Document ID: SEC-2006-0122-0014
Agency: sec
Document Type: Notice
Title: U.S. Bank National Association, et al.; Notice of Application
Posted Date: 2008-04-22T04:00Z

[Federal Register: April 22, 2008 (Volume 73, Number 78)]
[Notices]               
[Page 21670-21673]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ap08-82]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28238; 812-13246]

 
U.S. Bank National Association, et al.; Notice of Application

April 16, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under sections 6(c), 12(d)(1)(J), 17(b) 
and 17(d) of the Investment Company Act of 1940 (the ``Act'') and rule 
17d-1 thereunder for an exemption from sections 12(d)(1)(A) and (B) of 
the Act, sections 17(a)(1) and (2) of the Act, and section 17(e) of the 
Act, and for an order permitting certain joint transactions pursuant to 
rule 17d-1 under the Act.

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    Applicants: U.S. Bank National Association (``Bank''), FAF 
Advisors, Inc. (``FAF Advisors''), Mount Vernon Securities Lending 
Trust (``Fund''), and First American Investment Funds, Inc. (``FAIF'').
    Summary of Application: Applicants request an order to permit (i) 
Certain registered management investment companies and their series 
(``Other Lending Funds'') that participate as lenders in a securities 
lending program (``Program'') administered by FAF Advisors or an entity 
controlling, controlled by, or under common control with FAF Advisors 
(``Lending Agent'') to pay, and Lending Agent to accept, fees based on 
a share of revenue generated from securities lending transactions under 
the Program; (ii) the Bank and any entity controlled or under common 
control with the Bank (``U.S. Bank Entity'') to engage in principal 
transactions with, and receive fees or commissions for acting as broker 
or agent in connection with the purchase or sale of securities for, the 
Other Lending Funds, irrespective of any affiliation that may arise 
solely because of an investment by an Other Lending Fund of cash 
collateral derived from loaned securities under the Program (``Cash 
Collateral'') in shares of any series of the Fund (``Investment 
Funds''); and (iii) the Other Lending Funds, FAIF and any other 
registered

[[Page 21671]]

management investment company or series thereof advised by FAIF 
Advisors or any other entity controlling, controlled by, or under 
common control with the Bank that may participate as a lender in the 
Program\1\ (``Affiliated Lending Funds,'' and together with the Other 
Lending Funds, ``Registered Lending Funds''), and any entity relying on 
section 3(c)(1) or 3(c)(7) that may participate as a lender in the 
Program (``Private Lending Funds,'' and together with the Registered 
Lending Funds, ``Lending Funds''), to invest Cash Collateral in 
existing and future Investment Funds that are short-term bond funds 
(``Non Money Market Investment Funds'').
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    \1\ The Affiliated Lending Funds participate in the Program 
pursuant to a prior Commission order. First American Investment 
Funds, Inc., Investment Company Act Release Nos. 22181 (Aug. 28, 
1996) (notice) and 22245 (Sep. 24, 1996) (order).

Filing Dates:  The application was filed on November 14, 2005, and 
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amended on November 6, 2006, November 16, 2007, and March 13, 2008.

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 May 12, 2008, and should be accompanied by proof of service on 
the 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 of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants: FAF Advisors, 800 Nicollet 
Mall, Minneapolis, MN 55402.

FOR FURTHER INFORMATION CONTACT: Nadya Roytblat, Assistant Director, at 
(202) 551-6823 (Office of Investment Company Regulation, Division of 
Investment Management).

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, 100 F Street, NE., 
Washington, DC 20549-1520 (tel. 202-551-8090).

Applicants' Representations

    1. The Bank is a national banking association and the largest 
subsidiary of U.S. Bancorp, a multi-state financial holding company 
headquartered in Minneapolis, Minnesota. The Bank serves as custodian 
for several of the Lending Funds. FAF Advisors is a wholly owned 
subsidiary of the Bank and is registered as an investment adviser under 
the Investment Advisers Act of 1940. FAF Advisors currently serves as 
Lending Agent administering the Program. FAIF is a Maryland corporation 
and is registered under the Act as an open-end management investment 
company. Certain of the series of FAIF are Affiliated Lending Funds.\2\
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    \2\ All existing Affiliated Lending Funds that currently intend 
to rely on the requested order are named as applicants. Any other 
existing or future entity may rely on the order only in accordance 
with the terms and conditions of the application.
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    2. The Fund is a Delaware statutory trust organized in 2005 and is 
registered as an open-end management investment company under the Act. 
The Fund currently offers two Investment Funds, one of which is a money 
market fund and the other a Non Money Market Investment Fund, a short-
term bond fund that seeks current income consistent with the 
preservation of capital by investing in fixed-income securities and 
maintaining a dollar-weighted average portfolio maturity of three years 
or less. Any future Non Money Market Investment Fund will be a short 
term bond fund. The Investment Funds are offered exclusively to the 
Lending Funds as low expense investment vehicles for Cash Collateral. 
Shares of the Investment Funds are not subject to any sales charge or 
service fee. FAF Advisors serves as the investment adviser, transfer 
agent and administrator of the Fund. The Bank serves as custodian of 
the Fund.
    3. Under the Program, the Lending Agent enters into an agreement 
with a Lending Fund (``Lending Agreement'') whereby the Lending Fund 
appoints the Lending Agent to serve as its agent to lend its portfolio 
securities and authorizes the Lending Agent to enter into a master 
borrowing agreement (``Borrowing Agreement'') with each person 
designated by the Lending Fund as eligible to borrow some or all of 
such securities (``Borrower''). All securities lent under a Borrowing 
Agreement are exchanged for cash or other types of collateral from the 
Borrower. When the collateral delivered is cash, the Lending Agreement 
authorizes and instructs the Lending Agent, as agent for the Lending 
Fund, to invest the cash in accordance with specific guidelines 
provided by the Lending Fund. With respect to loans involving cash 
collateral, the Lending Agent is compensated for its services under the 
Program indirectly through the income earned on the collateral. 
Pursuant to the Borrowing Agreement, the Lending Fund commits to pay 
the Borrower a negotiated return on the collateral for the term of the 
loan (``Borrower's Rebate''). The return on the Lending Fund's 
investment of the Cash Collateral during the term of the loan is 
intended to satisfy that commitment. The difference between the 
Borrower's Rebate and the actual return on the investment of the 
collateral (``Securities Lending Revenue'') is divided between the 
Lending Fund and the Lending Agent in accordance with the terms of the 
Lending Agreement. In the case of collateral other than cash, the 
Borrower will pay a loan fee to the Lending Fund. The amount of the 
loan fee (also ``Securities Lending Revenue'') is divided between the 
Lending Fund and the Lending Agent in accordance with the terms of the 
Lending Agreement.

Applicants' Legal Analysis

    Applicants request an order (i) Pursuant to section 17(d) of the 
Act and rule 17d-1 thereunder to permit the Other Lending Funds to pay, 
and a Lending Agent to accept, fees based on a share of the Securities 
Lending Revenue; (ii) pursuant to sections 6(c) and 17(b) of the Act 
granting an exemption from sections 17(a)(1) and (2) and 17(e) of the 
Act to permit any U.S. Bank Entity to engage in principal transactions 
in securities and other property with the Other Lending Funds and 
receive fees or commissions from the Other Lending Funds for acting as 
a broker or agent in connection with the purchase or sale of securities 
for the Other Lending Funds; (iii) pursuant to section 12(d)(1)(J) of 
the Act to permit the Lending Funds to invest Cash Collateral in shares 
of the Non Money Market Funds in excess of the limits in sections 
12(d)(1)(A) and (B) of the Act; and (iv) pursuant to sections 6(c) and 
17(b) of the Act granting an exemption from sections 17(a)(1) and (2) 
of the Act, and pursuant to section 17(d) of the Act and rule 17d-1 
thereunder, to permit the Non Money Market Funds to sell their shares 
to and redeem their shares from the Registered Lending Funds in 
connection with the investment of Cash Collateral, and the Non Money 
Market Funds, the Lending Funds and the Lending Agent to effect certain 
transactions incident to such investment in the Non Money Market 
Funds.\3\
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    \3\ The duties to be performed by a Lending Agent with respect 
to any Registered Lending Fund will not exceed the parameters set 
forth in Norwest Bank, Minnesota, N.A., SEC No-Action Letter (pub. 
avail. May 25, 1995) (``Norwest Bank''). The applicants are not 
requesting, and the Commission is not passing on, any relief from 
sections 15, 17(d) or 17(e) of the Act with respect to any duties of 
the lending agent that are not enumerated in Norwest Bank.

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[[Page 21672]]

Lending Agent Fee

    1. Section 17(d) of the Act and rule 17d-1 under the Act, in 
relevant part, prohibit any affiliated person or any affiliated person 
of an affiliated person (``Second Tier Affiliate'') of a registered 
investment company, acting as principal, from effecting any transaction 
in connection with any joint enterprise or other joint arrangement or 
profit sharing plan in which the investment company participates, 
without an order of the Commission.
    2. Section 2(a)(3) of the Act defines an affiliated person to 
include, in relevant part, (i) any person directly or indirectly 
owning, controlling, or holding with power to vote, 5% or more of the 
outstanding voting securities of the other person; (ii) any person 5% 
or more of whose outstanding voting securities is owned, controlled or 
held with power to vote by the other person, (iii) any person directly 
or indirectly controlling, controlled by, or under common control with 
the other person, and (vi) an investment adviser to an investment 
company.
    3. As investment adviser to an Investment Fund, FAF Advisors is an 
affiliated person of the Investment Fund. Applicants state that, if an 
Other Lending Fund acquires 5% or more of an Investment Fund's 
outstanding voting securities, the Other Lending Fund will become an 
affiliated person of the Investment Fund and a Second Tier Affiliate of 
the Lending Agent. Applicants also state that the Lending Agent may be 
a Second Tier Affiliate of an Other Lending Fund if the Other Lending 
Fund is a series of a registered investment company and FAF Advisors or 
another entity controlling, controlled by, or under common control with 
the Bank serves as investment adviser to another series of the same 
registered investment company.
    4. Due to these possible affiliations, applicants state that 
section 17(d) and rule 17d-1 may prohibit a Lending Agent from 
receiving a fee from the Other Lending Funds based on a share of the 
Securities Lending Revenue, and request an order pursuant to rule 17d-1 
to permit the arrangement. Under rule 17d-1, in passing on applications 
for orders under section 17(d), the Commission considers whether the 
investment company's participation in the joint enterprise 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 other participants. Applicants state 
that each Other Lending Fund has its own investment adviser that is not 
an affiliated person or Second Tier Affiliate of the Lending Agent, and 
that any fee arrangement between a Lending Agent and an Other Lending 
Fund with respect to the Program will be the product of arms length 
bargaining. Therefore, applicants submit that the proposed arrangement 
satisfies the standards for an order under rule 17d-1.

Transactions Between the Other Lending Funds and U.S. Bank Entities

    1. Sections 17(a)(1) and (2) of the Act generally prohibit, in 
relevant part, an affiliated person or Second Tier Affiliate of a 
registered investment company, acting as principal, from selling to or 
purchasing from the registered company, or any company controlled by 
the registered company, any security or other property. Section 
17(e)(1) of the Act makes it unlawful, in relevant part, for any 
affiliated person of a registered investment company or Second Tier 
Affiliate, when acting as agent, to accept from any source compensation 
for the purchase or sale of any property to or for such registered 
investment company, except in the course of such person's business as 
an underwriter or broker. Section 17(e)(2) of the Act makes it 
unlawful, in relevant part, for any affiliated person of a registered 
investment company or Second Tier Affiliate, when acting as broker, in 
connection with the sale of securities to or by such registered 
investment company, to receive from any source a commission, fee or 
other remuneration for effecting such transaction which exceeds the 
limits set forth in section 17(e)(2).
    2. Applicants state that FAF Advisors, controlled by U.S. Bancorp, 
may be deemed to control the Investment Funds, and that each U.S. Bank 
Entity may be deemed to be under common control with, and thus an 
affiliated person of, the Investment Funds. If an Other Lending Fund 
acquires 5% or more of an Investment Fund's outstanding voting 
securities, the Other Lending Fund will become an affiliated person of 
the Investment Fund and a Second Tier Affiliate of the U.S. Bank 
Entities. Therefore, applicants seek an exemption under sections 6(c) 
and 17(b) of the Act from the prohibitions in sections 17(a)(1) and (2) 
of the Act and section 17(e) of the Act.
    3. Section 17(b) of the Act provides that the Commission, upon 
application, may exempt a transaction from the provisions of section 
17(a) if evidence establishes that the terms of the proposed 
transaction, including the consideration to be paid, are reasonable and 
fair, 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 concerned and with the 
general purposes of the Act. Section 6(c) of the Act provides that the 
Commission may conditionally or unconditionally exempt any person, 
security, or transaction, or any class or classes of persons, 
securities, or transactions, from any provision or provisions of the 
Act or of any rule or regulation thereunder, if and to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    4. Applicants submit that no element of self-dealing would be 
involved in the principal transactions between a U.S. Bank Entity and 
an Other Lending Fund because, in each instance, no U.S. Bank Entity 
has any influence over the decisions made by any Other Lending Fund. 
Applicants state that each Other Lending Fund has its own investment 
adviser that is not an affiliated person or Second Tier Affiliate of 
any U.S. Bank Entity and that, in economic reality, may be a competitor 
of the Bank. The applicants submit that each transaction between an 
Other Lending Fund and a U.S. Bank Entity would therefore be a product 
of arms length bargaining, and that the standards of sections 6(c) and 
17(b) are met.
    5. With respect to section 17(e), applicants state that certain 
U.S. Bank Entities may rely on rule 17e-1 under the Act in effecting 
transactions for the Other Lending Funds, whereas other U.S. Bank 
Entities that do not meet the definition of ``broker'' in section 
2(a)(5) of the Act, may not rely on rule 17e-1. Applicants request 
relief under section 6(c) from section 17(e)(1) solely to the extent 
that a U.S. Bank Entity may not meet the definition of ``broker'' under 
the Act, and from section 17(e)(2), provided that the U.S. Bank Entity 
complies with rule 17e-1 under the Act except for the requirements in 
rule 17e-1(b)(3) and 17e-1(d)(2) concerning quarterly board review and 
the related recordkeeping requirements. Applicants submit that the 
requested relief is consistent with a similar exemption provided in 
rule 12d1-1 under the Act for affiliations analogous to those between 
an Other Lending Fund and a U.S. Bank Entity.

[[Page 21673]]

Investment by the Lending Funds of Cash Collateral in the Non Money 
Market Investment Funds

    1. Section 12(d)(1)(A) of the Act provides, in relevant part, that 
no registered investment company may acquire securities of another 
investment company representing more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or, together with the securities of other investment companies, 
more than 10% of the acquiring company's total assets. Section 
12(d)(1)(B) of the Act provides that no registered open-end investment 
company, any principal underwriter thereof, or any broker or dealer may 
sell securities of the investment company to another investment company 
if the sale will cause the acquiring company to own more than 3% of the 
acquired company's voting stock, or if the sale will cause more than 
10% of the acquired company's voting stock to be owned by investment 
companies. Section 12(d)(1)(J) of the Act provides that the Commission 
may exempt any person or transaction from any provision of section 
12(d)(1) if and to the extent that the exemption is consistent with the 
public interest and the protection of investors.
    2. Applicants request an exemption under section 12(d)(1)(J) to 
permit the Lending Funds to invest Cash Collateral in shares of the Non 
Money Market Investment Funds in excess of the limits imposed by 
section 12(d)(1)(A), and each Non Money Market Investment Fund to sell 
its shares to the Lending Funds in excess of the limits in section 
12(d)(1)(B).
    3. Applicants state that none of the abuses meant to be addressed 
by sections 12(d)(1)(A) and (B) of the Act will be created by the 
proposed investment of Cash Collateral in the Non Money Market 
Investment Funds. Applicants represent that the proposed arrangement 
will not result in an inappropriate layering of fees because shares of 
the Non Money Market Investment Funds will not be subject to a sales 
charge or service fee. Applicants further represent that there will not 
be any duplicative advisory fees. Applicants also represent that no Non 
Money Market Investment Fund will acquire shares of any other 
investment company or company relying on section 3(c)(1) or 3(c)(7) of 
the Act other than as permitted by rule 12d1-1 under the Act, so that 
there will not be any complex fund structure.
    4. Applicants also request an exemption under sections 6(c) and 
17(b) of the Act, and an order pursuant to rule 17d-1 under the Act, to 
permit the Non Money Market Investment Funds to sell their shares to 
the Registered Lending Funds, the Registered Lending Funds to redeem 
shares from the Non Money Market Funds, and the Lending Agent to 
effectuate the investment of Cash Collateral in the Non Money Market 
Funds.
    5. Applicants state that the Affiliated Lending Funds and the Non 
Money Market Investment Funds may be deemed to be under common control 
and therefore affiliated persons of each other. Applicants also state 
that if any Other Lending Fund acquires 5% or more of a Non Money 
Market Investment Fund's shares, the Other Lending Fund and the Non 
Money Market Investment Fund may be deemed affiliated persons of each 
other. Therefore, the sale of shares of the Non Money Market Investment 
Fund to the Registered Lending Funds, and the redemption of such shares 
in connection with the investment of Cash Collateral may be prohibited 
under sections 17(a)(1) and (2) of the Act. Applicants also state that 
the Lending Funds (by purchasing and redeeming shares of the Non Money 
Market Investment Funds), FAF Advisors (by managing the portfolio 
securities of the Affiliated Lending Funds and the Non Money Market 
Investment Funds at the same time that the Affiliated Lending Funds' 
Cash Collateral is invested in the Non Money Market Investment Funds, 
and serving as lending agent and receiving a portion of the Securities 
Lending Revenue), and the Non Money Market Investment Funds (by selling 
their shares to and redeeming shares from the Lending Funds) could be 
deemed to be participants in a joint enterprise or other joint 
arrangement within the meaning of section 17(d) of the Act and rule 
17d-1 under the Act.
    6. Applicants state that the requested relief satisfies the 
standards of sections 6(c) and 17(b) of the Act and rule 17d-1 under 
the Act. Applicants state that shares of the Non Money Market Funds 
will be purchased and redeemed by the Lending Funds at net asset value, 
on the same basis as the shares are purchased and redeemed by all other 
shareholders of the Non Money Market Funds.

Applicants' Conditions

    The applicants agree that any order granting the requested relief 
will be subject to the following conditions:
    1. The securities lending program of each Registered Lending Fund, 
including the investment of Cash Collateral, will comply with all 
present and future guidelines of the Commission and its staff regarding 
securities lending arrangements.
    2. No Registered Lending Fund will purchase shares of any 
Investment Fund unless participation in the Program has been approved 
by a majority of the directors or trustees of the Registered Lending 
Fund that are not interested persons of the Registered Lending Fund 
within the meaning of section 2(a)(19) of the Act. Such directors or 
trustees of each Registered Lending Fund also will evaluate the Program 
no less frequently than annually and determine that investing Cash 
Collateral in the Investment Fund is in the best interests of the 
shareholders of the Registered Lending Fund.
    3. Investment in shares of an Investment Fund by a particular 
Registered Lending Fund will be consistent with the Registered Lending 
Fund's investment objectives and policies. A Registered Lending Fund's 
Cash Collateral will be invested in a particular Investment Fund only 
if the Registered Lending Fund has approved that Investment Fund for 
investment and if that Investment Fund invests in the types of 
instruments that the Registered Lending Fund has authorized for the 
investment of its Cash Collateral.
    4. Shares of any Investment Fund will not be subject to a sales 
charge or service fee, as defined in rules 2830(b)(8) and (9), 
respectively, of the Conduct Rules of the National Association of 
Securities Dealers, Inc.
    5. No Investment Fund may invest in shares of any investment 
company or company relying on section 3(c)(1) or 3(c)(7) of the Act, 
other than as permitted by rule 12d1-1 under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-8652 Filed 4-21-08; 8:45 am]

BILLING CODE 8010-01-P