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[Federal Register Volume 62, Number 47 (Tuesday, March 11, 1997)]
[Notices]
[Pages 11232-11234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5916]

[[Page 11232]]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Rel. No. 22541; 812-10200]

PaineWebber America Fund, et al.; Notice of Application

March 4, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (``Act'').

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APPLICANTS: PaineWebber America Fund; PaineWebber Cashfund, Inc., 
PaineWebber Investment Series; PaineWebber Managed Assets Trust; 
PaineWebber Managed Investments Trust; PaineWebber Managed Municipal 
Trust; PaineWebber Master Series, Inc.; PaineWebber Municipal Series; 
PaineWebber Mutual Fund Trust; PaineWebber Olympus Fund; PaineWebber 
Financial Services Growth Fund Inc.; PaineWebber RMA Money Fund, Inc.; 
PaineWebber RMA Tax-Free Fund, Inc.; PaineWebber Securities Trust, 
PaineWebber Series Trust; Strategic Global Income Fund, Inc.; Triple A 
and Government Series--1997, Inc.; 2002 Target Term Trust Inc.; All-
American Term Trust Inc.; Global High Income Dollar Fund Inc.; Global 
Small Cap Fund Inc.; Investment Grade Municipal Income Fund Inc.; 
Insured Municipal Income Fund Inc.; Managed High Yield Fund Inc.; 
PaineWebber Municipal Money Market Series; PaineWebber Investment 
Trust; PaineWebber Investment Trust II; PaineWebber Investment Trust 
III; Liquid Institutional Reserves; Managed Accounts Services Portfolio 
Trust (collectively, ``Affiliated Funds''); PaineWebber Incorporated 
(``PaineWebber''), and Mitchell Hutchins Asset Management Inc. 
(``Mitchell Hutchins''), on behalf of themselves and any other 
registered investment companies, or series thereof, which currently or 
in the future may be advised by Mitchell Hutchins or PaineWebber, or 
any entity controlling, controlled by, or under common control (as 
defined in section 2(a)(9) of the Act) with PaineWebber or Mitchell 
Hutchins.\1\

    \1\ All existing Affiliated Funds that currently intend to rely 
on the requested relief have been named as parties to the 
application. Certain other funds, or series thereof, for which 
Mitchell Hutchins or PaineWebber, or any entity controlling, 
controlled by, or under common control with Mitchell Hutchins or 
PaineWebber, acts as investment adviser do not presently intend to 
rely on the requested order. Any such Affiliated Fund, or series 
thereof, however, would be covered by the order if it later proposed 
to enter into a lending arrangement with PaineWebber on the terms 
described in the application.
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RELEVANT ACT SECTIONS: Order requested under rule 17d-1 to permit 
certain transactions in accordance with section 17(d) and rule 17d-1.

SUMMARY OF APPLICATION: Applicants seek an order to permit the 
Affiliated Funds to pay, and PaineWebber as lending agent to accept, 
fees based on a share of the revenue generated from securities lending 
transactions, as described in the application.

FILING DATES: The application was filed on June 14, 1996 and amended on 
December 4, 1996, and February 26, 1997.

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 March 31, 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 such notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 1285 Avenue of the Americas, New York, New York 
10019.

FOR FURTHER INFORMATION CONTACT: Shirley A. Bodden, Paralegal 
Specialist, at (202) 942-0575, or Mercer E. Bullard, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the following Affiliated Funds is registered under the 
Act as a closed-end management investment company: Strategic Global 
Income Fund, Inc.; Triple A and Government Series--1997, Inc.; 2002 
Target Term Trust Inc; All-American Term Trust Inc.; Global High Income 
Dollar Fund Inc.; Global Small Cap Fund Inc.; Investment Grade 
Municipal Income Fund Inc.; Insured Municipal Income Fund Inc.; and 
Managed High Yield Fund Inc. All of the other Affiliated Funds are 
registered under the Act as open-end management investment companies. 
All of the closed-end companies and PaineWebber Cashfund, Inc., 
PaineWebber Master Series, Inc., PaineWebber Financial Services Growth 
Inc., PaineWebber RMA Money Fund, Inc., and PaineWebber RMA Tax-Free 
Fund, Inc. are organized as Maryland corporations; Managed Accounts 
Services Portfolio Trust is organized as a Delaware business trust; and 
the remaining Affiliated Funds are organized as Massachusetts business 
trusts. The Affiliated Funds invest in a range of equity and fixed-
income securities.
    2. PaineWebber, an investment adviser registered under the 
Investment Advisers Act of 1940 (``Advisers Act''), serves as 
investment adviser and Mitchell Hutchins, a registered investment 
adviser under the Advisers Act and a wholly-owned subsidiary of 
PaineWebber, serves as sub-adviser to PaineWebber Cashfund, Inc., 
PaineWebber RMA Money Fund, Inc., PaineWebber RMA Tax-Free Fund, Inc., 
PaineWebber Managed Municipal Trust, PaineWebber Municipal Money Market 
Series, and Liquid Institutional Reserves. Mitchell Hutchins serves as 
investment adviser to the remaining Affiliated Funds, although it has 
delegated certain of its responsibilities with respect to certain Funds 
to sub-advisers.
    3. PaineWebber is a publicly owned securities brokerage, investment 
banking, and asset management firm offering a broad range of services 
to corporations, institutions, and substantial private investors 
worldwide. PaineWebber and Mitchell Hutchins are registered as 
investment advisers under the Investment Advisers Act of 1940 and as 
broker-dealers under the Securities Exchange Act of 1934. PaineWebber 
is also a member of the National Association of Securities Dealers, 
Inc., and the New York Stock Exchange.
    4. Each of the Affiliated Funds is permitted under its investment 
objectives, policies, and restrictions to lend its portfolio 
securities. Mitchell Hutchins and PaineWebber previously proposed that 
each Affiliated Fund lend its securities to increase the income earned 
by such Fund, thus increasing total return to shareholders. The boards 
of directors/trustees (``Board'') of certain Affiliated Funds approved 
that proposal and authorized commencement of securities lending 
activities with respect to such Funds. Pursuant to such approval, 
PaineWebber's compensation for acting as lending agent is limited, 
pending receipt of the exemptive relief

[[Page 11233]]

requested in the application and further action by the Boards, to 
reimbursement for specific expenses that it incurs as lending agent for 
Affiliated Funds.\2\
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    \2\ Applicants have not sought and are not seeking exemptive 
relief with respect to the specific lending activities to be 
undertaken by PaineWebber or with respect to the expense 
reimbursement arrangement recently approved by the Boards.
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    5. In connection with the establishment of a securities lending 
program, the Board of a Fund, including a majority of the directors who 
are not ``interested persons'' as defined in section 2(a)(19) of the 
Act, has established or, for Affiliated Funds that have not yet 
commenced securities lending, will establish procedures to govern the 
program. These procedures do or will comply with the positions set 
forth by the Commission and its staff in no-action letters and require 
specific guidelines relating to the creditworthiness of borrowers and 
of issuers from whom an Affiliated Fund may accept irrevocable letters 
of credit as collateral.
    6. Mitchell Hutchins and PaineWebber proposed that each Affiliated 
Fund engage a lending agent for the Fund, and the Boards approved the 
retention of PaineWebber as lending agent. PaineWebber, as lending 
agent, is responsible for soliciting borrowers, monitoring daily the 
value of the loaned securities and collateral, requesting that 
borrowers add to the collateral when required by the loan arrangements 
and performing other administrative functions in connection with each 
Affiliated Fund's securities lending program. PaineWebber enters into 
loans with pre-approved borrowers on terms the parameters of which are 
pre-approved by the Fund's investment adviser or sub-adviser. Although 
not currently contemplated, PaineWebber may invest cash collateral for 
the loans in instruments pre-approved by such investment adviser or 
sub-adviser.
    7. The duties of PaineWebber as lending agent for an Affiliated 
Fund are included in a lending agency agreement. Procedures governing 
determination of the borrowers and acceptable investment instruments 
have been adopted by the Boards and the relevant investment advisers 
and sub-advisers. The investment adviser or sub-adviser monitors 
PaineWebber's activities as lending agent to ensure that securities 
loans are effected in accordance with the adviser's or sub-adviser's 
instructions and within the procedures adopted by the relevant Board.
    8. Although PaineWebber acts as both investment adviser and lending 
agent to certain Affiliated Funds, the personnel providing day-to-day 
lending agency services to the Funds do not provide investment advisory 
services to the Funds and are completely separate and distinct from 
those PaineWebber personnel who provide investment advisory services to 
the Funds. PaineWebber's activities as lending agent are conducted 
under the supervision of investment management personnel as each Fund's 
investment adviser or sub-adviser, who are not in any way involved in 
PaineWebber's lending agency operations. None of the lending 
representatives in PaineWebber's securities lending department 
participates in any way in the selection of portfolio securities or any 
other aspects of the management of the Affiliated Funds.
    9. Ultimate responsibility for determining which specific 
securities are available to be loaned and to whom the securities may be 
loaned resides with the investment adviser or sub-adviser for each 
Affiliated Fund, subject to the parameters set forth in the procedures 
approved by each Affiliated Fund's Board. Each Affiliated Fund's 
investment adviser or sub-adviser notifies the lending agent as to 
which securities are or are not available to be loaned and approves a 
list of approved borrowers to whom each Affiliated Fund may lend its 
securities. PaineWebber provides the investment adviser or sub-adviser 
with a list of lending transactions for each Fund on a periodic basis. 
In addition, under the lending agency agreement, each Fund retains full 
discretion and power to prevent any loan from being made or to 
terminate any loan once made. The investment adviser or sub-adviser are 
required to terminate loans as necessary in order to vote proxies with 
respect to material matters affecting the issuer of the securities on 
loan. The duties to be performed by PaineWebber as lending agent for 
each Affiliated Fund are consistent with and do not exceed the 
parameters set forth in Norwest Bank, Minnesota, N.A. (May 25, 1995), 
except to the extent that the SEC staff should later modify such 
parameters.
    10. Each borrower of an Affiliated Fund's securities is required to 
tender collateral to be held by the Fund's custodian or sub-custodian 
in the form of cash, securities issued or guaranteed by the United 
States Government, its agencies, or instrumentalities (``U.S. 
Government securities''), or irrevocable letters of credit issued by 
certain approved banks or such other collateral that may be acceptable 
collateral for the Fund in accordance with present and future 
applicable positions of the SEC staff. The borrower delivers collateral 
to the Fund's custodian or sub-custodian equal to at least 100% of the 
securities loan which collateral is supplemented to cover differences 
between the value of the collateral and the market value of the loaned 
securities as necessary.
    11. When the collateral consists of U.S. Government securities or 
letters of credit, PaineWebber typically negotiates on behalf of the 
Affiliated Fund a lending fee to be paid by the borrower to the Fund. 
The beneficial ownership of the collateral remains with the borrower, 
as does the right to the income earned where the collateral consists of 
U.S. Government securities. At the termination of a loan, the borrower 
pays the lending fee to the Fund, and PaineWebber will receive a pre-
negotiated percentage of the fee.
    12. When the collateral consists of cash, the Affiliated Fund, 
instead of receiving a separate lending fee, typically receives a 
portion of the return earned on the investment of the cash collateral 
by or under the direction of the Fund's investment adviser or sub-
adviser. Depending on the arrangements negotiated with the borrower by 
PaineWebber, a percentage of the return on the investment of the cash 
collateral may be remitted by the Fund to the borrower. Out of amounts 
earned on the investment of the cash collateral, the borrower is first 
paid the amount agreed upon, if any, and then, out of any remaining 
earnings, PaineWebber receives a pre-negotiated percentage. In the cash 
collateral scenario, the Affiliated Fund bears the risk of loss of the 
collateral.
    13. Applicants propose that each Fund adopt the following 
procedures to ensure that the fee arrangement and other terms governing 
the relationship with PaineWebber, as lending agent, will be fair:
    a. In connection with the approval of PaineWebber as lending agent 
for an Affiliated Fund and implementation of the proposed fee 
arrangement, a majority of the Board (including a majority of the 
directors/trustees who are not ``interested persons'' within the 
meaning of the Act) will determine that: (i) the contract with 
PaineWebber is in the best interests of the Affiliated Fund and its 
shareholders; (ii) the services to be performed by PaineWebber are 
required by the Affiliated Fund; (iii) the nature and quality of the 
services provided by PaineWebber are at least equal to those provided 
by others offering the same or similar services; and (iv) the fees for 
PaineWebber's services are fair and reasonable in light of the usual 
and customary charges imposed by others for services of the same nature 
and quality.

[[Page 11234]]

    b. Each Affiliated Fund's contract with PaineWebber for lending 
agency services will be reviewed annually and will be approved for 
continuation only if a majority of the Board of each Fund (including a 
majority of the directors who are not interested persons) makes the 
findings referred to in paragraph a. above.
    c. In connection with the approval of PaineWebber as lending agent 
for an Affiliated Fund and initial implementation of the proposed fee 
arrangement, the Board will obtain competing quotes regarding lending 
agency fees from at least three independent lending agents to assist 
the Board in making the findings referred to in paragraph a. above.
    d. The Board, including a majority of the directors who are not 
interested persons, will (i) determine at each quarterly meeting that 
the loan transactions during the prior quarter were effected in 
compliance with the conditions and procedures set forth herein, and 
(ii) review no less frequently than annually the conditions and 
procedures set forth herein for continuing appropriateness.
    e. Each Affiliated Fund Portfolio will (i) maintain and preserve 
permanently in an easily accessible place a written copy of the 
conditions and procedures (and modifications thereto) described in the 
application or otherwise followed in connection with lending 
securities, and (ii) maintain and preserve for a period not less than 
six years from the end of the fiscal year in which any loan transaction 
occurred, the first two years in an easily accessible place, a written 
record of each such loan transaction setting forth a description of the 
security loaned, the identity of the person on the other side of the 
loan transaction, the terms of the loan transaction, and the 
information or materials upon which the determination was made that 
each loan was in accordance with the procedures set forth above and the 
conditions to the application.
    14. Applicants request an order, pursuant to section 17(d) of the 
Act and rule 17d-1 thereunder, to the extent necessary to permit an 
Affiliated Fund to pay, and PaineWebber to accept, fees in connection 
with PaineWebber's acting as lending agent in the manner and subject to 
the conditions and procedures described in the application.

Applicants' Legal Analysis

    1. 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, such investment adviser. Under section 2(a)(3), 
PaineWebber, as an investment adviser to certain Affiliated Funds, is 
an affiliated person of such Funds. In addition, PaineWebber, which 
owns all of the outstanding stock of Mitchell Hutchins, is an 
affiliated person of Mitchell Hutchins. Since Mitchell Hutchins is an 
affiliated person of certain Affiliated Funds by virtue of its position 
as an investment adviser of such Portfolios, PaineWebber may thereby be 
deemed an affiliated person of an affiliated person of such Funds.
    2. Section 17(d) of the Act and rule 17d-1 thereunder make it 
unlawful for an affiliated person of a registered investment company, 
or any affiliated person of such person, acting as principal, to 
participate in or effect any transaction in connection with any joint 
enterprise or other joint arrangement or profit-sharing plan in which 
such investment company is a joint participant, unless an application 
regarding such joint enterprise or other joint arrangement or profit-
sharing plan has been filed with the SEC and has been granted by an 
order of the SEC. Rule 17d-1 provides that, in passing upon any such 
application, the SEC will consider whether the participant of such 
registered investment company in such joint enterprise or joint 
arrangement or profit-sharing plan 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 the other participants. To the extent that PaineWebber's 
proposed activities as lending agent for the Funds in return for a 
share of the revenue generated thereby may be deemed a joint enterprise 
or profit sharing plan, applicants believe that such activities would 
be prohibited by section 17(d) and rule 17d-1.
    3. Applicants believe that the basic policy underlying section 
17(d) is to prevent affiliates of investment companies from taking 
advantage of their relationship and to otherwise regulate potential 
conflicts of interest between an investment company and its affiliates. 
Applicants submit that the potential for conflict arises in connection 
with negotiating the percentage split of the lending fee between the 
lending agent and an Affiliated Fund. Applicants believe that the 
procedures to be adopted by each Fund with respect to the Fund's 
employment of PaineWebber as lending agent will ensure the fairness of 
the fee arrangement and other terms governing this relationship. 
Applicants note that the proposed conditions and procedure place 
reliance on the directors who are not interested persons of each 
Affiliated Fund to determine that the lending arrangements are fair and 
reasonable and in the best interests of each Fund and it shareholders. 
Applicants believe that such conditions and procedures will fully 
protect each Affiliated Fund's shareholders from the conflicts 
contemplated by section 17(d) and rule 17d-1.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. No Affiliated Fund may lend its portfolio securities to a 
borrower that is an affiliated person of the Fund or an affiliated 
person of an affiliated person of such Fund.
    2. Except as set forth in the application, the securities lending 
program of each Affiliated Fund will comply with all present and future 
applicable SEC staff positions regarding securities lending 
arrangements, e.g., with respect to the type and amount of collateral, 
voting of loaned securities, limitations on the percentage of portfolio 
securities on loan, prospectus disclosure, termination of loans, 
receipt of dividends or other distributions, and compliance with 
fundamental policies.\3\
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    \3\ See, e.g., SIFE Trust Fund (pub. avail. Feb. 17, 1982).
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    3. The approval of each Affiliated Fund's Board, including a 
majority of directors who are not ``interested persons'' under the Act, 
shall be required for the initial and subsequent approvals of 
PaineWebber's service as lending agent for each Affiliated Fund, for 
the institution of all procedures relating to the securities lending 
program of the Affiliated Fund, and for any periodic review of loan 
transactions for which PaineWebber acted as lending agent.

    For the SEC, by the Division of Investment Management, under 
delegated authority.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5916 Filed 3-10-97; 8:45 am]
BILLING CODE 8110-01-M
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