[Federal Register Volume 65, Number 28 (Thursday, February 10, 2000)]
[Notices]
[Pages 6645-6647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3086]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24278; 812-11562]


First American Investment Funds, Inc., et al.; Notice of 
Application

February 4, 2000.
AGENCY:  Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under sections 6(c), 10(f), and 17(b) 
of the Investment Company Act of 1940 (``Act'') for an exemption from 
sections 10(f) and 17(a)(1) of the Act.

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SUMMARY OF THE APPLICATION: The requested order would permit certain 
registered management investment companies to purchase certain 
securities from an affiliated underwriter and through group orders 
placed with an underwriting syndicate that includes the affiliated 
underwriter.

Applicant: First American Investment Funds, Inc. (``FAIF''); Minnesota 
Municipal Income Portfolio, Inc.; Minnesota Municipal Term Trust, Inc.; 
Minnesota Municipal Term Trust, Inc.-II.; U.S. Bank National 
Association (``U.S. Bank''); and U.S. Bancorp Piper Jaffray Inc. 
(``Piper Jaffray'').

Filing Dates: The application was filed on April 2, 1999 and was 
amended on December 22, 1999. Applicants have agreed to file an 
additional amendment, the substance of which is incorporated in this 
notice, during the notice period.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on February 29, 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 may request notification by writing to the 
Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o James D. Alt, 
Esq., Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, MN 
55402.

FOR FURTHER INFORMATION CONTACT: Rachel H. Graham, Senior Counsel, at 
(202) 942-0583, or Nadya B. Roytblat, Assistant Director, 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 from 
the Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. FAIF is an open-end management investment company registered 
under the Act. FAIF offers its shares in several series, including the 
Minnesota Intermediate Tax Free Fund and the Minnesota Tax Free Fund. 
Minnesota Municipal Income Portfolio, Inc., Minnesota Municipal Term 
Trust, Inc., and Minnesota Municipal Term Trust, Inc.-II are closed-end 
management investment companies registered under the Act. The two named 
series of FAIF, together with the three closed-end investment 
companies, collectively are referred to in this notice as the 
``Funds.'' The Funds invest primarily in debt securities of the State 
of Minnesota, its political subdivisions, authorities, agencies, 
instrumentalities and corporations, the interest on which is exempt 
from federal and Minnesota personal income taxes (``Minnesota Tax-
Excempt Securities'').
    2. U.S. Bank, which is exempt from registration as an investment 
adviser under the Investment Advisers Act of 1940 (``Advisers Act'') 
pursuant to section 202(a)(11) of the Advisers Act, serves as 
investment adviser to each Fund. U.S. Bank is a wholly-owned subsidiary 
of U.S. Bancorp.
    3. Piper Jaffray, a registered broker-dealer and investment banking 
firm, is a wholly-owned indirect subsidiary of U.S. Bancorp. Applicants 
state that Piper Jaffray is one of the leading underwriters of most 
types of Minnesota Tax-Exempt Securities based on both dollar volume 
and number of new issues. In 1998, Piper Jaffray served as underwriter 
of approximately $2.4 billion in principal amount of Minnesota Tax-
Exempt Securities. According to applicants, this amount

[[Page 6646]]

represented approximately 46% of the total dollar amount, and 
approximately 24% of the total number, of new issues of Minnesota Tax-
Exempt Securities during that year.
    4. Applicants request relief under section 10(f) from section 10(f) 
and under sections 6(c) and 17(b) from section 17(a)(1) to permit the 
Funds to purchase Minnesota Tax-Exempt Securities from Piper Jaffray, 
when Piper Jaffray is the sole underwriter of these securities or these 
securities are unavailable from other members of an underwriting 
syndicate. Applicants also request relief under these sections to 
permit the Funds to purchase Minnesota Tax-Exempt Securities through 
group orders placed with an underwriting syndicate of which Piper 
Jaffray is a member. \1\ The requested order would not permit 
transactions between Piper Jaffray and the Funds in other securities or 
in Minnesota Tax-Exempt Securities sold in the secondary market.
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    \1\ A group order is an order that is allocated to all members 
of an underwriting syndicate in proportion to their relative 
participations.
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    5. Applicants request that any relief granted pursuant to the 
application also apply to all current and future series of FAIF and to 
any other registered management investment companies organized in the 
future that are advised or subadvised by U.S. Bank (or a person 
controlling, controlled by, or under common control with U.S. Bank) and 
that invest primarily in Minnesota Tax-Exempt Securities (collectively, 
``Future Funds'').\2\
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    \2\ Each Fund that currently intends to rely on the requested 
order is named as an applicant. Any Future Fund that relies on the 
requested relief will do so only in compliance with the terms and 
conditions of the application.
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Applicants' Legal Analysis

    1. Section 10(f) of the Act, in relevant part, prohibits a 
registered investment company from purchasing securities from an 
underwriting syndicate in which an affiliated person of the company's 
investment adviser acts as a principal underwriter. Under section 
2(a)(3) of the Act, Piper Jaffray is an affiliated person of U.S. Bank 
because both entities are under the control of U.S. Bancorp.
    2. Section 10(f) further provides that the Commission, by rule or 
order, may exempt any transaction or class of transactions from section 
10(f) to the exempt that the exemption is consistent with the 
protection of investors. Rule 10f-3 under the Act permits a registered 
investment company to make purchases otherwise prohibited by section 
10(f) under certain conditions. Under the rule, the company may not 
purchase the securities being offered directly or indirectly from its 
affiliated underwriter, and purchases of municipal securities may not 
be designated as group sales or otherwise allocated to the account of 
the affiliated underwriter.
    3. Section 17(a)(1) of the Act, in relevant part, prohibits an 
affiliated person of a registered investment company, or an affiliated 
person of such person, acting as principal, from selling securities to 
the investment company. Under section 17(b) of the Act, the Commission 
will exempt a transaction from the provisions of section 17(a) if it 
finds that the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned, and that the proposed transaction is consistent with the 
policy of the registered investment company and the general purposes of 
the Act. Section 6(c) of the Act, in relevant part, permits the 
Commission to exempt any transaction or class of transactions from any 
provision of the Act if, and to the extent that, 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.
    4. Applicants assert that the supply of newly-issued Minnesota Tax-
Exempt Securities has remained relatively stable over the past several 
years, while the demand for these securities has been increasing. 
Applicants state that, in their experience, group orders generally are 
given priority over designated orders and member orders in 
underwritings of Minnesota Tax-Exempt Securities.\3\ Due to the 
priority given to group orders, the Funds may not be able to purchase 
Minnesota Tax-Exempt Securities through designated orders or member 
orders in an offering that is oversubscribed. Applicants assert that 
the Funds therefore may be precluded from making purchases in any 
oversubscribed offering where Piper Jaffray is a member of the 
underwriting syndicate. As noted above, applicants assert that Piper 
Jaffray is one of the leading underwriters of most types of Minnesota 
Tax-Exempt Securities.
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    \3\ In a designated order, the purchaser designates one or more 
syndicate members to receive the credit for sale. In a member order, 
the purchaser places an order directly with a member of the 
syndicate that retains that portion of the commission not retained 
by the manager.
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    5. Applicants assert that the Funds are largely dependent upon the 
new issue market for Minnesota Tax-Exempt Securities in order to meet 
their portfolio needs. According to applicants, the availability of 
Minnesota Tax-Exempt Securities in the secondary market is 
unpredictable because, among other reasons, a substantial portion of 
these securities are held to maturity by their original purchasers. 
Applicants also assert that prices may be higher in the secondary 
market because of dealer markups and, because secondary market 
purchases are often made at a discount to par, a portion of the return 
on the securities purchased may be treated as taxable income.
    6. Applicants state that permitting the Funds to buy Minnesota Tax-
Exempt Securities directly from Piper Jaffray when the securities are 
unavailable from another underwriter, or through group orders when 
Piper Jaffray is a member of the underwriting syndicate for the 
securities, would benefit the shareholders of the Funds by providing 
the Funds with adequate access to the new issue market for Minnesota 
Tax-Exempt Securities. Applicants assert that, as a condition to the 
requested relief, the Funds, together with all other persons for whom 
U.S. Bank and its affiliates have investment discretion (collectively, 
``Related Purchasers'') would be prohibited from purchasing a majority 
or more of any class of an issue of Minnesota Tax-Exempt Securities 
when Piper Jaffray is an underwriter of the securities. This condition 
would operate in addition to the requirement in rule 10f-3(b)(7)(i) 
that the aggregate amount of securities of any class of Minnesota Tax-
Exempt Securities purchased by the Funds, together with all other 
investment companies advised by U.S. Bank, may not exceed 25% of the 
principal amount of the offering of that class. According to 
applicants, these two requirements would protect the Funds against the 
dumping of unmarketable securities.
    7. Applicants note that, as a further condition to the requested 
relief, the aggregate value of Minnesota Tax-Exempt Securities held by 
a fund and acquired pursuant to the order may not exceed 50% of the 
Fund's total net assets. According to applicants, this condition should 
ensure that no Fund is operated primarily as a vehicle for purchasing 
securities in transactions permitted by the order. Applicants state 
that the order also would be conditioned on certain procedural 
safeguards designed to protect the independence of U.S. Bank in making 
investment decisions on behalf of the Funds and to ensure appropriate 
oversight of all transactions effected in reliance on the order. 
Applicants further state that the requested order meets the standards 
for relief set forth in sections 6(c), 10(f), and 17(b) of the Act.

[[Page 6647]]

Applicant's Conditions

    Applicants agree that the order will be subject to the following 
conditions:
    1. Transactions effected pursuant to the order will be effected in 
accordance with all of the provisions of rule 10f-3, other than 
paragraph (b)(8). At least a majority of any class of an issue of 
Minnesota Tax-Exempt Securities purchased pursuant to the order must be 
purchased by persons who are not Related Purchasers. If the aggregate 
number of securities the Related Purchasers wish to acquire exceeds the 
permitted amount, the securities acquired will be allocated to each 
Related Purchaser in the proportion that the number of securities that 
such Related Purchaser wishes to acquire bears to the total number of 
securities that all Related Purchasers wish to acquire.
    2. Purchases of Minnesota Tax-Exempt Securities directly from Piper 
Jaffray or from a syndicate manager of an underwriting syndicate of 
which Piper Jaffray is a member when the purchases are designated as 
group sales may be effected only in Minnesota Tax-Exempt Securities 
that, at the time of purchase, have one of the following investment 
grade ratings from at least one nationally recognized statistical 
rating organization: (i) One of the two highest investment grade 
ratings in the case of securities with remaining maturities of one year 
or less, or (ii) one of the three highest investment grade ratings in 
the case of securities with remaining maturities greater than one year.
    3. Purchases of Minnesota Tax-Exempt Securities directly from Piper 
Jaffray or from a syndicate manager of an underwriting syndicate of 
which Piper Jaffray is a member when the purchases are designated as 
group sales will be limited so that no such transaction will be 
effected if, as a result, the aggregate value of Minnesota Tax-Exempt 
Securities held by a Fund and acquired pursuant to the order would 
exceed 50% of the total net assets of that Fund.
    4. Purchases of Minnesota Tax-Exempt Securities directly from Piper 
Jaffray or from a syndicate manager of an underwriting syndicate of 
which Piper Jaffray is a member when the purchases are designated as 
group sales will be effected only when the Minnesota Tax-Exempt 
Securities to be acquired are otherwise unavailable for purchase. If 
Piper Jaffray is the sole underwriter of the securities, this condition 
is automatically fulfilled because there is no other potential seller. 
When Piper Jaffray is a member of an underwriting syndicate, U.S. Bank 
will observe the following procedures to determine when the securities 
are unavailable from other members of the syndicate. Initially, U.S. 
Bank will determine the aggregate number of securities that the Related 
Purchasers wish to acquire. Next, U.S. Bank will attempt to purchase as 
much of this number as possible from members of the syndicate other 
than Piper Jaffray. After acquiring as many securities as possible from 
such other members, U.S. Bank will attempt to purchase from Piper 
Jaffray the number of securities that the Related Purchasers wish to 
acquire and have been unable to obtain from such other members. The 
securities acquired from such other members will be allocated first to 
the Funds to the extent of the number of securities the Funds wish to 
acquire, or the number of securities the Funds are entitled to acquire 
based upon the relative needs of the Related Purchasers and the total 
number of securities purchased from such other members and from Piper 
Jaffray, whichever is less.
    5. When the Funds purchase Minnesota Tax-Exempt Securities from a 
syndicate manager of an underwriting syndicate of which piper Jaffray 
is a member, the Funds will not: (i) Submit designated orders to a 
syndicate manager that are allocated to Piper Jaffray; (ii) submit 
group orders to a syndicate manager that designate Piper Jaffray to 
receive any portion of the commission; or (iii) otherwise allocate 
orders to Piper Jaffray.
    6. The exemption will be valid only so long as U.S. Bank and Piper 
Jaffray operate as separate entities and independent profit centers 
within the holding company framework of U.S. Bancorp, with separate 
officers and employees, separate capitalizations, and separate books 
and records. Employees of Piper Jaffray will not participate with, or 
seek to influence, U.S. Bank in its investment decisions as investment 
adviser to the Funds, other than in the normal course of sales 
activities of the same nature that are being carried out simultaneously 
with respect to unaffiliated clients of Piper Jaffray. Senior 
executives of U.S. Bancorp with responsibility for overseeing the 
operations of various subsidiaries are not precluded from exercising 
those functions over U.S. Bank because they oversee Piper Jaffray as 
well, provided that such persons will not have any involvement with 
respect to transactions effected pursuant to the exemption and will not 
attempt to influence or control the purchase of securities by the Funds 
from Piper Jaffray or an underwriting syndicate of which Piper Jaffray 
is a member.
    7. U.S. Bank and Piper Jaffray will adopt a set of guidelines for 
their respective personnel to make certain that transactions conducted 
pursuant to the order comply with the conditions set forth in the 
application and that the parties maintain arm's length relationships. 
Compliance officers of U.S. Bank and Piper Jaffray will periodically 
monitor the activities of their respective companies for compliance 
with such guidelines and with the conditions set forth in the 
application.
    8. The board of directors of each Fund, including a majority of the 
directors who are not interested persons under section 2(a)(19) of the 
Act and have no direct or indirect financial interest in the 
transaction (other than through ownership of Fund shares), will review, 
no less frequently, each purchase of Minnesota Tax-Exempt Securities 
directly from Piper Jaffray or from a syndicate manager of an 
underwriting syndicate of which Piper Jaffray is a member when the 
purchases are designated as group sales since the last review and will 
determine that the terms of such transaction were reasonable and fair 
to the shareholders of the Fund and did not involve overreaching of the 
Fund or its shareholders on the part of any person concerned. In 
considering whether the price paid for the security was reasonable and 
fair, the price of the security will be analyzed with respect to 
comparable transactions involving similar securities being purchased or 
sold during a comparable period of time.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3086 Filed 2-9-00; 8:45 am]
BILLING CODE 8010-01-M