11232 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Notices

1All 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.

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’’).

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.; AllAmerican 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

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 subadvisers.

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
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Notices 11233

2Applicants 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.

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

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 preapproved 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 subadviser 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 subadviser. 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.
11234 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Notices

3See, e.g., SIFE Trust Fund (pub. avail. Feb. 17,

1982).

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

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