SEC Division of Investment Management staff letter: Adams Express Company

~-, .' ,
CHADBOURNE, PARKE, WHITESIDE & WOLFF 30 ROCKEFELLER PLAZA. NEW YORK, !. Y. 101 12 EDMUND S. MUSKIE DONALO L. DEMING ROBERT A.. HOWES PAUL G. PENNOYER. .JR. PETER M. WARD ,JOHN WILCOX JANET C. BROWN CHARI.l':"; H. HARF'f DAVID R. BAKER EDMUND E. HARVEY MICHAEL B. WEIR WILLIAM M. BRADNER, JR. RAYMOND R. FLETCHER, JR. EDWARD C. /4cLEAN, JR. STUART D, BAKER ZACHARY SHIMER NiCHOLAS B. ANGELL GEORGE E. ZEITLIN NORMAN SIN RICH WILLIAM ..I. GEEN DONALD I STRAUBER DANIEL ..I. O'NEILL PAUL A.. RANDOUR MALCOLM E. MARTIN EDWARD P. SMITH WILLIAM .J. CALISE, JR. EUGENE R. SULLIVAN, JR. WHITNEY i. GERARD R. TIMMIS WARE (2 12) 641-5800 ~Ii~~~~i;: ~: ~~~NN WUI TELEX 62052a STc;.,~~~~;~~~N g¡tLRil ~E:~i;.ARTHY WU TELEX 646n8~ ...~: ..."....... .JAMES K, CRIMMINS MARCIA E CARPENI ¡.., "~'''''''''''-,,''' . ,l", ..~/¡.,.:)' '~.'.'.. :,...~..............' CHARLES e. LAUREN ~~~~ii t£f¡~~~~~Y:.R ¡~~~L""lI..Ç;(f ..-¿~(P:--~ ',-: ,::,' ~. ~:~,,_~ H~i~1!~ò~~~~~~A~R. GA~~~SH.KBg~KEi;L I I~ ¡) . .- Í ~:.,~ ~.;~.~. ~.~ -¿. GE~'Á. ~~~~ÓI~R. b~ii~: ~;,~~~gN becliQu....../7c,;-, .¿¿.... ,. ..~ ':1. ~J .' .' ~.,C': ! WASHINGTON OFFICE THOMAS J. GALLAGHER. J~.. F .~ / 1101 VERMONT AVENUE. N. W. JOHN B. O'SULLIVAN ii' . I..,:': , WASHINGTON. D. C. 20005 JEROME C. KATZ ':'~L':Le . 0 ( . .. '-. c':..,¿'- , (2021 2eg'3000 GILBERT L. KLEMANN, II ,-. --"~--'--'7'- . t' ",~';;.. ,;,:.. - Ì' , . ;' WUI TELEX Q04256 ~g~HR '1:.~61~ER ¡PUbli C' 10 '(jf- --iiz¿" . r:;. "" ' '/ TRT TELEX 140162 VERONICAM.AHERN. ¡Availability .01 J' '.:.......:~...... c-,".:.1.". " U.A.E~F1CES ~ ,. -..-.,",,,,~,,, ',., . '.'.' ",.:""" i'., "~"'. .;~, '.. " '. CHADBOURNE. PARKE & AFRIDI COUNSEL . I ~.:; P. O. BOX Q2t52' DUBAI . ..................:.J ('l' OÙBAI INTERNATIONAL TRADE CENTRE WILLIAM H. MATHERS March 7, 1984 __ UNITED ARAB EMIRATES . ALVIN D. LURIE TEL. :i73e2~: TELEX 451"5 GARY M. KEYES OFFICES ALSO IN ABU DHABI FREDERICK W. TAYLOR. JR. AND SHARJAH, U. A. E. eW:l ""~'Trro IN NEW YORK Investment Company Act of 1940/
Section 17 (f); Rule 17f-2
(, .
Division of Investment Management
Secur.i ties and Exchange Commission 450 Fifth Street, N. W. Washington, D.C. 20549 Re: The Adams Express Company File No. 811-2624 . Dear Sirs:
We are counsel to The Adams Express Company (the "Company"), a closed-end investment company reg istered ~ (' under the Investment Company Act of 1940 (the "1940 Act"). The Bank of New York (the "Bank") acts as '.custodian of the Company's portfolio of securities in accordance with Rule 17f-2 promulgated under the 1940 Act. As a source of income, the Company has in the past loaned certain of the securities in its portfolio to qualified borrowers who collateralize such loans to the extent of no less than 102% of the full market value of the securities loaned. The Company's Board of Directors exercises close and

,
CHADBOGR!\E. PARKE, WHITESIDE & WOLFF Division of Investment 1'1anag ement -2- Mar ch 7, 19 84 continuous control of the' Company' s securities loan program in accordance with its business judgment. The Company now proposes to enter into an agree- ~ent wi th the Bank to appoint the Bank its agent to loan secur i ties owned by :the Company a?d held by the Bank in an account for the Company's benefit. The proposed securities loan agency agreement (the "Agreement") would maintain the Company ¡ S control Over which secur i ties are loaned, to whom they are loaned, and the value of colla teral. against -which they are loaned. In adãi tion, the Agreement would' prov ide tha t the Bpnk may ioan securi ties only to those prospective borrowers tha t meet the Bank's standards for credi tworthiness, thus providing a se~ond, independent eval ua tion of prospective borrowers that is not currently av~ilable to the Company. The Agreement would provide that loans of securi￾ties could be made to any 'enti ty named on a list agreed to by the company and the Bank from time to time, other than any entity whose name the Company has notified the Bank to delete from such list. In deleting names from such list, the Company will evaluate prospective borrowers in the same manner as it currently evaluates the qualif.ications. and creditworthiness of prospective borrowers of it~ securities under the Company's existing securities loan

CHADBOURNE. PARKE. WHITESIDE & WOLFF Division of Investment Management -3- Ma r c h 7, 1 9 8 4 program. As is the case with the Company's existing secur i ties loan program, loans made under the Agreement would be collateralized by bank letters of credit, securi￾ties and cash equal to not less than 102% of the market value of the loaned secur i ties. The Bank may accept a letter of credit as collateral only if it was issued by a bank named on a list agreed to by the Company and the Bank from time to time. In evaluating the names on such list, the Company will evaluate each bank in' the same manner as it currently evaluates banks when the Company accepts let￾ters of credit as collateral for loans made under its existing_.~ecuri ties loan program. The Agreement would require the Bank to terminate any loan whenever it receives (a) oral or wri tten instruc￾tions to term ina te such loan from an off icer of the Company designated by the Company as authorized (an "Authorized Person") to give such notice, (b) a written instruction from an Authorized Person tha.t the name of the borrower is to be deleted from the list of potential borrowers or that the name of the bank which issued a letter of credit as col￾la teral for the loan is to be deleted from the list of banks, or (c) notice of anydefaul t in connectiqn with the loan. The Bank may a t any time term ina te any loan in its absolute discretion and, as stated above, the Bank must ter~inate any loan upon receiving notice from an Authorized

CHADBOURKE, PARKE. WHITESIDE & WOLFF Division of Investment Management -4- March 7, 1984 Person. Therefore the Co~pany, acting through its Authorized Persons, retains full discretion and power to prevent- any loan from being made or to terminate any loan once made. As the Company i s agent under the Agreement, the Bank would undertake to make colla teralized loans of secur i ties for the Company i s account in conjunction 'wi th similar loans made for the accounts òf other lenders of securities, mostly pension and profit-sharing funds. Al though th~ Company would still exercise its business judgment in. controlling the loans made by the Bank, the Company anticip~ t~s tha tit would obtain significant benefi ts under the Agreement from the Bank i s economies of scale and access to markets. In addition, the Bank would perform certain administrative functions under the Agreement at lower cost to the Company than that available under the Company i s existing securities loan program. As incentive to the Bank to make profitable loans for the Company and as full compensation under the Agreement, the Company would pay a fee to the Bank equal to a percentage of èarnings on ,loans of securities made under the Agreement. We note tha t the staff of the Commission has acknowledged that secur i ties loan agency arrang~ents sub￾stantially similar to the Agreement meet the requirements of Section l7(f) of the 1940 Act and Rule l7f-2 thereunder.

.
CHADBOUR:s'E, PARRE. WHITESIDE & WOLFF Division of Investment Management -5- March.7, 1984 In rendering no-action advice concerning the application of Rule 1 7f~ 2 in Twentieth Century Investors, Inc. (avail￾able November 26, 1982) and United States & Foreicrn Securi- "' . ties Corporation (available November 26, 1982), the staff of the Commission noted tha t the agent for the securities loan programs therein described would guarantee return to the lender of the loaned securities and payment when due of all interest, dividends and distributions in respect thereof, provisions not present in the Agreement~ The Company has advised us that current market conditions and competi tion among thos e insti tu tions lending securities have severely limi ted the yields earned by the Company under its existing securi ties loan program and the fees tha t might be earned by the Company under a securities loan agency agreement similar to the Agreement but with the borrower i s performance guaranteed by the agent. As wi th other investment decisions, the Company i s management and Board of Directors have pr imary and ul tima te responsibility for evaluating the relative risks and bene￾fits of any proposed transaction. The Company assumes the burden of evaluating and selecting borrowers of securities and issuers of collateral in making loans under its existing s'ecuri ties loan program and would continue to do so for loans'made under the Agreement. Al though under the Agreewent

CHA.DBOVRKE, PARKE, WHITESIDE & WOLFF Division of Investment Management -6- March 7, 1984 the Bank would not guara~tee the performance of the bor￾rower, the Bank would evaluate the credi tworL~iness of prospective borrowers, exercise discretion in making particular loans and accepting collateral, and value daily the collateral to ensure that it equals no less than 102% of the market value of the loaned securities. These obli￾ga tions of .the Bank would add a second level of protection for the Company 's stockhold er s that is not now present. We believe that to meet the requirements of Rule 17f~2 the Agreement need not require the Bank to guarantee the per￾formance of a borrower. We would apprecia te your advice as to whether you concur in our views set forth herein. Because the Company is currently considering entering into the Agree￾ment, we would appreciate your prompt response to our inquiry. . If any further information is needed or if we can be helpful in any other way, please contact the under￾signed or, in my absence, Christopher G. Karras of this office, by collect telephone (212) 541-5800. Very truly yours, ~~.o.~

EDMUND S. MUSKIE
DONALD L. DEMING
ROBERT A. HOWES
PAUL G. PENNOYER. JR,
PETER M. WARD
JOHN WILCOX
.JANET C. BROWN
DAVID R. BAKER
EDMUND E. HARVEY
MICHAEL B. WEIR
WILLIAM M. BRADNER, JR.
EDWARD C. McLEAN, JR.
STUART D. BAKER
ZACHARY SHIMER
NICHOLAS B. ANGELL
GEORGE E. ZEITLIN
NORMAN SIN RICH WILLIAM J. GEEN
DONALD I STRAUBER

• DANIEL J. O'NEILL
  PAUL A. RANDOUR
  MALCOLM E. MARTIN
  EDWARD P. SMITH
  WILLIAM .J. CALISE. JR.
  EUGENE R. SULLIVAN, .JR.
  WHITNEY i. GERARD
  R. TIMMIS WARE
  CHADBOURNE, PARKE, WHITESIDE & WOLFF 30 ROCKEFELLER PLAZA. NEW YORK, N. Y. 10112 RICHARD J. NEY MICHAEL K, GLENN BERNARD W. McCARTHY DANIEL E. LEACH￾MARCIA E. CARPENI LESLIE JOHN SCHREYER HENRY J. OECHLER. JR. CHARLES K. O'NEILL RIGDON H. BOYKIN THOMAS E. BEZANSON GEORGE T. MANNING JOHN B.O'SULLIVAN JEROME C. KATZ GILBERT L. KLEMANN. II KEITH MARTIN. PETER R. KOLYER VERONICA M. AHERN- (2 12) 54 i -5800 WUI TELEX 620520 WU TELEX 645383 TELECOPIER (2 1 2) 586-7713 OF COUNSEL STANNARD DUNN CHARLES B. LAUREN FRANK B. STONE HAROLD L. WARNER. .JR. MELVIN D. GOODMAN GEORGE BOYD, JR. . . M. A. K. AFRIDI￾WASHINGTON OFFICE 1101 VERMONT AVENUE. N, W. WASHINGTON. D, C. 20005 (202) 289'3000 WUI TELEX Q04256 TRT TELEX 140162 TELECOPIER (2021 28Q'B517 COUNSEL WILLIAM H. MATHERS ALVIN D. LURIE GARY M, KEYES FREDERICK W. TAYLOR. JR. U.A.E, OFFICES CHADBOURNE, PARKE & AFRIDI DUBAI INTERNATIONAL TRADE CENTRE P. O. BOX 9262' DjJBAI UNITED ARAB EMIRATES I,). 984 TEL. 373625: TELEX '046145 t. OFFICES ALSO IN ABU DHABI r SECURITIES A!lO mHANGtNRiM~M' u. A. E. RECEIVED JUL 1 3 1984 July 12, -NOT ADMITTED IN NEW YOftK Mr. Thomas S. Harman Division of Investment Management Securi ties and Exchange Commission 450 Fifth street, N.W. Washington~ D.C. 20549 . 0!l-.' OFFll,E ~f C!-IlEf cnUMSEl nlYtSin~ OF IiI~mi1E1n MAlUGEMElIt pany '.~ I . ....: Re: The Adams Expres s Co File Number: 811-262 Dear Mr. Harman:
  Reference is made to my letter of March 7, 1984 reques ting your advice as to our views regarding the applicabili ty of and requirements under Section 17 (f) of the Investment Company Act of 1940 and Rule l7f-2 there￾under to certain securities loan transactions proposed to be entered into by The Adams Express Company (the "Company"). This letter is in response to the four questions you raised in our telephone conversation on JUlY 11, 1984 i as follows:

1. You have asked whether the collateral
   underlying securities loans will include accrued interest and dividends. I am advised that, under the proposed arrange￾ments, the dividends payable on corporate stocks and accrued interest on corporate bonds will not be collateralized; however i interest accrued on government securities that are the subject of loans is collateralized. It may be noted in this connection that the proposed arrangements call for collateralization at 102% of the market value of any loan securities, with such collateral being marked to market; thus, it is likely that in substantially all securities loan trans￾actions the margin of 2% of market value will be sufficient

CHADBOURNE, PARKE. WHITESIDE & WOLFF Mr. Thomas 8. Harman -2- July 12, 1984 to cover accrued quarterly dividends inasmuch as most corporate stocks do not carry annual dividends of 8% or more. Furthermore, it is normal practice that the dividends be paid, or credited through DTC, on the payment date or with￾in one day following the payment date so that the Company would receive credit therefor wi thin one day of payment. As to U.8. government securities collateral, the accrued interest on such obligations is permitted under the proposed arrangements and is included as part of the col- lateral.
2. You have asked who receives the loan premium.
The proposed agreement with. The Bank of New York (the "Bank") will provide for the Company to pay to the Bank a loan fee in an amount equal to a percentage of the earnings on loaned securities and, for this purpose, earnings include the difference between any rebate paid to a borrower and -the rate of return earned on cash collateral as well as any fees paid by borrowers on loans collateralized by letters of credit. The Bank will initially receive any such earnings or loan fees and will credit the Company's account for the amounts payable to the Company after retention of the Bank's fee. The current arrangemente call for the Company to receive 60% of earnings on securities loans but such per￾centage is subject to adjustment upwards or downwards, depending upon experience under the proposed agreement and future negotiations with respect thereto. .
3. You have asked what are the permissible
investments of cash collateral and whether they include investments in securities of the Bank. The proposed agree￾ment will provide for cash collateral to be invested in obligations issued or guaranteed as to interest and principal by the U. 8. goverli.ment or agencies or instrumentalities thereof, or commercial paper, certificates of deposit, bankers' acceptances, repurchase agreements with respect to the same, and/or bank time deposits issued or guaranteed as to interest and principal by an entity, except a broker/ dealer, named on a list given to the Company by the Bank from time to time, other than an entity that the Company has notified the Bank to delete from such list. It is anticipated that the Bank of New York would be such an eligible entity, and the Company has determined that an in￾vestment of cash collateral in securities of the Bank will be limited to an aggregate principal amount of $10,000,000 a t anyone time.

CHADBOURNE. PARKE, WHITESIDE & WOLFF Mr. Thomas S. Harman -3- July 12, 1984
4. You have asked whether, if a letter of credit is involved, the Bank can be an issuer of' such
letter of credit. The propose~ agreement precludes th~t the Bank of New York will be an issuer of any letters of credit used as collateral for loans of the Company i s securi ties. I trust the foregoing is responsive to your questions and if you need further clarification, I would appreciate your calling me. Very truly yours, 'Z~o.~ Robert A. Howes cc: Mr. Simeon F. Wooten The Adams Express Company

P. IIØ ~I."-=r- .
~ l' it !.
.~ YJ;i~ .:. ~'.d~ .':~ l '~ll t':. ~ ."l,...'; i ', . ',. ~ . ~~ SEP 7 1984 RESPONSE OF THE OFFICE OF CHIEF COONSEL DIVISION OF INVES'IMENT MANAGEMENT Our Ref. No. 84- 140-CC The Adams Express Company File No. 811-2624 We would not recommend that the Commission take any enforcement action pursuant to section 17 (f) of the Investment Company Act of 1940 or rule 17f-2 thereunder if The Adams Express Company (the "Company") lends its portfolio securities as proposed. Our position is based on the understanding that the Company's board of directors will remain responsible for determining who may borrow the Company's securities and the propriety of any loan. Our position is also based upon the facts and representations in your letters of March 7 and July 12, 1984, and upon the representations made to Thomas S. Harman by Robert A. Howes on August 7, 1984, that:
(1) the Bank of New York ("BNY") will value daily the collateral supporting the securities loaned to en￾sure that the collateral equals no less than 102% of the market value of the loaned securities; (2) the Company will retain full discretion and power to prevent any loan from being made or to terminate any loan once made; (3) the Company will receive all dividends, interest, and distributions on the securities it lends; (4) the valuation of any securities lent, for the purpose of determining the amount of the collateral to be deposited thereon, will include accrued interest; (5) any cash collateral invested with BNYwill be limited to an aggregate pr incipal amount of $10,000,000 at any one time and BNY will pay interest on such cash col￾lateral at a rate that is competitive ,with what it pays its other customers and with what other banks pay; and (6) any letter of credit accepted as collateral will be irrevocable and will not be issued by BNY. 61/~~, !f~ Thomas S. Harman Attorney