SEC Division of Investment Management staff letter: Standard Shares, Inc.

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.JEROMi: n, Iii:LLERSTEIN
GEor.GE '-'llNKIN
PAUL ROSIF.R
.JEROME d, COHEN
NEW YORK, N, Y. 10005 m::C1D - S.L.C. GEOIlGC ROSIEn lQOf,IQ73 Or- COlJN~.EL Maù, 1974 MAYS! - l~/Ll V'CTOR ßRuDNt:y I ~. WHITEHALL. 3-8"130 ¡1tl ::Ie/!- -- io . , "4 ~ 1.. ----... r:.~ct.ton'-'''''~'', '. ¡ i -'-~-- --'---._ ;;~'uie / - -/. ' Alan Rosenblat, Esq. r?:.i1z;-----1.-.7-it;'- ~_ _ Chief Counsel '::::.!..0hi I1ty .' C? /? f? / - Division of Management Regulatioñ-- . '-..-.9.#-&.2£ ! Securi ties and Exchange conunission ":--~'.....J 5 00 North Capitol Street, N. W . Washington, D.C. 20549 MIC"AEL G. TANNENBAUM Dear Sir:
'lYe are counsel to Standard Shares, Inc. (IIS.ta.nd~rd II) , a closed-end, non-diversified management investment company registered under ,the Investment Company Act of 1940 (lithe "Act ") . . Standard has, from time to time, made loans of port￾Rule 1 7f-2 under Section 17 (f) of the Act. Rule l7f-2 assumes folio securities in accordance with the orincioles set fort~ in . . . L L" that loans of secur'ities will be made by investmen:t companies and imposes only t.he requirement that such loans be "collaterc:.l￾ized to the e~tent of their full market value. ii Accordingly, all loans have been made only on receipt of 100% cash collateral. e In addition to obtaining such collateral, Standard has followed the guidelines prescribed by the Staff under Rule 17£-2 in its correspondence with State Street Bank and llrus't Company (IIGuidelines"). Thus, all loans have been terminable on demand 1 Standard has received a reasonable return on. each loan, has received all dividends or other distributions on the securities loaned, and has retained the market risk of ga.in or loss with respect to the value of the securi.tics. As t.oGuide￾line (5), voting rights have passed with the loan of the securi￾ties, a consequence ''lhich is in accord with the Staff i sHay 23, 1972, clarification. Standard i s right to termincl.t.e the loan has assured it of retention, for all pract.ical purpose::;, of the bOosic .'il'- :".,. ..... ~ ~~~:'. ," ;.t , d:~ . ":'...i.~~~i.p:~,;.PSlE"*:J)~;..;¡;.;.:-y'~;,-:it,;rtfft~.o"tr.~til't.:M.'.'i::.WlPV~~~5Ii-'1.'!';U~,t::.~"nlI__:'l"'_W-~":;-.~t',,:,~.'.""'-' :' "\l( ¡P'i"

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2 voting rights on the loaned securities in the event that any issue requiring a vote should arise. All loan transactions and all transactions relating to marking to market are carried out on behalf åf Standard by its custodian, Manufacturers Hanover Trust Company. î J Guideline (5) provides that no service, placement or other fee may be paid in connection with such loans. In com￾pliance with our interpretation of that Guideline, Standard has not attempted to utilize the services of third parties in find￾ing borrowers for securities it wishes to lend. Recently, how￾ever, a body of "placing brokers" has developed, offering assistance to borrowers in locating securities available for loan at no charge to the borrower.. Compensation .to t~1.e broker takes the form of negotiated fees, which, we are advised, have been at an averag,:;:: rate of approximately l% per annulil on the value of the loan. Al~lOUgh fees may in particular cases be stated as percentages of the value of the loans, they are, in , economic reality, merely reductions in the ra.te of ret.urn' available to the lender on the collateral deposited by the borrower as security for the loans.' Prospective bo~rower~ 1 relieved of the burden of canvassing the marke.t to locate available securities and free of any commission burden,. have tended increasingly to deal with such "placing brokers." As a result, Standard has been encountering increasing difficulty in placing securities loans . In the course of our efforts over .the past several months to clarify our understanding of the in'tentions of the Staff with respèct to Guideline (5 ), we have become aware of the S.taff i s correspondence with counsel for t.í..¡o such "placing brokers." . (Norman F. Swanton Associat.es, 'Sepbúnb;~r 17, 1973,' and Bernard S~ Kanton, September 12, 1973) In each case, .the Staff took the position that it would not object to the receipt of a fee by the brok.:=r for arranging loans of securities for mutual funds provided that (1) the broker discloses in writ,ing to th::; fund's directors that it is possible to arrange for 'che securities to be borrowed without paying any fee, (2) neither . the broker nor any of its affiliated persons is an affiliated . person o:E the f~nd, its investment adviser or its principal underwriter, and (3) the fund represents to the broker in 'lriting that its directors hav,,:~ determined that the fee is reasonahle and based solely on Uie services rendered.

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As outlined above~ Standard is, of course, 2~are th2t it may arrange loans of securities T,,'¡ithout u.tilizing the services of placing brolc'ers; and although it has experienced increasing difficulty in doing so, Standard would 'continue to arrange ìoans .directly when the opportunity arises. All loans of securities have been and T".lill cqntil1ue to be made only to bro'kers '1ho are not affiliates of St2.ndard or of any affiliate of S.tandard, and no broker having any such affiliationviouldbe em:;;:iloyec1 by StaDdard. as a placing broker. In addition, Standard would be pre￾pared, if required, to furnish to a placing broker a \vritten representation that, its directors have determi.ned tha.t its pro￾posed fee is reasonable and based solely on the services rendered. In this connection, however, we suggest th2:t, from ,tl1e standpoint of Standard i s shareholders, the operativ? act is the determination by Jche directors; and th2.t the shareholàers gain little more by a viritten representation from Standard directed to i.ts e.~gent. If a representation mus'c be' r.i.ade, .it ''-:,ould seem more appropriate t.O require it: of the placing broker,' in ord'3r to aid S.të.ndard iS dir.ec':" tors in m~(ing a determination that the fee is based solely on the services rendered as placing broker. As a possible alternative to utilizing the services of a placing broker, Standard is considGring making i.t more attra,c￾tive to borrm'¡ers to borrm.i directly front Standard by sugges-ting to prospective borrm.,ers Ð..i1. arrangemen-t involving a securities 102m agreement \vhich would permit the borrowing broker to deliver United states Treasury bills in lieu of betwi3en 10,% cmd l5% of the 100% cash collateral ,¡hich .¡ould otherwise. be required at the tiri:i.e of borrm.¡j.ng.* The precise percenta.ge of Jche tota.l' collateral for

• Ùher.e a securit.y loan ofsffi2)_1 value is involv'3d, t.lls 1)orrm,¡er
  'wu.ld receive collateral credit for Treasury bills de;;")osit.ed only to the exb~nt of Jche pro:,Josed 10% to 15% even tho1..i.ç;h th8 smalles.t available 'rreasury bill of $10,000 fa.co' affi'Junt 'may have a ve.lue in excess OJ: ,0 0::" C e .Loan. .Ln suc 1 a sJ.L-ua'cion, C113 DOrrO\ling . ,.. 1 501 C -, h - - 1 . .... .' - J " . ~rer would dep6si~ ~t l~ast 8 i~ c~sh collaterai. In view of the ffië.rginal value to St2.ndard of such smv.ll loan.:;;, it \voulc1 accept the p03sibilit.y that the br01~er !:lay borrmv such s'3curitics el::;e'ldhere~ , ~

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':hich Treasury bills Hould be a.ccer:itable collater2..1 on new loàns, would fluctuate 2nd be determined perioc1i'cally by reference to . the then current. yield on such bills. Standard intends to vary' the percentages as may be necessary to enable the borrm.¡er to 'eè.rn the equivalent of ël.bout 1% per annum on the market value of th8 aggregate or cash c~nd Treasury bill collateral deposits. The borrowing broker ,vould rete.in the pm.¡er 'co sUDstitutG n.3~..¡ bills for maturing Treasury bills, thus enabling it to roll the bills over at maturity if the loa::i ,,¡ere then outstanding. All marking . to marl;,:et vlOuld be done by adjusting the cash collateral, bu'c not the omount of Treasury Dills.. The bills ..'Ould be valu:,d atl:he time of t.he making' of the loan and at the time or each marki.ng to marl;:et at the price' for such bills in .the over the counter market on such day. If such securities loan arr2ngemerits \vere currei1'tly in effect, a loan by Standard of securities having a market value of $90,000 might, for G;:ë.lTIple, be coiiab::~raiizeël lJY .the delivery to S'candard is custoàian of the follmving; '1 ) i ), 90-day United S'cates Treasury bill (di~couht value) ,¡ $ 9,800 Cash 80,200 $90,000 I f it is 2.SSUI11.2d that Standard 'Jere also -to invest in rlreè:.sury bills and that .the Treast.ü:-y bill. ra-l:e were approximately 7.5% per annum (vihich is a rate approximat.ely reflec'cing -chG $9,800 bill value), -the 2.9sregat.3 annual yieid of about $ 6,750 'Toulc1 be c1:i.vided $73'5 to -tl18,borrmYÌng- broker and $5,015 t.o S-can5.arcL A~ ~ COn~orrll.~'n ......-::. "-;"'13 l)oi--roi.¡i' ng' ~"'--Ol~ a- T.rr"'ilo~ ') O)~Jn 0 ~r',"'1 ~~..~ ''-0..... -'-', a v c~ .:i',.;~ ç.. .,.;, ,-1. .. " ...V1. ..._.l. .'.~.. ..i. (,.. - .......c:.... -.-"-;,.,).. .:- ..i... i-l' Yr.i.;:i1'" 0 8c....1 'oF t'1'" '-o'...a1 COl 1 ""J-c.-""i 0'- ~l;c11J-l"r i.-,,~,,-:- '-h"'n .t.',,-::i ìr:/ ,-c. . /0 .._ 1._ l,.. t- . . L..L........J,. 0. ..L ...:J. ..-...:.;- ~o-l--4 .-..,.10:" t- C.".- 1...... -..i'" nOT,¡ 1)0; 110 n;-i; C"t ',- ,1 ç:-:i í'; no 1)"('01-: ,"'-,..,~ ¡.l'"!l'1,"'+-11"'-.i.- 'C' 11'" 1)0' r.....Ol.r; ''''Ie; ~)-rr)'J¿ ("--'.i.-n \ . ...... ~. ..: __....... J: .-....:J - .....__..",. .JJ "-" '-. ~ - ....- ......-.. .~...... l.. \70U'ri rr.:ia';~)'c )""01'"1-' or Ie"'" than l'~1 or. .L1,"" ""''''r''o''' v;-ili"" 0;; 'eli"" \ ..:__ çc__...,-,~ .r.l. _ _ __ ;..")û ..... ../0 i.. L. ..~.... i,,\L\ .'i...__t... (......i..I_ -- . .v. 10......')' ,rO'J.l'd h,"" -,.c:.Fpc.....~ri ")" tIi''''' r-,'-i"o o i'': , .1-h,"" 'l';-ii'l"":"'.lTtl $in f'lo.~ ,..~ ':,::i
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of the Ð.vaìlabJ.e Tr-2asury bill units to the vcÙU3 o:C' t.l1:3 bon:-0'l'2c1 securi.ties.. Thus, if the sccuri.tics cleclin::d. i;.1 V2iU~ ;':0 $ïOIOOO, the ro;:im"" ....("\ 800 v",1u"" T--n.",..:",ui-v' 1),'11 \roii1.' r'''1)r-'~"''11J. '1''''0''-'- 1""1 or. ..". .Jcut...... "?:J i f L'........ '....... L.....c...~ .J-.... . ..t.. \ .''. ...... ~. ~...J'~ L. c..:..~ ....L. .. "-..:/0 .L the then collateral a;lc1 .the brokfJr .,ou1,:1 be r2ceiv:i.ng 2 r'3tU2:'lì of 1.05%. As indicat'Jc1 3.DOV3, th~;') 1-:iùr1dng t.o :narL~t o~:: Je112 colJ.i:1.t:3j:~ê' on ;3uch 0. ch2nge in the V~:lU9 of -th,::: bOJ:rm'!2d 3.~curitir~;.3 ,-;oul~1 bo " , '. '"''''fo' ---,i.;-..) . 'r;r

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5. accomplished entirely by reducing the cash collateral. No change would be made in the Treasury bill collateral during. th'3 life of .the loan (except for possible substitution by the broker of new bills for matured bills). Standard is of th-~ view tha t . the proposed acceptance of Treasury bills for a part of the collat~ral 'will provide an appropriate economic incentive to the borrmving broker to maketh~ effort to borrmv the securities from Standard rather than to proceed automatically through a placing broker. The net effect of such arrangem,úits would be a reduction in the borrowing costs O:C the borrm..¡ing broker by an amount approximately' equal to the commission which securities lenders are now paying to placing broki ~1e proposed loan arrangements comply in fonJ and sub￾stance .¡ith the requirement of Rule l7f-2 (c) that the loans be collateralized to the exten-t of their full market value. Standard . is also of the view that the arrangements will comply wi tp. t118 basic purposes of the Guidelines, even though the propose'd a8cept￾ance of Treasury bills as part of the collateral does not. accord precisely with the terms of Guidelines (1) and (4). Although 'Standard will not receive 1000/0 'cash collateral, it. wiilreceiv~ cash and cash equivalents equal in the aggregate to 100% of the value of, the securities. Standard will, therefore, be secured to 'the same extent as if it had received 1000/0 cash collateral. and 'will be in compliance with Guideline (1) .In addi.tioni Standard will rec~ive such reasonable return as is economical1yfeasible in vie\v of the competition nO\v existing in. placinc;rsecurib.es loans. S'tandard \vill be receiving. app'roximately t.he same ret.urn :as it \V'ould if' it loaned securities through plàc ing bro1c~rs and . reduced its re-turn by the eimountof the fee paid to such brokers. 'The negotiation of such loans can be carried on by Standard is.. exis'ting staff at no extra cost.. Th~. execution of the.. loans and the receipt and. retention of the collat:~ral i:;ould rcsul~c in nomina:
'charges by Stanèlard i s custodian, which charges would not vary significantl~ if Treasury bills constitute part of tl18 colla terL1l. Based upon tlie foregoin9' outline 'of tlie m::inner in ''I,.¡l1icn St2.ndard propose:;:; tomocìify its present pri:lctices ,.,i th respect to 'the l(~nding of portfolio securities, i:1l1d in light of the recent Sv.!anton i:ind I\anton correspondence, we '...Tould ... -. ."If)'!;.,y:
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~' appreciate your: advice as to ',IJhether the Staff would recommend to the Cònunission that any action be taken if Standard útilizes the services, of placing brokers or alternatively accepts 'Treasury bills in lieu of a negotiated p'2rcentage . of bet'..¡een 10% and 15% of the cash collateral in connection with the placement of loans of portfolio securities. We would also apprec ia te your advice as to whether board supervision of the reasonableness and purpose of a placement feg, without ~ritten ~epres~ntation thereof to the placing bro)t.::er, '-'lOuld satisfy the requirement outlined in paragraph (3) of. the Swanton and Kanton correspondence. Very truly yours ( HELLERSTEIN, ROSIER & MINKIN By. )f21Y2lb' n ,',) , (~ Rule 1 7 f~2 sets forth variousprovisiou;which a registered managemen't investment company must fol10\7 if it acts as its own custodian for its securities and simi'lar investments under Section17(f)(2) of the Act. Since Standard Shares, InC. (IIStandard") has a bank custodian, it is apparently operating under the provisions of Section 17 (t) (1) of the Act. However, we have no objection to Standard:using the standards in Rulel7 . £-2 as guidelinesL '~Bas.ed on the fact~ presented in the ,ro:,egoi.:.ng i and in your letter of July 16, 1974, \ole would not recommend' J that the Commission take any action if Standard utiiizes the services of placing brokers since Standard t s N-8B-1 includes among the company's fundamental policies the right to make loans to any person, firm. or corporation, without any' prohibition against the lending of portfolio securities, provided that the safeguards set forth in our correspon4ence i 'vith Norman A. Swanton Associates and State Street Bank and Trust Company arc met, including the requirement that the investment company must. represent to the placing broker in writing that its directors have determined that the fee is reasonable and based solely on the services' rendered. The directors of an investment company have a fiduciary duty to act in the best interests of the conipany's shareholders. Accordingly, the reason for requiring the fund to make such a written statement as to the reasonableness and purpose of the fee is to provide assurance to a company's shareholders that their directors have made a .comparative analysis of the fees. charged by various brokers for similar placing services and, as a result, believe they are acting in their shareholders' best interests by engci,ging the broker who charges a reasonable fee. Accordingly, He cnnnot agree vith your sugges tion that a written rcp~esentation :tq to t;.1.1f rp:lsnn:thl (.'npss of thp fpp 'Jniil(l hpop fi i- Stiiml;:inl' i:; , 1 " i i ":...:.,:L:r' ..,.~

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0, shareho'lders more if it were required of the placing broker rather than of the investment company. ° However, we \ would raise no objection if, instead of engaging a placing broker, Standard accepts Treasury bills in lieu of a negotiated percentage of between 10% and 15% of the cash collateral in connection with the placement of loans of portfolio securities and, further, permits the borrowers to earn the equivalent of about 1% per annum on the market value of the aggregate of cash and Treasury bill collateral deposit~ providing such earnings are not used to compensat~1 any affiliated person or investment adviser of Standard, or' an affiliated person of such person or adviser, in connection with the lending of portfolio securiti~s or any other activities of ~di;:d. .0 . J .h--t--- ~tuv~.A(UVl' ---.. Alan Rosenblat, Chief Counsel Division of Investment Management Regulation EAB: ad JUL 29 1974 In future correspondence please refer to our Reference No 0 74-442.

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HELLERSTEIN. ROSIER ò.. MINKIN f' .. EIGHTY PINE STREET NEW YOR.~. N. Y.10005 JEROME R. HELL.ERSTEIN GEORGE MINKIN PAUL ROSIER JEROME J. COHEN MICHAEL.G. TANNENBAUM July l6, 1974 I' Alan' Rosenblat, Esq. Chief Counsel, Division of Investment Management Regulat ion Secur it ie s and Exchange commis s ion SOO North capitol street, N. W. Washington, D. C. 20549 .'), ~', ) Attention: Ms. Elizabeth Barnes Re: standard Shares, Inc. Reference NO. 74-442 -- Dear Ms. Barnes:
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GEORGE ROSIER
1006-1973
Of" COUNSEL
VICTOR BnUDNEY
WHllEHALL. 3'8730 pursuant to our telephone conversation today 1 I am attaching to this letter a copy of item 4 (g) of standard's Registration statement on form N-8B-l, con￾cerning the making of loans toothér persons. V~~tY yours, 1.kr, /, . , 'I, l!Ïïl! . $( 'I I' "'t I' , I ' , / .v"'l,. . 'i-'~: " cU~ paul Rosier PRIed Enclosure t).- j)
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" i (g) The Making of Loans to Other Persons.
Registrant ha~ no present intention to en￾gage in the making of loans as a pr inc ipal activity. However, registrant reserves freed-om of action to make loans to any per￾son, firm or corporation, provided that the aggregate of all such loans shall ?ot ex￾ceed at anyone time 10% of the value of the total assets of registrant at the time of the making of any such loan or loans.. For the purposes of this paragraph, loans shall not be deemed to include the pur.- chase or other acquisition by registrant of bonds, debentures or ether securities evidencing indebtedness, as to which reg￾istrant reserves full freedom of action. , J 'l , . ~, ~ . ...........y. .~..-..'i ~. ¡~ lit,