entity that controls, is controlled by, 
or is under common control with PNC (collectively, the ``PNC 
Companies''). \1\ Applicants also request that the relief be extended 
to future Series of the Fund and to such other registered open-end 
management investment companies and their series that in the future: 
(a) are advised by the Advisors or the PNC Companies, (b) are taxable 
money market funds under rule 2a-7 under the Act, and (c) effect 
purchases and sales through PNC's ``sweep'' program (collectively, such 
future companies and the Fund are the ``Funds''). \2\
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    \1\ Applicants represent that every Advisor will be registered 
under the Advisers Act, and any PNC Company that serves as an 
investment adviser to any Series will be registered or exempt from 
registration under the Advisers Act.
    \2\ Any future entity that relies on the requested order will do 
so only in accordance with the terms and conditions of the 
application. Each entity that currently intends to rely on the 
requested order has been named as an applicant.
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    4. The Fund's shares are purchased by customers of the PNC 
Companies, including qualified deposit, custody, agency, and trust 
accounts, through their accounts with the PNC Companies. The Fund's 
shares may be purchased through automatic investment transactions. In 
these transactions, one of PNC's subsidiary banks, as agent, follows 
the standing instructions of the customer and automatically invests 
excess cash balances in the customer's accounts in shares of one or 
more Series (``sweep program''). \3\ Each of the participating Series 
currently declares dividends daily to shareholders of record as of 4 
p.m. on that day and accepts orders at the next net asset value 
determined after the order is received. Net asset value is determined 
as of 12 noon and 5:30 p.m. Orders are executed when good funds are 
received, which is normally after the dividend is declared for the day 
on which the order is received. Accordingly, in the sweep program, 
customers do not earn a dividend in the Fund for the day on which the 
customers' banking transactions occurred. This would normally result in 
the customers losing a day's worth of income on such funds.
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    \3\ In accordance with the standing instructions of the 
customers of the PNC Companies, the computer program also provides 
for the automatic redemption of Fund shares held in an account as of 
the next determined net asset value if the cash balance in the 
account is less than the minimum balance specified by the customer.
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    5. To permit BlackRock, as the Fund's investment adviser, to invest 
anticipated new assets attributable to the sweep program on the same 
day that they are available for investment (despite the fact that the 
exact amount will not be known until after the time for investment that 
day), applicants propose that the PNC Companies enter into overnight 
repurchase agreements with each Series. The assets would be invested in 
fund shares as of the time the relevant Series determined its net asset 
value on the same day the sweep occurs (the ``Sweep Time''). The Fund 
proposes to enter into a master repurchase agreement with the PNC 
Companies, which is substantially the same as the industry standard 
master repurchase agreement promulgated by the Public Securities 
Association, covering all repurchase agreement transactions (the 
``Master Repurchase Agreement'').
    6. In order to enable each Series to handle sweep transactions that 
result in net redemptions as well as net investments, BlackRock would 
plan each day's portfolio transactions for each Series to include an 
overnight repurchase agreement transaction with the PNC Companies in a 
specified standing base amount (``Base Amount''). The Base Amount would 
represent the greatest amount of net redemptions likely to be 
experienced by a Series as a result of the sweep program on any given 
day and would be approximately 2% to 5% of the aggregate net asset 
value of each Series and would be the amount that a Series otherwise 
would have in uninvested cash to meet redemptions expected from the 
sweep program. The Base Amount as to any particular Series on any 
particular day will not exceed 5% of that Series' net assets prior to 
giving effect to the sweep for that day, or such lower amount as the 
Fund's board of trustees (``Board''), including a majority of the 
trustees who are not ``interested persons,'' as defined by section 
2(a)(19) of the Act, of the PNC Companies, the Advisors, or the Fund 
(``Independent Trustees''), may determine. The purpose of a repurchase 
agreement in the Base Amount would be to enable a Series to adjust its 
earning assets downward after normal trading hours in response to a net 
redemption being required by the sweep program for that Series on a 
particular day. Thus, the Base Amount for each Series would be the 
amount of the purchase agreement that would be in effect overnight with 
the PNC Companies if the sweep program produces no net investment or 
net redemption, giving the Series an opportunity to reduce the 
repurchase agreement (and thus its assets) if there are net redemptions 
on that day. If the operation of the sweep program produces net 
investment into a Series on a given day, the Fund will invest the net 
amount swept into that Series by increasing the Base Amount of the 
overnight repurchase agreement transaction with the PNC Companies by 
the net amount being swept into the Series. If the operation of the 
sweep program produces net redemptions from a Series on a given day, 
the amount of the overnight repurchase agreement transaction for that 
Series will be reduced from the Base Amount by the net amount being 
redeemed.
    7. Applicants intend to limit the amount of each Series' net assets 
that may be invested pursuant to the requested order with the PNC 
Companies to a percentage upon which applicants from time to time may 
agree (the ``Maximum Purchase Amount''). The Maximum Purchase Amount 
may fluctuate but will not exceed 15% of the net assets of a Series 
after giving effect to the sweep for that day.
    8. To facilitate the repurchase transaction where the exact amount 
of the overnight repurchase agreement and, consequently, the amount of 
the required collateral is not known until PNC's computer processing is 
completed during the night (the ``Completion Time''), the PNC 
Companies, at no cost to the Fund, will maintain at all times in a 
segregated subcustodian account in the name of the Fund, for the 
benefit of the applicable Series, collateral having a value when added 
to the value of the collateral collateralizing any overnight repurchase 
agreements with the PNC Companies outstanding at the time, at least 
equal to the amount (the ``Required Collateral Amount'') necessary to 
collateralize fully (within the meaning of rule 2a-7 under Act) 
repurchase agreements with

[[Page 63655]]

the Fund on behalf of each applicable Series in an amount equal to the 
Maximum Purchase Amount. BlackRock will notify the Fund's custodian and 
PNC of any change in the Maximum Purchase Amount, and the PNC Companies 
will adjust the amount of collateral maintained in the segregated 
account as often as necessary so that it at least equal the aggregate 
Required Collateral Amount for the applicable Series. The relevant 
Series will have a perfect security interest in the repurchase 
agreement collateral held in the account.
    9. PNC Bank's Trust Department will act as the Fund's subcustodian 
pursuant to a subcustodian agreement approved by the Board, including a 
majority of the Independent Trustees.\4\ The Fund's assets held by PNC 
Bank's Trust Department would be maintained in a segregated custodian 
account established on behalf of the Fund in accordance with the rules 
and standards of the Comptroller of the Currency and the Act. PNC 
Bank's Trust Department would receive the eligible securities 
transferred to it in its capacity as subcustodian for the Fund and hold 
them in a manner complying with the requirements of section 17(f) of 
the Act. After the Completion Time that night, the records maintained 
by PNC Bank's Trust Department in its capacity as the Funds' 
subcustodian would show:
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    \4\ The subcustodian account may be maintained with PNC Bank's 
Trust Department or a nominee qualified to act as a custodian 
pursuant to section 17(f) of the Act, and references in this notice 
to PNC Bank's Trust Department mean either entity.
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    (a) For each customer account participating in the sweep program, a 
cash entry for the number of shares of the applicable Series' shares 
purchased or redeemed and a corresponding sub-entry for the number of 
shares purchased or redeemed as of the Sweep Time through operation of 
the computer sweep program; and
    (b) For the Fund's subcustodian account, all purchase and sales 
transactions (which, where a PNC Company is a trustee, nominee, or the 
equivalent, may be a single net purchase or redemption transaction for 
a number of subaccounts maintained by that PNC Company) and the net 
cash proceeds, if any, received by the Fund for each applicable Series 
through the operation of the sweep (or, conversely, the net redemption 
proceeds paid or payable by the Fund for each applicable Series if 
there were net redemptions). In addition, the Fund's subcustodian 
account would reflect the specific amount in fact invested in an 
overnight repurchase agreement for each applicable Series (including 
the ownership of the securities securing the repurchase agreement). If 
the sweep resulted in net redemptions for any Series, the subcustodian 
account would reflect this fact and show reduced or no ownership of 
securities held in the subcustodian account to secure repurchase 
transactions with the PNC Companies, since (contrary to expectations) 
none of the Fund's assets had been used to purchase such securities. To 
the extent that securities transferred to secure the repurchase 
agreements exceeded the amount of collateral actually required for that 
day's repurchase agreements (as shown by the results of the day's 
computer processing), the appropriate PNC Company would be shown to be 
the owner of the excess securities.
    10. After the Completion Time, PNC would transmit to the Funds' 
transfer agent records relating to the automatic investment 
transaction. The transfer agent's records would then show an entry to 
each of the corresponding shareholder accounts for the number of each 
relevant Series' shares automatically purchased or redeemed as of the 
Sweep Time through operation of the sweep.
    11. Each Series will purchase only securities in which it may 
invest as described in its prospectus and statement of additional 
information and as limited by rule 2a-7. The Master Repurchase 
Agreement will be collateralized only by securities that are, except as 
to maturity, ``first-tier securities'' as defined by rule 2a-7(a)(12) 
under the Act (``First-Tier Securities'') and that are eligible 
collateral for the applicable Series under the Series' prospectuses and 
statement of additional information and rule 2a-7 under the Act. The 
transactions will comply with the guidelines set forth in Investment 
Company Act Release No. 13005 (February 2, 1983) and will be 
collateralized fully as that term is defined in rule 2a-7. Any 
repurchase agreement entered into by a Fund will satisfy the 
requirements of proposed rule 5b-3,\5\ if and when the rule is adopted 
and becomes effective. The Master Repurchase Agreement will be subject 
to annual approval with respect to each Series by the Board, including 
a majority of the Independent Trustees.
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    \5\ Investment Company Act Release No. 24050 (Sept. 23, 1999) 
(proposing rule 5b-3).
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    12. The transactions would be ``repurchase agreements'' for 
purposes of Chapter 11 of the United States Bankruptcy Code and the 
Financial Institutions Reform, Recovery and Enforcement Act of 1989. 
These statutes provide that, if the bankruptcy of the counterparty 
occurs, the repurchase agreement can be liquidated without being 
subject to the potential delay associated with the automatic stay or 
similar provision of those statutes.

Applicants' Legal Analysis

    1. Section 17(a) of the Act makes it unlawful for any affiliated 
person of a registered investment company, or any affiliated person of 
such affiliated person, acting as principal, to sell or purchase any 
security to or from such investment company. Section 2(a)(3) of the Act 
defines an affiliated person to include any investment adviser of a 
registered investment company and a person that controls, is controlled 
by, or is under common control with another person. Each Advisor, as 
the Funds' investment adviser, is affiliated with the Funds. In 
addition, since each Advisor will be controlled by PNC and will be 
under common control with each of the other PNC Companies, PNC and each 
of the other PNC Companies would be an affiliated person of an 
affiliated person (Advisor) of the Funds. Accordingly, the Advisors and 
the PNC Companies are subject to the prohibitions contained in section 
17(a) with respect to the Funds.
    2. 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, the proposed transaction is consistent with the 
policy of each registered investment company concerned, and the 
proposed transaction is consistent with the general policy of the Act.
    3. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction or any class or classes of 
persons, securities, or transactions from any provision of the Act, or 
from any rule thereunder, if such exemption is necessary or appropriate 
in the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act. Applicants request relief under sections 17(b) and 6(c) of the Act 
from section 17(a) of the Act to permit the Funds to engage in 
overnight repurchase agreements with the PNC Companies. Applicants 
submit that the requested relief satisfies the standards for relief in 
sections 6(c) and 17(b) for the reasons discussed below.
    4. Applicants submit that the requested relief is appropriate and 
in the public interest because it will permit the applicable States to 
invest at a favorable yield incremental net assets attributable to the 
``sweep'' program on

[[Page 63656]]

the same day that such assets are available for investment. Applicants 
believe that a more attractive ``sweep'' program of this type would 
result in increased assets for the applicable Series and the Fund. 
Applicants submit that a larger asset base for a particular Series 
would benefit that Series' shareholders by spreading expenses over a 
larger asset base.
    5. Applicants contend that the proposed exemption is necessary to 
enable the Fund to earn market rates of return on assets obtained on a 
particular day through the sweep program. Applicants state that they 
have been unable to local any unaffiliated issuer willing to engage in 
the transactions on a basis as favorable to the Fund as the proposed 
amendments.
    6. Applicants state that PNC and its affiliates are aware of the 
potential conflicts of interest inherent in the operation of the sweep 
program if the proposed relief is granted. Applicants state that, 
therefore, PNC and BlackRock have established procedures and conditions 
to be followed by their employees and agents to prevent any 
overreaching on the part of any person that could act to the detriment 
of the Fund and to ensure that each transaction is effected on a 
reasonable and fair basis.
    7. Applicants submit that the proposed transactions will not reduce 
any of the applicable Series' yields. If the operation of the proposed 
sweep program shortens the Funds' average daily portfolio maturity, the 
effect of the reduction would be minimal because: (a) each Series 
currently maintains a relatively short average daily portfolio 
maturity; (b) upon receipt of assets, the Series historically have 
invested the assets in overnight or very short-term obligations with 
the investment occurring one day later; and (c) yields on overnight 
instruments are often very similar to or even higher than rates on 
comparable credit quality instruments with maturities of 30 to 40 days. 
Thus, applicants believe that any effect on yield as a result of the 
proposed sweep program would be negligible. In addition, operations 
pursuant to the independent pricing mechanism set forth in condition 
(9) below should provide yields from sweep investments that are no 
lower than similar non-sweep investments.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. No sweep account customer of any of the PNC Companies will be 
permitted to effect a sweep transaction for any participating Series of 
any Fund after the Sweep Time for the Series and the Series' net asset 
value has been computed for that day.
    2. The Board of each Fund, including a majority of the Independent 
Trustees, will: (a) Adopt procedures that are reasonably designed to 
provide that the conditions set forth below and the requirements of 
Investment Company Act Release No. 13005 (Feb. 2, 1983) have been 
complied with; (b) make and approve changes to the procedures as deemed 
necessary; (c) determine no less frequently than quarterly that the 
transactions made pursuant to the order during the preceding quarter 
were effected in compliance with the procedures; and (d) approve the 
Master Repurchase Agreement annually. The Advisor of each Fund may 
implement these procedures, subject to the direction and control of the 
Board of each Fund.
    3. The legal or compliance department of, and internal and outside 
auditors for, the PNC Companies (``Compliance Personnel'') will prepare 
guidelines for the Advisors and the PNC Companies to ensure that the 
transactions described in the application comply with the conditions of 
the application and that the integrity of the program is maintained. 
The Funds' independent public accountants will verify assets held in 
each subcustodian account in accordance with rule 17f-2 under the Act. 
The Compliance Personnel will periodically monitor the activities of 
the Advisors and the PNC Companies in connection with the operation of 
the sweep program to ensure that the conditions set forth in the 
application are adhered to.
    4. The terms of the relief will be disclosed fully in each Fund's 
prospectus and statement of additional information. A schedule of all 
transactions with the PNC Companies will be filed with each semi-annual 
report filed by the Funds with the Commission pursuant to sections 
30(a) and 30(b)(1) of the Act. The relevant Advisor will provide each 
Fund's Board with a full report of the transactions under the sweep 
program, as described in the application, no less frequently than 
quarterly. The relevant Advisor also will provide each Fund's Board 
with a statement that, as the Fund's investment adviser, it determined 
the repurchase transactions to be necessary and appropriate under the 
circumstances.
    5. The Funds, the PNC Companies, and the Advisors will maintain 
records with respect to those transactions conducted pursuant to the 
requested exemption as may be necessary to confirm compliance with the 
conditions to the requested relief. In this regard, each Fund will 
maintain an itemized daily record of repurchase agreement transactions 
entered into pursuant to the exemption, showing for each transaction: 
That it has entered into the transaction; the entity with which it has 
entered into the transaction; the purchase and repurchase prices; the 
time and date of the transaction; the type and amount of collateral; 
and the date fixed for termination of the transaction, which will 
always be the next business day. For each transaction, the records also 
shall document the quotations received from other dealers in accordance 
with condition (9), including: The names of the dealers; the prices 
quoted; and the times and dates the quotations were received. The 
records required by this condition will be maintained and preserved in 
the same manner as records required under rule 31a-1(b)(1) under the 
Act.
    6. The Maximum Purchase Amount will be the amount stipulated by the 
PNC Companies from time to time but will not exceed 15% of the sum of 
the net assets of the applicable Series after giving effect to the 
sweep for any particular day. The Base Amount as to any particular 
Series on any particular day will not exceed 5% of that Series' net 
assets prior to giving effect to the sweep for that day, or such lower 
amount as the Board of the Funds, including a majority of the 
Independent Trustees, may determine. With respect to a particular 
Series on a particular day, the amount invested pursuant to the 
requested exemption will not exceed the lesser of the sum of the Base 
Amount for that Series plus the amount swept into that Series on that 
day or 15% of the next assets of that Series after giving effect to the 
sweep for that day.
    7. All records pertaining to the sweep program will be preserved 
for a period of not less than six years, the first two years in an 
easily accessible place, from the end of the fiscal year in which any 
sweep transaction occurred.
    8. In connection with overnight repurchase agreement transactions 
pursuant to the Master Repurchase Agreement, the PNC Companies will 
maintain at all times during operation of the sweep program in a 
segregated subcustodian account in the name of the relevant Fund for 
the benefit of the applicable Series' collateral comprised only of 
securities that are, except for their maturity, First-Tier Securities 
valued at an amount equal to the Required Collateral Amount. In 
addition, the PNC Companies will transfer the collateral through the 
book

[[Page 63657]]

entry system of the Federal Reserve, the Depository Trust Company, or 
another book entry system approved by the Independent Trustees (each, 
an ``approved book entry system'') and, in connection with the 
transfer, each Fund's subcustodian account with PNC Bank's Trust 
Department will be designated through an approved book entry system as 
the recipient of the securities and the PNC Companies' internal records 
and written confirmation will indicate that the collateral is being 
held on behalf of and in the relevant Fund's name for the benefit of 
the applicable Series. Each Fund thereby will acquire a security 
interest in the collateral for the benefit of the applicable Series. 
Any repurchase agreements entered into by a Fund will satisfy the 
requirements of proposed rule 5b-3 under the Act, if and when the rule 
is adopted and becomes effective.
    9. Before any transaction may be conducted pursuant to the 
requested exemption, the relevant Advisor must obtain the information 
as it deems necessary to determine that the price test below has been 
satisfied. Before any repurchase agreement is entered into pursuant to 
the requested exemption, the relevant Advisor must obtain and document 
competitive quotations from at least two other dealers with respect to 
repurchase agreements comparable to the type of repurchase agreement 
involved (including size, which would equal the Maximum Purchase Amount 
for the particular Series in question, maturity, and collateral), 
except that if quotations are unavailable from two dealers only one 
other competitive quotation is required. In addition, the repurchase 
transactions for which quotations are sought must be conventional 
overnight repurchase agreements in which the funds would be transferred 
by the relevant Fund on behalf of the participating Series as of the 
same day that the transaction is entered into, and then returned by the 
counterparty on the following business day. Before entering into a 
transaction pursuant to the requested exemption, a determination will 
be required in each instance, based upon the information available to 
the relevant Advisor, that the income to be earned from the repurchase 
agreement to be entered into with any PNC Company is at least equal to 
that available from the repurchase agreements with respect to which 
quotes were obtained.
    10. No less frequently than quarterly, the Board of each Fund, 
including a majority of the Independent Trustees, on behalf of each 
Series of that Fund, will review the Base Amounts that have been 
established for the Series during the preceding quarter to determine 
whether the Base Amounts appropriately reflected the amounts of the 
Series' net assets that would have remained uninvested at the Fund's 
custodian in order to meet potential redemptions from the sweep program 
if the Base Amounts were not available. To assist the Board in this 
review, the Advisors will provide the Board with all relevant 
information. The Board, including a majority of the Independent 
Trustees, will take such steps as it deems necessary to assure that the 
Base Amounts for each Series appropriately reflect the amounts of the 
Series' net assets that would remain uninvested at the Fund's custodian 
in order to meet potential redemptions from the sweep program if the 
Base Amounts are not available.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-27234 Filed 10-23-00; 8:45 am]
BILLING CODE 8010-01-M