Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 3933

1992. The revised Circular specified

certain discount rates to be updated

annually when the interest rate and

inflation assumptions used to prepare

the budget of the United States

Government were changed. These

discount rates are found in Appendix C

of the revised Circular. The updated

discount rates are shown below. The

discount rates in Appendix C are to be

used for cost-effectiveness analysis,

including lease-purchase analysis, as

specified in the revised Circular. They

do not apply to regulatory analysis.

DATES: The revised discount rates are

effective immediately and will be in

effect through January 1999.

FOR FURTHER INFORMATION CONTACT:

Robert B. Anderson, Office of Economic

Policy, Office of Management and

Budget, (202) 395–3381.

Joseph J. Minarik,

Associate Director for Economic Policy, Office

of Management and Budget.

[OMB Circular No. A–94, Revised, October

29, 1992]

Appendix C

(Revised January 1998)

Discount Rates for Cost-Effectiveness, Lease

Purchase, and Related Analyses

Effective Dates. This appendix is updated

annually around the time of the President’s

budget submission to Congress. This version

of the appendix is valid through the end of

January, 1999. Copies of the updated

appendix and the Circular can be obtained

from the OMB Publications Office (202–395–

7332) or in an electronic form through the

OMB home page on the world-wide WEB,

http://www.whitehouse.gov/WH/EOP/omb.

Updates of this appendix are also available

upon request from OMB’s Office of Economic

Policy (202–395–3381), as is a table of past

years’ rates.

Nominal Discount Rates. Nominal interest

rates based on the economic assumptions

from the budget are presented below. These

nominal rates are to be used for discounting

nominal flows, which are often encountered

in lease-purchase analysis.

Nominal Interest Rates on Treasury Notes

and Bonds of Specified Maturities (in

Percent)

3-Year ..................................................... 5.6

5-Year ..................................................... 5.7

7-Year ..................................................... 5.8

10-Year ................................................... 5.9

30-Year ................................................... 6.1

Real Discount Rates. Real interest rates

based on the economic assumptions from the

budget are presented below. These real rates

are to be used for discounting real (constantdollar) flows, as is often required in costeffectiveness analysis.

Real Interest Rates on Treasury Notes and

Bonds of Specified Maturities (in Percent)

3-year ...................................................... 3.4

5-year ...................................................... 3.5

7-year ...................................................... 3.5

10-year .................................................... 3.6

30-year .................................................... 3.8

Analyses of programs with terms

different from those presented above

may use a linear interpolation. For

example, a four-year project can be

evaluated with a rate equal to the

average of the three-year and five-year

rates. Programs with durations longer

than 30 years may use the 30-year

interest rate.

[FR Doc. 98–1826 Filed 1–26–98; 8:45 am]

BILLING CODE 3110–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Investment Company Act Release No.

23004; 812–10134]

Daily Money Fund, et al.; Notice of

Application

January 20, 1998.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of application for an

order under the Investment Company

Act of 1940 (the ‘‘Act’’) granting an

exemption under section 6(c) of the Act

from sections 13(a), 18(f), and 21(b) of

the Act, under sections 6(c) and 17(b) of

the Act from sections 17(a)(1) and (3) of

the Act, and under rule 17d–1 under the

Act to permit certain transactions in

accordance with section 17(d) of the Act

and rule 17d–1.

SUMMARY OF APPLICATION: The requested

order would permit certain registered

open-end funds and unregistered funds

to enter into insurance agreements with

an affiliated mutual insurance company

(the ‘‘Mutual Company’’). The Mutual

Company would provide limited

insurance coverage for certain money

market assets held by the funds.

APPLICANTS: Daily Money Fund, Fidelity

Aberdeen Street Trust, Fidelity Advisor

Series I, Fidelity Advisor Series II,

Fidelity Advisor Series III, Fidelity

Advisor Series IV, Fidelity Advisor

Series V, Fidelity Advisor Series VI,

Fidelity Advisor Series VII, Fidelity

Advisor Series VIII, Fidelity Beacon

Street Trust, Fidelity Boston Street

Trust, Fidelity California Municipal

Trust, Fidelity California Municipal

Trust II, Fidelity Capital Trust, Fidelity

Charles Street Trust, Fidelity

Commonwealth Trust, Fidelity Concord

Street Trust, Fidelity Congress Street

Fund, Fidelity Contrafund, Fidelity

Court Street Trust, Fidelity Court Street

Trust II, Fidelity Destiny Portfolios,

Fidelity Devonshire Trust, Fidelity

Exchange Fund, Fidelity Financial

Trust, Fidelity Fixed-Income Trust,

Fidelity Government Securities Fund,

Fidelity Hastings Street Trust, Fidelity

Hereford Street Trust, Fidelity Income

Fund, Fidelity Institutional Cash

Portfolios, Fidelity Institutional TaxExempt Cash Portfolios, Fidelity

Investment Trust, Fidelity Magellan

Fund, Fidelity Massachusetts Municipal

Trust, Fidelity Money Market Trust,

Fidelity Mt. Vernon Street Trust,

Fidelity Municipal Trust, Fidelity

Municipal Trust II, Fidelity Newbury

Street Trust, Fidelity New York

Municipal Trust, Fidelity New York

Municipal Trust II, North Carolina

Capital Management Trust, Fidelity

Phillips Street Trust, Fidelity Puritan

Trust, Fidelity Revere Street Trust,

Fidelity School Street Trust, Fidelity

Securities Fund, Fidelity Select

Portfolios, Fidelity Summer Street

Trust, Fidelity Trend Fund, Fidelity

Union Street Trust, Fidelity Union

Street Trust II, Fidelity U.S.

Investments-Bond Fund, L.P., Fidelity

U.S. Investments-Government Securities

Fund, L.P., Variable Insurance Products

Fund, Variable Insurance Products Fund

II, Variable Insurance Products Fund III

(collectively, the ‘‘Trusts’’); Fidelity

Canadian Asset Allocation Fund,

Fidelity U.S. Money Market Fund,

Fidelity Asset Manager Fund, Fidelity

Canadian Bond Fund, Fidelity Canadian

Growth Company Fund, Fidelity

Canadian Income Fund, Fidelity

Canadian Short Term Asset Fund,

Fidelity Capital Builder Fund, Fidelity

Emerging Markets Bond Fund, Fidelity

Emerging Markets Portfolio Fund,

Fidelity European Growth Fund,

Fidelity Far East Fund, Fidelity Growth

America Fund, Fidelity International

Portfolio Fund, Fidelity Japanese

Growth Fund, Fidelity Latin America

Growth Fund, Fidelity North American

Income Fund, Fidelity RSP Global Bond

Fund, Fidelity Small Cap America

Fund, Fidelity True North Fund,

Fidelity Managed Income Fund, Fidelity

Focus Consumer Industries Fund,

Fidelity Focus Financial Services Fund,

Fidelity Focus Health Care Fund,

Fidelity Focus Natural Resources Fund,

Fidelity Focus Technology Fund

(collectively, the ‘‘Canadian Funds’’);

Fidelity Advisor U.S. Large-Cap Stock

Fund (Bermuda) Ltd., Fidelity Advisor

World Europe Fund (Bermuda) Ltd.,

Fidelity Advisor World Southeast Asia

Fund (Bermuda) Ltd., Fidelity World

Advisor World U.S. Limited Term Bond

Fund (Bermuda) Ltd., Fidelity Advisor

World U.S. Government Investment

Fund (Bermuda) Ltd., Fidelity Advisor

World U.S. Treasury Money Fund
3934 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

1The terms ‘‘FDC’’ and ‘‘NFSC’’ include any

other company controlled by or under common

control with FMR that acts in the future as

distributor for the Trusts or their series.

2 In order to participate in the Mutual Company,

a 2(b) Entity (including the Municipal Trust) would

have to determine that the proposed investments in

instruments through the proposed transactions are

consistent with state laws or administrative rules

regulating the 2(b) Entity. If not, it must seek to

have those laws or rules amended. Accordingly, the

Municipal Trust is not named as an applicant

because it considers it premature to join formally.

3Money market funds are funds that have as their

objective the generation of income and the

preservation of capital. Money market funds are

subject to rule 2a–7 under the Act, which contains

several conditions limiting the risk and volatility of

securities in which a money market fund may

invest.

(Bermuda) Ltd. (collectively, the

‘‘Fidelity Advisor World Funds’’);

Fidelity Investments Canada, Ltd.

(‘‘FICL’’); Fidelity Management and

Research Company (‘‘FMR’’); Fidelity

Distributors Corporation (‘‘FDC’’);

National Financial Services Corporation

(‘‘NFSC’’) 1; each Trust and each

registered investment company and

series thereof that are currently or in the

future advised by FMR or a person

controlling, controlled by, or under

common control with FMR (collectively

with FMR, the ‘‘Adviser’’) or distributed

by FDC or NFSC (collectively, the

‘‘Registered Funds’’); the Fidelity

Advisor World Funds, the Canadian

Funds, and other pooled investment

funds advised or in the future advised

by the Adviser, that are offered

exclusively outside the United States to

non-U.S. residents (the ‘‘Unregistered

Funds’’); and state and local entities or

accounts thereof advised or in the future

advised by the Adviser that are exempt

from regulation under the Act pursuant

to section 2(b) of the Act (the ‘‘2(b)

Entities’’) (collectively, the Registered

Funds, the Unregistered Funds, and the

2(b) Entities are the ‘‘Funds’’).

FILING DATES: The application was filed

on May 7, 1996, and amended on

December 3, 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

February 16, 1998, 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 consented.

Persons may request notification of a

hearing by writing to the SEC’s

Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, NW., Washington, DC 20549.

Applicants, 82 Devonshire Street,

Boston, Massachusetts 02109.

FOR FURTHER INFORMATION CONTACT:

Elaine M. Boggs, Senior Counsel, at

(202) 942–0572 (Division of Investment

Management, Office of Investment

Company Regulation), or Mercer E.

Bullard, Special Counsel, at (202) 942–

0659 (Division of Investment

Management, Office of Chief Counsel).

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 (telephone

(202) 942–8090).

Applicants’ Representations

A. Overview

1. Each of the Registered Funds is an

open-end investment company

registered under the Act and offers one

or more portfolios. The Fidelity Advisor

World Funds are portfolios of mutual

funds established under the laws of

Bermuda. The Canadian Funds are

portfolios established under the laws of

Canada. The only 2(b) Entity that

currently may rely on the requested

order is the Massachusetts Municipal

Depository Trust (‘‘Municipal Trust’’),

which is established pursuant to

Massachusetts law.2

2. The Adviser, an investment adviser

registered under the Investment

Advisers Act of 1940, acts as investment

adviser to each Registered Fund and its

portfolios and provides the Registered

Funds with administrative services.

FICL acts as the investment adviser to

the Canadian Funds. FDC and NFSC act

as the distributors of all the Registered

Funds. FMR, FICL, FDC, and NFSC are

all direct or indirect subsidiaries of FMR

Corp.

3. Applicants propose that certain

Funds (‘‘Participating Funds’’) enter

into insurance agreements with the

Mutual Company. The Mutual Company

would provide insurance coverage for

certain loss events (‘‘Loss Events’’)

described below with regards to certain

money market securities (‘‘Insurable

Assets’’). Initially, applicants expect

that the only Participating Funds will be

U.S. dollar denominated money market

funds.3 Other types of Funds may

participate in the future if the Fund’s

Adviser and board of trustees determine

that the insurance would be of value to

the Fund and that the Fund had an

independent need for the insurance

coverage.

B. Mutual Company Operations

1. The Mutual Company will be

organized as a Bermuda mutual

insurance company and will be

governed by a board of directors

consisting of employees of FMR or FMR

Corp. and other persons associated with

the Mutual Company. As a mutual

insurance company, the Mutual

Company will not issue stock.

Proprietary interests in the Mutual

Company will belong only to the

Participating Funds as policyholders.

Each Participating Fund will have equal

voting rights, i.e., each Participating

Fund will have one vote. The board of

trustees (‘‘Trustees’’) of each Registered

Fund will exercise the Fund’s voting

rights. The Funds will have voting

rights with respect to (a) the election

and removal of the Mutual Company’s

board of directors; (b) the dissolution or

liquidation of the Mutual Company; (c)

the amendment of the Mutual

Company’s articles of incorporation or

other governing instrument; (d) any

merger, consolidation or sale of

substantially all of the Mutual

Company’s assets; and (e) additional

matters relating to the Mutual Company

as may be required or authorized by

law.

2. Employees of the Adviser will be

involved in the day-to-day operations of

the Mutual Company, including

determining and implementing the

investment policies of the Mutual

Company and managing its assets. The

Mutual Company will employ an

unaffiliated third party in Bermuda to

conduct its administrative and

ministerial activities.

3. The Mutual Company will operate

on a break-even basis and any reserves

and surplus will be used (a) to increase

the Mutual Company’s aggregate

coverage and/or the risk retained by the

Mutual Company and/or (b) to decrease

the premiums charged by the Mutual

Company. The Mutual Company will

pay no dividends or distributions, and

neither the Funds’ interest in the

Mutual Company nor the policies will

be transferable. A Participating Fund

that terminates its participation prior to

the liquidation of the Mutual Company

will not receive any proceeds, regardless

of whether the Mutual Company has a

surplus at the time. If the Mutual

Company is liquidated when it has a

surplus, Participating Funds at that time

will divide the proceeds based on their

relative levels of premium payments to

the Mutual Company during its

existence.
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 3935

C. Insurance Coverage

1. Insurable Assets are securities that,

at the time of purchase, are money

market securities eligible pursuant to

rule 2a–7 under the Act (including

repurchase agreements), other than: (i)

U.S. Treasury securities backed by the

full faith and credit of the U.S.

Government, and (ii) other obligations

all of the principal and interest of which

are backed by the full faith and credit

of the U.S. Government.

2. Loss Events include losses incurred

by a Participating Fund in connection

with a nonpayment of principal or

interest by the issuer when due and

payable, or the institution of a

bankruptcy, insolvency, or similar

proceeding with respect to the issuer

and/or credit enhancement provider (if

any) of an Insurable Asset. Loss Events

also include losses in connection with

a default relating to a credit

enhancement. In addition, Loss Events

include the inability of a Fund to

recover fully the amount loaned under

a repurchase agreement because of an

event of default under the contract

(‘‘repo-related Loss Event’’), and losses

resulting if certain payments to a

Participating Fund were subsequently

considered a preference in bankruptcy

(‘‘preference-related Loss Event’’). In the

future, the definition of Loss Events

could be expanded.

3. The Adviser or the Mutual

Company will retain insurance

professionals to set the aggregate annual

premium based upon their assessment

of the risk of Loss Events occurring with

respect to Insurable Assets in which the

Funds invest. The insurable

professionals, using actuarial standards,

will allocate the premium among the

Participating Funds based on the risk

characteristics of the different types of

Insurable Assets held by each Fund.

4. The insurance policy (‘‘Policy’’)

written by the Mutual Company will be

structured as a claims-made policy. The

Policy will have a term of one year and

will be renewable. Neither the Mutual

Company nor a Participating Fund will

be permitted to terminate or decrease its

coverage during a policy year. The

Policy will have no cash surrender

value, will not be transferable, and will

not provide for the payment of any

dividend or other distribution.

5. Loss recoveries by the Participating

Funds will be limited to $100 million

annually in the aggregate. A

Participating Fund will recover for a

Loss Event only to the extent that the

amount of its loss exceeds the

deductible amount of 0.30% of a

Participating Fund’s Insurable Assets,

which will be applied on a per loss

basis for each Fund. There are no limits

(other than the Policy limit) on the

amount of loss recoverable by a

Participating Fund in a particular year

or with respect to any single issuer.

6. The Mutual Company also would

provide coverage for certain wrongful

acts on the part of past or present

officers, Trustees, or employees of a

Participating Fund that result in the

Fund sustaining a Loss Event. This

coverage would not apply to FMR in its

capacity as investment adviser to the

Funds. Wrongful acts would include

any breach of duty, neglect, error,

misstatement, misleading statement,

omission or other act committed or

wrongfully attempted by an employee

resulting in a Participating Fund

sustaining a loss attributable to a Loss

Event. The coverage is not fidelity bond

coverage and will not be subject to rule

17g–1 under the Act. The coverage

would generally expand the existing

errors and omissions coverage

maintained by a Participating Fund by

covering losses not currently covered by

the Fund’s existing policy. For example,

the Mutual Company would cover

losses that result from wrongful acts in

connection with the purchase of an

investment that was not rule 2a–7

eligible and that are in an amount that

exceeds the amount covered under the

Participating Fund’s existing errors and

omissions policy.

D. Mutual Company Capitalization

1. As noted above, the Mutual

Company will have an annual aggregate

Policy limit of $100 million. The Mutual

Company initially will cover the first

$30 million in claims from payments

collected from the Participating Funds

and Fidelity, with third-party

reinsurance covering the remaining $70

million. The first $30 million will be

capitalized by the following sources: (i)

A one-year loan by Fidelity of $250,000

(‘‘Fidelity Note’’), (ii) a one-year

demand note by the participating funds

of $450,000 in the aggregate (‘‘Fund

Notes’’), (iii) first-year premiums of

approximately $2.7 million, (iv)

assessable premiums of approximately

$11 million, and (v) a commitment by

Fidelity of approximately $17 million. If

the Mutual Company’s reserves are

insufficient to cover claims, it will use

its other assets in the following order:

(a) The Fund Notes, (b) the FMR Note,

(c) the premium assessment, (d) FMR’s

commitment, and (e) reinsurance.

2. The amount of each Fund Note will

be determined on a pro rata basis in the

same proportion as the Fund’s premium

payment. Because the Fund Notes are

demand notes, a Participating Fund will

not be required to pay any monies to the

Mutual Company unless these are one

or more covered Loss Events exceeding

the Mutual Company’s available

reserves and surplus funds. Fund Notes

will be drawn upon and will be repaid

to the Funds by the Mutual Company on

a pro rata basis.

3. In addition, because annual

premiums in the initial years of

operation will be insufficient to permit

the Mutual Company to provide the $30

million of coverage it will retain, the

Company’s insurance policies will be

‘‘assessable.’’ Thus, if a Loss Event

occurs, each Participating Fund will be

subject, in addition to its annual

premium payments, to a special

premium assessment initially estimated

to be approximately two and one half

times its annual premium payment. A

Fund’s annual and special assessment

premiums will be paid from the general

assets of the Fund, except that FMR will

pay the premiums for Funds with ‘‘allinclusive’’ management agreements,

under which FMR is contractually

obligated to pay all Fund expenses. The

special premium assessment will be

made on a pro rata basis by each

Participating Fund in the same

proportion as the Fund’s then current

pro rata shares of its regular premium

payment, regardless of which Fund

actually sustains a Loss Event. If

reserves and surplus funds in the

Mutual Company build up sufficiently,

applicants expect the assessment rate to

decline over time.

4. Assuming that all the Fund Notes

are fully drawn upon and the Funds are

subject to the maximum special

premium assessment, applicants

anticipate that the maximum

commitment by all Participating Funds

(which as of October 31, 1997, had

approximately $98 billion in net assets)

to the Mutual Company would initially

amount to approximately $11 million

resulting in a projected maximum

commitment by the Funds that would

not exceed .04% of the Funds’ net

assets. Thus, any monies required to be

paid by a Participating Fund pursuant to

the Fund Notes or special assessment in

a given year would not cause the net

asset value of a money market Fund to

be reduced below $1.00 per share.

5. The Mutual Company also will

receive a $17 million commitment from

FMR backed by a letter of credit to cover

Loss Events exceeding the Mutual

Company’s reserves and surplus funds

and the Participating Funds’ assessable

policies. FMR’s commitment to cover

losses would stand behind the

premiums and assessable policies of the

Participating Funds and is expected to

decline over time as reserves increase.

The Mutual Company will pay FMR an
3936 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

annual fee, at market rates, for the

commitment. The rate of the annual fee

will be the same amount as the lowest

rate FMR would then pay a bank for a

letter of credit in a comparable amount.

The reinsurance obtained by the Mutual

Company will stand behind the

premiums, assessable policies, and

FMR’s commitment.

E. Insurance Claims

1. The order of the payment of claims

will be based on the date the loss was

incurred. In the event of multiple losses

occurring on the same date in excess of

the Policy limit, claims will be paid pro

rata based on the amount of a fund’s

loss in excess of its deductible.

2. A Participating Fund that

experiences a Loss Event typically

would receive payment within

approximately 30 days of filing an

acceptable proof of loss with the Mutual

Company. Entities providing

reinsurance will be obligated to pay the

Mutual Company within the same

period of time. Normal insurance

subrogation rights will be provided in

connection with the insurance coverage.

3. Beginning the day of the Loss Event

until the proceeds of a Participating

Fund’s claim are received from the

Mutual Company, the net asset value of

a Participating Fund that sustains a Loss

Event will be computed by recording

the amount of the expected recovery as

a receivable on the books of the Fund,

subject to the Policy limit. Prior to

recording a receivable, a Participating

Fund will have contacted the Mutual

Company upon the occurrence of a Loss

Event to determine the amount of

available coverage. The recovery will be

determined by calculating the amount of

the Participating Fund’s loss and

comparing this number to the coverage

remaining under the Policy limit for the

policy year in question. The relevant

receivable on a Participating Fund’s

books will be computable and recorded

prior to the Fund’s next net asset value

determination following a Loss Event.

F. Disclosure of the Insurance

1. A brief description of the nature

and extent of the insurance coverage

will be contained in each Registered

Fund’s registration statement and, if

required by generally accepted

accounting principles (‘‘GAAP’’), its

financial statements. The insurance

coverage provided by the Mutual

Company will not be used in connection

with the marketing of the sale of shares

of the Registered Funds, and thus will

not be discussed in any marketing or

sales literature distributed with respect

to any Registered Fund.

Applicants’ Legal Analysis

A. Sections 13(a) and 18(f)

1. Section 18(f)(1) of the Act generally

prohibits a registered open-end

investment company from issuing any

senior security. Section 13(a)(2) of the

Act requires that a registered investment

company obtain shareholder

authorization before issuing any senior

security not contemplated by the

recitals of policy in its registration

statement. Section 13(a)(3) of the Act

provides that no registered investment

company will, unless authorized by the

vote of a majority of its outstanding

voting securities, deviate from any

investment policy that is changeable

only if authorized by shareholder vote,

or deviate from any policy recited in its

registration statement pursuant to

section 8(b)(3) of the Act. Each

Registered Fund has a fundamental

investment policy prohibiting the

issuance of senior securities except as

permitted under the Act. Applicants

request relief from sections 13(a) and

18(f) to the extent that the assessable

feature of the policy entered into by

each Registered Fund and the obligation

of each Fund pursuant to the Fund

Notes could be deemed the issuance of

senior securities by the Registered

Funds, and thus be prohibited by

section 18(f) and in contravention of a

Registered Fund’s fundamental policy

against issuing senior securities

pursuant to section 13(a)(2), and its

deviation from that policy in

contravention of section 13(a)(3). Relief

from section 13(a)(3) would extend only

to existing Registered Funds with a

fundamental investment restriction

prohibiting investments in senior

securities and to any other Registered

Funds that have such policies at the

time the Adviser becomes the Fund’s

investment adviser.

2. Section 6(c) of the Act permits the

SEC to exempt any person or transaction

from any provision of the Act, if the

exemption is necessary or appropriate

in the public interest and consistent

with the protection of investors and the

purposes fairly intended by the policies

of the Act. For the reasons provided

below, applicants argue that the

requested order meets the section 6(c)

standards.

3. Applicants state that sections 13(a)

and 18(f) resulted from Congress’ desire

to eliminate certain practices including

(a) heavy borrowings by investment

companies from the public without

adequate assets and reserves, (b) the

complexity of capital structures which

induced investment companies to invest

in risky securities to produce income

necessary to cover the high cost of

borrowings, (c) the freedom of

investment companies to borrow funds

for speculation, and (d) the propensity

of senior securities to mislead investors

by conveying false impression of

freedom from risk, and to increase the

speculative nature of both the common

stock and senior securities of

investment companies.

4. Applicants state that the assessable

feature of the policy and the obligations

created by the Fund Notes will not give

rise to the abuses at which sections

13(a) and 18(f) are directed. Applicants

submit that neither the assessable

feature nor the Fund Notes will involve

speculative trading or leverage in the

typical sense because a Registered Fund

will not be buying portfolio securities

with borrowed money. Applicants

believe that the proposed insurance

coverage will not create an unduly

complicated capital structure.

Applicants contend that, because of the

limited coverage and the deductible, the

insurance coverage will not induce a

Registered Fund to invest in risky

securities.

5. Applicants further state that neither

the special assessment feature nor the

Fund Notes will change the risk/reward

characteristics of any Registered Fund.

Applicants submit that payment of

monies by a Registered Fund pursuant

to the Fund Notes will have no effect on

the Fund’s net asset value because the

Fund will record a receivable on its

books and will receive interest at market

rates on those monies. Further,

applicants believe that, even assuming

that all the Fund Notes are drawn upon

and the Funds are subject to the

maximum special assessment, it is

projected that the maximum amount

payable by the Participating Fund will

be de minimis in relation to their total

net assets.

B. Sections 17(a) (1) and (2)

1. Sections 17(a) (1) and (2) of the Act

generally prohibit sales or purchases of

securities to or from a registered

investment company by any affiliated

person of the company or any affiliated

person of an affiliated person. 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 anyone under

common control with the investment

company. Under section 2(a)(3), FMR,

as investment adviser of each of the

Funds, is an affiliated person of each

Fund. Further, because the Funds either

share a common investment adviser or

have an investment adviser that is under

common control with those of the other

Funds, and most Registered Funds also

share a common board of trustees or
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 3937

other governing body, each Fund may

be deemed to be under common control

with all other Funds and, therefore, may

be deemed to be an affiliated person of

those Funds.

2. Each Participating Fund will have

voting rights in the Mutual Company.

To the extent that the Mutual Company

could be deemed to be controlled by, or

under common control with, the

Participating Funds or the Adviser and

thus an affiliated person of the

Registered Funds, applicants believe

that the insurance coverage could be

deemed to be controlled by, or under

common control with, the Participating

Funds or the Adviser and thus an

affiliated person of the Registered

Funds, applicants believe that the

insurance coverage could be deemed

‘‘property’’ subject to the prohibition of

section 17(a)(1) against an affiliate of a

Registered Fund selling property to the

Fund. In addition, applicants state that

FMR’s commitment to the Mutual

Company could be viewed as a sale of

property to the Registered Funds (as the

indirect beneficiaries of the

commitment and payers of the fee) by

an affiliated person of the Registered

Funds under section 17(a)(1). Further,

applicants state that FMR’s contribution

of cash to the Mutual company in

exchange for the FMR Note could be

considered the sale of a security for

property by the Mutual Company, a

company controlled by the Registered

Funds, to FMR under section 17(a)(2).

Applicants request exemptions from the

provisions of sections 17(a) (1) and (2)

to permit these transactions.

3. Section 17(b) of the Act permits the

SEC to grant an order permitting a

transaction otherwise prohibited by

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. For the reasons stated below,

applicants believe that the terms of the

transactions meet the standards of

sections 6(c) and 17(b).

4. Applicants state that the insurance

coverage will provide the Participating

Funds and their shareholders with a

means of reducing their risk of loss from

defaulting Insurable Assets and repoand preference-related Loss Events and,

in some cases, protection against their

net asset value per share dropping

below $1.00. Applicants believe that the

proposed transactions do not involve

overarching because the coverage could

not be obtained from an unaffiliated

third-party issuer at a comparable price.

In addition, applicants state that the

proposed arrangement is consistent with

the policies of each Participating Fund.

C. Sections 17(a)(3) and 21(b)

1. Section 17(a)(3) of the Act generally

prohibits an affiliated person or an

affiliated person of an affiliated person

of a registered investment company

from borrowing money or other property

from the company or from any company

controlled by the registered company

except in certain circumstances not

relevant here. Section 21(b) makes it

unlawful for any registered investment

company to lend money or property to

any person, directly or indirectly, if the

person controls or is under common

control with the registered company.

2. Applicants seek relief from section

17(a)(3) and from section 21(b) to the

extent that the Fund Notes, if drawn

upon by the Mutual Company, could be

deemed the borrowing of money or

property from the Registered Funds by

an affiliated person. Applicants state

that sections 17(a)(3) and 21(b) were

intended to prevent a party with strong

potential adverse interests and influence

over the investment decisions of a

registered investment company from

causing or inducing the investment

company to engage in lending

transactions that are detrimental to the

best interests of the investment

company and its shareholders.

Applicants believe that the Fund Notes

do not raise these concerns because: (a)

The amount of each Fund’s Fund Note

will be determined on a pro rata basis

in the same proportion as the Fund’s

then current pro rata share of its regular

premium payment, (b) all Fund Notes

will have the same terms, which will be

fair and reasonable to each Fund, and

(c) any interest received by the Funds

on the Fund Notes will be determined

according to a market rate.

D. Section 17(d) and Rule 17d–1

1. Section 17(d) of the Act and rule

17d–1 under the Act prohibit an

affiliated person of a registered

investment company or an affiliated

person of an affiliated person, acting as

principal, from participating in any joint

arrangement in which the investment

company participates unless the

arrangement has been approved by the

SEC. Applicants believe that the

involvement of FMR and the

Participating Funds in the Mutual

Company could be deemed to constitute

participation in a joint arrangement

because of: (a) The payment of

premiums by the Funds to the Mutual

Company for insurance coverage and

the rights of the Funds to certain

payments from the Mutual Company in

connection with a Loss Event, (b) the

assessable feature of the Policies, (c) the

receipt by FMR from the Mutual

Company of interest on the FMR Note

and an annual fee for its commitment,

and (d) FMR’s contribution of cash to

the Mutual Company in exchange for

the FMR Note.

2. Rule 17d–1(b) provides that, in

determining whether to approve a

transaction, the SEC is to consider

whether the proposed transaction is

consistent with the provisions, policies,

and purposes of the Act, and the extent

to which the participation of the

investment companies is on a basis

different from or less advantageous than

that of the other participants. For the

reasons stated below, applicants believe

that the requested relief meets these

standards.

3. Applicants state that the Registered

Funds will not participate in the

arrangement on a basis that is different

from or less advantageous than other

Participating Funds because each

Fund’s premium will be allocated in

accordance with the risk characteristics

of the different types of Insurable Assets

in which the Funds invest based upon

actuarial standards. Applicants state

that each Participating Fund’s

assessable portion will be on a pro rata

basis according to its share of the

regular premium payments. Applicants

also state that, in the case of multiple

loss events in a single year, the Mutual

Company will make payments

chronologically based on the date on

which a Loss Event occurs up to the

annual Policy limit. Applicants note

that, while a Registered Fund may not

recover on a loss in a particular year, all

Registered Funds will be treated in the

same manner.

4. Applicants state that the Mutual

Company is intended to provide

substantial benefits to the Participating

Funds, including protection against

losses incurred from defaulting

Insurable Assets and from repo- and

preference-related Loss Events. Further,

applicants note that the interest

received by FMR on the FMR note and

the fee it will receive for its

commitment to cover losses of the

Mutual Company will be determined

according to a market rate. Applicants

state that the fees will compensate FMR

for assuming significant economic risks

and that FMR will receive no other

direct benefits from its involvement

with the Mutual Company.

Applicants’ Conditions

Applicants agree that any order of the

SEC granting the requested relief will be

subject to the following conditions:

1. The Trustees, including a majority

of the Trustees who are not ‘‘interested

persons’’ of any Registered or

Unregistered Fund, as defined in section
3938 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

1The two regulatory circulars that govern the use

of telephones at the equity trading posts were

approved by the Commission on October 28, 1996

[(see SR–CBOE–96–15, Securities Exchange Act

Release No. 37876 (October 28, 1996), 61 FR 56728

(November 4, 1996)] and on March 2, 1994 [See SR–

CBOE–93–24, Securities Exchange Act Release No.

33701 (March 2, 1994)].

2See SR–CBOE–96–15, approved in Securities

Exchange Act Release No. 37876 (October 28, 1996),

61 FR 56728 (November 4, 1996).

2(a)(19) of the Act (‘‘Disinterested

Trustees’’), will initially and at least

annually thereafter, in each year a

Registered Fund participates in the

insurance arrangement, determine (a)

that the Policy is in the best interests of

the Registered Fund and its

shareholders, (b) that any amounts paid

or potentially payable to the Mutual

Company by the Registered Fund

including, without limitation, the

premiums, the special assessable

premium, and the Fund Notes, are fair

and reasonable to the Registered Fund,

(c) after reviewing all claims paid or

denied by the Mutual Company, that the

settlement of all claims has been

reasonable and fair to the Registered

Fund, and (d) that any procedures

adopted pursuant to condition 3 have

been complied with.

2. Any conflicts that may arise

concerning the Participating Funds

relating to the operation or policies of

the Mutual Company will be resolved

on an equitable basis by a committee of

the Disinterested Trustees of the

Registered Funds.

3. The Trustees of each Registered

Fund, including a majority of the

Disinterested Trustees, will adopt

procedures that are reasonably designed

to provide that the conditions in the

application have been complied with.

The procedures will include, without

limitation, the guidelines set forth in the

Statement of Policy Regarding Coverage,

attached as Exhibit D to the application,

as it may be amended from time to time.

4. Participation by a Registered Fund

in the Mutual Company will be

consistent with the policy of the Fund,

as recited in its registration statement

and reports filed under the Act.

5. The nature and extent of the

insurance coverage will be briefly

described in each Registered Fund’s

current registration statement and, if

required by GAAP, in each Registered

Fund’s financial statements. Other than

this disclosure, the insurance coverage

provided by the Mutual Company will

not be used in connection with the

marketing of the sales of shares of the

Registered Funds.

6. Each Registered Fund will maintain

and preserve permanently in an easily

accessible place a written copy of the

procedures (and any modifications

thereto) described in condition (3) and

will maintain and preserve for a period

of not less than six years from the end

of the fiscal year in which any Fund

participated in the Mutual Company,

the first two years in an easily accessible

place, a written record relating to the

premiums paid and any claims made by

the Fund and any action taken by the

Mutual Company with respect to the

claim, and the information or materials

upon which the determinations

described in condition (1) were made.

The Mutual Company will make its

records available to the Trustees and the

staff of the SEC upon request.

7. The Mutual Company will pay

FMR for its commitment to cover losses

at a rate not to exceed the lowest rate

FMR would then be paying a bank for

a letter of credit in a comparable

amount.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–1854 Filed 1–26–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39556; File No. SR–CBOE–

97–65]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Incorporated Relating to the Placing of

Orders Over the Outside Telephone

Lines at the Equity Trading Posts

January 16, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934, 15

U.S.C. 78s(b)(1), notice is hereby given

that on December 11, 1997, the Chicago

Board Options Exchange, Incorporated

(‘‘CBOE’’) filed with the Securities and

Exchange Commission (‘‘Commission’’)

the proposed rule change as described

in Items, I, II, and III below, which Items

have been prepared by the CBOE. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Chicago Board Options Exchange,

Inc. (‘‘CBOE or the ‘‘Exchange’’)

proposes to amend its policy 1 governing

the use of member-owned or Exchangeowned telephones located at the equity

trading post on the floor of the

Exchange.

The text of the proposed rule change

is available at the Office of the

Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, Proposed Rule

Change

In its filing with the Commission,

CBOE included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The CBOE has

prepared summaries, set forth in

sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, Proposed Rule

Change

The purpose of the proposed rule

change is to amend the policy currently

governing the use of telephones at

equity option trading posts. The

proposed amendment would permit

floor brokers at these posts to receive

orders, over telephones located at the

equity option posts, when (i) those calls

are patched through a booth on the floor

as further described below and (ii) the

order is from U.S. registered brokerdealers. The revised policy will be

issued in a regulatory circular. In

addition, the Exchange has filed as

Exhibit B to the filing a proposed form

of application and agreement to be used

by members seeking approval to use the

telephones at the equity option posts.

Orders Entered by Broker-Dealers

The proposed change is the latest in

a continual expansion of direct

telephone access of orders to the equity

option trading posts since a telephone

policy was first filed with the

Commission in 1993, see SR–CBOE–93–

24. The regulatory circular that was the

subject of that original filing prohibited

any orders from being transmitted over

the outside telephone lines at the equity

option posts. (At that time and today,

orders could and can be transmitted

over the intra-floor lines from one point

on the Exchange floor to another.) In

1996, the Exchange liberalized its

telephone policy in the equity crowds to

allow market-makers to place orders

over the outside telephone lines directly

with floor brokers at the equity option

posts.2 This change allowed marketmakers who need to be off the floor to

transmit their orders more efficiently.

The current proposed change would

expand the ability to transmit orders

entered by broker-dealers over