SEC Division of Investment Management staff letter: Federated Investors

~bA /.
21 APR 1994
Pl!Bll
Our Ref. No. 94-147-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Federated Investors

DIVISION OF INVESTMENT MAAGEMENT File No. 132-3

Your letter of March 16, 1994 requests our assurance that we

would not recommend enforcement action to the Commission under

section 17 (a) of the Investment Company Act of 1940 (the "1940

Act") 1/ if certain registered investment companies distributed

and administered by affiliates of Federated Investors (the

"Funds") engage in the transactions described in your letter.

Each Fund is advised by a bank (or affiliated person of a

bank), which also is a fiduciary of a common trust fund and/or

collective investment fund ("Common Trust"). ~/ The Fund

advisers have determined that it would be in the best interests

of the Funds' shareholders for the Funds to acquire the assets of

the Common Trusts. ~/ In this regard, you state that the

proposed transactions would provide each Fund with additional

assets consistent with its investment objective and policies,

permit greater diversification, and contribute to economies of

scale in the management of each Fund's assets. Consequently, the

advisers propose to cause the Funds to purchase substantially all

of the assets of the Common Trusts in exchange for Fund shares,

which shares would be distributed to the participating trust

accounts of the Common Trusts.

You represent that, except for the requirement that the

transaction be a purchase or sale for cash, each proposed

transaction will comply with all the requirements of

Rule 17a-7 under the 1940 Act. ~/ Specifically, you state that

(1) securities purchased or sold in the proposed transactions

will be valued in accordance with each Fund's traditional

1/ section 17 (a) generally prohibits affiliated persons of a

registered investment company from selling securities to, or

purchasing securities from, the investment company.

Z/ Telephone conversation with Matthew G. Maloney on Mar. 28, 1994. ~/ The banks, as fiduciaries, have determined that it would be

in the best interests of the Common Trusts for the Funds to

acquire the assets of the Common Trusts.

4/ Rule 17a-7 conditionally exempts from the prohibitions of

Section 17 (a) certain purchases and sales of securities

between registered investment companies and certain

affiliated persons, where the affiliation arises solely by

reason of having a common investment adviser, common

directors, and/ or common off icers.

~ valuation methods used to calculate net asset value and, in

particular, will be consistent with the requirements of

Rule 17a-7 (b) i (2) the proposed transactions are consistent with

the investment objective and policies of each Fundi (3) the

proposed transactions will not involve payment of any brokerage

commission, fee (other than customary transfer fees),. or other

remuneration; and (4) each Fund will comply with paragraphs (e)

and (f) of Rule 17a-7 in connection with the proposed

transactions. In addition, you represent that, other than the

bank in its fiduciary capacity, no affiliated person of a Fund,

or affiliated person of an affiliated person of the Fund, will

have any beneficial interest in the Common Trust involved in the

proposed transaction with the Fund.

On the basis of the facts and representations in your letter

and without necessarily agreeing with your legal analysis, we

would not recommend enforcement action to the Commission under

section 17 (a) if the Funds engage in the transactions described

in your letter. 5/ This response only expresses the Division's

5/ See The First National Bank of Chicago (pub. avail.

Sept. 22, 1992); The First National Bank of Chicago (pub.

avail. Feb. 5, 1986); American National Medical Association

Retirement Plan (pub. avai I. Jan. 15, 1987); Lincoln

National Investment Management Company (pub. avail. Apr. 25,

1976) .

• 2

. ,"\ ~.'
. . posi tion on enforcement action and does not purport to express any legal conclusions on the questions presented. ~/

7:~u::ru~/df

Senior Counsel

6/ In The First National Bank of Chicago (pub. avail. Sept. 22,

1992), the staff, because of conflict-of-interest concerns,

conditioned a similar grant of relief under section 17 (a) on

an undertaking from a fund's adviser that it would follow

certain procedures when it had the authority to vote fund

shares held in a fiduciary capacity. While we remain

concerned about potential conflicts of interest when an

adviser can control the voting of fund shares, we have

reconsidered our position. Because the proposed transaction

itself does not require the adviser to vote fund shares, we

have not conditioned Federated Investors' no-action relief

on this type of undertaking, and will not do so in response

to future requests for substantially similar relief. We

note, however, that, if a fund's adviser is a fiduciary for

an employee benefit plan, Section 406 (b) of the Employee

Retirement Income Security Act of 1974, as amended, may

prohibi t the fiduciary from voting any fund shares owned by

the plan on a matter in which the fiduciary has an interest

(~, approval of the advisory contract). section 406 (b)

prohibits a plan fiduciary from dealing with the assets of

the plan in its own interest.

• 3

." "
DICKSTEIN, SHAPIRO & MORIN
2101 L STREET, N.W.

WASH INGTON, D. C. 20037-1526 8300 800NE BOULEVARD

VIENNA. VIRGINIA 22182-2626 202 785-9700 703 847-9190 MATTHEW G. MALONEY FACSIMILE 202887-0689 598 MADISON AVENUE DIRECT DIAL TELEX 892608 DSM WSH NEW YORK. N.Y. 10022-1614 . 202828-2218 212 832-1900 15 RUE DE MARIGNAN March 16, 1994 75008 PARIS, FRANCE

33.1.40.76.02.86
1940 Act/1? (a)
Office of Chief Counsel A(J ~~ ~ l'il.
Division of Investment Management
SECTION Securities and Exchange Commission

450 Fifth street, N.W. RULE l;t~ -1 Washington, D. C. 20549

i~ii~BILITY 4/-,191 Ladies and Gentlemen:

On behalf of the registered investment companies (the

"Funds") advised and/or distributed by affiliates of Federated

Investors ("Federated"), we respectfully request that the Staff

of the Division of Investment Management confirm that it will not

recommend enforcement action to the Securities and Exchange

Commission (the "SEC") under section 17 (a) of the Investment

Company Act of 1940 (the "1940 Act") with respect to the

transactions described below. This letter supersedes our prior

correspondence with the Staff dated September 17, 1992, March 25,

1993, August 9, 1993 and October 29, 1993 and reflects the series

of discussions we have had telephonically with various members of

the Staff since the date of our original submission in September

1992.
Facts
The Funds are management investment companies. Certain

of the Funds are advised by a bank or affiliated persons of a

bank and distributed and administered by affiliates of Federated

(collectively, "Private Label Funds"). In a number of cases, a

bank which serves as investment adviser to a Private Label Fund

maintains a common trust fund and/or a commingled investment fund

(the "Common Trust") established under applicable state or

federal laws for the commingled investment of securities held by

the bank in its fiduciary capacity.

At the present time, the investment advisers and Funds

listed on Exhibit A hereto are considering engaging in the

transactions described below. As confirmed in the telephone

conversation of October 14, 1992, however, we specifically

request that the requested relief be made available not only to

these Funds and advisers but to all other existing and

to-be-established Private Label Funds which from time to time

propose to engage in transactions of the character described

38

. \

herein subject, of course, to compliance with the conditions

described herein.
Prooosed Transaction

In their capacities as investment advisers to one or more

Private Label Funds and fiduciaries with respect to one or more

Common Trusts, a number of banks have determined that it would be

in the best interests of both the Private Label Fund and the

Common Trust for the Private Label Fund to purchase substantially

all of the assets held by the Common Trust. The bank has

determined that ownership by the Private Label Fund of the assets

held by the Common Trust would be consistent with the investment

objective and policies of the Private Label Fund, and would be in

the best interests of its shareholders. In addition, the

transaction would be effected in accordance with, and pursuant

to, procedures approved by the Private Label Fund i s Board of Directors or Trustees which are designed to ensure substantial compliance with Rule l7a-7. Accordingly, the bank proposes to cause the Private Label

Fund to acquire substantially all the assets of the Common Trust,

and the Private Label Fund simultaneously proposes to issue to

the Common Trust shares of the Private Label Fund which

immediately thereafter would be distributed to the participating

trust accounts of the Common Trust. The aggregate net asset

value of Private Label Fund shares issued to the Common Trust

would be equal in value to the total fair market value of the

assets acquired by the Private Label Fund. Securi ties purchased

or sold in the proposed transaction would be valued in accordance

with the Private Label Fund i s traditional valuation methods used

to calculate net asset value and, in particular, would be

consistent with the requirements of Rule 17a-7 (b). As fiduciary

for the Common Trust and all fiduciary accounts participating

therein, the bank has determined that it has the power and

authority to engage in the proposed transaction, and would comply

with all obligations imposed upon it by applicable fiduciary

laws.
The proposed transactions would not involve payment of

any brokerage commission, fee (other than customary transfer

fees), or other remuneration. Except for the requirement that

the transaction be a purchase or sale for no consideration other

than cash, the proposed transactions would comply with the

requirements of Rule 17a-7 and would be subject to the procedures adopted by the Pr,i vate Label Fund i s Board of Directors or Trustees to ensure compliance with the requirements of

Rule 17a-7. Other than the bank, no person who is an affiliated

person of the Private Label Fund, or an affiliated person of an

affiliated person of the Private Label Fund, within the meaning

38

of Section 2 (a) (3) of the 1940 Act would have a beneficial interest in the proposed transaction.

Both the bank and the Private Label Fund desire to

consummate the proposed transaction because it would provide the

Private Label Fund with additional assets consistent with its

investment objective and policies, permit greater diversification

and contribute to economies of scale in the management of the

Private Label Fund i s assets, which will benefit existing

shareholders of the Private Label Fund.

Leaal Considerations

section 17(a) (1) of the 1940 Act states that "(i)t shall

be unlawful for any affiliated person * * * of * * * a registered

investment company * * * or any affiliated person of such a

person * * * acting as principal * * * knowingly to sell any

security or other property to such registered investment company

• • *." The bank is an affiliated person of the Private Label

Fund by virtue of being its investment adviser, i and also would

be deemed to be an affiliated person of the Common Trust by 2 Since virtue of the control it exercises over it as trustee.

the Common Trust itself proposes to sell securities to the

Private Label Fund, and the Private Label Fund proposes to

purchase such securities from the Common Trust, it may be argued

that an affiliated person, or an affiliated person of an

affiliated person, of the Private Label Fund, acting as

principal, proposes to sell securities to the Private Label Fund and that such transaction would violate section 17 (a) . The SEC has previously determined, however, that certain

transactions which involve the purchase or sale of securities by

a registered investment company from another person which is an

affiliated person, or affiliated person of an affiliated person,

of such an investment company, solely by reason of having common

investment advisers, directors or officers do not necessarily

give rise to the concerns underlying section 17 (a) of the 1940

Act and may be effected without exemptive relief provided certain

safèguards are in place to prevent the abuses designed to be

prevented by section 17(a). Thus, for example, Rule 17a-7

1 section 2 (a) (3) (E) of the 1940 Act defines an "affiliated person" of another person as "if such other person is an

investment company, any investment adviser thereof, or any member

of an advisory board thereof."

2 section 2 (a) (3) (C) of the 1940 Åct defines an "affiliated person" of another person as "any person directly or indirectly

controlling, controlled by, or under common control with, such

other person."

38

permi ts the purchase or sale of securities between an investment

company and another investment company or other account advised

by the same (or affiliated) investment adviser provided the

conditions set forth in the rule are met.

Rule 17a-7 states that a "purchase or sale transaction

• • • between a registered investment company * * * and a person

which is an affiliated person of such registered investment

company (or affiliated person of such person) solely by reason of

having a common investment advisor * * * is exempt from

Section 17 (a) of the Act" provided that certain enumerated
conditions are met. As indicated in the above description of the proposed transaction, sections (b) - (f) of Rule 17a-7 will be satisfied by the transaction participants.

Rule 17a-7 exempts transactions involving affiliation

solely by virtue of having a common investment adviser. Although

the Bank is technically not an investment adviser to the Common

Trust, its position as trustee with respect to the Common Trust

and each of its participating fiduciary accounts is functionally

equivalent to that of an investment adviser. As a practical

matter ,the bank, as fiduciary, manages the investment and

reinvestment of the Common Trust i s assets in the same manner as

an investment adviser provides advisory services to an investment

company. Consequently, the bank effectively serves as investment adviser to both the Private Label Fund and the Common Trust.

As structured, the requirement of Rule 17a-7 (a) that cash

be the sole consideration for the proposed purchase or sale would

not be met. As proposed, the Private Label Fund would not pay

cash for the assets of the Common Trust, but instead would issue

Private Label Fund shares to the Common Trust in an aggregate

amount equal to the net asset value of the cash and securities

acquired, which shares would then be distributed by the Common

Trust to its participants.

The absence of cash consideration has not precluded the

staff from granting no-action relief in the past to similar

transactions. For example, in Trustfunds Institutional Managed

Trust (pub. avail. July 20,1988), a transaction was proposed

wherein two portfolios of a registered investment company would

enter into a purchase and sale of securities. The transaction

contemplated that the shareholders of one portfolio would

"redeem" their shares and purchase shares of the other portfolio.

Rather than receive cash from the first portfolio, however, it

was proposed that the second portfolio issue its shares to the

first portfolio's shareholders. Simul taneously, the second

portfolio would acquire the portfolio securities with the shares

treated as the consideration for such purchase. No cash changed

hands.
3956

Trustfunds Institutional Managed Trust argued' that the

proposed transaction was "encompassed" by Rule 17a-7 and within

the exemption. No-action reI ief was granted by the Commission.

No-action positions were granted on similar facts in The First

National Bank of Chicago (pub. avail. Sept. 22, 1992), American

Medical Association (pub. avail. Jan. 15, 1987), Metropolitan

Series Fund, Incorporated (pub. avail. Aug. 29, 1986), and Cash

Accumulation Trust (pub. avail. Nov. 30, 1984).

The common theme underlying the Staff's analysis in

various no-action relief granted in reliance on Rule 17a-7

appears to be to focus on whether an affiliated person of the

registered investment company or its investment adviser participates in and benefits directly from the transaction. In at least three no-action letters, the Staff conditioned the grant

of relief on a requirement that no affiliated person of the

participating investment company would have any beneficial

interest in the account or fund selling securities to the

registered investment company. See The First National Bank of

Chicago (pub. avail. Feb. 5, 1986), American Medical Association

(pub. avail. Jan. 15, 1987), and Lincoln National Investment

Management Company (pub. avail. April 25, 1976). As stated

above, no affiliated person of the Private Label Fund, other than

the bank in its fiduciary capacity, would have any interest in

the Common Trust.

The proposed transaction is consistent with staff

concerns as evidenced in no-action relief previously granted

under Rule 17a-7. In addition, no-action relief granted under

Rule 17a-7 demonstrate that failure to comply literally with the

cash requirement of Rule 17a-7(a) is not fatal.

In a series of conversations with the undersigned since

the date of our original submission, the Staff have articulated a

view that any request for no-action relief should be conditioned

upon an undertaking by the adviser to a Fund that such adviser,

or any affiliate thereof which possesses voting rights in respect

of Fund shares issued in a transaction described above, agree

either to pass through such voting rights to a cO-fiduciary or

beneficiary or vote all such shares pro rata in a manner

consistent with voting of other shares of the Fund for which the

bank does not possess such voting rights. As indicated in our

discussions, we believe that such a condition would be

inappropriate and unnecessary.

Conclusion
The conditions of Rule 17a-7 were designed to safeguard

the interests of investment company shareholders. An SEC Release

indicates that the conditions were intended "to limit the

.
38

.

exemption to those situations where the Commission, upon the

basis of its experience, considers that there is no likelihood of

overreaching of the investment companies participating in the

transaction." Investment Company Act Release No. 4604, 31 Fed.

Reg. 7913 (June 3, 1966). By substantially complying with the

conditions of Rule 17a-7, the interests of the Private Label Fund

shareholders are protected. Previous no-action relief granted

under Rule 17a-7 demonstrates that compliance with the cash

requirement of the Rule is not essential for the protection of

the shareholders.

Accordingly, we respectfully request that the staff

advise us that it will not recommend any enforcement action to

the SEC if a Private Label Fund engages in the proposed

transaction as described herein in reliance upon Rule 1 7a-7 ,

subject to compliance by the Private Label Fund with all of the requirements of Rule i 7a-7 except for the cash requirement of Rule 17a-7 (a) . If the Staff intends to issue a response that is

adverse to this request, we respectfully further request the

opportuni ty to have a conference prior to the issuance of such

response. If you have any questions regarding this request,

please contact the undersigned at (202) 828-2218.

Very truly yours,
C)~~
Matthew G. Maloney

MGM/kld cc: Julia Ulstrup

.
3156

..
Exhibit A
Investment Adviser:
Fund:
Investment Adviser:
Fund:
Investment Adviser:
Fund:
Deposi t Guaranty National Bank
DG Investor Series
First Alabama Bank
First Priority Funds
Mark Twain Bank
Mark Twain Funds