BMO Funds, Inc., et al.; Notice of Application, 39010-39015 [2014-15971]
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Federal Register / Vol. 79, No. 131 / Wednesday, July 9, 2014 / Notices
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public interest and consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the Act.
Applicants’ Conditions
Applicants agree that any order
granting the requested relief will be
subject to the following conditions:7
1. Before a Subadvised Series may
rely on the order requested in the
application, the operation of the
Subadvised Series in the manner
described in the application, including
the hiring of Wholly-Owned SubAdvisers, will be, or has been, approved
by a majority of the Subadvised Series’
outstanding voting securities as defined
in the Act, or, in the case of a new
Subadvised Series whose public
shareholders purchase shares on the
basis of a prospectus containing the
disclosure contemplated by condition 2
below, by the sole initial shareholder
before offering the Subadvised Series’
shares to the public.
2. The prospectus for each
Subadvised Series will disclose the
existence, substance, and effect of any
order granted pursuant to the
application. Each Subadvised Series
will hold itself out to the public as
employing the multi-manager structure
described in the application. Each
prospectus will prominently disclose
that the Adviser has the ultimate
responsibility, subject to oversight by
the Board, to oversee the Sub-Advisers
and recommend their hiring,
termination and replacement.
3. The Adviser will provide general
management services to a Subadvised
Series, including overall supervisory
responsibility for the general
management and investment of the
Subadvised Series’ assets. Subject to
review and approval of the Board, the
Adviser will (a) set a Subadvised Series’
overall investment strategies, (b)
evaluate, select, and recommend SubAdvisers to manage all or a portion of
a Subadvised Series’ assets, and (c)
implement procedures reasonably
designed to ensure that Sub-Advisers
comply with a Subadvised Series’
investment objective, policies and
restrictions. Subject to review by the
Board, the Adviser will (a) when
appropriate, allocate and reallocate a
Subadvised Series’ assets among
multiple Sub-Advisers; and (b) monitor
and evaluate the performance of SubAdvisers.
4. A Subadvised Series will not make
any Ineligible Sub-Adviser Changes
7 Applicants will only comply with conditions 7,
8, 9 and 12 if they rely on the relief that would
allow them to provide Aggregate Fee Disclosure.
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without the approval of the
shareholders of the applicable
Subadvised Series.
5. Subadvised Series will inform
shareholders of the hiring of a new SubAdviser within 90 days after the hiring
of the new Sub-Adviser pursuant to the
Modified Notice and Access Procedures.
6. At all times, at least a majority of
the Board will be Independent Board
Members, and the selection and
nomination of new or additional
Independent Board Members will be
placed within the discretion of the thenexisting Independent Board Members.
7. Independent Legal Counsel, as
defined in rule 0–1(a)(6) under the Act,
will be engaged to represent the
Independent Board Members. The
selection of such counsel will be within
the discretion of the then-existing
Independent Board Members.
8. The Adviser will provide the
Board, no less frequently than quarterly,
with information about the profitability
of the Adviser on a per Subadvised
Series basis. The information will reflect
the impact on profitability of the hiring
or termination of any sub-adviser during
the applicable quarter.
9. Whenever a sub-adviser is hired or
terminated, the Adviser will provide the
Board with information showing the
expected impact on the profitability of
the Adviser.
10. Whenever a sub-adviser change is
proposed for a Subadvised Series with
an Affiliated Sub-Adviser or a WhollyOwned Sub-Adviser, the Board,
including a majority of the Independent
Board Members, will make a separate
finding, reflected in the Board minutes,
that such change is in the best interests
of the Subadvised Series and its
shareholders, and does not involve a
conflict of interest from which the
Adviser or the Affiliated Sub-Adviser or
Wholly-Owned Sub-Adviser derives an
inappropriate advantage.
11. No Board member or officer of a
Subadvised Series, or director or officer
of the Adviser, will own directly or
indirectly (other than through a pooled
investment vehicle that is not controlled
by such person), any interest in a SubAdviser, except for (a) ownership of
interests in the Adviser or any entity,
other than a Wholly-Owned SubAdviser, that controls, is controlled by,
or is under common control with the
Adviser, or (b) ownership of less than
1% of the outstanding securities of any
class of equity or debt of a publicly
traded company that is either a SubAdviser or an entity that controls, is
controlled by, or is under common
control with a Sub-Adviser.
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12. Each Subadvised Series will
disclose the Aggregate Fee Disclosure in
its registration statement.
13. In the event the Commission
adopts a rule under the Act providing
substantially similar relief to that
requested in the application, the
requested order will expire on the
effective date of that rule.
14. Any new Sub-Advisory
Agreement or any amendment to a
Subadvised Series’ existing Investment
Management Agreement or SubAdvisory Agreement that directly or
indirectly results in an increase in the
aggregate advisory rate payable by the
Subadvised Series will be submitted to
the Subadvised Series’ shareholders for
approval.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014–15970 Filed 7–8–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
31146; File No. 812–14217]
BMO Funds, Inc., et al.; Notice of
Application
July 2, 2014.
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.
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: BMO Fund, Inc.
(‘‘Company’’ or ‘‘BMO’’), BMO Asset
Management Corp. (‘‘Adviser’’), and
BMO Harris Bank N.A. (‘‘Bank’’).
DATES: Filing Dates: The application was
filed on September 25, 2013, and
amended on February 14, 2014 and June
6, 2014. Applicants have agreed to file
an amendment during the notice period,
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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 July 28, 2014, 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 BMO Funds, Inc., 111
East Kilbourn Avenue, Milwaukee, WI
53202.
FOR FURTHER INFORMATION CONTACT:
Emerson S. Davis, Senior Counsel, at
(202) 551–6868 or Daniele Marchesani,
Branch Chief, at (202) 551–6821
(Division of Investment Management,
Chief Counsel’s Office).
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 for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
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Applicants’ Representations
1. The Company is organized as a
Wisconsin corporation and is registered
under the Act as an open-end
management investment company. The
Company consists of multiple series,
three of which comply with Rule 2a–7
under the Act and hold themselves out
as money market funds (‘‘Money Market
Funds’’). BMO Asset Management Corp.
is a wholly-owned subsidiary of BMO
Financial Corp, which is an indirectly
wholly-owned subsidiary of the Bank of
Montreal, a Canadian bank holding
company. BMO Asset Management
Corp. is, and any other Adviser will be
registered as an investment adviser
under the Investment Advisers Act of
1940 (‘‘Advisers Act’’) and serve as the
investment adviser to the Funds.1 The
1 Applicants request that the relief apply to each
existing and future series of the Company, any other
registered open-end investment company or series
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Adviser may engage one or more
affiliated or unaffiliated subadvisers and
each will be registered as an investment
adviser under the Advisers Act or not be
subject to registration. BMO Harris
Bank, an affiliate of BMO Asset
Management Corp. and an indirect
wholly-owned subsidiary of BMO
Financial Corp., serves as custodian for
the Company and the Funds.
2. At any particular time, while some
Funds are entering into repurchase
agreements, or purchasing other shortterm instruments, other Funds may
need to borrow money from the same or
similar banks for temporary purposes to
satisfy redemption requests, to cover
unanticipated cash shortfalls such as a
trade ‘‘fail’’ in which cash payment for
a security sold by a Fund has been
delayed, or for other temporary
purposes. The Company, on behalf of
the Funds, has entered into a Loan
Agreement, as amended, with State
Street Bank & Trust Company (the
‘‘Loan Agreement’’) under which the
Company has access to a $50 million
standby line of credit on behalf of the
Funds.
3. When a Fund borrows money from
a bank or under the Loan Agreement, it
pays interest on the loan at a rate that
is higher than the rate that is earned by
other (non-borrowing) Funds on
investments in repurchase agreements
or other short-term instruments of the
same maturity as the bank loan or loan
under the Loan Agreement. Applicants
assert that this differential represents
the profit earned by the lender on loans
and is not attributable to any material
difference in the credit quality or risk of
such transactions.
4. The Funds seek to enter into master
interfund lending agreements
(‘‘Interfund Lending Agreements’’) with
each other that would permit each Fund
to lend money directly to and borrow
money directly from other Funds
through a credit facility for temporary
purposes. The Money Market Funds
will not participate as borrowers in the
proposed credit facility. Applicants
state that the proposed credit facility
would both reduce the Funds’ potential
borrowing costs and enhance the ability
thereof (‘‘Funds’’) for which BMO Asset
Management Corp., including any successor entity
thereto, or a person controlling, controlled by, or
under common control (within the meaning of
section 2(a)(9) of the Act) with BMO Asset
Management Corp. serves as investment adviser
(collectively, the ‘‘Adviser’’); and (c) BMO Asset
Management Corp. The term ‘‘successor’’ is limited
to entities that result from a reorganization into
another jurisdiction or a change in the type of
business organization. All entities that currently
intend to rely on the requested relief are named as
applicants. Any other entity that relies on the order
in the future will comply with the terms and
conditions set forth in the application.
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of the lending Funds to earn higher rates
of interest on their short-term lendings.
Although the proposed credit facility
would reduce the Funds’ need to
borrow from banks, the Funds would be
free to establish and maintain
committed lines of credit or other
borrowing arrangements with
unaffiliated banks.
5. Applicants anticipate that the
proposed credit facility would provide a
borrowing Fund with significant savings
at times when the cash position of the
borrowing Fund is insufficient to meet
temporary cash requirements. This
situation could arise when shareholder
redemptions exceed anticipated
volumes and certain Funds have
insufficient cash on hand to satisfy such
redemptions. When the 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
Fund could use the proposed credit
facility when a sale of securities ‘‘fails’’
due to circumstances beyond the Fund’s
control, such as a delay in the delivery
of cash to the Fund’s custodian or
improper delivery instructions by the
broker effecting the transaction. ‘‘Sales
fails’’ may present a cash shortfall if the
Fund has undertaken to purchase a
security using the proceeds from
securities sold. Alternatively, the Fund
could ‘‘fail’’ on its intended purchase
due to lack of funds from the previous
sale, resulting in additional cost to the
Fund, or sell a security on a same-day
settlement basis, earning a lower return
on the investment. Use of the proposed
credit facility under these circumstances
would enable the Fund to have access
to immediate short-term liquidity.
7. While bank borrowings could
generally supply needed cash to cover
unanticipated redemptions and sales
fails, under the proposed credit facility,
a borrowing Fund would pay lower
interest rates than those that would be
payable under short-term loans offered
by banks. In addition, Funds making
short-term cash loans directly to other
Funds would earn interest at a rate
higher than they otherwise could obtain
from investing their cash in repurchase
agreements or purchasing shares of a
money market fund. Thus, applicants
assert that the proposed credit facility
would benefit both borrowing and
lending Funds.
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8. The interest rate to be charged to
the 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 for any day would
be the highest rate available to a lending
Fund, directly or through a joint
account, from investment in overnight
repurchase agreements. The Bank Loan
Rate for any day would be calculated by
the Credit Facility Team (as defined
below) each day an Interfund Loan is
made according to a formula established
by each Fund’s board of directors (the
‘‘Board’’) and intended to approximate
the lowest interest rate at which bank
short-term loans would be available to
the Funds. The formula would be based
upon a publicly available rate (e.g.,
federal funds 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 Fund’s
Board. In addition, each Fund’s Board
would periodically review the
continuing appropriateness of using the
formula 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
Funds.
9. The proposed credit facility would
be administered by the Funds’
president, chief compliance officer and
treasurer and chief compliance officer
and an investment professional within
the Adviser who serves as a portfolio
manager for the Money Market Funds
(the ‘‘Money Market Manager’’)
(collectively, the ‘‘Credit Facility
Team’’). No other portfolio manager of
any Fund will serve as a member of the
Credit Facility Team. On any day on
which a Fund intends to borrow money,
the Credit Facility Team would make an
Interfund Loan from a lending Fund to
a borrowing Fund only if the Interfund
Loan Rate is (i) more favorable to the
lending Fund than the Repo Rate and,
if applicable, the yield of any money
market fund in which a lending Fund
could otherwise invest and (ii) more
favorable to the borrowing Fund than
the Bank Loan Rate. Under the proposed
credit facility, the portfolio managers for
each participating Fund could provide
standing instructions to participate
daily as a borrower or lender. The
Money Market Funds would not
participate as borrowers. The Credit
Facility Team on each business day
would collect data on the uninvested
cash and borrowing requirements of all
participating Funds. The Credit Facility
Team would allocate loans among
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borrowing Funds without any further
communication from the portfolio
managers of the Funds (other than the
Money Market Manager acting in his or
her capacity as a member of the Credit
Facility Team). All allocations made by
the Credit Facility Team will require the
approval of at least one member of the
Credit Facility Team, who is a high level
employee and who is not the Money
Market Manager. 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, any remaining cash
will be invested in accordance with the
standing instructions of portfolio
managers or such remaining amounts
will be invested directly by the portfolio
managers of the Funds and returned to
the Funds.
10. The Credit Facility Team would
allocate borrowing demand and cash
available for lending among the Funds
on what the Credit Facility Team
believes to be an equitable basis, subject
to certain administrative procedures
applicable to all 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 each Fund’s Board,
including a majority of directors who
are not ‘‘interested persons’’ of the
Fund, as that term is defined in section
2(a)(19) of the Act (‘‘Independent
Directors’’), to ensure that both
borrowing and lending Funds
participate on an equitable basis.
11. The Credit Facility Team would:
(a) Monitor the Interfund Loan Rate and
the other terms and conditions of the
loans; (b) limit the borrowings and loans
entered into by each Fund to ensure that
they comply with the Fund’s investment
policies and limitations; (c) ensure
equitable treatment of each Fund; and
(d) make quarterly reports to each
Fund’s Board concerning any
transactions by the Fund under the
proposed credit facility and the
Interfund Loan Rate charged.
12. The Adviser and BMO Harris
Bank, through the Credit Facility Team,
would administer the proposed credit
facility as a disinterested fiduciary as
part of its duties under the relevant
advisory or administrative contract with
each Fund and would receive no
additional fee as compensation for its
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services in connection with the
administration of the proposed credit
facility. They may collect standard
pricing, record keeping, bookkeeping
and accounting fees associated with the
transfer of cash and/or securities in
connection with repurchase and lending
transactions generally, including
transactions effected through the
proposed credit facility. Such fees
would be no higher than those
applicable for comparable bank loan
transactions.
13. No Fund may participate in the
proposed credit facility unless: (a) The
Fund has obtained shareholder approval
for its participation, if such approval is
required by law; (b) the Fund has fully
disclosed all material information
concerning the credit facility in its
prospectus and/or statement of
additional information; and (c) the
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.
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 Funds may be under common
control by virtue of having the Adviser
as their common investment adviser
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and/or by having common officers,
directors and/or trustees.
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 reports filed
under the Act, 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 credit facility transactions do
not raise these concerns because: (a) The
Adviser and BMO Harris Bank, through
the Credit Facility Team, would
administer the program as a
disinterested fiduciary as part of its
duties under the relevant advisory
contract with each Fund and a
disinterested party, respectively, as part
of its duties under the relevant advisory
or administrative contract with each
Fund; (b) all Interfund Loans would
consist only of uninvested cash reserves
that the lending Fund otherwise would
invest in short-term repurchase
agreements or other short-term
instruments either directly or through a
money market fund; (c) the Interfund
Loans would not involve a significantly
greater risk than other such investments;
(d) the lending Fund would receive
interest at a rate higher than it could
otherwise obtain through such other
investments; and (e) the borrowing
Fund would pay interest at a rate lower
than otherwise available to it under its
bank loan agreements and avoid the upfront commitment fees associated with
committed lines of credit. Moreover,
applicants assert that the other terms
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and conditions that applicants propose
also would effectively preclude the
possibility of any Fund obtaining an
undue advantage over any other 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 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) of the Act.
Applicants also state that a pledge of
assets in connection with an Interfund
Loan could be construed as a purchase
of the borrowing Fund’s securities or
other property 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 also 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 Fund that imposes conditions on
the quality of or access to collateral for
a borrowing (if the lender is another
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
investments. Applicants submit that the
proposed credit facility does not involve
these abuses. Applicants note that there
will be no duplicative costs or fees to
the Funds or their shareholders, and
that the Adviser and BMO Harris Bank
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39013
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 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 permit a Fund to
lend to or borrow directly from other
Funds.
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 Fund,
including combined interfund 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
Funds to borrow from other 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, joint arrangement, or
profit-sharing plan 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 proposed
credit facility is consistent with the
provisions, policies and purposes of the
Act in that it offers both reduced
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borrowing costs and enhanced returns
on loaned funds to all participating
Funds and their shareholders.
Applicants note that each 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 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 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, 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 Fund than
the Repo Rate; and, if applicable, the
yield of the highest yielding money
market fund in which the lending Fund
could otherwise invest and (b) more
favorable to the borrowing Fund than
the Bank Loan Rate.
3. If a Fund has outstanding bank
borrowings, any Interfund Loans to the
Fund: (a) will be at an interest rate equal
to or lower than the interest rate of any
outstanding bank loan; (b) will 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) will have a maturity no
longer than any outstanding bank loan
(and in any event not over seven days);
and (d) will provide that, if an event of
default by the Fund occurs under any
agreement evidencing an outstanding
bank loan to the Fund, that event of
default will automatically (without need
for action or notice by the lending Fund)
constitute an immediate event of default
under the Interfund Lending Agreement
entitling the lending Fund to call the
Interfund Loan (and exercise all rights
with respect to any collateral) and that
such call will be made if the lending
bank exercises its right to call its loan
under its agreement with the borrowing
Fund.
4. A Fund may make an unsecured
borrowing through the proposed credit
facility if its outstanding borrowings
from all sources immediately after the
interfund borrowing total 10% or less of
its total assets, provided that if the Fund
has a secured loan outstanding from any
other lender, including but not limited
to another Fund, the Fund’s interfund
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borrowing 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 Fund’s total
outstanding borrowings immediately
after an interfund borrowing would be
greater than 10% of its total assets, the
Fund may borrow through the proposed
credit facility only on a secured basis.
A Fund may not borrow through the
proposed credit facility or from any
other source if its total outstanding
borrowings immediately after the
interfund borrowing would be more
than 33 1/3% of its total assets.
5. Before any Fund that has
outstanding interfund borrowings may,
through additional borrowings, cause its
outstanding borrowings from all sources
to exceed 10% of its total assets, the
Fund must first secure each outstanding
Interfund Loan 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
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 Fund will within one
business day thereafter: (a) Repay all of
its outstanding Interfund Loans; (b)
reduce its outstanding indebtedness to
10% or less of its total assets; or (c)
secure each outstanding Interfund Loan
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 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 Fund’s total outstanding
borrowings exceed 10% is repaid or the
Fund’s total outstanding borrowings
cease to exceed 10% of its total assets,
the Fund will 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 at least
equal to 102% of the outstanding
principal value of the Interfund Loan.
6. No Fund may lend to another Fund
through the proposed credit facility if
the loan would cause its aggregate
outstanding loans through the proposed
credit facility to exceed 15% of the
lending Fund’s current net assets at the
time of the loan.
7. A Fund’s Interfund Loans to any
one Fund shall not exceed 5% of the
lending Fund’s net assets.
PO 00000
Frm 00165
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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 Fund’s borrowings through the
proposed credit facility, as measured on
the day when the most recent loan was
made, will not exceed the greater of
125% of the Fund’s total net cash
redemptions for the preceding seven
calendar days or 102% of the 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 Fund and may be repaid on any
day by a borrowing Fund.
11. A Fund’s participation in the
proposed credit facility must be
consistent with its investment objectives
and limitations and organizational
documents.
12. The Credit Facility Team will
calculate total Fund borrowing and
lending demand through the proposed
credit facility, and allocate loans on an
equitable basis among the Funds,
without the intervention of any portfolio
manager of the Funds (other than the
Money Market Manager acting in his or
her 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 who
is not the Money Market Manager. The
Credit Facility Team will not solicit
cash for the proposed credit facility
from any Fund or prospectively publish
or disseminate loan demand data to
portfolio managers (except to the extent
that the Money Market Manager has
access to loan demand data). The Credit
Facility Team will invest any amounts
remaining after satisfaction of borrowing
demand in accordance with the
instructions of each of the relevant
portfolio manager or such remaining
amounts will be invested directly by the
portfolio managers of the Funds or the
Credit Facility Team will return
remaining amounts to the Funds.
13. The Credit Facility Team will
monitor the interest rates charged and
the other terms and conditions of the
Interfund Loans and will make a
quarterly report to the Board of each
Fund concerning the participation of the
Funds in the proposed credit facility
and the terms and other conditions of
any extensions of credit under the credit
facility.
14. The Board of each Fund,
including a majority of the Independent
Directors, will:
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(a) Review, no less frequently than
quarterly, each Fund’s participation in
the proposed credit facility during the
preceding quarter for compliance with
the conditions of any order permitting
such transactions;
(b) establish the Bank Loan Rate
formula used to determine the interest
rate on Interfund Loans and review, no
less frequently than annually, the
continuing appropriateness of the Bank
Loan Rate formula; and
(c) review, no less frequently than
annually, the continuing
appropriateness of the Fund’s
participation in the proposed credit
facility.
15. 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 Fund makes a demand for
payment under the provisions of the
Interfund Lending Agreement, the
Credit Facility Team will promptly refer
the loan for arbitration to an
independent arbitrator selected by the
Board of each 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 Funds. The
arbitrator will submit, at least annually,
a written report to the Board of each
Fund setting forth a description of the
nature of any dispute and the actions
taken by the Funds to resolve the
dispute.
16. Each 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
proposed 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 transactions,
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
borrowings, the yield of any money
market fund in which the lending Fund
could otherwise invest, and such other
information presented to the Fund’s
Board in connection with the review
required by conditions 13 and 14.
17. The Credit Facility Team will
prepare and submit to the Board of each
Fund for review an initial report
describing the operations of the
proposed credit facility and the
2 If the dispute involves Funds with different
Boards of Directors, the respective Board of each
Fund will select an independent arbitrator that is
satisfactory to each Fund.
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procedures to be implemented to ensure
that all Funds are treated fairly. After
the commencement of the proposed
credit facility, the Credit Facility Team
will report on the operations of the
proposed credit facility at each Board’s
quarterly meetings.
Each 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 Fund
participates in the proposed credit
facility, which report evaluates the
Fund’s compliance with the terms and
conditions of the application and the
procedures established to achieve such
compliance. Each 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
Fund participates in the proposed credit
facility, that certifies that the Fund and
Adviser have established procedures
reasonably designed to achieve
compliance with the terms and
conditions of the application. 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 and, if
applicable, the yield of the highest
yielding Money Market Funds, 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 of
each Fund; and
(e) that the Interfund Loan Rate does
not exceed the interest rate on any third
party borrowings of a borrowing Fund at
the time of the Interfund Loan.
Additionally, each Fund’s
independent public accountants, in
connection with their Fund audit
examinations, will review the operation
of the proposed credit facility for
compliance with the conditions of this
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 Fund will participate in the
proposed credit facility upon receipt of
requisite regulatory approval unless it
has fully disclosed in its prospectus
and/or statement of additional
information all material facts about its
intended participation.
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39015
For the Commission, by the Division of
Investment Management, under delegated
authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014–15971 Filed 7–8–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on Thursday, July 10, 2014 at 2 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or her designee, has
certified that, in her opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matter at the Closed Meeting.
Commissioner Stein, as duty officer,
voted to consider the items listed for the
Closed Meeting in closed session.
The subject matter of the Closed
Meeting will be:
Institution and settlement of injunctive
actions;
Institution and settlement of
administrative proceedings; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact the Office of the Secretary at
(202) 551–5400.
Dated: July 3, 2014.
Lynn M. Powalski,
Deputy Secretary.
[FR Doc. 2014–16107 Filed 7–7–14; 11:15 am]
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 79, Number 131 (Wednesday, July 9, 2014)]
[Notices]
[Pages 39010-39015]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15971]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 31146; File No. 812-14217]
BMO Funds, Inc., et al.; Notice of Application
July 2, 2014.
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.
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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: BMO Fund, Inc. (``Company'' or ``BMO''), BMO Asset
Management Corp. (``Adviser''), and BMO Harris Bank N.A. (``Bank'').
DATES: Filing Dates: The application was filed on September 25, 2013,
and amended on February 14, 2014 and June 6, 2014. Applicants have
agreed to file an amendment during the notice period,
[[Page 39011]]
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 July 28, 2014, 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 BMO Funds,
Inc., 111 East Kilbourn Avenue, Milwaukee, WI 53202.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at
(202) 551-6868 or Daniele Marchesani, Branch Chief, at (202) 551-6821
(Division of Investment Management, Chief Counsel's Office).
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 for an
applicant using the Company name box, at https://www.sec.gov/search/search.htm or by calling (202) 551-8090.
Applicants' Representations
1. The Company is organized as a Wisconsin corporation and is
registered under the Act as an open-end management investment company.
The Company consists of multiple series, three of which comply with
Rule 2a-7 under the Act and hold themselves out as money market funds
(``Money Market Funds''). BMO Asset Management Corp. is a wholly-owned
subsidiary of BMO Financial Corp, which is an indirectly wholly-owned
subsidiary of the Bank of Montreal, a Canadian bank holding company.
BMO Asset Management Corp. is, and any other Adviser will be registered
as an investment adviser under the Investment Advisers Act of 1940
(``Advisers Act'') and serve as the investment adviser to the Funds.\1\
The Adviser may engage one or more affiliated or unaffiliated
subadvisers and each will be registered as an investment adviser under
the Advisers Act or not be subject to registration. BMO Harris Bank, an
affiliate of BMO Asset Management Corp. and an indirect wholly-owned
subsidiary of BMO Financial Corp., serves as custodian for the Company
and the Funds.
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\1\ Applicants request that the relief apply to each existing
and future series of the Company, any other registered open-end
investment company or series thereof (``Funds'') for which BMO Asset
Management Corp., including any successor entity thereto, or a
person controlling, controlled by, or under common control (within
the meaning of section 2(a)(9) of the Act) with BMO Asset Management
Corp. serves as investment adviser (collectively, the ``Adviser'');
and (c) BMO Asset Management Corp. The term ``successor'' is limited
to entities that result from a reorganization into another
jurisdiction or a change in the type of business organization. All
entities that currently intend to rely on the requested relief are
named as applicants. Any other entity that relies on the order in
the future will comply with the terms and conditions set forth in
the application.
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2. At any particular time, while some Funds are entering into
repurchase agreements, or purchasing other short-term instruments,
other Funds may need to borrow money from the same or similar banks for
temporary purposes to satisfy redemption requests, to cover
unanticipated cash shortfalls such as a trade ``fail'' in which cash
payment for a security sold by a Fund has been delayed, or for other
temporary purposes. The Company, on behalf of the Funds, has entered
into a Loan Agreement, as amended, with State Street Bank & Trust
Company (the ``Loan Agreement'') under which the Company has access to
a $50 million standby line of credit on behalf of the Funds.
3. When a Fund borrows money from a bank or under the Loan
Agreement, it pays interest on the loan at a rate that is higher than
the rate that is earned by other (non-borrowing) Funds on investments
in repurchase agreements or other short-term instruments of the same
maturity as the bank loan or loan under the Loan Agreement. Applicants
assert that this differential represents the profit earned by the
lender on loans and is not attributable to any material difference in
the credit quality or risk of such transactions.
4. The Funds seek to enter into master interfund lending agreements
(``Interfund Lending Agreements'') with each other that would permit
each Fund to lend money directly to and borrow money directly from
other Funds through a credit facility for temporary purposes. The Money
Market Funds will not participate as borrowers in the proposed credit
facility. Applicants state that the proposed credit facility would both
reduce the Funds' potential borrowing costs and enhance the ability of
the lending Funds to earn higher rates of interest on their short-term
lendings. Although the proposed credit facility would reduce the Funds'
need to borrow from banks, the Funds would be free to establish and
maintain committed lines of credit or other borrowing arrangements with
unaffiliated banks.
5. Applicants anticipate that the proposed credit facility would
provide a borrowing Fund with significant savings at times when the
cash position of the borrowing Fund is insufficient to meet temporary
cash requirements. This situation could arise when shareholder
redemptions exceed anticipated volumes and certain Funds have
insufficient cash on hand to satisfy such redemptions. When the 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 Fund could use the proposed
credit facility when a sale of securities ``fails'' due to
circumstances beyond the Fund's control, such as a delay in the
delivery of cash to the Fund's custodian or improper delivery
instructions by the broker effecting the transaction. ``Sales fails''
may present a cash shortfall if the Fund has undertaken to purchase a
security using the proceeds from securities sold. Alternatively, the
Fund could ``fail'' on its intended purchase due to lack of funds from
the previous sale, resulting in additional cost to the Fund, or sell a
security on a same-day settlement basis, earning a lower return on the
investment. Use of the proposed credit facility under these
circumstances would enable the Fund to have access to immediate short-
term liquidity.
7. While bank borrowings could generally supply needed cash to
cover unanticipated redemptions and sales fails, under the proposed
credit facility, a borrowing Fund would pay lower interest rates than
those that would be payable under short-term loans offered by banks. In
addition, Funds making short-term cash loans directly to other Funds
would earn interest at a rate higher than they otherwise could obtain
from investing their cash in repurchase agreements or purchasing shares
of a money market fund. Thus, applicants assert that the proposed
credit facility would benefit both borrowing and lending Funds.
[[Page 39012]]
8. The interest rate to be charged to the 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
for any day would be the highest rate available to a lending Fund,
directly or through a joint account, from investment in overnight
repurchase agreements. The Bank Loan Rate for any day would be
calculated by the Credit Facility Team (as defined below) each day an
Interfund Loan is made according to a formula established by each
Fund's board of directors (the ``Board'') and intended to approximate
the lowest interest rate at which bank short-term loans would be
available to the Funds. The formula would be based upon a publicly
available rate (e.g., federal funds 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 Fund's Board. In addition, each
Fund's Board would periodically review the continuing appropriateness
of using the formula 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 Funds.
9. The proposed credit facility would be administered by the Funds'
president, chief compliance officer and treasurer and chief compliance
officer and an investment professional within the Adviser who serves as
a portfolio manager for the Money Market Funds (the ``Money Market
Manager'') (collectively, the ``Credit Facility Team''). No other
portfolio manager of any Fund will serve as a member of the Credit
Facility Team. On any day on which a Fund intends to borrow money, the
Credit Facility Team would make an Interfund Loan from a lending Fund
to a borrowing Fund only if the Interfund Loan Rate is (i) more
favorable to the lending Fund than the Repo Rate and, if applicable,
the yield of any money market fund in which a lending Fund could
otherwise invest and (ii) more favorable to the borrowing Fund than the
Bank Loan Rate. Under the proposed credit facility, the portfolio
managers for each participating Fund could provide standing
instructions to participate daily as a borrower or lender. The Money
Market Funds would not participate as borrowers. The Credit Facility
Team on each business day would collect data on the uninvested cash and
borrowing requirements of all participating Funds. The Credit Facility
Team would allocate loans among borrowing Funds without any further
communication from the portfolio managers of the Funds (other than the
Money Market Manager acting in his or her capacity as a member of the
Credit Facility Team). All allocations made by the Credit Facility Team
will require the approval of at least one member of the Credit Facility
Team, who is a high level employee and who is not the Money Market
Manager. 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,
any remaining cash will be invested in accordance with the standing
instructions of portfolio managers or such remaining amounts will be
invested directly by the portfolio managers of the Funds and returned
to the Funds.
10. The Credit Facility Team would allocate borrowing demand and
cash available for lending among the Funds on what the Credit Facility
Team believes to be an equitable basis, subject to certain
administrative procedures applicable to all 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
each Fund's Board, including a majority of directors who are not
``interested persons'' of the Fund, as that term is defined in section
2(a)(19) of the Act (``Independent Directors''), to ensure that both
borrowing and lending Funds participate on an equitable basis.
11. The Credit Facility Team would: (a) Monitor the Interfund Loan
Rate and the other terms and conditions of the loans; (b) limit the
borrowings and loans entered into by each Fund to ensure that they
comply with the Fund's investment policies and limitations; (c) ensure
equitable treatment of each Fund; and (d) make quarterly reports to
each Fund's Board concerning any transactions by the Fund under the
proposed credit facility and the Interfund Loan Rate charged.
12. The Adviser and BMO Harris Bank, through the Credit Facility
Team, would administer the proposed credit facility as a disinterested
fiduciary as part of its duties under the relevant advisory or
administrative contract with each Fund and would receive no additional
fee as compensation for its services in connection with the
administration of the proposed credit facility. They may collect
standard pricing, record keeping, bookkeeping and accounting fees
associated with the transfer of cash and/or securities in connection
with repurchase and lending transactions generally, including
transactions effected through the proposed credit facility. Such fees
would be no higher than those applicable for comparable bank loan
transactions.
13. No Fund may participate in the proposed credit facility unless:
(a) The Fund has obtained shareholder approval for its participation,
if such approval is required by law; (b) the Fund has fully disclosed
all material information concerning the credit facility in its
prospectus and/or statement of additional information; and (c) the
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.
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 Funds may be
under common control by virtue of having the Adviser as their common
investment adviser
[[Page 39013]]
and/or by having common officers, directors and/or trustees.
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
reports filed under the Act, 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 credit facility transactions do not raise these concerns
because: (a) The Adviser and BMO Harris Bank, through the Credit
Facility Team, would administer the program as a disinterested
fiduciary as part of its duties under the relevant advisory contract
with each Fund and a disinterested party, respectively, as part of its
duties under the relevant advisory or administrative contract with each
Fund; (b) all Interfund Loans would consist only of uninvested cash
reserves that the lending Fund otherwise would invest in short-term
repurchase agreements or other short-term instruments either directly
or through a money market fund; (c) the Interfund Loans would not
involve a significantly greater risk than other such investments; (d)
the lending Fund would receive interest at a rate higher than it could
otherwise obtain through such other investments; and (e) the borrowing
Fund would pay interest at a rate lower than otherwise available to it
under its bank loan agreements and avoid the up-front 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 Fund obtaining an undue
advantage over any other 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 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) of the Act. Applicants
also state that a pledge of assets in connection with an Interfund Loan
could be construed as a purchase of the borrowing Fund's securities or
other property 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 also 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 Fund that imposes
conditions on the quality of or access to collateral for a borrowing
(if the lender is another 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 investments. Applicants submit that the proposed
credit facility does not involve these abuses. Applicants note that
there will be no duplicative costs or fees to the Funds or their
shareholders, and that the Adviser and BMO Harris Bank 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
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 permit a Fund
to lend to or borrow directly from other Funds.
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 Fund, including combined
interfund 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 Funds to borrow from other
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, joint arrangement, or profit-sharing
plan 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 proposed credit facility is consistent with the provisions,
policies and purposes of the Act in that it offers both reduced
[[Page 39014]]
borrowing costs and enhanced returns on loaned funds to all
participating Funds and their shareholders. Applicants note that each
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 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 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, 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 Fund than the Repo Rate; and, if applicable, the yield
of the highest yielding money market fund in which the lending Fund
could otherwise invest and (b) more favorable to the borrowing Fund
than the Bank Loan Rate.
3. If a Fund has outstanding bank borrowings, any Interfund Loans
to the Fund: (a) will be at an interest rate equal to or lower than the
interest rate of any outstanding bank loan; (b) will 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) will have a maturity no longer than any outstanding
bank loan (and in any event not over seven days); and (d) will provide
that, if an event of default by the Fund occurs under any agreement
evidencing an outstanding bank loan to the Fund, that event of default
will automatically (without need for action or notice by the lending
Fund) constitute an immediate event of default under the Interfund
Lending Agreement entitling the lending Fund to call the Interfund Loan
(and exercise all rights with respect to any collateral) and that such
call will be made if the lending bank exercises its right to call its
loan under its agreement with the borrowing Fund.
4. A Fund may make an unsecured borrowing through the proposed
credit facility if its outstanding borrowings from all sources
immediately after the interfund borrowing total 10% or less of its
total assets, provided that if the Fund has a secured loan outstanding
from any other lender, including but not limited to another Fund, the
Fund's interfund borrowing 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
Fund's total outstanding borrowings immediately after an interfund
borrowing would be greater than 10% of its total assets, the Fund may
borrow through the proposed credit facility only on a secured basis. A
Fund may not borrow through the proposed credit facility or from any
other source if its total outstanding borrowings immediately after the
interfund borrowing would be more than 33 1/3% of its total assets.
5. Before any Fund that has outstanding interfund borrowings may,
through additional borrowings, cause its outstanding borrowings from
all sources to exceed 10% of its total assets, the Fund must first
secure each outstanding Interfund Loan 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 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 Fund will within one
business day thereafter: (a) Repay all of its outstanding Interfund
Loans; (b) reduce its outstanding indebtedness to 10% or less of its
total assets; or (c) secure each outstanding Interfund Loan 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 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 Fund's total outstanding borrowings exceed 10% is
repaid or the Fund's total outstanding borrowings cease to exceed 10%
of its total assets, the Fund will 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 at least equal to 102% of the
outstanding principal value of the Interfund Loan.
6. No Fund may lend to another Fund through the proposed credit
facility if the loan would cause its aggregate outstanding loans
through the proposed credit facility to exceed 15% of the lending
Fund's current net assets at the time of the loan.
7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of
the lending 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 Fund's borrowings through the proposed credit facility, as
measured on the day when the most recent loan was made, will not exceed
the greater of 125% of the Fund's total net cash redemptions for the
preceding seven calendar days or 102% of the 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 Fund and may be repaid on any day by a borrowing Fund.
11. A Fund's participation in the proposed credit facility must be
consistent with its investment objectives and limitations and
organizational documents.
12. The Credit Facility Team will calculate total Fund borrowing
and lending demand through the proposed credit facility, and allocate
loans on an equitable basis among the Funds, without the intervention
of any portfolio manager of the Funds (other than the Money Market
Manager acting in his or her 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 who is not the Money Market Manager. The Credit Facility Team will
not solicit cash for the proposed credit facility from any Fund or
prospectively publish or disseminate loan demand data to portfolio
managers (except to the extent that the Money Market Manager has access
to loan demand data). The Credit Facility Team will invest any amounts
remaining after satisfaction of borrowing demand in accordance with the
instructions of each of the relevant portfolio manager or such
remaining amounts will be invested directly by the portfolio managers
of the Funds or the Credit Facility Team will return remaining amounts
to the Funds.
13. The Credit Facility Team will monitor the interest rates
charged and the other terms and conditions of the Interfund Loans and
will make a quarterly report to the Board of each Fund concerning the
participation of the Funds in the proposed credit facility and the
terms and other conditions of any extensions of credit under the credit
facility.
14. The Board of each Fund, including a majority of the Independent
Directors, will:
[[Page 39015]]
(a) Review, no less frequently than quarterly, each Fund's
participation in the proposed credit facility during the preceding
quarter for compliance with the conditions of any order permitting such
transactions;
(b) establish the Bank Loan Rate formula used to determine the
interest rate on Interfund Loans and review, no less frequently than
annually, the continuing appropriateness of the Bank Loan Rate formula;
and
(c) review, no less frequently than annually, the continuing
appropriateness of the Fund's participation in the proposed credit
facility.
15. 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 Fund makes a demand for payment
under the provisions of the Interfund Lending Agreement, the Credit
Facility Team will promptly refer the loan for arbitration to an
independent arbitrator selected by the Board of each 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 Funds. The arbitrator
will submit, at least annually, a written report to the Board of each
Fund setting forth a description of the nature of any dispute and the
actions taken by the Funds to resolve the dispute.
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\2\ If the dispute involves Funds with different Boards of
Directors, the respective Board of each Fund will select an
independent arbitrator that is satisfactory to each Fund.
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16. Each 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 proposed 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 transactions, 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 borrowings, the yield of any money
market fund in which the lending Fund could otherwise invest, and such
other information presented to the Fund's Board in connection with the
review required by conditions 13 and 14.
17. The Credit Facility Team will prepare and submit to the Board
of each Fund for review an initial report describing the operations of
the proposed credit facility and the procedures to be implemented to
ensure that all Funds are treated fairly. After the commencement of the
proposed credit facility, the Credit Facility Team will report on the
operations of the proposed credit facility at each Board's quarterly
meetings.
Each 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 Fund participates in the proposed credit facility,
which report evaluates the Fund's compliance with the terms and
conditions of the application and the procedures established to achieve
such compliance. Each 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 Fund participates in the proposed credit facility,
that certifies that the Fund and Adviser have established procedures
reasonably designed to achieve compliance with the terms and conditions
of the application. 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
and, if applicable, the yield of the highest yielding Money Market
Funds, 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 of each Fund; and
(e) that the Interfund Loan Rate does not exceed the interest rate
on any third party borrowings of a borrowing Fund at the time of the
Interfund Loan.
Additionally, each Fund's independent public accountants, in
connection with their Fund audit examinations, will review the
operation of the proposed credit facility for compliance with the
conditions of this 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 Fund will participate in the proposed credit facility upon
receipt of requisite regulatory approval unless it has fully disclosed
in its prospectus and/or statement of additional information all
material facts about its intended participation.
For the Commission, by the Division of Investment Management,
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15971 Filed 7-8-14; 8:45 am]
BILLING CODE 8011-01-P
