John Hancock Variable Insurance Trust, et al.; Notice of Application, 72731-72736 [2011-30349]
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Federal Register / Vol. 76, No. 227 / Friday, November 25, 2011 / Notices
that it restricts any Applicant Fund from
investing in Other Investments as
described in the application.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–30350 Filed 11–23–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
29865; File No. 812–13621]
John Hancock Variable Insurance
Trust, et al.; Notice of Application
November 18, 2011.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order pursuant to: (a) Section 6(c) of the
Investment Company Act of 1940
(‘‘Act’’) granting an exemption from
sections 18(f) and 21(b) of the Act; (b)
section 12(d)(1)(J) of the Act granting an
exemption from section 12(d)(1) of the
Act; (c) sections 6(c) and 17(b) of the
Act granting an exemption from sections
17(a)(1), 17(a)(2) and 17(a)(3) of the Act;
and (d) section 17(d) of the Act and rule
17d–1 under the Act to permit certain
joint arrangements and transactions.
AGENCY:
Summary of the Application:
Applicants request an order that would
permit certain registered open-end
management investment companies to
participate in a joint lending and
borrowing facility.
APPLICANTS: John Hancock Variable
Insurance Trust, John Hancock Funds II,
John Hancock Funds III, John Hancock
Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock
Capital Series, John Hancock Collateral
Investment Trust, John Hancock Current
Interest, John Hancock Investment
Trust, John Hancock Investment Trust
II, John Hancock Investment Trust III,
John Hancock Municipal Securities
Trust, John Hancock Series Trust, John
Hancock Sovereign Bond Fund, John
Hancock Strategic Series, John Hancock
Tax-Exempt Series Fund (each a ‘‘John
Hancock Fund’’ and collectively the
‘‘John Hancock Funds’’), John Hancock
Advisers, LLC (‘‘JHA’’), Manulife Asset
Management (US) LLC (‘‘JHAM’’) and
John Hancock Investment Management
Services, LLC (‘‘JHIMS’’) (each of JHA,
JHAM and JHIMS, an ‘‘Adviser,’’ and
such entities together, the ‘‘Advisers’’).
DATES: Filing Dates: The application was
filed on December 31, 2008, and
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SUMMARY:
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amended on July 8, 2009, November 15,
2010, November 4, 2011 and November
18, 2011. Applicants have agreed to file
an amendment during the notice period,
the substance of which is reflected in
this notice.
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 December 13, 2011, 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
contested. Persons who wish to be
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F
Street, NE., Washington, DC 20549–
1090; Applicants: c/o Stuart E. Fross,
K&L Gates LLP, State Street Financial
Center, One Lincoln Street, Boston, MA
02111; John J. Danello, John Hancock
Financial Services, Inc., 601 Congress
Street, Boston, MA 02210; Carolyn M.
Flanagan, Manulife Asset Management
(US), LLC, 101 Huntington Avenue,
Boston, MA 02199.
FOR FURTHER INFORMATION CONTACT:
Laura L. Solomon, Senior Counsel, at
(202) 551–6915 or Janet M. Grossnickle,
Assistant Director, at (202) 551–6821
(Division of Investment Management,
Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations
1. Each John Hancock Fund is
organized as a Massachusetts business
trust and is registered under the Act as
an open-end, management investment
company. Some of the trusts have not
created separate series of shares but
most issue one or more series, each
series of shares having a different
investment objective and different
investment policies and each such
series is deemed to be a John Hancock
Fund. Certain of the John Hancock
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Funds either are or may be money
market funds that comply with rule 2a–
7 of the Act (each a ‘‘Money Market
Hancock Fund’’ and collectively, the
‘‘Money Market Hancock Funds’’ and
they are included in the term ‘‘John
Hancock Funds’’). JHA, JHAM and
JHIMS are each a Delaware limited
liability company that is registered as an
investment adviser under the
Investment Advisers Act of 1940
(‘‘Advisers Act’’), each are indirect
subsidiaries of Manulife Financial
Corporation and act as investment
adviser to the John Hancock Funds.1
2. John Hancock Funds may lend cash
to banks or other entities by entering
into repurchase agreements, purchasing
short-term instruments or under
arrangements whereby custodian fees
are reduced. In order to meet an
unexpected volume of redemptions or to
cover unanticipated cash shortfalls,
John Hancock Funds contracted for
committed lines of credit with State
Street Bank and Trust Company and
The Bank of New York Mellon
Corporation (‘‘Bank Borrowing’’). The
amount of borrowing under each of
these lines of credit is limited to the
amount specified by fundamental
investment restrictions and/or other
policies of the applicable John Hancock
Fund and section 18 of the Act.
3. If John Hancock Funds that
experience a cash shortfall were to draw
down on their Bank Borrowing, they
would pay interest at a rate that is likely
to be higher (and currently actually is
higher) than the rate that could be
earned by non-borrowing John Hancock
Funds on investments in repurchase
agreements and other short-term money
market instruments of the same maturity
as the Bank Borrowing (‘‘Short-Term
Instruments’’). Applicants assert the
difference between the higher rate paid
on Bank Borrowing and what the bank
pays to borrow under repurchase
agreements or other arrangements
represents the bank’s profit for serving
as the middleperson between a borrower
and lender and is not attributable to any
material difference in the credit quality
or risk of such transactions.
1 Applicants request that the order also apply to
any existing or future series of the John Hancock
Funds, to any other registered open-end
management investment company or its series for
which JHA, JHAM or JHIMS or a person controlling,
controlled by, or under common control (within the
meaning of section 2(a)(9) of the Act) with JHA,
JHAM, or JHIMS serves as investment adviser
(‘‘Adviser’’). All John Hancock Funds that currently
intend to rely on the requested order have been
named as applicants. Any other John Hancock Fund
that relies on the requested order in the future will
comply with the terms and conditions of the
application.
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4. The John Hancock Funds seek to
enter into master interfund lending
agreements (‘‘Credit Facility’’) with each
other that would permit each John
Hancock Fund to lend money directly to
and borrow money directly from other
John Hancock Funds for temporary
purposes through the Credit Facility (an
‘‘Interfund Loan’’). The Money Market
Hancock Funds typically will not
participate as borrowers in the Credit
Facility. Applicants state that the Credit
Facility would enable the John Hancock
Funds to access an available source of
money and reduce costs incurred by the
John Hancock Funds that need to obtain
loans for temporary purposes and
permit those John Hancock Funds that
have cash available: (i) To earn a return
on the money that they might not
otherwise be able to invest; or (ii) to
earn a higher rate of interest on
investment of their short-term balances.
Although the proposed Credit Facility
would reduce the John Hancock Funds’
need to borrow from banks, the John
Hancock Funds would be free to
establish and/or continue committed
lines of credit or other borrowing
arrangements with banks.
5. Applicants anticipate that the
proposed Credit Facility would provide
a borrowing John Hancock Fund with
significant savings at times when the
cash position of the John Hancock Fund
is insufficient to meet temporary cash
requirements. This situation could arise
when shareholder redemptions exceed
anticipated cash volumes and certain
John Hancock Funds have insufficient
cash on hand to satisfy such
redemptions. When the John Hancock
Funds liquidate portfolio securities to
meet redemption requests, they often do
not receive payment in settlement for up
to three days (or longer for certain
foreign transactions). However,
redemption requests normally are
effected immediately. The proposed
credit facility would provide a source of
immediate, short-term liquidity pending
settlement of the sale of portfolio
securities.
6. Applicants also anticipate that a
John Hancock Fund could use the Credit
Facility when a sale of securities ‘‘fails’’
due to circumstances beyond the John
Hancock Fund’s control, such as a delay
in the delivery of cash to the John
Hancock Fund’s custodian or improper
delivery instructions by the broker
effecting the transaction. ‘‘Sales fails’’
may present a cash shortfall if the John
Hancock Fund has undertaken to
purchase a security using the proceeds
from securities sold. Alternatively, the
John Hancock Fund could ‘‘fail’’ on its
intended purchase due to lack of funds
from the previous sale, resulting in
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additional cost to the John Hancock
Fund, or sell a security on a same-day
settlement basis, earning a lower return
on the investment. Use of the Credit
Facility under these circumstances
would enable the John Hancock Fund to
have access to immediate short-term
liquidity.
7. While Bank Borrowing generally
could supply John Hancock Funds with
needed cash to cover unanticipated
redemptions and sales fails, under the
proposed Credit Facility, a borrowing
John Hancock Fund would pay lower
interest rates than those that would be
payable under short-term loans offered
by banks. In addition, John Hancock
Funds making short-term cash loans
directly to other John Hancock Funds
would earn interest at a rate higher than
they otherwise could obtain from
investing their cash in Short-Term
Instruments. Thus, applicants assert that
the proposed Credit Facility would
benefit both borrowing and lending John
Hancock Funds.
8. The interest rate to be charged to
the John Hancock Funds on any
Interfund Loan (the ‘‘Interfund Loan
Rate’’) would be the average of the
‘‘Repo Rate’’ and the ‘‘Bank Loan Rate,’’
both as defined below. The Repo Rate
would be the highest current overnight
repurchase agreement rate available to a
lending John Hancock Fund. The Bank
Loan Rate for any day would be
calculated by the Credit Facility Team,
as defined below, on each day an
Interfund Loan is made according to a
formula established by each John
Hancock Fund’s board of trustees (the
‘‘Board’’) intended to approximate the
lowest interest rate at which a bank
short-term loan would be available to
the John Hancock Fund. The formula
would be based upon a publicly
available rate (e.g., federal funds rate
plus 25 basis points) and would vary
with this rate so as to reflect changing
bank loan rates. The initial formula and
any subsequent modifications to the
formula would be subject to the
approval of each John Hancock Fund’s
Board. In addition, the Board of each
John Hancock Fund would periodically
review the continuing appropriateness
of reliance on the formula used to
determine the Bank Loan Rate, as well
as the relationship between the Bank
Loan Rate and current bank loan rates
that would be available to the John
Hancock Fund.
9. Certain members of the Adviser’s
fund administration personnel and
money market portfolio managers or
analysts (the ‘‘Credit Facility Team’’)
would administer the Credit Facility. No
portfolio manager (other than a Money
Market Hancock Fund portfolio
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manager) of any John Hancock Fund
will serve as a member of the Credit
Facility Team. Under the proposed
Credit Facility, the portfolio managers
for each participating John Hancock
Fund could provide standing
instructions to participate daily as a
borrower or lender. The Credit Facility
Team on each business day would
collect data on the uninvested cash and
borrowing requirements of all
participating John Hancock Funds. Once
the Credit Facility Team has determined
the aggregate amount of cash available
for loans and borrowing demand, the
Credit Facility Team would allocate
loans among borrowing John Hancock
Funds without any further
communication from the portfolio
managers of the John Hancock Funds.
Applicants anticipate that there
typically will be far more available
uninvested cash each day than
borrowing demand. Therefore, after the
Credit Facility Team has allocated cash
for Interfund Loans, the Credit Facility
Team will invest any remaining cash in
accordance with the standing
instructions of the portfolio managers or
such remaining amounts will be
invested directly by the portfolio
managers of the John Hancock Funds.
10. The Credit Facility Team would
allocate borrowing demand and cash
available for lending among the John
Hancock Funds on what the Credit
Facility Team believes to be an
equitable basis, subject to certain
administrative procedures applicable to
all John Hancock Funds, such as the
time of filing requests to participate,
minimum loan lot sizes, and the need to
minimize the number of transactions
and associated administrative costs. To
reduce transaction costs, each Interfund
Loan normally would be allocated in a
manner intended to minimize the
number of participants necessary to
complete the loan transaction. The
method of allocation and related
administrative procedures would be
approved by the Boards of the John
Hancock Funds, including a majority of
the Board members who are not
‘‘interested persons’’ of the John
Hancock Fund, as that term is defined
in section 2(a)(19) of the Act
(‘‘Independent Board Members’’), to
ensure that both borrowing and lending
John Hancock Funds participate on an
equitable basis.
11. The Adviser would: (a) Monitor
the Interfund Loan Rate and the other
terms and conditions of the Interfund
Loans; (b) limit the borrowings and
loans entered into by each John
Hancock Fund to ensure that they
comply with the John Hancock Fund’s
investment policies and limitations; (c)
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ensure equitable treatment of each John
Hancock Fund; and (d) make quarterly
reports to the Board of each John
Hancock Fund concerning any
transactions by the applicable John
Hancock Fund under the Credit Facility
and the Interfund Loan Rate.
12. The Advisers, through the Credit
Facility Team, would administer the
Credit Facility as a disinterested
fiduciary as part of its duties under the
investment management and
administrative agreements with each
John Hancock Fund and would receive
no additional fee as compensation for its
services in connection with the
administration of the Credit Facility.
13. No John Hancock Fund may
participate in the Credit Facility unless:
(a) the John Hancock Fund has obtained
shareholder approval for its
participation, if such approval is
required by law; (b) the John Hancock
Fund has fully disclosed all material
information concerning the Credit
Facility in its registration statement on
form N–1A; and (c) the John Hancock
Fund’s participation in the Credit
Facility is consistent with its investment
objectives, limitations and
organizational documents.
14. In connection with the Credit
Facility, applicants request an order
under section 6(c) of the Act exempting
them from the provisions of sections
18(f) and 21(b) of the Act; under section
12(d)(1)(J) of the Act exempting them
from section 12(d)(1) of the Act; under
sections 6(c) and 17(b) of the Act
exempting them from sections 17(a)(1),
17(a)(2), and 17(a)(3) of the Act; and
under section 17(d) of the Act and rule
17d–1 under the Act to permit certain
joint arrangements and transactions.
Applicants’ Legal Analysis
1. Section 17(a)(3) of the Act generally
prohibits any affiliated person of a
registered investment company, or
affiliated person of an affiliated person,
from borrowing money or other property
from the registered investment
company. Section 21(b) of the Act
generally prohibits any registered
management company from lending
money or other property to any person,
directly or indirectly, if that person
controls or is under common control
with that company. Section 2(a)(3)(C) of
the Act defines an ‘‘affiliated person’’ of
another person, in part, to be any person
directly or indirectly controlling,
controlled by, or under common control
with, such other person. Section 2(a)(9)
of the Act defines ‘‘control’’ as the
‘‘power to exercise a controlling
influence over the management or
policies of a company,’’ but excludes
circumstances in which ‘‘such power is
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solely the result of an official position
with such company.’’ Applicants state
that the John Hancock Funds may be
under common control by virtue of
having common investment advisers
and/or by having common directors,
trustees and officers.
2. Section 6(c) of the Act provides that
an exemptive order may be granted
where an 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. Section 17(b) of the Act
authorizes the Commission to exempt a
proposed transaction from section 17(a)
provided that the terms of the
transaction, including the consideration
to be paid or received, are fair and
reasonable and do not involve
overreaching on the part of any person
concerned, and the transaction is
consistent with the policy of the
investment company as recited in its
registration statement and with the
general purposes of the Act. Applicants
believe that the proposed arrangements
satisfy these standards for the reasons
discussed below.
3. Applicants assert that sections
17(a)(3) and 21(b) of the Act were
intended to prevent a party with strong
potential adverse interests to, and some
influence over the investment decisions
of, a registered investment company
from causing or inducing the investment
company to engage in lending
transactions that unfairly inure to the
benefit of such party and that are
detrimental to the best interests of the
investment company and its
shareholders. Applicants assert that the
proposed transactions do not raise these
concerns because: (a) The Advisers,
through the Credit Facility Team
members, would administer the Credit
Facility as a disinterested fiduciary as
part of its duties under the investment
management and administrative
agreements with each John Hancock
Fund; (b) all Interfund Loans would
consist only of uninvested cash reserves
that the John Hancock Fund otherwise
would invest in short-term repurchase
agreements or other short-term
investments; (c) the Interfund Loans
would not involve a significantly greater
risk than such other investments; (d) the
lending John Hancock Fund would
receive interest at a rate higher than it
could otherwise obtain through such
other investments; and (e) the borrowing
John Hancock Fund would pay interest
at a rate lower than otherwise available
to it under its bank loan agreements and
avoid the quarterly commitment fees
associated with committed lines of
credit. Moreover, applicants assert that
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the other terms and conditions that
applicants propose also would
effectively preclude the possibility of
any John Hancock Fund obtaining an
undue advantage over any other John
Hancock Fund.
4. Section 17(a)(1) of the Act generally
prohibits an affiliated person of a
registered investment company, or any
affiliated person of such a person, from
selling securities or other property to
the investment company. Section
17(a)(2) of the Act generally prohibits an
affiliated person of a registered
investment company, or any affiliated
person of such a person, from
purchasing securities or other property
from the investment company. Section
12(d)(1) of the Act generally prohibits a
registered investment company from
purchasing or otherwise acquiring any
security issued by any other investment
company except in accordance with the
limitations set forth in that section.
5. Applicants state that the obligation
of a borrowing John Hancock Fund to
repay an Interfund Loan could be
deemed to constitute a security for the
purposes of sections 17(a)(1) and
12(d)(1). Applicants also state that any
pledge of securities to secure an
Interfund Loan by the borrowing John
Hancock Fund to the lending John
Hancock Fund could constitute a
purchase of securities for purposes of
section 17(a)(2) of the Act. Section
12(d)(1)(J) of the Act provides that the
Commission may exempt persons or
transactions from any provision of
section 12(d)(1) if and to the extent that
such exemption is consistent with the
public interest and the protection of
investors. Applicants contend that the
standards under sections 6(c), 17(b), and
12(d)(1)(J) are satisfied for all the
reasons set forth above in support of
their request for relief from sections
17(a)(3) and 21(b) and for the reasons
discussed below. Applicants state that
the requested relief from section 17(a)(2)
of the Act meets the standards of section
6(c) and 17(b) because any collateral
pledged to secure an Interfund Loan
would be subject to the same conditions
imposed by any other lender to a John
Hancock Fund that imposes conditions
on the quality of or access to collateral
for a borrowing (if the lender is another
John Hancock Fund) or the same or
better conditions (in any other
circumstance).
6. Applicants state that section
12(d)(1) was intended to prevent the
pyramiding of investment companies in
order to avoid imposing on investors
additional and duplicative costs and
fees attendant upon multiple layers of
investment companies. Applicants
submit that the proposed Credit Facility
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does not involve these abuses.
Applicants note that there will be no
duplicative costs or fees to the John
Hancock Funds or their shareholders,
and that each Adviser will receive no
additional compensation for its services
in administering the Credit Facility.
Applicants also note that the purpose of
the proposed Credit Facility is to
provide economic benefits for all the
participating John Hancock Funds and
their shareholders.
7. Section 18(f)(1) of the Act prohibits
open-end investment companies from
issuing any senior security except that
a company is permitted to borrow from
any bank, provided, that immediately
after the borrowing, there is asset
coverage of at least 300 per centum for
all borrowings of the company. Under
section 18(g) of the Act, the term ‘‘senior
security’’ generally includes any bond,
debenture, note or similar obligation or
instrument constituting a security and
evidencing indebtedness. Applicants
request exemptive relief under section
6(c) from section 18(f)(1) to the limited
extent necessary to implement the
Credit Facility (because the lending
John Hancock Funds are not banks).
8. Applicants believe that granting
relief under section 6(c) is appropriate
because the Funds would remain
subject to the requirement of section
18(f)(1) that all borrowings of a John
Hancock Fund, including combined
Interfund Loans and bank borrowings,
have at least 300% asset coverage. Based
on the conditions and safeguards
described in the application, applicants
also submit that to allow the John
Hancock Funds to borrow from other
John Hancock Funds pursuant to the
proposed Credit Facility is consistent
with the purposes and policies of
section 18(f)(1).
9. Section 17(d) of the Act and rule
17d–1 under the Act generally prohibit
an affiliated person of a registered
investment company, or any affiliated
person of such a person, when acting as
principal, from effecting any joint
transaction in which the investment
company participates, unless, upon
application, the transaction has been
approved by the Commission. Rule 17d–
1(b) under the Act provides that in
passing upon an application filed under
the rule, the Commission will consider
whether the participation of the
registered investment company in a
joint enterprise on the basis proposed 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 the other participants.
10. Applicants assert that the purpose
of section 17(d) is to avoid overreaching
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by and unfair advantage to insiders.
Applicants assert that the Credit Facility
is consistent with the provisions,
policies and purposes of the Act in that
it offers both reduced borrowing costs
and enhanced returns on loaned funds
to all participating John Hancock Funds
and their shareholders. Applicants note
that each John Hancock Fund would
have an equal opportunity to borrow
and lend on equal terms consistent with
its investment policies and fundamental
investment limitations. Applicants
assert that each John Hancock Fund’s
participation in the proposed Credit
Facility would be on terms that are no
different from or less advantageous than
that of other participating John Hancock
Funds.
Applicants’ Conditions
Applicants agree that any order
granting the requested relief will be
subject to the following conditions:
1. The Interfund Loan Rate will be the
average of the Repo Rate and the Bank
Loan Rate.
2. On each business day, when an
interfund loan is to be made, the Credit
Facility Team will compare the Bank
Loan Rate with the Repo Rate and will
make cash available for Interfund Loans
only if the Interfund Loan Rate is: (a)
More favorable to the lending John
Hancock Fund than the Repo Rate; and
(b) more favorable to the borrowing John
Hancock Fund than the Bank Loan Rate.
3. If a John Hancock Fund has
outstanding bank borrowings, any
Interfund Loan to the John Hancock
Fund will: (a) Be at an interest rate
equal to or lower than the interest rate
of any outstanding bank loan; (b) be
secured at least on an equal priority
basis with at least an equivalent
percentage of collateral to loan value as
any outstanding bank loan that requires
collateral; (c) have a maturity no longer
than any outstanding bank loan (and in
any event not over seven days); and (d)
provide that, if an event of default
occurs under any agreement evidencing
an outstanding bank loan to the John
Hancock Fund, that the event of default
by the John Hancock Fund,
automatically (without need for action
or notice by the lending John Hancock
Fund) will constitute an immediate
event of default under the interfund
lending agreement that both (i) entitles
the lending John Hancock Fund to call
the Interfund Loan immediately and
exercise all rights with respect to any
collateral and (ii) causes the call to be
made if the lending bank exercises its
right to call its loan under its agreement
with the borrowing John Hancock Fund.
4. A John Hancock Fund may borrow
on an unsecured basis through the
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Credit Facility only if the relevant
borrowing fund’s outstanding
borrowings from all sources
immediately after the interfund
borrowing total 10% or less of its total
assets, provided that if the borrowing
fund has a secured loan outstanding
from any other lender, including but not
limited to another John Hancock Fund,
the lending John Hancock Fund’s
Interfund Loan will be secured on at
least an equal priority basis with at least
an equivalent percentage of collateral to
loan value as any outstanding loan that
requires collateral. If a borrowing John
Hancock Fund’s total outstanding
borrowings immediately after an
Interfund Loan would be greater than
10% of its total assets, the John Hancock
Fund may borrow through the Credit
Facility only on a secured basis. A John
Hancock Fund may not borrow through
the Credit Facility or from any other
source if its total outstanding
borrowings immediately after the
borrowing would be more than 33 1⁄3%
of its total assets.
5. Before any John Hancock Fund that
has outstanding interfund borrowings
may, through additional borrowings,
cause its outstanding borrowings from
all sources to exceed 10% of its total
assets, it must first secure each
outstanding Interfund Loan to a John
Hancock Fund by the pledge of
segregated collateral with a market
value at least equal to 102% of the
outstanding principal value of the loan.
If the total outstanding borrowings of a
John Hancock Fund with outstanding
Interfund Loans exceed 10% of its total
assets for any other reason (such as a
decline in net asset value or because of
shareholder redemptions), the John
Hancock Fund will within one business
day thereafter either: (a) Repay all its
outstanding Interfund Loans to John
Hancock Funds; (b) reduce its
outstanding indebtedness to John
Hancock Funds to 10% or less of its
total assets; or (c) secure each
outstanding Interfund Loan to John
Hancock Funds by the pledge of
segregated collateral with a market
value at least equal to 102% of the
outstanding principal value of the loan
until the John Hancock Fund’s total
outstanding borrowings cease to exceed
10% of its total assets, at which time the
collateral called for by this condition 5
shall no longer be required. Until each
Interfund Loan that is outstanding at
any time that a John Hancock Fund’s
total outstanding borrowings exceed
10% of its total assets is repaid or the
John Hancock Fund’s total outstanding
borrowings cease to exceed 10% of its
total assets, the John Hancock Fund will
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mark the value of the collateral to
market each day and will pledge such
additional collateral as is necessary to
maintain the market value of the
collateral that secures each outstanding
Interfund Loan to John Hancock Funds
at least equal to 102% of the
outstanding principal value of the
Interfund Loans.
6. No John Hancock Fund may lend
to another John Hancock Fund through
the Credit Facility if the loan would
cause the lending John Hancock Fund’s
aggregate outstanding loans through the
Credit Facility to exceed 15% of its
current net assets at the time of the loan.
7. A John Hancock Fund’s Interfund
Loans to any one John Hancock Fund
shall not exceed 5% of the lending John
Hancock Fund’s net assets.
8. The duration of Interfund Loans
will be limited to the time required to
receive payment for securities sold, but
in no event more than seven days. Loans
effected within seven days of each other
will be treated as separate loan
transactions for purposes of this
condition.
9. A John Hancock Fund’s borrowings
through the Credit Facility, as measured
on the day when the most recent loan
was made, will not exceed the greater of
125% of the John Hancock Fund’s total
net cash redemptions for the preceding
seven calendar days or 102% of the John
Hancock Fund’s sales fails for the
preceding seven calendar days.
10. Each Interfund Loan may be called
on one business day’s notice by a
lending John Hancock Fund and may be
repaid on any day by a borrowing John
Hancock Fund.
11. A John Hancock Fund’s
participation in the Credit Facility must
be consistent with its investment
policies, limitations and organizational
documents.
12. The Credit Facility Team will
calculate total John Hancock Fund
borrowing and lending demand through
the Credit Facility, and allocate
Interfund Loans on an equitable basis
among the John Hancock Funds,
without the intervention of any portfolio
manager of the John Hancock Funds
(other than a money market portfolio
manager or managers acting in his or her
or their capacity as a member of the
Credit Facility Team). All allocations
will require the approval of at least one
member of the Credit Facility Team who
is a high level employee and is not a
money market portfolio manager. The
Credit Facility Team will not solicit
cash for the Credit Facility from any
John Hancock Fund or prospectively
publish or disseminate loan demand
data to portfolio managers (except to the
extent that a money market portfolio
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14:31 Nov 23, 2011
Jkt 226001
manager or managers on the Credit
Facility Team has or have access to loan
demand data). The Credit Facility Team
will invest all amounts remaining after
satisfaction of borrowing demand in
accordance with the standing
instructions of the portfolio managers or
such remaining amounts will be
invested directly by the portfolio
managers of the John Hancock Funds.
13. The Credit Facility Team will
monitor the Interfund Loan Rate and the
other terms and conditions of the
Interfund Loans and will make a
quarterly report to the Boards of the
John Hancock Funds concerning the
participation of the John Hancock Funds
in the Credit Facility and the terms and
other conditions of any extensions of
credit under the Credit Facility.
14. The Board of each John Hancock
Fund, including a majority of the
Independent Board Members, will:
(a) Review, no less frequently than
quarterly, each of the John Hancock
Fund’s participation in the Credit
Facility during the preceding quarter for
compliance with the conditions of any
order permitting such participation;
(b) establish the Bank Loan Rate
formula used to determine the interest
rate on Interfund Loans;
(c) review, no less frequently than
annually, the continuing
appropriateness of the Bank Loan Rate
formula; and
(d) review, no less frequently than
annually, the continuing
appropriateness of each John Hancock
Fund’s participation in the Credit
Facility.
15. Each John Hancock Fund will
maintain and preserve for a period of
not less than six years from the end of
the fiscal year in which any transaction
by it under the Credit Facility occurred,
the first two years in an easily accessible
place, written records of all such
transactions setting forth a description
of the terms of the transaction,
including the amount, the maturity and
the Interfund Loan Rate, the rate of
interest available at the time each
Interfund Loan is made on overnight
repurchase agreements and Bank
Borrowing, and such other information
presented to the Boards of the John
Hancock Funds in connection with the
review required by conditions 13 and
14.
16. In the event an Interfund Loan is
not paid according to its terms and the
default is not cured within two business
days from its maturity or from the time
the lending John Hancock Fund makes
a demand for payment under the
provisions of the interfund lending
agreement, the Adviser promptly will
refer the loan for arbitration to an
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Frm 00064
Fmt 4703
Sfmt 4703
72735
independent arbitrator selected by the
Board of any John Hancock Fund
involved in the loan who will serve as
arbitrator of disputes concerning
Interfund Loans.2 The arbitrator will
resolve any problem promptly, and the
arbitrator’s decision will be binding on
both John Hancock Funds. The
arbitrator will submit, at least annually,
a written report to the Board of each
John Hancock Fund setting forth a
description of the nature of any dispute
and the actions taken by the John
Hancock Funds to resolve the dispute.
17. The Advisers will prepare and
submit to the Board for review an initial
report describing the operations of the
Credit Facility and the procedures to be
implemented to ensure that all John
Hancock Funds are treated fairly. After
the commencement of the Credit
Facility, the Advisers will report on the
operations of the Credit Facility at the
Board’s quarterly meetings. Each John
Hancock Fund’s chief compliance
officer, as defined in rule 38a–1(a)(4)
under the Act, shall prepare an annual
report for its Board each year that the
John Hancock Fund participates in the
Credit Facility, that evaluates the John
Hancock Fund’s compliance with the
terms and conditions of the application
and the procedures established to
achieve such compliance. Each John
Hancock Fund’s chief compliance
officer will also annually file a
certification pursuant to Item 77Q3 of
Form N–SAR as such Form may be
revised, amended or superseded from
time to time, for each year that the John
Hancock Fund participates in the Credit
Facility, that certifies that the John
Hancock Fund and the Advisers have
established procedures reasonably
designed to achieve compliance with
the terms and conditions of the order. In
particular, such certification will
address procedures designed to achieve
the following objectives:
(a) That the Interfund Loan Rate will
be higher than the Repo Rate but lower
than the Bank Loan Rate;
(b) Compliance with the collateral
requirements as set forth in the
application;
(c) Compliance with the percentage
limitations on interfund borrowing and
lending;
(d) Allocation of interfund borrowing
and lending demand in an equitable
manner and in accordance with
procedures established by the Board;
and
2 If the dispute involves John Hancock Funds that
do not have common Boards, the Board of each
affected John Hancock Fund will select an
independent arbitrator that is satisfactory to each
John Hancock Fund.
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Federal Register / Vol. 76, No. 227 / Friday, November 25, 2011 / Notices
(e) That the Interfund Loan Rate does
not exceed the interest rate on any third
party borrowings of a borrowing John
Hancock Fund at the time of the
Interfund Loan.
Additionally, each John Hancock
Fund’s independent public accountants,
in connection with their audit
examination of the John Hancock Fund,
will review the operation of the Credit
Facility for compliance with the
conditions of the application and their
review will form the basis, in part, of
the auditor’s report on internal
accounting controls in Form N–SAR.
18. No John Hancock Fund will
participate in the Credit Facility, upon
receipt of requisite regulatory approval,
unless it has fully disclosed in its
registration statement on Form N–1A (or
any successor form adopted by the
Commission) all material facts about its
intended participation.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–30349 Filed 11–23–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65791; File No. SR–FINRA–
2011–053]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Granting
Approval of Proposed Rule Change to
Amend Certain TRACE Rules
November 18, 2011.
wreier-aviles on DSK7SPTVN1PROD with NOTICES
I. Introduction
On September 22, 2011, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
consolidate all TRACE-Eligible
Securities transaction processing and
data management on a single technology
platform, the Multi Product Platform
(‘‘MPP’’), and make various changes to
the rules governing how TRACE-Eligible
Securities other than Asset-Backed
Securities are required to be reported.
The proposed rule change was
published for comment in the Federal
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
VerDate Mar<15>2010
14:31 Nov 23, 2011
Jkt 226001
Register on October 6, 2011.3 The
Commission received two comments in
response to the proposal.4 On November
10, 2011, FINRA responded to the
comments.5 This order grants approval
of the proposed rule change.
II. Description of the Proposal
Currently, transactions only in
TRACE-Eligible Securities that are
Asset-Backed Securities are processed
on the MPP.6 The proposed rule change
would make certain amendments to the
reporting requirements of Rule 6730 that
would permit FINRA to migrate all
other TRACE-Eligible Securities to the
MPP. These new requirements are
substantially similar to those that
currently apply to transactions in AssetBacked Securities and are described
below.
TRACE-Eligible Securities Transactions
Executed on a Non-Business Day
Currently, as set forth in Rules
6730(a)(1)(D) and 6730(a)(2)(B),
transactions in TRACE-Eligible
Securities, except Asset-Backed
Securities, that are executed on a
weekend, holiday, or other day when
the TRACE system is not open must be
reported the next business day (T + 1),
designated ‘‘as/of,’’ and are subject to
two unique requirements. First, the date
of execution (‘‘Trade Date’’) reported to
TRACE is not the actual date the trade
was executed; instead, a member must
report as the Trade Date the day (i.e.,
T + 1) that the report must be timely
submitted. Second, the execution time
reported must be ‘‘12:01 a.m. Eastern
Time’’ (‘‘00:01:00’’), instead of the
actual Time of Execution.7 As described
in the Notice, the two requirements
were established at the inception of
TRACE because, at that time, the
TRACE system did not recognize any
day on which the TRACE system is
closed as a valid Trade Date, and the
two current required elements allow
FINRA to distinguish transactions in
3 See Securities Exchange Act Release No. 65459
(September 30, 2011), 76 FR 62128 (‘‘Notice’’).
4 See letter from Suzanne H. Shatto, dated
October 20, 2011 (‘‘Shatto Letter’’); letter from
Christopher Killian, Vice President, Securities
Industry and Financial Markets Association
(‘‘SIFMA’’), to Elizabeth M. Murphy, Secretary,
Commission, dated October 27, 2011 (‘‘SIFMA
Letter’’).
5 See letter from Sharon Zackula, Associate Vice
President and Associate General Counsel, FINRA, to
Elizabeth M. Murphy, Secretary, Commission, dated
November 10, 2011 (‘‘FINRA Letter’’).
6 ‘‘TRACE-Eligible Security’’ and ‘‘Asset-Backed
Security’’ are defined in, respectively, Rule 6710(a)
and Rule 6710(m).
7 ‘‘Time of Execution’’ is defined in Rule 6710(d).
Also, when the reporting method used includes a
‘‘special price memo’’ field, the member must enter
the actual date of execution and Time of Execution
in such field.
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
TRACE-Eligible Securities executed on
non-business days from all other
reported transactions.
FINRA has enhanced the TRACE
system to recognize, for all types of
TRACE-Eligible Securities, any calendar
date as a valid Trade Date. Accordingly,
the proposed rule change would amend
Rules 6730(a)(1)(D) and 6730(a)(2)(B) to
delete in both provisions the two data
elements described above, and instead
require members to report transactions
executed on non-business days in the
same manner that transactions executed
after or before TRACE System Hours on
business days are reported currently.8
The proposal also would combine and
renumber certain rules and incorporate
minor technical changes.
Size (Volume), Commission, and
Settlement Terms
In addition, the proposed rule change
would amend the technical
requirements for reporting the size
(volume) of a transaction, the
commission (if any), and the settlement
of transactions in TRACE-Eligible
Securities, other than Asset-Backed
Securities.
Currently, FINRA requires members
to report the size (volume) of a
transaction in a TRACE-Eligible
Security, other than an Asset-Backed
Security, by reporting the number of
bonds transacted.9 For example, a sale
of corporate bonds having a par or
principal value of $10,000 is reported as
a sale of ten bonds. The proposal would
amend Rules 6730(c)(2) and 6730(d)(2)
to require a member to report the size
of such transactions using the total par
value or principal value traded, rather
than the number of bonds.10
The proposed rule change would
make similar change to the reporting of
commissions. Under current Rules
6730(c)(11) and 6730(d)(1), in cases
where a commission is charged in a
transaction in a TRACE-Eligible
Security, the commission must be
reported ‘‘stated in points per bond (e.g.,
for corporate bonds, 1 point equals
$10.00 per bond).’’ 11 As amended by
the proposal, Rules 6730(c)(11) and
6730(d)(1) would require members to
report the total dollar amount of the
8 ‘‘TRACE System Hours’’ is defined in Rule
6710(t).
9 See Rules 6730(c)(2) and 6730(d)(2).
10 Previously, FINRA adopted similar provisions
for reporting the size (volume) of transactions in
Asset-Backed Securities that do not amortize. See
Securities Exchange Act Release No. 61566
(February 22, 2010), 75 FR 9262 (March 1, 2010)
(order approving File No. SR–FINRA–2009–065).
11 Rule 6730(d)(1).
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]]>Agencies
[Federal Register Volume 76, Number 227 (Friday, November 25, 2011)]
[Notices]
[Pages 72731-72736]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30349]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29865; File No. 812-13621]
John Hancock Variable Insurance Trust, et al.; Notice of
Application
November 18, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order pursuant to: (a) Section
6(c) of the Investment Company Act of 1940 (``Act'') granting an
exemption from sections 18(f) and 21(b) of the Act; (b) section
12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of
the Act; (c) sections 6(c) and 17(b) of the Act granting an exemption
from sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Act; and (d)
section 17(d) of the Act and rule 17d-1 under the Act to permit certain
joint arrangements and transactions.
-----------------------------------------------------------------------
SUMMARY: Summary of the Application: Applicants request an order that
would permit certain registered open-end management investment
companies to participate in a joint lending and borrowing facility.
Applicants: John Hancock Variable Insurance Trust, John Hancock Funds
II, John Hancock Funds III, John Hancock Bond Trust, John Hancock
California Tax-Free Income Fund, John Hancock Capital Series, John
Hancock Collateral Investment Trust, John Hancock Current Interest,
John Hancock Investment Trust, John Hancock Investment Trust II, John
Hancock Investment Trust III, John Hancock Municipal Securities Trust,
John Hancock Series Trust, John Hancock Sovereign Bond Fund, John
Hancock Strategic Series, John Hancock Tax-Exempt Series Fund (each a
``John Hancock Fund'' and collectively the ``John Hancock Funds''),
John Hancock Advisers, LLC (``JHA''), Manulife Asset Management (US)
LLC (``JHAM'') and John Hancock Investment Management Services, LLC
(``JHIMS'') (each of JHA, JHAM and JHIMS, an ``Adviser,'' and such
entities together, the ``Advisers'').
DATES: Filing Dates: The application was filed on December 31, 2008,
and amended on July 8, 2009, November 15, 2010, November 4, 2011 and
November 18, 2011. Applicants have agreed to file an amendment during
the notice period, the substance of which is reflected in this notice.
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 December 13, 2011, 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
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090; Applicants: c/o Stuart E.
Fross, K&L Gates LLP, State Street Financial Center, One Lincoln
Street, Boston, MA 02111; John J. Danello, John Hancock Financial
Services, Inc., 601 Congress Street, Boston, MA 02210; Carolyn M.
Flanagan, Manulife Asset Management (US), LLC, 101 Huntington Avenue,
Boston, MA 02199.
FOR FURTHER INFORMATION CONTACT: Laura L. Solomon, Senior Counsel, at
(202) 551-6915 or Janet M. Grossnickle, Assistant Director, at (202)
551-6821 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at https://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. Each John Hancock Fund is organized as a Massachusetts business
trust and is registered under the Act as an open-end, management
investment company. Some of the trusts have not created separate series
of shares but most issue one or more series, each series of shares
having a different investment objective and different investment
policies and each such series is deemed to be a John Hancock Fund.
Certain of the John Hancock Funds either are or may be money market
funds that comply with rule 2a-7 of the Act (each a ``Money Market
Hancock Fund'' and collectively, the ``Money Market Hancock Funds'' and
they are included in the term ``John Hancock Funds''). JHA, JHAM and
JHIMS are each a Delaware limited liability company that is registered
as an investment adviser under the Investment Advisers Act of 1940
(``Advisers Act''), each are indirect subsidiaries of Manulife
Financial Corporation and act as investment adviser to the John Hancock
Funds.\1\
---------------------------------------------------------------------------
\1\ Applicants request that the order also apply to any existing
or future series of the John Hancock Funds, to any other registered
open-end management investment company or its series for which JHA,
JHAM or JHIMS or a person controlling, controlled by, or under
common control (within the meaning of section 2(a)(9) of the Act)
with JHA, JHAM, or JHIMS serves as investment adviser (``Adviser'').
All John Hancock Funds that currently intend to rely on the
requested order have been named as applicants. Any other John
Hancock Fund that relies on the requested order in the future will
comply with the terms and conditions of the application.
---------------------------------------------------------------------------
2. John Hancock Funds may lend cash to banks or other entities by
entering into repurchase agreements, purchasing short-term instruments
or under arrangements whereby custodian fees are reduced. In order to
meet an unexpected volume of redemptions or to cover unanticipated cash
shortfalls, John Hancock Funds contracted for committed lines of credit
with State Street Bank and Trust Company and The Bank of New York
Mellon Corporation (``Bank Borrowing''). The amount of borrowing under
each of these lines of credit is limited to the amount specified by
fundamental investment restrictions and/or other policies of the
applicable John Hancock Fund and section 18 of the Act.
3. If John Hancock Funds that experience a cash shortfall were to
draw down on their Bank Borrowing, they would pay interest at a rate
that is likely to be higher (and currently actually is higher) than the
rate that could be earned by non-borrowing John Hancock Funds on
investments in repurchase agreements and other short-term money market
instruments of the same maturity as the Bank Borrowing (``Short-Term
Instruments''). Applicants assert the difference between the higher
rate paid on Bank Borrowing and what the bank pays to borrow under
repurchase agreements or other arrangements represents the bank's
profit for serving as the middleperson between a borrower and lender
and is not attributable to any material difference in the credit
quality or risk of such transactions.
[[Page 72732]]
4. The John Hancock Funds seek to enter into master interfund
lending agreements (``Credit Facility'') with each other that would
permit each John Hancock Fund to lend money directly to and borrow
money directly from other John Hancock Funds for temporary purposes
through the Credit Facility (an ``Interfund Loan''). The Money Market
Hancock Funds typically will not participate as borrowers in the Credit
Facility. Applicants state that the Credit Facility would enable the
John Hancock Funds to access an available source of money and reduce
costs incurred by the John Hancock Funds that need to obtain loans for
temporary purposes and permit those John Hancock Funds that have cash
available: (i) To earn a return on the money that they might not
otherwise be able to invest; or (ii) to earn a higher rate of interest
on investment of their short-term balances. Although the proposed
Credit Facility would reduce the John Hancock Funds' need to borrow
from banks, the John Hancock Funds would be free to establish and/or
continue committed lines of credit or other borrowing arrangements with
banks.
5. Applicants anticipate that the proposed Credit Facility would
provide a borrowing John Hancock Fund with significant savings at times
when the cash position of the John Hancock Fund is insufficient to meet
temporary cash requirements. This situation could arise when
shareholder redemptions exceed anticipated cash volumes and certain
John Hancock Funds have insufficient cash on hand to satisfy such
redemptions. When the John Hancock Funds liquidate portfolio securities
to meet redemption requests, they often do not receive payment in
settlement for up to three days (or longer for certain foreign
transactions). However, redemption requests normally are effected
immediately. The proposed credit facility would provide a source of
immediate, short-term liquidity pending settlement of the sale of
portfolio securities.
6. Applicants also anticipate that a John Hancock Fund could use
the Credit Facility when a sale of securities ``fails'' due to
circumstances beyond the John Hancock Fund's control, such as a delay
in the delivery of cash to the John Hancock Fund's custodian or
improper delivery instructions by the broker effecting the transaction.
``Sales fails'' may present a cash shortfall if the John Hancock Fund
has undertaken to purchase a security using the proceeds from
securities sold. Alternatively, the John Hancock Fund could ``fail'' on
its intended purchase due to lack of funds from the previous sale,
resulting in additional cost to the John Hancock Fund, or sell a
security on a same-day settlement basis, earning a lower return on the
investment. Use of the Credit Facility under these circumstances would
enable the John Hancock Fund to have access to immediate short-term
liquidity.
7. While Bank Borrowing generally could supply John Hancock Funds
with needed cash to cover unanticipated redemptions and sales fails,
under the proposed Credit Facility, a borrowing John Hancock Fund would
pay lower interest rates than those that would be payable under short-
term loans offered by banks. In addition, John Hancock Funds making
short-term cash loans directly to other John Hancock Funds would earn
interest at a rate higher than they otherwise could obtain from
investing their cash in Short-Term Instruments. Thus, applicants assert
that the proposed Credit Facility would benefit both borrowing and
lending John Hancock Funds.
8. The interest rate to be charged to the John Hancock Funds on any
Interfund Loan (the ``Interfund Loan Rate'') would be the average of
the ``Repo Rate'' and the ``Bank Loan Rate,'' both as defined below.
The Repo Rate would be the highest current overnight repurchase
agreement rate available to a lending John Hancock Fund. The Bank Loan
Rate for any day would be calculated by the Credit Facility Team, as
defined below, on each day an Interfund Loan is made according to a
formula established by each John Hancock Fund's board of trustees (the
``Board'') intended to approximate the lowest interest rate at which a
bank short-term loan would be available to the John Hancock Fund. The
formula would be based upon a publicly available rate (e.g., federal
funds rate plus 25 basis points) and would vary with this rate so as to
reflect changing bank loan rates. The initial formula and any
subsequent modifications to the formula would be subject to the
approval of each John Hancock Fund's Board. In addition, the Board of
each John Hancock Fund would periodically review the continuing
appropriateness of reliance on the formula used to determine the Bank
Loan Rate, as well as the relationship between the Bank Loan Rate and
current bank loan rates that would be available to the John Hancock
Fund.
9. Certain members of the Adviser's fund administration personnel
and money market portfolio managers or analysts (the ``Credit Facility
Team'') would administer the Credit Facility. No portfolio manager
(other than a Money Market Hancock Fund portfolio manager) of any John
Hancock Fund will serve as a member of the Credit Facility Team. Under
the proposed Credit Facility, the portfolio managers for each
participating John Hancock Fund could provide standing instructions to
participate daily as a borrower or lender. The Credit Facility Team on
each business day would collect data on the uninvested cash and
borrowing requirements of all participating John Hancock Funds. Once
the Credit Facility Team has determined the aggregate amount of cash
available for loans and borrowing demand, the Credit Facility Team
would allocate loans among borrowing John Hancock Funds without any
further communication from the portfolio managers of the John Hancock
Funds. Applicants anticipate that there typically will be far more
available uninvested cash each day than borrowing demand. Therefore,
after the Credit Facility Team has allocated cash for Interfund Loans,
the Credit Facility Team will invest any remaining cash in accordance
with the standing instructions of the portfolio managers or such
remaining amounts will be invested directly by the portfolio managers
of the John Hancock Funds.
10. The Credit Facility Team would allocate borrowing demand and
cash available for lending among the John Hancock Funds on what the
Credit Facility Team believes to be an equitable basis, subject to
certain administrative procedures applicable to all John Hancock Funds,
such as the time of filing requests to participate, minimum loan lot
sizes, and the need to minimize the number of transactions and
associated administrative costs. To reduce transaction costs, each
Interfund Loan normally would be allocated in a manner intended to
minimize the number of participants necessary to complete the loan
transaction. The method of allocation and related administrative
procedures would be approved by the Boards of the John Hancock Funds,
including a majority of the Board members who are not ``interested
persons'' of the John Hancock Fund, as that term is defined in section
2(a)(19) of the Act (``Independent Board Members''), to ensure that
both borrowing and lending John Hancock Funds participate on an
equitable basis.
11. The Adviser would: (a) Monitor the Interfund Loan Rate and the
other terms and conditions of the Interfund Loans; (b) limit the
borrowings and loans entered into by each John Hancock Fund to ensure
that they comply with the John Hancock Fund's investment policies and
limitations; (c)
[[Page 72733]]
ensure equitable treatment of each John Hancock Fund; and (d) make
quarterly reports to the Board of each John Hancock Fund concerning any
transactions by the applicable John Hancock Fund under the Credit
Facility and the Interfund Loan Rate.
12. The Advisers, through the Credit Facility Team, would
administer the Credit Facility as a disinterested fiduciary as part of
its duties under the investment management and administrative
agreements with each John Hancock Fund and would receive no additional
fee as compensation for its services in connection with the
administration of the Credit Facility.
13. No John Hancock Fund may participate in the Credit Facility
unless: (a) the John Hancock Fund has obtained shareholder approval for
its participation, if such approval is required by law; (b) the John
Hancock Fund has fully disclosed all material information concerning
the Credit Facility in its registration statement on form N-1A; and (c)
the John Hancock Fund's participation in the Credit Facility is
consistent with its investment objectives, limitations and
organizational documents.
14. In connection with the Credit Facility, applicants request an
order under section 6(c) of the Act exempting them from the provisions
of sections 18(f) and 21(b) of the Act; under section 12(d)(1)(J) of
the Act exempting them from section 12(d)(1) of the Act; under sections
6(c) and 17(b) of the Act exempting them from sections 17(a)(1),
17(a)(2), and 17(a)(3) of the Act; and under section 17(d) of the Act
and rule 17d-1 under the Act to permit certain joint arrangements and
transactions.
Applicants' Legal Analysis
1. Section 17(a)(3) of the Act generally prohibits any affiliated
person of a registered investment company, or affiliated person of an
affiliated person, from borrowing money or other property from the
registered investment company. Section 21(b) of the Act generally
prohibits any registered management company from lending money or other
property to any person, directly or indirectly, if that person controls
or is under common control with that company. Section 2(a)(3)(C) of the
Act defines an ``affiliated person'' of another person, in part, to be
any person directly or indirectly controlling, controlled by, or under
common control with, such other person. Section 2(a)(9) of the Act
defines ``control'' as the ``power to exercise a controlling influence
over the management or policies of a company,'' but excludes
circumstances in which ``such power is solely the result of an official
position with such company.'' Applicants state that the John Hancock
Funds may be under common control by virtue of having common investment
advisers and/or by having common directors, trustees and officers.
2. Section 6(c) of the Act provides that an exemptive order may be
granted where an 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.
Section 17(b) of the Act authorizes the Commission to exempt a proposed
transaction from section 17(a) provided that the terms of the
transaction, including the consideration to be paid or received, are
fair and reasonable and do not involve overreaching on the part of any
person concerned, and the transaction is consistent with the policy of
the investment company as recited in its registration statement and
with the general purposes of the Act. Applicants believe that the
proposed arrangements satisfy these standards for the reasons discussed
below.
3. Applicants assert that sections 17(a)(3) and 21(b) of the Act
were intended to prevent a party with strong potential adverse
interests to, and some influence over the investment decisions of, a
registered investment company from causing or inducing the investment
company to engage in lending transactions that unfairly inure to the
benefit of such party and that are detrimental to the best interests of
the investment company and its shareholders. Applicants assert that the
proposed transactions do not raise these concerns because: (a) The
Advisers, through the Credit Facility Team members, would administer
the Credit Facility as a disinterested fiduciary as part of its duties
under the investment management and administrative agreements with each
John Hancock Fund; (b) all Interfund Loans would consist only of
uninvested cash reserves that the John Hancock Fund otherwise would
invest in short-term repurchase agreements or other short-term
investments; (c) the Interfund Loans would not involve a significantly
greater risk than such other investments; (d) the lending John Hancock
Fund would receive interest at a rate higher than it could otherwise
obtain through such other investments; and (e) the borrowing John
Hancock Fund would pay interest at a rate lower than otherwise
available to it under its bank loan agreements and avoid the quarterly
commitment fees associated with committed lines of credit. Moreover,
applicants assert that the other terms and conditions that applicants
propose also would effectively preclude the possibility of any John
Hancock Fund obtaining an undue advantage over any other John Hancock
Fund.
4. Section 17(a)(1) of the Act generally prohibits an affiliated
person of a registered investment company, or any affiliated person of
such a person, from selling securities or other property to the
investment company. Section 17(a)(2) of the Act generally prohibits an
affiliated person of a registered investment company, or any affiliated
person of such a person, from purchasing securities or other property
from the investment company. Section 12(d)(1) of the Act generally
prohibits a registered investment company from purchasing or otherwise
acquiring any security issued by any other investment company except in
accordance with the limitations set forth in that section.
5. Applicants state that the obligation of a borrowing John Hancock
Fund to repay an Interfund Loan could be deemed to constitute a
security for the purposes of sections 17(a)(1) and 12(d)(1). Applicants
also state that any pledge of securities to secure an Interfund Loan by
the borrowing John Hancock Fund to the lending John Hancock Fund could
constitute a purchase of securities for purposes of section 17(a)(2) of
the Act. Section 12(d)(1)(J) of the Act provides that the Commission
may exempt persons or transactions from any provision of section
12(d)(1) if and to the extent that such exemption is consistent with
the public interest and the protection of investors. Applicants contend
that the standards under sections 6(c), 17(b), and 12(d)(1)(J) are
satisfied for all the reasons set forth above in support of their
request for relief from sections 17(a)(3) and 21(b) and for the reasons
discussed below. Applicants state that the requested relief from
section 17(a)(2) of the Act meets the standards of section 6(c) and
17(b) because any collateral pledged to secure an Interfund Loan would
be subject to the same conditions imposed by any other lender to a John
Hancock Fund that imposes conditions on the quality of or access to
collateral for a borrowing (if the lender is another John Hancock Fund)
or the same or better conditions (in any other circumstance).
6. Applicants state that section 12(d)(1) was intended to prevent
the pyramiding of investment companies in order to avoid imposing on
investors additional and duplicative costs and fees attendant upon
multiple layers of investment companies. Applicants submit that the
proposed Credit Facility
[[Page 72734]]
does not involve these abuses. Applicants note that there will be no
duplicative costs or fees to the John Hancock Funds or their
shareholders, and that each Adviser will receive no additional
compensation for its services in administering the Credit Facility.
Applicants also note that the purpose of the proposed Credit Facility
is to provide economic benefits for all the participating John Hancock
Funds and their shareholders.
7. Section 18(f)(1) of the Act prohibits open-end investment
companies from issuing any senior security except that a company is
permitted to borrow from any bank, provided, that immediately after the
borrowing, there is asset coverage of at least 300 per centum for all
borrowings of the company. Under section 18(g) of the Act, the term
``senior security'' generally includes any bond, debenture, note or
similar obligation or instrument constituting a security and evidencing
indebtedness. Applicants request exemptive relief under section 6(c)
from section 18(f)(1) to the limited extent necessary to implement the
Credit Facility (because the lending John Hancock Funds are not banks).
8. Applicants believe that granting relief under section 6(c) is
appropriate because the Funds would remain subject to the requirement
of section 18(f)(1) that all borrowings of a John Hancock Fund,
including combined Interfund Loans and bank borrowings, have at least
300% asset coverage. Based on the conditions and safeguards described
in the application, applicants also submit that to allow the John
Hancock Funds to borrow from other John Hancock Funds pursuant to the
proposed Credit Facility is consistent with the purposes and policies
of section 18(f)(1).
9. Section 17(d) of the Act and rule 17d-1 under the Act generally
prohibit an affiliated person of a registered investment company, or
any affiliated person of such a person, when acting as principal, from
effecting any joint transaction in which the investment company
participates, unless, upon application, the transaction has been
approved by the Commission. Rule 17d-1(b) under the Act provides that
in passing upon an application filed under the rule, the Commission
will consider whether the participation of the registered investment
company in a joint enterprise on the basis proposed 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 the other participants.
10. Applicants assert that the purpose of section 17(d) is to avoid
overreaching by and unfair advantage to insiders. Applicants assert
that the Credit Facility is consistent with the provisions, policies
and purposes of the Act in that it offers both reduced borrowing costs
and enhanced returns on loaned funds to all participating John Hancock
Funds and their shareholders. Applicants note that each John Hancock
Fund would have an equal opportunity to borrow and lend on equal terms
consistent with its investment policies and fundamental investment
limitations. Applicants assert that each John Hancock Fund's
participation in the proposed Credit Facility would be on terms that
are no different from or less advantageous than that of other
participating John Hancock Funds.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. The Interfund Loan Rate will be the average of the Repo Rate and
the Bank Loan Rate.
2. On each business day, when an interfund loan is to be made, the
Credit Facility Team will compare the Bank Loan Rate with the Repo Rate
and will make cash available for Interfund Loans only if the Interfund
Loan Rate is: (a) More favorable to the lending John Hancock Fund than
the Repo Rate; and (b) more favorable to the borrowing John Hancock
Fund than the Bank Loan Rate.
3. If a John Hancock Fund has outstanding bank borrowings, any
Interfund Loan to the John Hancock Fund will: (a) Be at an interest
rate equal to or lower than the interest rate of any outstanding bank
loan; (b) be secured at least on an equal priority basis with at least
an equivalent percentage of collateral to loan value as any outstanding
bank loan that requires collateral; (c) have a maturity no longer than
any outstanding bank loan (and in any event not over seven days); and
(d) provide that, if an event of default occurs under any agreement
evidencing an outstanding bank loan to the John Hancock Fund, that the
event of default by the John Hancock Fund, automatically (without need
for action or notice by the lending John Hancock Fund) will constitute
an immediate event of default under the interfund lending agreement
that both (i) entitles the lending John Hancock Fund to call the
Interfund Loan immediately and exercise all rights with respect to any
collateral and (ii) causes the call to be made if the lending bank
exercises its right to call its loan under its agreement with the
borrowing John Hancock Fund.
4. A John Hancock Fund may borrow on an unsecured basis through the
Credit Facility only if the relevant borrowing fund's outstanding
borrowings from all sources immediately after the interfund borrowing
total 10% or less of its total assets, provided that if the borrowing
fund has a secured loan outstanding from any other lender, including
but not limited to another John Hancock Fund, the lending John Hancock
Fund's Interfund Loan will be secured on at least an equal priority
basis with at least an equivalent percentage of collateral to loan
value as any outstanding loan that requires collateral. If a borrowing
John Hancock Fund's total outstanding borrowings immediately after an
Interfund Loan would be greater than 10% of its total assets, the John
Hancock Fund may borrow through the Credit Facility only on a secured
basis. A John Hancock Fund may not borrow through the Credit Facility
or from any other source if its total outstanding borrowings
immediately after the borrowing would be more than 33 \1/3\% of its
total assets.
5. Before any John Hancock Fund that has outstanding interfund
borrowings may, through additional borrowings, cause its outstanding
borrowings from all sources to exceed 10% of its total assets, it must
first secure each outstanding Interfund Loan to a John Hancock Fund by
the pledge of segregated collateral with a market value at least equal
to 102% of the outstanding principal value of the loan. If the total
outstanding borrowings of a John Hancock Fund with outstanding
Interfund Loans exceed 10% of its total assets for any other reason
(such as a decline in net asset value or because of shareholder
redemptions), the John Hancock Fund will within one business day
thereafter either: (a) Repay all its outstanding Interfund Loans to
John Hancock Funds; (b) reduce its outstanding indebtedness to John
Hancock Funds to 10% or less of its total assets; or (c) secure each
outstanding Interfund Loan to John Hancock Funds by the pledge of
segregated collateral with a market value at least equal to 102% of the
outstanding principal value of the loan until the John Hancock Fund's
total outstanding borrowings cease to exceed 10% of its total assets,
at which time the collateral called for by this condition 5 shall no
longer be required. Until each Interfund Loan that is outstanding at
any time that a John Hancock Fund's total outstanding borrowings exceed
10% of its total assets is repaid or the John Hancock Fund's total
outstanding borrowings cease to exceed 10% of its total assets, the
John Hancock Fund will
[[Page 72735]]
mark the value of the collateral to market each day and will pledge
such additional collateral as is necessary to maintain the market value
of the collateral that secures each outstanding Interfund Loan to John
Hancock Funds at least equal to 102% of the outstanding principal value
of the Interfund Loans.
6. No John Hancock Fund may lend to another John Hancock Fund
through the Credit Facility if the loan would cause the lending John
Hancock Fund's aggregate outstanding loans through the Credit Facility
to exceed 15% of its current net assets at the time of the loan.
7. A John Hancock Fund's Interfund Loans to any one John Hancock
Fund shall not exceed 5% of the lending John Hancock Fund's net assets.
8. The duration of Interfund Loans will be limited to the time
required to receive payment for securities sold, but in no event more
than seven days. Loans effected within seven days of each other will be
treated as separate loan transactions for purposes of this condition.
9. A John Hancock Fund's borrowings through the Credit Facility, as
measured on the day when the most recent loan was made, will not exceed
the greater of 125% of the John Hancock Fund's total net cash
redemptions for the preceding seven calendar days or 102% of the John
Hancock Fund's sales fails for the preceding seven calendar days.
10. Each Interfund Loan may be called on one business day's notice
by a lending John Hancock Fund and may be repaid on any day by a
borrowing John Hancock Fund.
11. A John Hancock Fund's participation in the Credit Facility must
be consistent with its investment policies, limitations and
organizational documents.
12. The Credit Facility Team will calculate total John Hancock Fund
borrowing and lending demand through the Credit Facility, and allocate
Interfund Loans on an equitable basis among the John Hancock Funds,
without the intervention of any portfolio manager of the John Hancock
Funds (other than a money market portfolio manager or managers acting
in his or her or their capacity as a member of the Credit Facility
Team). All allocations will require the approval of at least one member
of the Credit Facility Team who is a high level employee and is not a
money market portfolio manager. The Credit Facility Team will not
solicit cash for the Credit Facility from any John Hancock Fund or
prospectively publish or disseminate loan demand data to portfolio
managers (except to the extent that a money market portfolio manager or
managers on the Credit Facility Team has or have access to loan demand
data). The Credit Facility Team will invest all amounts remaining after
satisfaction of borrowing demand in accordance with the standing
instructions of the portfolio managers or such remaining amounts will
be invested directly by the portfolio managers of the John Hancock
Funds.
13. The Credit Facility Team will monitor the Interfund Loan Rate
and the other terms and conditions of the Interfund Loans and will make
a quarterly report to the Boards of the John Hancock Funds concerning
the participation of the John Hancock Funds in the Credit Facility and
the terms and other conditions of any extensions of credit under the
Credit Facility.
14. The Board of each John Hancock Fund, including a majority of
the Independent Board Members, will:
(a) Review, no less frequently than quarterly, each of the John
Hancock Fund's participation in the Credit Facility during the
preceding quarter for compliance with the conditions of any order
permitting such participation;
(b) establish the Bank Loan Rate formula used to determine the
interest rate on Interfund Loans;
(c) review, no less frequently than annually, the continuing
appropriateness of the Bank Loan Rate formula; and
(d) review, no less frequently than annually, the continuing
appropriateness of each John Hancock Fund's participation in the Credit
Facility.
15. Each John Hancock Fund will maintain and preserve for a period
of not less than six years from the end of the fiscal year in which any
transaction by it under the Credit Facility occurred, the first two
years in an easily accessible place, written records of all such
transactions setting forth a description of the terms of the
transaction, including the amount, the maturity and the Interfund Loan
Rate, the rate of interest available at the time each Interfund Loan is
made on overnight repurchase agreements and Bank Borrowing, and such
other information presented to the Boards of the John Hancock Funds in
connection with the review required by conditions 13 and 14.
16. In the event an Interfund Loan is not paid according to its
terms and the default is not cured within two business days from its
maturity or from the time the lending John Hancock Fund makes a demand
for payment under the provisions of the interfund lending agreement,
the Adviser promptly will refer the loan for arbitration to an
independent arbitrator selected by the Board of any John Hancock Fund
involved in the loan who will serve as arbitrator of disputes
concerning Interfund Loans.\2\ The arbitrator will resolve any problem
promptly, and the arbitrator's decision will be binding on both John
Hancock Funds. The arbitrator will submit, at least annually, a written
report to the Board of each John Hancock Fund setting forth a
description of the nature of any dispute and the actions taken by the
John Hancock Funds to resolve the dispute.
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\2\ If the dispute involves John Hancock Funds that do not have
common Boards, the Board of each affected John Hancock Fund will
select an independent arbitrator that is satisfactory to each John
Hancock Fund.
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17. The Advisers will prepare and submit to the Board for review an
initial report describing the operations of the Credit Facility and the
procedures to be implemented to ensure that all John Hancock Funds are
treated fairly. After the commencement of the Credit Facility, the
Advisers will report on the operations of the Credit Facility at the
Board's quarterly meetings. Each John Hancock Fund's chief compliance
officer, as defined in rule 38a-1(a)(4) under the Act, shall prepare an
annual report for its Board each year that the John Hancock Fund
participates in the Credit Facility, that evaluates the John Hancock
Fund's compliance with the terms and conditions of the application and
the procedures established to achieve such compliance. Each John
Hancock Fund's chief compliance officer will also annually file a
certification pursuant to Item 77Q3 of Form N-SAR as such Form may be
revised, amended or superseded from time to time, for each year that
the John Hancock Fund participates in the Credit Facility, that
certifies that the John Hancock Fund and the Advisers have established
procedures reasonably designed to achieve compliance with the terms and
conditions of the order. In particular, such certification will address
procedures designed to achieve the following objectives:
(a) That the Interfund Loan Rate will be higher than the Repo Rate
but lower than the Bank Loan Rate;
(b) Compliance with the collateral requirements as set forth in the
application;
(c) Compliance with the percentage limitations on interfund
borrowing and lending;
(d) Allocation of interfund borrowing and lending demand in an
equitable manner and in accordance with procedures established by the
Board; and
[[Page 72736]]
(e) That the Interfund Loan Rate does not exceed the interest rate
on any third party borrowings of a borrowing John Hancock Fund at the
time of the Interfund Loan.
Additionally, each John Hancock Fund's independent public
accountants, in connection with their audit examination of the John
Hancock Fund, will review the operation of the Credit Facility for
compliance with the conditions of the application and their review will
form the basis, in part, of the auditor's report on internal accounting
controls in Form N-SAR.
18. No John Hancock Fund will participate in the Credit Facility,
upon receipt of requisite regulatory approval, unless it has fully
disclosed in its registration statement on Form N-1A (or any successor
form adopted by the Commission) all material facts about its intended
participation.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30349 Filed 11-23-11; 8:45 am]
BILLING CODE 8011-01-P
